10-K 1 fy201410-k.htm 10-K FY 2014 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 3, 2014
or
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07323
FRISCH’S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
State of Ohio
  
31-0523213
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification Number)
2800 Gilbert Avenue
Cincinnati, Ohio 45206
(Address of principal executive offices)
513-961-2660
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each Exchange on which registered
Common Stock of No Par Value
 
NYSE MKT
Securities registered pursuant to Section 12(g) of the Act:        None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [    ]    No [ x ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [    ]    No [ x ]
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 for such shorter period that the registrant was required to submit and post such files).
Yes [ x ]    No [    ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[ x ]





Indicate by check mark whether the registrant is 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 [    ] (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 [ x ]
The aggregate market value of voting common stock held by non-affiliates of the registrant on December 10, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $95,224,827, based upon the closing sales price of the registrant’s common stock as reported on NYSE MKT on that date. The registrant does not have any non-voting common equity.
As of July 29, 2014, there were 5,113,041 shares of registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders to be held October 22, 2014 are incorporated by reference into Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
 




Cautionary Statement Regarding Forward-Looking Information
Forward-looking statements are contained throughout this Annual Report on Form 10-K. Such statements may generally express management’s expectations with respect to its plans, goals and projections, or its current 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 numerous risks and the development of 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 this Form 10-K under Part I, Item 1A. “Risk Factors,” Risk factors and other uncertainties may also be discussed from time to time in the Company’s news releases, public statements or in other reports that the Company files with the Securities and Exchange Commission.
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” and similar words (or derivatives thereof) are generally used to distinguish forward-looking statements from statements pertaining to historical or present facts.
All forward looking statements in this Form 10-K are provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995. Such forward looking information should be evaluated in the context of all of the Company's risk factors, which readers should review carefully and not place undue reliance on management's forward looking statements. Except as may be required by law, the Company disclaims any obligation to update any of the forward-looking statements that may be contained throughout this Form 10-K.
References to fiscal years used in this Form 10-K
In this Annual Report on Form 10-K, the Company’s fiscal year that ended June 3, 2014 may be referred to as fiscal year 2014. 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 the month of May. Fiscal year 2014 consisted of 53 weeks, which began on May 29, 2013 and ended on Tuesday, June 3, 2014.
Also in this Annual Report on Form 10-K, the Company’s fiscal years that ended May 28, 2013, May 29, 2012, May 31, 2011 and June 1, 2010 may be referred to as fiscal years 2013, 2012, 2011 and 2010, respectively. All of these years consisted of 52 weeks. References to fiscal year 2015 refer to the 52 week year that began on June 4, 2014, which will end on Tuesday, June 2, 2015.
With the exception of fiscal year 2014, the first quarter of each fiscal year presented herein contained 16 weeks while the last three quarters contained 12 weeks. The fourth quarter of fiscal year 2014 contained 13 weeks, which occurs normally every six years.



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PART I
(Items 1 through 4)
Item 1. Business
Background
Frisch’s Restaurants, Inc. (together with its wholly owned subsidiaries, referred to as the “Company” or the “Registrant”), is a regional company that operates full service family-style restaurants under the name “Frisch’s Big Boy.” Frisch’s Big Boy restaurants operated by the Company during the last five years have been located entirely in various regions of Ohio, Kentucky and Indiana.
Incorporated in the state of Ohio in 1947, the Company’s stock has been publicly traded since 1960, and currently trades on the NYSE MKT. The Company’s executive offices are located at 2800 Gilbert Avenue, Cincinnati, Ohio 45206. The telephone number is (513) 961-2660. The Company’s web site is www.frischs.com.
As of June 3, 2014, the Company operated 96 Frisch's Big Boy restaurants. Additionally, the Company licensed the rights to operate 25 Frisch's Big Boy restaurants to other operators. All of the restaurants licensed to other operators are located in various markets within the states of Ohio, Kentucky and Indiana.
The Company owns the trademark “Frisch’s.” The rights to the “Big Boy” trademark, trade name and service mark are exclusively and irrevocably owned by the Company for use in the states of Kentucky and Indiana, and in most of Ohio and Tennessee.
At the beginning of fiscal year 2012, 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) of Raleigh, North Carolina. The Company closed six of the Golden Corrals in August 2011 due to issues related to under performance. In May 2012, the Company sold the remaining 29 Golden Corrals to GCC. Results for Golden Corral are presented as discontinued operations for fiscal year 2012 and all prior years. Segment information is no longer reported. For additional financial information relating to the Company's Golden Corral restaurants, refer to Note B - Discontinued Operations - to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Frisch's Big Boy Restaurants
Frisch's Big Boy restaurants are full service family-style restaurants that offer quick service in an inviting atmosphere with genuine Midwestern hospitality. All of the restaurants offer “drive-thru” service. The restaurants are generally open seven days a week, typically from 7:00 a.m. to 11:00 p.m. with extended weekend evening hours. Standardized menus offer a wide variety of items at moderate prices, featuring well-known signature items such as the original “Big Boy” double-deck hamburger sandwich, freshly made onion rings and hot fudge cake for dessert. Primetime Burgers, featuring one-third pound of beef, were successfully introduced to the menu in fiscal year 2012, which are now available as the classic cheeseburger, mushroom and swiss or a BLT cheeseburger. All burgers are made with fresh, never frozen 100 percent ground beef. Other menu selections include many sandwiches, pasta, roast beef, chicken and seafood dinners, complemented by salads topped with homemade dressings, popular side dishes and a variety of well-liked desserts, non-alcoholic beverages and many other items. The Company works continually to develop new products. Buffalo Bites 'n Fries, which has a spicy flavor profile and attracts a younger customer base, was begun as a limited time offer, but was added to the menu in 2013 after a very successful introduction. In addition, a full breakfast menu is offered, and all of the restaurants utilize breakfast bars that are converted easily to soup and salad bars for lunch and dinner hours. Drive-thru and carryout menus emphasize combo meals that consist of a popular sandwich packaged with French fries and a beverage and sold at a lower price than if purchased separately. Breakfast combo meals - breakfast sandwiches, breakfast burritos and other offerings that can be paired with crispy hash browns and the choice of coffee or a soft drink - were added to the drive-thru menu near the end of the previous fiscal year and continue to grow in sales.
The menu also has quality offerings for the health conscious customer, such as the soup and salad bar, a selection of wraps, seasonal fresh fruit smoothies and a section of the menu features smaller portions. All fried foods are fried only in trans fat-free shortening. In addition, customers may order customized servings to meet their dietary concerns. For example, a sandwich can be ordered without the usual dressing of cheese and tartar sauce.
The operations of the Company are vertically integrated. A commissary and food manufacturing plant manufactures and prepares foods, and stocks food and beverages, paper products and other supplies for distribution to all of the Company's restaurants. Raw materials, consisting principally of food items, are generally plentiful and may be obtained from any number of reliable suppliers. Quality and price are the principal determinants of source. Most companies in the restaurant industry do not operate commissaries or food manufacturing plants, choosing instead to purchase directly from outside sources. The Company believes that its restaurant operations benefit from centralized purchasing and food preparation through its commissary operation, which ensures uniform

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product quality, timeliness of distribution (two to three deliveries per week) to restaurants and ultimately results in lower food and supply costs.
Substantially all licensed Frisch's Big Boy restaurants regularly purchase products from the commissary. Sales of commissary products to restaurants licensed to other operators were $9.9 million in fiscal year 2014 (4.7 percent of consolidated sales), $9.5 million in fiscal year 2013 (4.7 percent of consolidated sales) and $9.4 million in fiscal year 2012 (4.6 percent of consolidated sales).
Television and radio are the primary media to carry and promote Frisch's Big Boy’s key messages. Television conveys the visual message with food photography, while radio provides a cost effective means to promote limited time offered menu items. Outdoor billboards and targeted on-line advertising are used to complement the media plan, primarily to introduce and promote new menu items. The Company also utilizes social media as a means to develop two-way communication directly with the customer. Targeted social media communities are a cost effective way to reach a wide range of customers, but are a particularly important means to promote limited time offerings and to engage younger audiences. The marketing strategy does not use discounting to drive customer traffic.
In recent years, the Frisch's Big Boy marketing strategy has evolved from “What's Your Favorite Thing?” to a tag free advertising message. This evolution has refocused marketing campaigns away from a primary emphasis on signature menu items toward other offerings to bring awareness to Frisch's Big Boy's broad menu, along with limited time offerings. However, signature menu items continue to be promoted through television commercials that are broadcast on local network affiliates and local cable programming. Television is also used to promote drive thru availability and speed, as well as dining experience with service.
The Company currently expends for advertising an amount equal to 2.5 percent of gross sales from its restaurant operations, plus fees paid into an advertising fund by restaurants licensed to other operators.
Designed with longevity in mind while also appealing to younger customers, newly constructed Frisch's Big Boy restaurants are marked with bold colors and bright environments, featuring sleek lines, cherry colored paneling and wood trim, accented with abundant natural light and company memorabilia covering much of the wall space. Over the last three fiscal years, the cost to build and equip a typical full service Frisch's Big Boy restaurant has ranged from $2,250,000 to $3,825,000. The actual cost depends greatly on the costs of land and land improvements, both of which can vary widely from location to location, and whether the land is purchased or leased. Costs also depend on whether the new restaurant is constructed using basic plans for the original 2001 building prototype (5,700 square feet with seating for 172 guests) or its smaller adaptation, the 2010 building prototype (5,000 square feet with seating 148 guests), which is used in smaller trade areas.
As part of the Company’s continuing commitment to serve customers in clean, pleasant surroundings, the Company renovates approximately one-fifth of its Frisch's Big Boy restaurants each year. The renovations are designed to not only refresh and upgrade the interior finishes, but also to synchronize the interiors and exteriors of older restaurants with that of newly constructed restaurants. Depending on age and a variety of other factors, the current cost to renovate a restaurant ranges from $100,000 to $230,000. The restaurants are not closed for business when being remodeled; all work is completed after normal operating hours.
In addition, certain high-volume restaurants are regularly evaluated to determine a) whether their kitchens should be redesigned for increased efficiencies (which may cost up to $150,000) and b) if an expansion of the dining room (which may cost $800,000 or more) is warranted.
The following tabulation recaps Frisch's Big Boy restaurant openings and closings over the five most recent fiscal years:
 
Fiscal Year
 
2010
 
2011
 
2012
 
2013
 
2014
Frisch's Big Boy Restaurants Owned and Operated by the Company
 
 
 
 
 
 
 
 
 
In operation beginning of year
88

 
91

 
95

 
93

 
95

Opened
3

 
4

 
1

 
2

 
1

Opened replacement building
1

 

 
1

 

 

Closed to make way for new buildings
(1
)
 

 
(1
)
 

 

Closed

 

 
(3
)
 

 

End of year - Frisch's Big Boy restaurants owned and operated
91

 
95

 
93

 
95

 
96


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One new Frisch's Big Boy restaurant opened in fiscal year 2014 in Lexington, Kentucky, in December 2013. No new Frisch's Big Boy restaurant construction was in progress as of of June 3, 2014. One older restaurant in Columbus, Ohio was closed in early July 2014 (the first quarter of fiscal year 2015).
The following tabulation recaps openings and closings for Frisch's Big Boy restaurants that are licensed to other operators over the five most recent fiscal years:
 
 
Fiscal Year
 
2010
 
2011
 
2012
 
2013
 
2014
Frisch's Big Boy Restaurants Licensed to Others
 
 
 
 
 
 
 
 
 
Licensed to others beginning of year
26

 
25

 
25

 
25

 
25

Opened

 

 

 

 

Closed
(1
)
 

 

 

 

End of year - Frisch's Big Boy restaurants licensed to others
25

 
25

 
25

 
25

 
25

One additional license was granted during fiscal year 2014. The restaurant is being constructed by the franchisee in Ironton, Ohio, with an anticipated opening date in August 2014.
Franchise fees are charged to licensees for use of trademarks and trade names, and licensees are required to make contributions to the Company’s general advertising account. These fees and contributions are calculated principally on percentages of sales. Total franchise and other service fee revenue earned by the Company from licensees was $1.3 million in fiscal year 2014 and $1.2 million in each of the fiscal years 2013 and 2012. Other service fees from licensees include revenue from accounting and payroll services that four of the licensed restaurants purchased from the Company in each of the last three fiscal years.
The license agreements with licensees are not uniform, but most of the licenses for individually licensed restaurants that were in effect as of June 3, 2014 are covered by agreements containing the following provisions:
1.
The Company grants to the Licensee the right to use the name “Frisch” and/or “Frisch’s,” “Big Boy” and related trademarks and trade names in connection with the operation of a food and restaurant business, in return for which the Licensee pays a monthly license fee equal to 3.75 percent of its gross sales. In addition, an initial license fee of $30,000 is generally required in exchange for the granting of a license for a new Frisch's Big Boy restaurant.
2.
The Company provides local and regional advertising through publications, radio, television, etc., in return for which the Licensee pays a monthly fee equal to 2.5 percent of its gross sales.
 
In addition, Licensees are required to conduct business on a high scale, in an efficient manner, with cleanliness and good service, all to the complete satisfaction of the Company. Licensees are required to serve only quality foods and must comply with all food, sanitation and other regulations.
Long standing area license agreements granted to other operators in northern Indiana and northwestern Ohio differ in various ways from license agreements covering individual restaurants. The most notable differences are significantly lower license and advertising fee percentages and lower initial fees paid by the area operators. Provisions for these lower fees have been perpetually in place since the 1950s.
Human Resources
The Company provides equal opportunity employment without regard to age, race, religion, color, sex, national origin, disability, veteran status or any other legally protected class. The Company’s equal opportunity employment policy provides and maintains a work environment that is free from all forms of illegal discrimination including sexual harassment. The philosophy of the policy stresses the need to train and to promote the person who becomes the most qualified individual to do a particular job. The Company is committed to promoting “Diversity” in the workplace in order to enhance its equal opportunity employment policy.
The Company remains committed to providing employees with the best training possible, as management believes that investing in people is a strategic advantage. Comprehensive recruiting and training programs are designed to maintain the food and service quality necessary to achieve the Company’s goals for operating results. A management recruiting staff is maintained at the Company’s headquarters. Corporate training centers for new restaurant managers are operated in Cincinnati, Ohio and Covington, Kentucky. The training includes both classroom instruction and on-the-job training. A full time recruiter is on staff to attract high quality hourly-paid restaurant workers.

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The Company’s incentive-based compensation program for restaurant managers, area supervisors and regional directors (collectively, members of the operations management team) ties compensation of the members of the operations management team directly to the cash flows of their restaurant(s), which allows incentive compensation to be earned consistently. The incentive compensation that the members of the operations management team can earn under the program is at a level the Company believes is above the average for competing restaurant concepts. The Company believes the program maintains turnover in operations management at the lowest possible level, and has resulted in a strong operations management team that focuses on building same store sales and margins.
Employee selection software helps lower hourly employee turnover rates; an employee validation website is in place that measures employee job satisfaction; and an interactive employee training program utilizes training videos and quizzes. These digital videos are loaded directly onto the hard drive of a computer located at each restaurant that is networked to the point-of-sale system, allowing headquarters to access the interactive results.
Information Technology
Each of the Company’s restaurants is managed through standardized operating and control systems anchored by a point-of-sale (POS) system that allows management to instantly accumulate and utilize data for more effective decision making, while allowing restaurant managers to spend more time in the dining room focusing on the needs of customers. The system generates the guest check and provides functionality for settling the customer’s check using cash, credit or debit card, or gift card. The system provides a record of all items sold, the service time, and the server responsible for the customer. Employee time keeping is also kept on the POS system. Back office functionality provides employee scheduling, inventory control, sales forecasting, product ordering and many other management reports. Security measures include biometric sign-on devices to access the POS system. The system meets the security requirements of the Payment Card Industry (PCI). The Company has received its attestations of compliance in each of the last three years. A finding of non-compliance could restrict the Company’s privileges to accept credit cards as a form of payment. A $2,000,000 five year plan to replace POS register equipment in all Frisch's Big Boy restaurants began in August 2012. As of June 3, 2014, new POS equipment had been installed in 40 Frisch's Big Boy restaurants, including 20 in fiscal year 2014. Twenty more are currently scheduled for installation in fiscal year 2015 (the third year of the five year plan).
Standardized operating and control systems also include an automated drive-thru timer system in all Frisch's Big Boy restaurants that measures the time from when a customer’s car first enters the drive-thru station until the order is received and the customer exits the drive-thru. This information is provided to the restaurant manager in a real time environment, which reduces the amount of time required to serve customers. To replenish restaurant inventories, a “suggested order” automated system analyzes current inventory balances and sales patterns and then “suggests” a replenishment order from the commissary operation. This process optimizes in-store inventory levels, which results in better control over food costs, identifies waste and improves food quality.
In addition to electronic signature capture devices that process debit and credit card transactions, other paperless systems in Frisch's Big Boy restaurants include a) employee payroll advices that can be either emailed directly to the employee or provided electronically to each restaurant where the employees may print them on demand if desired, b) signatures have been captured on key employment documents such as I-9s, Forms W-4 and acknowledgments regarding employee handbooks, c) an on-line employment application is on the Company’s corporate web site (www.frischs.com) that provides direct feeds into the POS system and the enterprise reporting system at headquarters, and d) a portal/dashboard, accessed centrally on corporate information systems, provides "actionable" information to restaurant operations, with "critical" information presented graphically.
To enhance the customer's experience while visiting the drive-thru, a program was launched in fiscal year 2014 to fit each restaurant with an order confirmation board, replete with a sleek, custom built canopy to protect the customer from the elements of the weather, The order confirmation boards ensure that all drive-thru orders are filled accurately with the speed of service the customer expects. As of June 3, 2014, 66 of the installations were in place, with all restaurants scheduled to be completed by autumn 2014.
An enterprise reporting system supports the Company’s information needs including accounting, inventory control, procurement, processing of payroll and accounts payable, human resources records and other record keeping. A secondary data storage appliance with supporting hardware and a VM ware server are in place as part of an off-site storage area network (SAN). The SAN performs near real time replication of all data in the production environment, which allows for quick start-up of the disaster recovery environment should it be necessary to call it into service.
Raw Materials
The sources and availability of food and supplies are discussed above under the caption "Frisch's Big Boy Restaurants". Other raw materials used in food processing include equipment for cooking and preparing food, refrigeration and storage equipment and various other fixtures. The Company currently purchases the majority of its restaurant equipment from a single vendor. Other reliable restaurant equipment suppliers are available should the Company choose to replace this vendor, and in fact, a variety of

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other vendors are used to supply the balance of equipment purchased. In addition, no significant disruptions in the supply of electricity and natural gas used in restaurant operations have been experienced in recent years.
Trademarks and Service Marks
The Company has registered certain trademarks and service marks on the Principal Register of the United States Patent and Trademark Office, including “Frisch’s” and the tag line “What’s Your Favorite Thing?” Other registrations include, but are not limited to, “Brawny Lad,” “Buddie Boy,” “Just Right Favorites,” “Pie Baby,” “Fire & Ice,” “Frisch-ly Made,” “Bundle of Joy,” and “Tiers of Joy.” All of these registrations are considered important to the operations of Frisch's Big Boy restaurants, especially the primary mark “Frisch’s”. The duration of each registration varies, depending upon when registration was first obtained. The Company currently intends to renew all of its trademarks and service marks when each comes up for renewal.
Pursuant to a 2001 agreement with Big Boy Restaurants International, LLC, the Company acquired limited ownership rights and a right to use the “Big Boy” trademarks and service marks within the states of Indiana and Kentucky and in most of Ohio and Tennessee. A concurrent use registration was issued October 6, 2009 on the Principal Register of the United States Patent and Trademark Office, confirming these exclusive “Big Boy” rights.
The Company is not aware of any infringements on its federally registered trademarks and service marks or its other trademarks, nor is the Company aware of any infringement on any of its territorial rights to use the proprietary marks that are owned by or licensed to the Company.
Seasonality
The Company’s business is moderately seasonal, with the third quarter of the fiscal year (mid-December through early March) normally accounting for a smaller share of annual revenues. Additionally, severe winter weather can have a marked negative impact upon revenue during the third quarter. Occupancy and other fixed operating costs have a greater negative impact on operating results during any quarter that may experience lower sales. Results for any quarter should not be regarded as indicative of the year as a whole, especially the first quarter, which contains 16 weeks. Each of the last three quarters normally contains 12 weeks. The fourth quarter of fiscal year 2014 contained a 13th week that was necessary to complete the 53 week accounting year.
Working Capital
Restaurant sales provide the Company’s principal source of cash. Funds from restaurant operations are immediately available to meet the Company’s working capital needs, as substantially all sales from restaurant operations are settled in cash or cash equivalents such as debit and credit cards. Other sources of cash may include borrowing against credit lines, proceeds from stock options exercised and occasional sales of real estate.
The Company uses its positive cash flows for debt service, capital spending (restaurant expansion and remodeling costs), capital stock repurchases and cash dividends.
As there is no need to maintain significant levels of inventories, and accounts receivable are minimal in nature, the Company has historically maintained a strategic negative working capital position, which is not uncommon in the restaurant industry. The working capital deficit was $4,505,000 as of June 3, 2014. As significant, predictable cash flows are provided by restaurant operations, the deployment of a negative working capital strategy has not hindered the Company’s ability to satisfactorily retire any of its obligations when due. Additionally, a working capital revolving line of credit is readily available if needed.
On July 25, 2012, the Board of Directors declared a special one-time dividend of $9.50 per share, which was paid on September 14, 2012 in the amount of $47,962,754. The funding was provided by the proceeds from the sale of the Company's remaining 29 Golden Corral restaurants in May 2012.
Customers
Because all of the Company’s retail sales are derived from food sales to the general public, there is no material dependence upon a single customer or any group of a few customers.
Competition
The restaurant industry is highly competitive and many of the Company’s competitors are substantially larger and possess greater financial resources than does the Company. The Company's restaurants have numerous competitors, including national chains, regional and local chains, as well as independent operators. None of these competitors, in the opinion of the Company's management, is dominant in the family-style sector of the restaurant industry. In addition, competition continues to increase from non-traditional

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competitors such as supermarkets that not only offer home meal replacement but also have in-store dining space, trends that continue to grow in popularity.
The principal methods of competition in the restaurant industry are brand name recognition and advertising; menu selection and prices; food quality and customer perceptions of value, speed and quality of service; cleanliness and fresh, attractive facilities in convenient locations. In addition to competition for customers, sharp competition exists for qualified restaurant managers, hourly restaurant workers and quality sites on which to build new restaurants.
Research and Development
The Company’s corporate staff includes a research and development chef whose responsibilities entail development of new menu items and enhancing existing products. From time to time, the Company conducts a variety of other research to identify a) emerging industry trends and changing consumer behaviors and preferences, b) where future restaurants should be built, and c) observational research of competitors is sometimes utilized for various purposes, including assistance with design concepts for new restaurant prototypes. While these activities are important to the Company, these expenditures have not been material during the Company's last three fiscal years and are not expected to be material to the Company’s future results.
Government Regulation
The Company is subject to licensing and regulation by various Federal, state and local agencies. These licenses and regulations pertain to food safety, health, sanitation, safety, vendors’ licenses and hiring and employment practices including compliance with the Fair Labor Standards Act and minimum wage statutes. All Company operations, including the commissary and food manufacturing plant, are believed to be in material compliance with all applicable laws and regulations. All of the Company’s restaurants substantially meet local and state building and fire codes, and the material requirements of the Americans with Disabilities Act. Although the Company has not experienced any significant obstacles to obtaining building permits, licenses or approvals from governmental bodies, increasingly rigorous requirements on the part of state, and in particular, local governments, could delay or possibly prevent expansion in desired markets.
The federal Food Safety Modernization Act (FMA) was enacted in January 2011 to standardize procedures associated with recalls of manufactured food. The Company is in compliance with the minimum procedures of the FMA and is currently updating all documentation processes to meet the final compliance deadline in 2016.
On March 13, 2014 an executive order was issued by President Obama that directs the Secretary of the U.S. Department of Labor to revamp regulations to expand the number of workers entitled to receive overtime compensation. Management is watching the development of the regulations closely and will analyze and evaluate the effect upon the Company's practices once the specifics of the regulations are known.
The federal Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. As the Company intends to continue sponsoring existing health care plans, management continues to analyze and evaluate the future short and long term effects upon the Company while initiating various strategies to mitigate the expected financial burden of compliance with the mandate when it becomes fully effective on January 1, 2015.
PPACA requires calorie counts and other nutritional information to be posted on the Company’s menus. The nutritional information will be required to appear on menus no later than six months (and possibly up to one year) after the U.S. Food and Drug Administration (FDA) publishes the final rule. On April 3, 2014 the FDA announced that it had moved the final regulation to the White House Office of Management and Budget (OMB), which is the final step in the review process. Once the final review by OMB is completed (which it had yet to do as of July 2014), the final regulation will be published and made publicly available. Calorie counts and other nutritional information about the Company's menu offerings are available now on the Company's website (http://www.frischs.com). Sales and profitability could be adversely affected if customers significantly alter their menu ordering habits when this information becomes available on the Company's menus.
The Company is subject to the franchising regulations of the Federal Trade Commission and the franchising laws of Ohio, Kentucky and Indiana where it has licensed Frisch's Big Boy restaurants to other operators.
Environmental Matters
The Company does not believe that various federal, state or local environmental regulations have had or will have any material effect upon the capital expenditures, earnings or competitive position of the Company's operations. However, the Company cannot predict the effect of any future environmental legislation or regulations.


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Employees
As of June 3, 2014, the Company and its subsidiaries employed approximately 6,100 active employees. Approximately 3,500 of the Company’s employees are considered part-time (those who work less than 30 hours per week). Although there is no significant seasonal fluctuation in employment levels, hours worked may vary according to sales patterns in individual restaurants. None of the Company’s employees is represented by a collective bargaining agreement. Management believes that employee relations are excellent and employee compensation is comparable with or better than competing restaurants.
Geographic Areas
The Company has no operations outside of the United States of America. The Company’s revenues, consisting principally of retail sales of food and beverages to the general public and certain wholesale sales to and license fees from restaurants licensed to other operators, were substantially generated in various markets in the states of Ohio, Kentucky and Indiana during each of the three fiscal years in the period ended June 3, 2014. Substantially all of the Company’s long-lived assets were deployed in service in the same states during the same periods stated above. Prior to being sold in May 2012, two Golden Corral restaurants were operated by the Company in western Pennsylvania and a third Golden Corral restaurant was operated in West Virginia.
Available Information
The Securities Exchange Act of 1934, as amended, requires the Company to file periodic reports with the Securities and Exchange Commission (SEC) including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive 14A Proxy Statements, and certain other information. The Company’s periodic reports (and any amendments thereto) can be viewed by visiting the website of the SEC (http://www.sec.gov). In addition, the SEC makes the Company’s periodic reports available for reading and copying in its Public Reference Room located at 100 F. Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
The Company makes available the periodic reports that it files with the SEC by visiting the "Investors" section of the Company's corporate website (http://www.frischs.com), through which a hyperlink is provided directly to the Company’s filings on the website of the SEC. New information available through the hyperlink is generally provided within a few minutes from the time a report is filed. Information contained on or available through the Company’s website is not a part of, nor is it being incorporated into, this Annual Report on Form 10-K. In addition, printed copies of the reports that the Company files with the SEC may be obtained without charge by writing to Mark R. Lanning, Chief Financial Officer, Frisch’s Restaurants, Inc., 2800 Gilbert Avenue, Cincinnati, Ohio 45206-1206. Email requests may be sent to cfo@frischs.com.
Copies of the Company’s corporate governance documents are available in the "Investors" section of the Company’s corporate website (http://www.frischs.com). The documents include the Company’s Code of Regulations, Corporate Governance Guidelines, Code of Conduct, Code of Ethics, Insider Trading Policy, Related Person Transaction Policy, the Charter of the Disclosure Controls and Risk Management Committee, and various charters of committees of the Board of Directors, including those of the Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Finance Committee.
The Audit Committee has established a procedure for the confidential, anonymous submission by employees and other concerned parties regarding the Company’s accounting, internal accounting controls or auditing matters. The toll free Corporate Governance Hotline number is 800-506-6424. The Hotline is managed by an independent third party and is available 24 hours a day, seven days a week. Messages are transcribed and referred electronically to the Audit Committee.
Executive Officers of the Registrant
The following table sets forth the names and certain information concerning the executive officers of the Company:
 

8


Name
 
Age
 
Current Principal Occupation or Employment and Five Year
Employment History
Craig F. Maier (a)
 
64
 
President and Chief Executive Officer of the Company (since 1989); Director of the Company (since 1984)
Mark R. Lanning
 
59
 
Vice President and Chief Financial Officer of the Company (since August 2011) and Vice President - Finance of the Company (since May 2011); Vice President – Investor Relations and Treasurer, Hillenbrand, Inc. (from March 2008 to May 2011); Vice President and Treasurer of Hillenbrand Industries, Inc. (from 1988 to March 2008)
Michael E. Conner, Sr.
 
62
 
Vice President - Human Resources of the Company (since 2000)
Michael R. Everett
 
60
 
Vice President - Information Services of the Company (since May 2006); Director of Information Services of the Company (from May 2005 to May 2006)
Stephen J. Hansen
 
49
 
Vice President - Commissary of the Company (since June 2010); Plant Manager, Klosterman Baking Company (from March 2009 to May 2010); Operations Manager, General Mills (from October 2008 to February 2009); Plant Manager, Campos Foods LLC (from 1996 to June 2008)
James I. Horwitz
 
57
 
Vice President – Real Estate of the Company (since March 2008); Director of Leasing and Development, Cincinnati United Contractors (from February 2007 to March 2008); Director of Real Estate, Alderwoods Group (from December 2005 to January 2007)
Karen F. Maier (a)
 
62
 
Vice President - Marketing of the Company (since 1983); Director of the Company (since 2005)
William L. Harvey (b)
 
60
 
Regional Director of the Company (since 1995) and formerly held positions within the Company of Area Supervisor and Executive Store Manager
James M. Fettig
 
46
 
Regional Director of the Company (since June 4, 2014) and formerly held position within the Company of Area Supervisor (from 1995 to June 3, 2014)
Lindon C. Kelley
 
59
 
Regional Director of the Company (since 2000) and formerly held positions within the Company of Area Supervisor and Executive Store Manager
Todd M. Rion
 
54
 
Regional Director of the Company (since February 2012) and formerly held the position within the Company of Area Supervisor (July 2009 to February 2012); independent restaurant operator (from 2006 to July 2009)
 
(a)Craig F. Maier and Karen F. Maier are siblings

(b)William L. Harvey retired effective June 3, 2014


9


Item 1A. Risk Factors
Operational, strategic, compliance and other risks and uncertainties that continually face the Company are identified herein. The occurrence of adverse events associated with all risks, including those risks not listed specifically or those that are unforeseen at the present time, could result in significant adverse effects on the Company’s financial position, results of operations and cash flows, which could include the permanent closure of any affected restaurant(s) with an impairment of assets charge taken against earnings, and could adversely affect the price at which shares of the Company’s common stock trade.
In addition to operating results, other factors can influence the volatility and price at which the Company’s common stock trades. The Company’s stock is thinly traded on the NYSE MKT. Thinly traded stocks can be susceptible to sudden, rapid declines in price, especially when holders of large blocks of shares seek exit positions. Rebalancing of stock indices in which the Company’s shares are placed, such as the Russell 2000 Index, can also influence the price of the Company’s stock.
Food Safety
Food safety is the most significant risk to any company that operates in the restaurant industry. It is the focus of increased government regulatory initiatives at the local, state and federal levels. Failure to protect the Company’s food supplies could result in food borne illnesses and/or injuries to customers. If any of the Company’s customers become ill from consuming the Company’s products, the affected restaurants may be forced to close. An instance of food contamination originating at the commissary operation could have far reaching effects, as the contamination would affect substantially all Frisch's Big Boy restaurants, including those licensed to other operators.
Economic Factors
Economic recessions can negatively influence discretionary consumer spending in restaurants and result in lower customer counts, as consumers become more price conscientious, tending to conserve their cash amid unemployment and other economic uncertainty. The effects of higher gasoline prices can also negatively affect discretionary consumer spending in restaurants. Increasing costs for energy can affect profit margins in many other ways. Petroleum based material is often used to package certain products for distribution. In addition, suppliers may add fuel surcharges to their invoices. The cost to transport products from the commissary to restaurant operations will rise with each increase in fuel prices. Higher costs for electricity and natural gas result in higher costs to a) heat and cool restaurant facilities, b) refrigerate and cook food and c) manufacture and store food at the Company’s food manufacturing plant.
Inflationary pressure, particularly on food costs, labor costs (especially associated with increases in the minimum wage) and health care benefits, can negatively affect the operation of the business. Shortages of qualified labor are sometimes experienced in certain local economies. In addition, the loss of a key executive could pose a significant adverse effect on the Company.
Future funding requirements of the defined benefit pension plan that is sponsored by the Company largely depend upon the performance of investments that are held in the trust that has been established for the plan. Equity securities comprise 70 percent of the target allocation of the plan's assets. Poor performance in equity securities markets can significantly lower the market values of the plan's investment portfolio, which, in turn, can result in a) material increases in future funding requirements, b) much higher net periodic pension costs to be recognized in future years, and c) increases in the underfunded status of the plan, which requires a reduction in the Company’s equity to be recognized.
Competition
The restaurant industry is highly competitive and many of the Company’s competitors are substantially larger and possess greater financial resources than does the Company. Frisch's Big Boy restaurants have numerous competitors, including national chains, regional and local chains, as well as independent operators. None of these competitors, in the opinion of the Company’s management, presently dominates the family-style sector of the restaurant industry in any of the Company’s operating markets. That could change at any time due to:
 
changes in economic conditions
changes in demographics in neighborhoods where the Company operates restaurants
changes in consumer perceptions of value, food and service quality
changes in consumer preferences, particularly based on concerns with nutritional content of food on the Company’s menu
new competitors enter the Company’s markets from time to time
increased competition from supermarkets and other non-traditional competitors
increased competition for quality sites on which to build restaurants


10


Development Plans and Financing Arrangements
The Company’s business strategy and development plans also face risks and uncertainties. These include the inherent risk of poor quality decisions in the selection of sites on which to build restaurants, the rising cost and availability of desirable sites and increasingly rigorous requirements on the part of local governments to obtain various permits and licenses. Other factors that could impede plans to increase the number of restaurants operated by the Company include saturation in existing markets, limitations on borrowing capacity and the effects of increases in interest rates.
In addition, the Company’s loan agreements include financial and other covenants with which compliance must be met or exceeded each quarter. Failure to meet these or other restrictions could result in an event of default under which the lender may accelerate the outstanding loan balances and declare them to be immediately due and payable.
The Supply and Cost of Food
Food purchases can be subject to significant price fluctuations that can considerably affect results of operations from quarter to quarter and year to year. Price fluctuations can be due to seasonality or any number of factors, such as weather, foreign demand and demographic factors. The market for beef, in particular, continues to be highly volatile due in part to import and export restrictions. Beef costs can also be affected by bio-fuel initiatives and other factors that influence the cost to feed cattle. The Company depends on timely deliveries of perishable food and supplies. Any interruption in the continuing supply would harm the Company’s operations.
Litigation and Negative Publicity
Employees, customers and other parties bring various claims against the Company from time to time. Defending such claims can distract the attention of senior level management away from the operation of the business. Legal proceedings can result in significant adverse effects to the Company’s financial condition, especially if other potentially responsible parties lack the financial wherewithal to satisfy a judgment against them or the Company’s insurance coverage proves to be inadequate. Also, see “Legal Proceedings” elsewhere in Part I, Item 3 of this Form 10-K.
Negative publicity associated with legal claims against the Company, especially those related to food safety issues, could harm the Company's reputation and brand (whether or not such complaints are valid), which, in turn, could adversely affect operating results. Publicity surrounding food safety issues has caused irreparable harm to the reputations of certain operators in the restaurant industry in the past. The Company’s reputation and brand can also be harmed by food safety issues and other operational problems that may be experienced by Frisch's Big Boy restaurants that the Company licenses to other operators, as well as Big Boy restaurants (non Frisch's) that are operated by others outside of the Company's territories or in the restaurant industry at large. Other negative publicity such as that arising from rumor and innuendo spread through social internet media and other sources can create adverse effects on the Company’s results of operations.
Intellectual Property
The Company's intellectual property, which includes its food recipes, is very important to the operation of the business and its competitive position in the marketplace. The Company protects these assets through a combination of federally registered trademarks and other trademark and service mark rights, and various other means. If the Company's efforts to protect its intellectual property are inadequate, or if any third party misappropriates or infringes on the Company's intellectual property, the value of the Company's brand may be harmed, which could have a material adverse effect upon the Company.
Governmental and Other Rules and Regulations
Governmental and other rules and regulations can pose significant risks to the Company. Examples include:
 
general exposure to penalties or other costs associated with the potential for violations of numerous governmental regulations, including:
immigration (I-9) and labor regulations regarding the employment of minors
minimum wage and overtime requirements
employment discrimination and sexual harassment
health, sanitation and safety regulations
facility issues, such as meeting the requirements of the Americans with Disabilities Act of 1990 or liabilities to remedy unknown environmental conditions
changes in existing environmental regulations that would significantly add to the Company’s costs
any future imposition by OSHA of costly ergonomics regulations on workplace safety

11


climate legislation that adversely affects the cost of energy
compliance with the Food Modernization Act (enacted January 2011)
legislative changes affecting labor law, especially increases in the federal or state minimum wage requirements
compliance with a March 2014 Executive Order affecting the federal rules of who qualifies for overtime pay
compliance with legislation enacted to reform the U.S. health care system could have a material adverse effect upon the Company’s health care costs
nutritional labeling on menus - compliance with legislation enacted to reform the U.S. health care system that requires nutritional labeling to be placed on menus and the Company’s reliance on the accuracy of certain information that may be obtained from third party suppliers
nutritional labeling on menus – potential adverse effect on sales and profitability if customers’ menu ordering habits should change
legislation or court rulings that result in changes to tax codes that are adverse to the Company
changes in accounting standards imposed by governmental regulators or private governing bodies could adversely affect the Company’s financial position
estimates used in preparing financial statements and the inherent risk that future events affecting them may cause actual results to differ markedly
Catastrophic Events
Unforeseen catastrophic events could disrupt the Company’s operations, the operations of the Company’s suppliers and the lives of the Company’s employees and customers. In particular, the dependency of the Company's restaurants on the commissary operation could present an extensive disruption of products to restaurants should a catastrophe impair its ability to operate. Examples of catastrophic events include but are not limited to:
 
adverse winter weather conditions
natural disasters such as earthquakes or tornadoes
fires or explosions
widespread power outages
criminal acts, including bomb threats, robberies, hostage taking, kidnapping and other violent crimes
acts of terrorists or acts of war
civil disturbances and boycotts
disease transmitted across borders that may enter the food supply chain
Technology, Information Systems and Cyber Risks
Technology and information systems are of vital importance to the strategic operation of the Company. Security violations such as unauthorized access to information systems, including breaches on third party servers, could result in the loss of proprietary data. Should consumer privacy be compromised, consumer confidence may be lost, which could adversely affect sales and profitability. To prevent credit card fraud, the Payment Card Security Standards Council requires an annual audit to certify the Company's compliance with the required internal controls of processing and storing of credit card data. A finding of non-compliance could restrict the Company's authorization to accept credit cards as a form of payment, which could adversely affect sales and profitability.
Other events that could pose threats to the operation of the business include:
 
catastrophic failure of certain information systems
failure of the Company's disaster recovery plan
difficulties that may arise in maintaining existing systems
difficulties that may occur in the implementation of and transition to new systems
financial stability of vendors to support software over the long term

Item 1B. Unresolved Staff Comments
None
Item 2. Properties
All of the Company’s Frisch's Big Boy restaurants are freestanding, well-maintained facilities. In addition to full service dining rooms, all of the restaurants are fashioned with windows for drive-thru service. Older restaurants are generally located in urban

12


or heavily populated suburban neighborhoods that cater to local trade rather than highway travel. A few of these restaurant facilities are now more than 40 years old. Restaurants that have been opened since the early 1990s have generally been located near interstate highways. A typical restaurant built before 2001 contains on average approximately 5,600 square feet with seating capacity for 156 guests. The prototype that was introduced in 2001 has generally contained 5,700 square feet with seating for 172 guests. An adaptation of the 2001 prototype was introduced in 2010 for use in smaller trade areas. Its footprint approximates 5,000 square feet and has 148 dining room seats.
Most new restaurant construction requires approximately 18 weeks to complete, depending on the time of year and weather conditions. A competitive bidding process is used to award contracts to general contractors for all new restaurant construction. The general contractor selects and schedules sub-contractors, and is responsible for procuring most building materials. A Company project coordinator is assigned to coordinate all construction projects.
The following table summarizes the number and location of Company operated restaurants and restaurants licensed to others as of June 3, 2014:
 
Frisch's Big Boy
Company
Operated
 
Operated by
Licensees
Cincinnati, Ohio market
51

 
4

Dayton, Ohio market
20

 

Columbus, Ohio market
10

 
1

Louisville, Kentucky market
9

 
2

Lexington, Kentucky market
6

 
3

Toledo, Ohio market

 
13

Other

 
2

Total
96

 
25

In July 2014, one of the Company operated restaurants in the Columbus, Ohio market was closed permanently, and in August 2014, a restaurant licensed to another operator was opened in Ironton, Ohio (southeast Ohio).
Sites acquired for development of new Company operated restaurants are identified and evaluated for potential long-term sales and profits. A variety of factors is analyzed including demographics, traffic patterns, competition and other relevant information. Because control of property rights is important to the Company, it is the Company’s policy to own its restaurant locations whenever possible.
In recent years, it has sometimes become necessary to enter into ground leases to obtain desirable land on which to build. In addition, many of the restaurants operated by the Company that opened prior to 1990 were financed with sale/leaseback transactions. Most of the leases have multiple renewal options. All of the leases generally require the Company to pay property taxes, insurance and maintenance. As of June 3, 2014, 15 restaurants were in operation on non-owned premises, 14 of which are classified as operating leases with one being treated as a capital lease. Three of the operating leases contain options to purchase the underlying properties, which become available over time. Under the terms of the lone capital lease, the Company is required to acquire the underlying land in fee simple title at any time between the 10th (2020) and 15th (2025) years of the lease. The following table recaps the Company's restaurant operations by type of occupancy (as of June 3, 2014):
 
Frisch's Big Boy
Company Operated
Owned in fee simple title
81
Land or land & building leased
15
Total
96
The restaurant that was closed permanently in July 2014 was owned in fee simple title. It was sold to a real estate developer shortly after its closure. Five of the 15 leased locations will expire during the next five years, as detailed in the list below. One of the five expiring leases has a purchase option and three (including the one with the purchase option) have renewal options available.


13


 
Fiscal year ending in
Number of Leases Expiring
2015
2016
1
2017
2018
2
2019
2
No construction of any new Company operated Frisch's Big Boy restaurants was in progress as of June 3, 2014.
None of the real property owned by the Company is currently encumbered by mortgages or otherwise pledged as collateral. With the exception of certain delivery equipment utilized under capital leases expiring during periods through fiscal year 2021, the Company owns substantially all of the furnishings, fixtures and equipment used in the operation of the business.
The Company owns a 79,000 square foot building that houses its commissary in Cincinnati, Ohio. It is suitable and adequate to supply the Company's restaurant operations and the needs of restaurants licensed to others. As the facility normally operates one shift daily, additional productive capacity is readily available if needed.
The Company maintains its headquarters in Cincinnati on a well-traveled street in a mid-town business district. This administrative office space approximates 49,000 square feet and is occupied under an operating lease that expires on December 31, 2022. During the term of the lease, the Company has been granted the right of first refusal in the event that the lessor receives a bona fide purchase offer from a third party. The Company has an option to purchase the property when the lease expires.
The Company owns six undeveloped pieces of land. Four of the six parcels may ultimately be developed into restaurant facilities. Two of these are in the Columbus, Ohio market and the other two in outlying areas of Indiana (south of Indianapolis). A fifth property is now under contract for sale (with a due diligence period extending into December 2014), which has situated on part of it a former restaurant building that is leased (ending in August 2014) to a third party. No specific plan is in place for the sixth piece of land.
Seven surplus land locations owned by the Company were listed for sale with brokers as of June 3, 2014, four of which are located in the Columbus, Ohio area, two are in the Dayton, Ohio area and the seventh is located in Toledo, Ohio. Two former Golden Corral restaurants (which ceased operating in August 2011) are also listed for sale with brokers, one of which is in the Cincinnati market area and the other one is in the Cleveland, Ohio market area.
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 at which time the seven operating leases were simultaneously assigned to GCC, with the Company remaining contingently liable in the event of default by GCC. The amount remaining under contingent lease obligations totaled $6,330,000 as of June 3, 2014, for which the aggregate average annual lease payments approximate $667,000 in each of the next five years. The Company is also contingently liable for the performance of a certain ground lease (for property located in Covington, Kentucky on which a hotel once operated by the Company is situated) that was assigned to a third party in 2000; the annual obligation of the lease approximates $48,000 through 2020. Should either of these the third parties default, the Company generally has the right to re-assign the leases.
Item 3. Legal Proceedings
On October 16, 2012, a former employee (plaintiff) filed a complaint in Boone County Circuit Court, Burlington, Kentucky, asserting various claims including negligence and intentional infliction of emotional distress, stemming from the plaintiff's employment in 1995. With the exception of the negligence claim, all claims were dismissed by the Court as a result of the Motion to Dismiss, filed by the Company on November 13, 2012. In August 2013, the plaintiff's complaint was amended to add a claim of sexual harassment and hostile work environment. The Company firmly denies the allegations and is defending the matter vigorously.
Employees, customers and other parties bring various other claims and suits against the Company from time to time in the ordinary course of business. Management continually evaluates exposure to loss contingencies from pending or threatened litigation, and presently believes that the resolution of claims currently outstanding, whether or not covered by insurance, will not result in a material effect on the Company’s earnings, cash flows or financial position.

14


Item 4. Mine Safety Disclosures
Not applicable.
PART II
(Items 5 through 9)
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on NYSE MKT under the symbol “FRS.” The closing price of the Company’s common stock as reported by NYSE MKT on July 29, 2014 was $23.89. There were approximately 1,400 shareholders of record as of July 29, 2014. The following table sets forth the high and low sales prices for the common stock and the regular cash dividend declared for each quarter within the Company’s two most recent fiscal years:
 
 
Fiscal Year Ended June 3, 2014
 
Fiscal Year Ended May 28, 2013
 
Stock Prices  
 
Dividend
 
Stock Prices  
 
Dividend
 
High    
 
Low    
 
per share  
 
High    
 
Low    
 
per share  
1st Quarter (1)
$22.09
 
$16.17
 
16¢
 
$33.50
 
$20.91
 
16¢
2nd Quarter
$25.42
 
$21.60
 
18¢
 
$22.04
 
$16.50
 
16¢
3rd Quarter
$27.75
 
$23.19
 
18¢
 
$20.37
 
$17.50
 
16¢
4th Quarter
$24.95
 
$22.45
 
18¢
 
$19.37
 
$15.76
 
16¢
(1)     On July 25, 2012, the Board of Directors declared a special one time dividend of $9.50 per share that was paid on September 14, 2012. The payment of the special dividend amounted to $47,962,754. The rules of the New York Stock Exchange required the ex-dividend date to be one business day after the payment date. The price of the stock closed at $31.06 on September 14, 2013 and re-opened on September 17, 2013 at $22.46 per share.
Dividend Policy
Through July 10, 2014, the Company has paid 214 consecutive regular quarterly cash dividends during its 54 year history as a public company. The Company currently expects that regular quarterly cash dividends will continue to be paid for the foreseeable future at rates comparable with or slightly higher than those shown in the above table.
Equity Compensation Plan Information
Information regarding equity compensation plans under which common stock of the Company is authorized for issuance is incorporated by reference to Item 12 of this Form 10-K.
Issuer Purchases of Equity Securities
On July 25, 2012, the Board of Directors authorized the Company to purchase, on the open market and in transactions negotiated privately, up to 450,000 shares of its common stock. The authorization allowed for purchases to begin immediately and to occur from time to time over a three year period that will end on July 25, 2015.
The following table shows information pertaining to the Company’s repurchases of its common stock during its fourth quarter that ended June 3, 2014:

15


Period
Total Number
Of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the
Plans or Programs
March 5, 2014
to April 1, 2014
 
$—
 
 
237,071

April 2, 2014
to April 29, 2014
 
$—
 
 
237,071

April 30, 2014
to June 3, 2014
 
$—
 
 
237,071

Total
 
$—
 
 
237,071


Performance Graph
The following graph compares the yearly percentage change in the Company’s cumulative total stockholder return on its common stock over the five year period ending June 3, 2014 with the Russell 2000 Index (Index) and a group of the Company’s peer issuers, selected by the Company in good faith. The graph assumes an investment of $100 in the Company’s common stock, in the Index and in the common stock of each member of the peer group on June 3, 2009 and reinvestment of all dividends.
The Company's peer issuers used for comparison purposes in the graph above have been modified from the prior year. However, the peer group used last year has also been presented as "Old Peer Group." The changes in the group were made in order to more closely align with the peer group used in the most recent compensation study done for executive compensation purposes. The new Peer Group consists of the following issuers: CBRL Group, Inc. (Cracker Barrel Old Country Store), Denny’s, Inc. Einstein Noah Restaurant Group Inc., Popeye's Louisiana Kitchen, Inc., Cosi Inc., Sonic Corp., Buffalo Wild Wings Inc., and Famous Dave's of America Inc.The old Peer Group consists of the following issuers: Bob Evans Farms, Inc., Biglari Holdings, Inc. (Steak n Shake), CBRL Group, Inc. (Cracker Barrel Old Country Store), Denny’s, Inc. and DineEquity, Inc. (IHOP and Applebees).


16


Item 6. Selected Financial Data
FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
SUMMARY OF OPERATIONS
 
 
Fiscal Year
 
2014
 
2013
 
2012
 
2011
 
2010
 
(in thousands, except per share data)
Sales
$
209,173

 
$
203,712

 
$
205,083

 
$
201,717

 
$
191,609

Cost of sales
 
 
 
 
 
 
 
 
 
Food and paper
70,088

 
68,268

 
69,042

 
66,349

 
61,756

Payroll and related
74,236

 
71,523

 
72,721

 
71,820

 
69,000

Other operating costs
42,973

 
41,368

 
41,805

 
40,912

 
38,337

Total cost of sales
187,297

 
181,159

 
183,568

 
179,081

 
169,093

 
 
 
 
 
 
 
 
 
 
Restaurant operating income
21,876

 
22,553

 
21,515

 
22,636

 
22,516

 
 
 
 
 
 
 
 
 
 
Administrative and advertising
12,599

 
13,074

 
13,379

 
12,517

 
12,258

Franchise fees and other revenue, net
(1,439
)
 
(1,376
)
 
(1,322
)
 
(1,324
)
 
(1,266
)
Loss (gain) on sale of real property
(135
)
 
14

 
(200
)
 
40

 

Impairment of long-lived assets

 
390

 
1,229

 

 

Operating profit
10,851

 
10,451

 
8,429

 
11,403

 
11,524

 
 
 
 
 
 
 
 
 
 
Interest expense
586

 
963

 
1,414

 
1,582

 
1,748

Earnings from continuing operations before income taxes
10,265

 
9,488

 
7,015

 
9,821

 
9,776

 
 
 
 
 
 
 
 
 
 
Income taxes
832

 
2,514

 
1,214

 
2,716

 
3,030

Earnings from continuing operations
9,433

 
6,974

 
5,801

 
7,105

 
6,746

 
 
 
 
 
 
 
 
 
 
(Loss) earnings from discontinued operations, net of tax

 
(158
)
 
(3,653
)
 
2,368

 
3,253

 
 
 
 
 
 
 
 
 
 
NET EARNINGS
$
9,433

 
$
6,816

 
$
2,148


$
9,473


$
9,999

 
 
 
 
 
 
 
 
 
 
Basic net earnings per share:
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
1.85

 
$
1.39

 
$
1.18

 
$
1.41

 
$
1.32

(Loss) earnings from discontinued operations

 
(0.03
)
 
(0.74
)
 
0.47

 
0.64

Basic net earnings per share
$
1.85

 
$
1.36

 
$
0.44

 
$
1.88

 
$
1.96

 
 
 
 
 
 
 
 
 
 
Diluted net earnings per share:
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
1.85

 
$
1.38

 
$
1.17

 
$
1.40

 
$
1.30

(Loss) earnings from discontinued operations

 
(0.03
)
 
(0.74
)
 
0.47

 
0.63

Diluted net earnings per share
$
1.85

 
$
1.35


$
0.43


$
1.87


$
1.93

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other financial statistics appear on the following page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

17


 
Fiscal Year
Item 6. Selected Financial Data (continued)
2014
 
2013
 
2012
 
2011
 
2010
 
(in thousands, except per share data)
Other financial statistics
 
 
 
 
 
 
 
 
 
Cash dividends per share
$
0.70

 
$
0.64

 
$
0.63

 
$
0.58

 
$
0.51

Special cash dividend per share

 
9.50

 

 

 

 
 
 
 
 
 
 
 
 
 
Working capital (deficit)
$
(4,504
)
 
$
(4,840
)
 
$
37,753

 
$
(14,240
)
 
$
(18,661
)
Total capital expenditures
13,160

 
9,837

 
13,365

 
19,703

 
24,484

Total assets
129,262

 
128,712

 
179,969

 
196,027

 
191,342

Total long-term obligations
16,792

 
25,795

 
36,069

 
41,399

 
42,707

Shareholders’ equity
94,343

 
83,656

 
121,725

 
125,528

 
120,094

Book value per share at year end
$
18.50

 
$
16.52

 
$
24.64

 
$
25.51

 
$
23.73

Return on average shareholders’ equity
10.6
%
 
6.6
 %
 
1.7
%
 
7.7
%
 
8.5%
Weighted average number of basic shares outstanding
5,087

 
5,031

 
4,934

 
5,038

 
5,104

Weighted average number of diluted shares outstanding
5,101

 
5,045

 
4,952

 
5,068

 
5,192

Number of shares outstanding at year end
5,099

 
5,062

 
4,939

 
4,920

 
5,061

Sales change percentage
2.7
%
 
(0.7
)%
 
1.7
%
 
5.3
%
 
(1.0
)%
 
 
 
 
 
 
 
 
 
 
Earnings as a percentage of sales
 
 
 
 
 
 
 
 
 
Gross profit from continuing operations
10.5
%
 
11.1
 %
 
10.5
%
 
11.2
%
 
11.8%
Operating profit from continuing operations
5.2
%
 
5.1
 %
 
4.1
%
 
5.7
%
 
6.0%
Earnings from continuing operations before income taxes
4.9
%
 
4.7
 %
 
3.4
%
 
4.9
%
 
5.1%
Earnings from continuing operations
4.5
%
 
3.4
 %
 
2.8
%
 
3.5
%
 
3.5%
With the exception of fiscal year 2014, all fiscal years presented contained 52 weeks consisting of 364 days. Fiscal year 2014 contained 53 weeks consisting of a total of 371 days.


18


Item 7. 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 included in 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, goals and projections, or its current 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 the occurrence of adverse events associated with numerous 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 this Form 10-K under Part I, Item 1A. “Risk Factors.” Risk factors and other uncertainties may also be discussed from time to time in the Company's news releases, public statements or in other reports that the Company files with the Securities and Exchange Commission.
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 statements pertaining to 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. Such forward-looking information should be evaluated in the context of all of the Company's risk factors, which readers should review carefully and not place undue reliance on management's forward-looking statements. 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.

CORPORATE OVERVIEW
(all dollars reported in the text of this MD&A are in thousands)
This MD&A should be read in conjunction with the Consolidated Financial Statements found in this Form 10-K under Part II, Item 8. 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.
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 June 3, 2014, 96 Frisch's Big Boy restaurants were owned and operated by the Company, which are 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.
Fiscal Year 2014 ended on Tuesday, June 3, 2014 (a period of 53 weeks comprised of 371 days). It compares with Fiscal Year 2013 that ended on Tuesday, May 28, 2013 and Fiscal Year 2012 that ended on Tuesday, May 29, 2012 (both of which were 52 week periods comprised of 364 days). Fiscal Year 2015 will end on Tuesday, June 2, 2015 (a period of 52 weeks comprised of 364 days).
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). In May 2012, 29 Golden Corrals were sold to GCC for $49.8 million (before closing adjustments), which resulted in a pretax loss of $5,590, of which $5,257 was recorded in the fourth quarter of Fiscal Year 2012. Results for the Golden Corral segment are reported as discontinued operations for all periods presented in the Consolidated Financial Statements.
Prior to the May 2012 sale of 29 Golden Corral restaurants, the Company had closed six under performing Golden Corral restaurants in August 2011, which resulted in a pretax charge of $4,000 for impairment of long-lived assets that was recorded in the first quarter of Fiscal Year 2012. Additional non-cash pretax impairment charges associated with the six restaurant closings in August 2011 were subsequently recorded during Fiscal Year 2012: a) $94 in the third quarter of Fiscal Year 2012 (based on a contract that was accepted on one of the properties that was less than the original estimate of its fair value) and b) $294 was recorded in the fourth quarter of Fiscal Year 2012 to reflect revised opinions of value on the remaining properties, which had been received from real estate brokers. Two of the six closed restaurants were sold in Fiscal Year 2012 and the four remaining closed restaurants were reclassified to "Property held for sale" (other long term assets) in the Consolidated Balance Sheet.


19



The following table recaps the earnings or loss components of the Company's Consolidated Statement of Earnings.
 
Fiscal Year
2014 (53 weeks)
 
Fiscal Year
2013 (52 weeks)
 
Fiscal Year
2012 (52 weeks)
 
(in thousands, except per share data)
Earnings from continuing operations before income taxes
$
10,266

 
$
9,487

 
$
7,015

Earnings from continuing operations
$
9,433

 
$
6,974

 
$
5,801

Diluted EPS from continuing operations
$
1.85

 
$
1.38

 
$
1.17

(Loss) earnings from discontinued operations, net of tax
$

 
$
(158
)
 
$
(3,653
)
Diluted EPS from discontinued operations
$

 
$
(0.03
)
 
$
(0.74
)
Net earnings
$
9,433

 
$
6,816

 
$
2,148

Diluted net EPS
$
1.85

 
$
1.35

 
$
0.43

 
 
 
 
 
 
Weighted average diluted shares outstanding
5,101

 
5,045

 
4,952

Factors having a notable effect on earnings from continuing operations before income taxes when comparing Fiscal Year 2014 with Fiscal Year 2013 and Fiscal Year 2012:
 
Consolidated restaurant sales in Fiscal Years 2014, 2013 and 2012 were $209,173, $203,712 and $205,083, respectively. Fiscal Year 2014 had a 53rd week of sales, which contributed an estimated $737 to operating income.
Big Boy same store sales decreased 0.9 percent in Fiscal Year 2014 (adjusted to a 52 week basis), which followed a 0.3 percent decrease in Fiscal Year 2013.
As a percentage of sales, consolidated food costs were 33.5 percent in Fiscal Year 2014, 33.5 percent in Fiscal Year 2013 and 33.7 percent in Fiscal Year 2012.
As a percentage of sales, consolidated payroll and related costs were 35.3 percent in Fiscal Year 2014, 34.9 percent in Fiscal Year 2013 and 35.3 percent in Fiscal Year 2012.
New store opening costs were $307 in Fiscal Year 2014, $592 in Fiscal Year 2013 and $398 in Fiscal Year 2012.
Share based compensation costs were $541 in Fiscal Year 2014, $745 in Fiscal Year 2013 and $938 in Fiscal Year 2012.
The CEO's incentive compensation was $426 in Fiscal Year 2014, $409 in Fiscal Year 2013 and zero in Fiscal Year 2012.
Gains & losses on the sale of real estate – a gain of $135 was recorded in Fiscal Year 2014, a loss of $14 in Fiscal Year 2013 and a gain of $200 was recorded in Fiscal Year 2012.
Impairment of long-lived assets - there were no charges for impairment of long-lived assets in Fiscal Year 2014, $390 was recorded in Fiscal Year 2013 and $1,229 in Fiscal Year 2012.
Income tax expense included in net earnings for Fiscal Years 2014 and 2013 amounted to $832 and $2,671 ($158 in discontinued operations), respectively. An income tax benefit of $1,494 was recorded in net earnings for Fiscal Year 2012 (benefit of $2,708 in discontinued operations) Income tax expense in Fiscal Year 2014 included certain tax benefits associated with the Domestic Production Activities Deduction (DPAD) available under the Internal Revenue Code and the release of valuation allowances that had been placed previously on certain deferred state income tax assets.
Underfunded status in the Company sponsored pension plan decreased to $1,872 as of June 3, 2014, down from $8,530 at May 28, 2013. The improvement in underfunded position, driven principally by market gains in the assets of the pension plan, increased equity by $3,594, net of tax, which was effected through a credit to accumulated other comprehensive loss.

20


RESULTS OF OPERATIONS
(all dollars reported in the text are in thousands)
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 sales: 

 
Fiscal Year
2014 (53 weeks)
 
Fiscal Year
2013 (52 weeks)
 
Fiscal Year
2012 (52 weeks)
 
(in thousands)
Frisch's Big Boy restaurants operated by the Company
$
197,623

 
$
192,891

 
$
194,398

Wholesale sales to licensees
9,995

 
9,537

 
9,434

Wholesale sales to groceries
1,555

 
1,284

 
1,251

Total sales
$
209,173

 
$
203,712

 
$
205,083

A breakdown of changes in Frisch's Big Boy same store sales by quarter follows (adjusted to remove the effect of the extra week of sales in the fourth quarter of Fiscal Year 2014):
Same store sales changes
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
Year
Fiscal Year 2014
(1.0)%
 
0.1%
 
(3.6)%
 
0.7%
 
(0.9)%
Fiscal Year 2013
(0.2)%
 
(1.7)%
 
(0.9)%
 
1.0%
 
(0.3)%

Menu prices are typically reviewed and adjusted each spring and autumn. The same store sales comparisons in the above table include average menu price increases of 1.5 percent, 1.1 percent, and 1.2 percent, implemented shortly after or shortly before the ends of the third quarters of Fiscal Years 2014, 2013 and 2012, respectively. The first quarters of Fiscal Years 2014, 2013 and 2012 included average menu price increases of 1.1 percent, 0.9 percent, and 1.5 percent, respectively. Another increase is currently being planned for implementation in the first quarter of Fiscal Year 2015 (September 2014). Customer counts in same stores (52 week basis) were 3.4 percent lower in Fiscal Year 2014 compared with Fiscal Year 2013, which was 2.8 percent lower than Fiscal Year 2012. The greater decrease in customer counts during Fiscal Year 2014 can be traced directly to severe winter weather conditions that persisted over much of the course of the third quarter (mid-December thru early March) of Fiscal Year 2014 throughout all regions in which the Company operates restaurants. While higher menu prices may contribute to the overall trend in lower customer traffic, management believes larger factors are the chronically high unemployment (and under employment) rate in the Midwest and the persistency of high gasoline prices, both of which continue to restrict the disposable income of the customer base, which in turn limits sales growth opportunities.
The Company operated 96 Frisch's Big Boy restaurants as of June 3, 2014. The count of 96 includes the following openings and closings since the beginning of Fiscal Year 2012 (June 2011) when there 95:
Fiscal Year 2014
Opened new unit in December 2013 in Lexington, Kentucky
Fiscal Year 2013
Opened new unit in March 2013 in Sidney, Ohio (Dayton market)
Opened new unit in August 2012 near Cincinnati, Ohio
Fiscal Year 2012
Closed unit in May 2012 in Cincinnati, Ohio
Closed unit in May 2012 in Elizabethtown, Kentucky (Louisville market)
Closed unit in December 2011 in Columbus, Ohio
Opened new unit in October 2011 in Highland Heights, Kentucky (Cincinnati market - replaced unit in Ft. Thomas, Kentucky)
Closed unit in September 2011 in Ft. Thomas, Kentucky (Cincinnati market)

21


Opened new unit in July 2011 near Cincinnati, Ohio

A Frisch's Big Boy restaurant located in Columbus, Ohio was closed permanently in July 2014. At this time, no new restaurant construction has been scheduled in Fiscal Year 2015.
The U.S. Food and Drug Administration (FDA) missed its February 2014 deadline for issuing the final regulations of the menu labeling provisions of the federal Patient Protection and Affordable Care Act (ACA), which was enacted March 2010. On April 3, 2014, the FDA announced that it had moved the final regulations to the White House Office of Management and Budget (OMB), which is the final step in the review process. Once the review is completed by OMB, the final regulation will be published and made publicly available. Nutritional information will not be required to appear on the Company's menus for at least six months (and possibly up to one year) after the FDA publishes the final rule, which it had yet to do as of July 2014. Sales volumes could be adversely affected if customers significantly alter their dining choices as a result of the requirement to add nutritional information to menus. Nutritional information is now available on the Company's website.
The Payment Card Industry Security Standards Council (PCI) has a data security standard with which all organizations that process card payments must comply. The standard is intended to prevent credit card fraud by focusing on the internal controls of processing and storing such data. PCI requires an annual audit to certify the Company's compliance with the required internal controls. The Company received its Attestations of Compliance in June 2011, June 2012, June 2013 and again in June 2014. A finding of non-compliance could restrict the Company from accepting credit and debit cards as a form of payment.
Restaurant Operating Income
The determination of restaurant operating income 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.
 
 
Fiscal Year
2014 (53 weeks)
 
Fiscal Year
2013 (52 weeks)
 
Fiscal Year
2012 (52 weeks)
Sales
100.0
%
 
100.0
%
 
100.0
%
Food and paper
33.5
%
 
33.5
%
 
33.7
%
Payroll and related
35.3
%
 
34.9
%
 
35.3
%
Other operating costs (including opening costs)
20.7
%
 
20.5
%
 
20.6
%
Gross profit
10.5
%
 
11.1
%
 
10.4
%
The cost of food remains at all time highs, especially proteins - beef, pork and chicken. Hamburger and bacon have the greatest consumption of all items in the Company's menu mix. The price of hamburger continues at record highs driven by the high cost of corn (the primary feed ingredient for cattle, hogs and poultry), record low beef supplies and rising global demand. An analysis of the Company's hamburger cost shows that prices had increased roughly 18 percent over the course of Fiscal Year 2014 (from June 2013 to June 2014). Some industry forecasts predict that beef prices will not begin to decline until 2016 at the earliest. A deadly disease (PED virus) has driven pork prices to record highs. The Company's cost for bacon, sausage and ham had all experienced double digit percentage increases from June 2013 to June 2014.
The effect of commodity price increases is actively managed with changes to the menu mix, together with periodic increases in menu prices. However, rapid escalations in the cost of food can be problematic to effective menu management. Although the Company does not use financial instruments as a hedge against changes in commodity prices, purchase contracts for some commodities may contain provisions that limit the price the Company will pay. These contracts are normally for periods of one year or less, but may have longer terms. For example, an agreement was reached with Pepsico Sales, Inc., effective November 1, 2013, which allows the Company to purchase Pepsi and Dole beverages at favorable long term pricing.
Food safety poses a major risk to the Company. Management rigorously emphasizes and enforces established food safety policies in all of the Company’s restaurants and in its commissary and food manufacturing plant. These policies are designed to work cooperatively with programs established by health agencies at all levels of governmental authority, including the federal Hazard Analysis of Critical Control Points (HACCP) program. In addition, the Company makes use of ServSafe Training, a nationally recognized program developed by the National Restaurant Association. The ServSafe program provides accurate, up-to-date science-based information to all levels of restaurant workers on all aspects of food handling, from receiving and storing to preparing and serving. All restaurant managers are required to be certified in ServSafe Training and are required to be re-certified every five years.

22


Higher payroll and related costs (as a percentage of sales) shown in the above table for Fiscal Year 2014 are due to higher restaurant management payroll over the course of the fiscal year and, since January 1, 2014, much higher costs for employee medical insurance. Factors offsetting the higher percentages include reductions in scheduled labor hours to mitigate the effect of higher pay rates for restaurant workers, together with lower pension costs and the effect of higher menu prices charged to customers. The percentage improvement Fiscal Year 2013 over Fiscal Year 2012 was primarily due to a greater savings from the reduction in the number of hours worked over the higher level of pay rates.
Payroll and related costs continue to be adversely affected by mandated increases in the minimum wage:
 
In Ohio, where roughly two-thirds of the Company’s payroll costs are incurred, the minimum wage for non-tipped employees was increased 33 percent from $5.15 per hour to $6.85 per hour beginning January 1, 2007. It was subsequently increased to $7.00 per hour on January 1, 2008, to $7.30 per hour on January 1, 2009 (there was no increase on January 1, 2010), to $7.40 per hour on January 1, 2011, to $7.70 per hour on January 1, 2012 and to $7.85 per hour on January 1, 2013. On January 1, 2014, the rate increased to $7.95 per hour, which represents a 54 percent increase since 2007.

The Ohio minimum wage for tipped employees increased 61 percent from $2.13 per hour to $3.43 per hour beginning January 1, 2007. It was subsequently increased to $3.50 per hour on January 1, 2008, to $3.65 per hour on January 1, 2009 (there was no increase on January 1, 2010), to $3.70 per hour on January 1, 2011, to $3.85 per hour on January 1, 2012 and to $3.93 per hour on January 1, 2013. On January 1, 2014, the rate increased to $3.98 per hour, which represents an 87 percent increase since 2007.

Federal minimum wage statutes currently apply to substantially all other (non-Ohio) employees. The federal minimum wage for non-tipped employees increased from $5.15 per hour to $5.85 per hour in July 2007. It was increased to $6.55 per hour in July 2008 and to $7.25 per hour in July 2009. The rate for tipped employees (non-Ohio) was not affected by the federal legislation, remaining at $2.13 per hour.
Although there is no seasonal fluctuation in employment levels, the number of hours worked by hourly paid employees has always been managed closely according to sales patterns in individual restaurants. However, the effects of paying the mandated higher hourly rates of pay have been and are continuing to be countered through the combination of reductions in the number of scheduled labor hours and higher menu prices charged to customers. Without benefit of reductions in labor hours, the Ohio minimum wage increase on January 1, 2012 would have added an estimated $420 to annual payroll costs in Ohio restaurant operations, the increase on January 1, 2013 would have added approximately $320, and the increase on January 1, 2014 would add approximately $180 if there were to be no further schedule reductions in labor hours.
Pressure is mounting in Washington, DC to raise the federal minimum wage from $2.13 per hour for tipped employees to $7.07 per hour and from $7.25 per hour for non-tipped employees to $10.10 per hour. If the legislation is ultimately enacted, the rates will be increased gradually over a three year period, followed by automatic increases each year indexed to inflation. Management will analyze and evaluate the effect of the legislation on the Company's operations if and when enactment of such legislation appears likely.
On March 13, 2014, an executive order was issued by President Obama that directs the Secretary of Labor to revamp regulations to expand the number of workers entitled to receive overtime compensation. Management will watch the development of the regulations closely and will analyze and evaluate the effect upon the Company's practices once the specifics of the anticipated regulations are known.
Benefit programs sponsored by the Company also greatly influence payroll and related costs.
The Company has always offered affordable medical insurance coverage to its full time employees. In response to the individual mandate of the ACA, a sizable number of additional employees (over previous years) elected to be covered under the Company's medical insurance plan for the 2014 calendar year. Beginning January 1, 2014, the response from this group of employees added approximately $30 per week to the Company's medical insurance costs.
Although medical insurance rates continue to be at all time highs, the Company's premium rates have remained fairly steady over the last few years. However, that trend is likely to change when the employer side of the ACA mandate becomes fully effective on January 1, 2015. Various strategies are being developed to mitigate the expected financial burden. Among other responses to the likely increase in rates, employees will be asked to contribute more than the historical 20 percent of premium cost and certain changes in benefit design may be implemented.



23


Net periodic pension cost (including amounts charged to discontinued operations in Fiscal Year 2012) was $1,863, $3,247 and $2,746 respectively, in Fiscal Years 2014, 2013 and 2012. The lower net periodic pension expense for Fiscal Year 2014 was driven primarily by an exceptional return on plan assets during Fiscal Year 2013, which exceeded the expected return by $4,296. A higher discount rate and certain demographic updates also contributed to the decrease, but to a lesser degree. Net periodic pension expense for Fiscal Year 2012 received a benefit in excess of $550 from changes in assumptions relating to retirement, termination and marriage. Fiscal Year 2012's net periodic pension cost also included the effect of a curtailment credit of $16 from the termination of Golden Corral employees and a settlement loss of $157. No settlement losses were incurred in Fiscal Years 2014 or 2012. Settlement losses are triggered when the sum of all settlements (lump sum cash outs) exceed interest and service cost. No settlement losses are currently expected in Fiscal Year 2015.
The expected long-term rate of return on plan assets used to compute pension cost was lowered to 7.25 percent for Fiscal Year 2014, and will remain at 7.25 percent for the determination of pension costs for Fiscal Year 2015. The expected long-term rate of return on plan assets was 7.50 percent in both Fiscal Years 2013 and 2012.
The discount rate used in the actuarial assumptions to compute pension costs was 4.40 percent in Fiscal Year 2014. The discount rate used in Fiscal Year 2013 was 4.25 percent and was 5.25 percent in Fiscal Year 2012. The rate for Fiscal Year 2015 will be lowered to 3.90 percent. The rate of compensation increase used to calculate pension costs was 4.00 percent in each of Fiscal Years 2014, 2013 and 2012, and will be lowered to 2.10 percent for Fiscal Year 2015, reflecting a change to a weighted average age based rate.
Net periodic pension cost for Fiscal Year 2015 is currently estimated at approximately $263. The improvement from Fiscal Year 2014 is due to several factors, the most notable of which are certain demographic changes that accounts for approximately $425, the change in the rate of compensation increase added $675 to the improvement, and the actual return on assets added approximately $300. These improvements are being offset by roughly $125 as a result of lowering of the discount rate from 4.40 percent to 3.90 percent.
Contributions made to Company sponsored plans were $2,000, $2,394 and $2,100 respectively, in Fiscal Years 2014, 2013 and 2012. Contributions for Fiscal Year 2015 are tentatively anticipated to be at least $2,000, which includes amounts to meet minimum legal funding requirements and potential discretionary contributions. Future funding of the pension plans largely depends upon the performance of investments that are held in trusts that have been established for the defined benefit pension plan. Equity securities comprise 70 percent of the target allocation of the plan's assets. The fair value of all the plan's assets was $37,835, $33,376 and $26,684 respectively at the end of Fiscal Years 2014, 2013 and 2012.
Pension accounting standards require the overfunded or underfunded status of defined benefit pension plans to be recognized as an asset or liability in the Company’s Consolidated Balance Sheet. Funded status is measured as the difference between plan assets at fair value and projected benefit obligations (PBO). Underfunded status at June 3, 2014 decreased to $1,871 (fair value of plan assets $37,835 versus PBO of $39,706) from $8,530 (fair value of plan assets $33,376 versus PBO of $41,906) at May 28, 2013. The PBO includes former Golden Corral employees (vested, terminated) measured at accumulated benefit obligation (no projections for future salary increases or additional years of credited service).
The Company’s equity was increased $3,594, net of tax, at June 3, 2014 to establish underfunded status at $1,871. The increase in equity was effected through a credit to accumulated other comprehensive loss. Equity was increased $3,566, net of tax, to establish underfunded status of $8,530 at May 28, 2013, which was also effected through a credit to accumulated other comprehensive loss.
Other operating costs include occupancy costs such as maintenance, rent, depreciation, abandonment losses, property tax, insurance and utilities, plus costs relating to field supervision, accounting and payroll preparation costs, new restaurant opening costs, and many other restaurant operating costs. Opening costs can have a significant effect on the operating costs. Opening costs in Fiscal Years 2014, 2013 and 2012 were $307, $592, and $398 respectively. Fees for processing the issuance of the Company's gift cards in supermarkets amounted to $821, $647 and $415 respectively, in Fiscal Years 2014, 2013 and 2012. There will be little to no expense in Fiscal Year 2015, as the Company withdrew from the program in June 2014. As most of the other typical expenses charged to other operating costs tend to be more fixed in nature, the percentages shown in the above table can be greatly affected by changes in same store sales levels. In other words, percentages will generally rise when sales decrease and percentages will generally decrease when sales increase.
Operating Income
To arrive at the measure of operating income, administrative and advertising expense is subtracted from restaurant operating income, while the line item for franchise fees and other revenue is added to it. Gains and losses from the sale of real property (if any) are then respectively added or subtracted. Charges for impairment of assets (if any) are also subtracted from restaurant operating income to arrive at the measure of operating income.

24


Administrative and advertising expense was $12,599, $13,074 and $13,379 respectively in Fiscal Years 2014, 2013 and 2012. Advertising expense represents the largest component of these costs, which was $4,931, $4,855 and $4,911 respectively, in Fiscal Years 2014, 2013 and 2012. Spending for advertising and marketing programs is proportionate to sales levels, reflecting the Company’s long-standing policy to spend a constant percentage of sales on advertising and marketing.
All other administrative costs were $7,667, $8,219 and $8,468 respectively, in Fiscal Years 2014, 2013 and 2012. The Chief Executive Officer’s (CEO) incentive compensation was included in other administrative costs as follows: $426, $409 and zero respectively, was accrued in Fiscal Years 2014, 2013 and 2012. Other administrative costs for Fiscal Years 2014 and 2013 benefited from the resignation of the Chief Operating Officer (COO) in September 2012, who was not replaced. Stock based compensation costs included in other administrative costs were $541, $745 and $938 respectively in Fiscal Years 2014, 2013 and 2012. Stock based compensation cost for Fiscal Year 2012 included $371 for an unrestricted stock award to the CEO. The unrestricted stock award was granted in exchange for the CEO's termination of an option to purchase 40,000 shares of the Company's common stock.
Revenue from franchise fees is based upon sales volumes generated by Frisch's Big Boy restaurants that are licensed to other operators. The fees are based principally on percentages of sales and are recorded on the accrual method as earned. As of June 3, 2014, 25 Frisch's Big Boy restaurants were licensed to other operators and paying franchise fees to the Company. No licensed Frisch's Big Boy restaurants opened or closed during any of the periods presented in this MD&A. One new license for a Frisch's Big Boy restaurant was granted in November 2013 to an operator in Ironton, Ohio. The restaurant facility is currently under construction and is expected to open in August 2014. An initial license fee of $30 was recorded in franchise fee revenue during the second quarter of Fiscal Year 2014. Other revenue also includes certain other fees earned from Frisch's Big Boy restaurants that are licensed to others along with minor amounts of rent and investment income.
Gains and losses from the sale of assets consist of transactions involving real property and sometimes may include restaurant equipment that is sold together with real property as a package when closed restaurants are sold. Gains and losses reported on this line do not include abandonment losses that routinely arise when certain equipment is replaced before it reaches the end of its expected life; abandonment losses are instead reported in other operating costs.
The sales of three separate real properties took place during Fiscal Year 2014, resulting in a net gain of $135. Gains totaling $142 were recorded on two of the transactions - a former Golden Corral restaurant (for which cumulative impairment of assets charges of $791,000 had been recorded in previous years - $674 was reported in Discontinued Operations in Fiscal Year 2012) and an excess piece of property in Louisville, Kentucky. One former Frisch's Big Boy restaurant was sold at a loss of $7 (for which cumulative impairment of assets charges of $574 had been recorded in previous years). Proceeds from the sale of three properties amounted to $1,513.
Losses from the sales of three separate real properties amounted to $14 in Fiscal Year 2013. The losses were from the sales of two former Frisch's Big Boy restaurants (for which cumulative impairment of assets charges of $1,167 had been recorded in previous years) and one former Golden Corral restaurant (for which an impairment of assets charge of $976 was recorded in Fiscal Year 2012 - reported in Discontinued Operations). Proceeds from the sales of the three former restaurants amounted to $2,636 in Fiscal Year 2013.
Gains from sales of real property in Fiscal Year 2012 amounted to $200, primarily from the sale of a former Frisch's Big Boy restaurant. Sales proceeds in Fiscal Year 2012 were $393.
In July 2014 (subsequent to the end of Fiscal Year 2014), a gain of approximately $1,400 was recorded upon the sale of a Frisch's Big Boy restaurant that closed permanently two days earlier. Sale proceeds amounted to $1,963.
No charges for impairment of assets were recorded during Fiscal Year 2014.
Impairment of assets charges in Fiscal Year 2013 amounted to $390, which reflected the continuation of soft local market conditions for the real estate held for sale by the Company. The 2013 impairment charges consisted of $212 to lower the fair values of the three former Golden Corral restaurants that had closed in August 2011 (which remained to be sold as of May 28, 2013), and $178 to lower the fair values of three former Frisch's Big Boy restaurants (two of which were sold in Fiscal Year 2013.
Impairment of assets charges in Fiscal Year 2012 amounted to $1,229, which included a charge of $901 associated with one under performing Frisch's Big Boy restaurant that was permanently closed near the end of Fiscal Year 2012 (which was sold in Fiscal Year 2013 - see preceding paragraphs), and $328 to lower the previous estimates of the fair values of two former Frisch's Big Boy restaurants that had been held for sale for several years (one was ultimately sold in Fiscal Year 2013; the other was finally sold in Fiscal Year 2014 - see preceding paragraphs).


25


Interest Expense
Interest expense was $586, $964 and $1,414 respectively, in Fiscal Years 2014, 2013 and 2012. The decreases are primarily the result of lower debt levels.
Income Taxes
Income tax expense as a percentage of pre-tax earnings was 8.1 percent in Fiscal Year 2014, 26.5 percent in Fiscal Year 2013 and 17.3 percent in Fiscal Year 2012. Historically, the effective tax rates have been kept consistently low through the Company’s use of available tax credits, principally the federal credit allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips and the federal Work Opportunity Tax Credit (WOTC). These credits are generally more favorable to the effective tax rate when lower levels of pretax earnings are experienced, as occurred in Fiscal Year 2012. The reasons for the unusually low rate in Fiscal Year 2014 are discussed in the next two paragraphs.
Management periodically assesses the likelihood of the realization of net deferred tax assets based on historical, current and future (expected) operating results. A valuation allowance is recorded if management believes the Company's net deferred tax assets will not be realized. In addition, management monitors the realization of valuation allowances and may consider their release in the future based on any positive evidence that may become available. During Fiscal 2014, management developed a plan to restructure the Company's consolidated subsidiaries from corporations to single member limited liability companies. By implementing this plan (went into effect on June 4, 2014), management believes future taxable income will be generated in amounts sufficient to realize certain state deferred tax assets. As a result, valuation allowances that had been placed on certain deferred state income tax assets during previous fiscal years were released during Fiscal Year 2014, which resulted in an income tax benefit of $222.

During Fiscal Year 2014, management undertook a project to identify, quantify and document tax benefits associated with the Domestic Production Activities Deduction (DPAD) that are available under the Internal Revenue Code (IRC). Prior to undertaking this project, management had elected not to claim DPAD tax benefits on the original filings of the Company's federal income tax returns for Fiscal Years 2010 (filed February 2011), 2011 (filed February 2012), 2012 (filed February 2013) and 2013 (filed February 2014). In February 2014, the Company filed an amended federal tax return for Fiscal Year 2010 and the Company received a refund of $347 in April 2014. Amended federal income tax returns for Fiscal Years 2011, 2012 and 2013 were filed in the fourth quarter of Fiscal year 2014. Expected refunds aggregate $693. All told in Fiscal Year 2014, $1,040 was recorded as DPAD tax benefits resulting from amending tax returns for prior years. In addition, the expected DPAD tax benefit for domestic production activities that occurred during the course of Fiscal Year 2014 approximated $300.

An automatic Change in Accounting Method (Form 3115) was filed with the Internal Revenue Service (IRS) in Fiscal Year 2011, to allow for immediate deduction of certain repairs and maintenance costs, replacing the previous treatment that had capitalized such costs. Final Repair Regulations were issued by the IRS in September 2013 to replace temporary and proposed repair regulations that had been issued in December 2011. The temporary and proposed regulations had departed significantly from the earlier regulations on which the Company's Change in Accounting Method had been based. The Final Repair Regulations are less of a departure from the earlier regulations than were the temporary and proposed regulations that had been issued in December 2011. The Final Repair Regulations, which specify when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted as incurred, must be applied to taxable years beginning on or after January 1, 2014 (the Company's Fiscal Year 2015). The effect of the of the Final Repair Regulations on the Company's Change in Accounting Method (filed in Fiscal Year 2011) is estimated to be an unfavorable, immaterial timing difference of under $50, which will be paid prospectively over a four year period. Once the exact amount is determined, the appropriate Forms 3115 will be filed with the IRS to conform the previous Change in Accounting Method to the Final Repair Regulations.
The Company believes it has no uncertain tax positions that have been filed or that are expected to be taken on a future tax return. The examination by the IRS of the Company’s federal tax return for Fiscal Year 2011, which was filed in February 2012, was concluded officially in November 2013. The examination resulted in no changes from the original tax return.

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. The Company recorded a pretax loss on the sale of $5,590 ($5,257 in the fourth quarter) during Fiscal Year 2012.
The Company had previously closed six under preforming Golden Corral restaurants in August 2011, which resulted in a non-cash pretax asset impairment charge of $4,000 that was recorded in the first quarter of Fiscal Year 2012. The impairment charge lowered the carrying values of the six restaurant properties to their estimated fair values. Additional non-cash pretax impairment

26


charges of $388 were subsequently recorded during Fiscal Year 2012: $94 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 $294 in the fourth quarter to reflect revised opinions of value from real estate brokers.
Results of discontinued operations are shown in the following table:     
 
Fiscal Year 2014
 
Fiscal Year 2013
 
Fiscal Year 2012
 
 
 
 
 
(50 weeks)
 
(in thousands)
Sales
$

 
$

 
$
92,227

 
 
 
 
 
 
Food and paper

 

 
35,420

Payroll and related

 

 
26,605

Other operating costs

 

 
24,027

 

 

 
86,052

 
 
 
 
 
 
Gross profit

 

 
6,175

 
 
 
 
 
 
Administrative and advertising

 

 
2,580

Gain on sale of assets

 

 
(22
)
Loss on sale of Golden Corral

 

 
5,590

Impairment of long-lived assets

 

 
4,388

 
 
 
 
 
 
Loss from discontinued operations before income taxes

 

 
(6,361
)
 
 
 
 
 
 
Income taxes

 
158

 
(2,708
)
 
 
 
 
 
 
Loss from discontinued operations, net of tax
$

 
$
(158
)
 
$
(3,653
)
The loss from discontinued operations reported in Fiscal Year 2013 represents certain adjustments to tax related balance sheet accounts associated with Golden Corral.

LIQUIDITY AND CAPITAL RESOURCES
Sources of Funds
Food sales to restaurant customers provide the Company’s principal source of cash. The funds from sales are available immediately for the Company’s use, as substantially all sales to restaurant customers are received in currency or are settled by debit or credit cards. The primary source of cash provided by operating activities is net earnings plus depreciation and impairment of assets, if any. Other sources of cash may include borrowing against credit lines, proceeds received when stock options are exercised and occasional sales of real estate. In addition to servicing debt, these cash flows are utilized for discretionary objectives, including capital projects (restaurant expansion and remodeling costs), capital stock repurchases and dividends.

Working Capital Practices
The Company has historically maintained a strategic negative working capital position, which is a common practice in the restaurant industry. As significant cash flows are provided consistently by operations and credit lines remain readily available, this practice should not hinder the Company’s ability to satisfactorily retire any of its obligations when due, including the aggregated contractual obligations and commercial commitments shown in the following table.







27



Aggregated Information about Contractual Obligations and Commercial Commitments as of June 3, 2014:
 
 
 
 
Payments due by period (in thousands)
 
 
 
 
 
 
Total
 
year 1
 
year 2
 
year 3
 
year 4
 
year 5
 
more than 5 years
 
Long-Term Debt
$
6,733

 
$
1,996

 
$
1,685

 
$
1,616

 
$
1,164

 
$
272

 
$

 
Interest on Long-Term Debt (estimated)
470

 
212

 
143

 
83

 
29

 
3

 

 
Rent due under Capital Lease Obligations
2,849

 
390

 
390

 
365

 
237

 
214

 
1,253

1
Rent due under Operating Leases
13,258

 
1,028

 
1,001

 
999

 
986

 
926

 
8,318

2
Purchase Obligations
28,863

 
11,179

 
4,460

 
4,267

 
2,477

 
2,505

 
3,975

3
Other Long-Term Obligations
564

 
256

 
101

 
103

 
104

 

 

 
Total Contractual Cash Obligations
$
52,737

 
$
15,061

 
$
7,780

 
$
7,433

 
$
4,997

 
$
3,920

 
$
13,546


1.
Operating leases may include option periods yet to be exercised, when exercise is determined to be reasonably assured.
2.
Consists primarily of commitments for certain food and beverage items, plus capital projects including commitments to purchase real property, if any. Includes a contract entered November 1, 2013 with Pepsico Sales, Inc. (Pepsi and Dole beverages replaced Coke and Minute Maid beverages), the term of which is specified by the longer of seven years or an agreed upon number of gallons. Does not include agreements that can be canceled without penalty.
3.
Deferred compensation liability (undiscounted) and certain community involvement commitments.

The Company's working capital deficit was $4,505 as of June 3, 2014. The Company's working capital deficit at May 28, 2013 was $4,840, which included $1,000 invested in commercial paper.
Borrowing authority under the Company's 2012 Loan Agreement expired on October 15, 2013. A new three year loan agreement was entered on October 31, 2013 (2013 Loan Agreement) with the same lender. Under the 2013 Loan Agreement:
The terms and conditions of all outstanding Construction Term Loans remained intact.
The lender's commitment under the Revolving Credit Facility was increased from $5,000 to $11,000, which is available through October 31, 2016.
The lender's commitment under the Construction Credit Facility was lowered from $15,000 to $5,000, which is available for construction financing through October 31, 2016. At the lender's discretion, the Company may request that the Construction facility be increased up to $15,000 at any time.
As of June 3, 2014, The Company was in full compliance with the covenants contained in the 2013 Loan Agreement.
Operating Activities
Net cash provided by continuing operations was $21,007 in Fiscal Year 2014, which compares with $19,933 in Fiscal Year 2013 and $14,257 Fiscal Year 2012. Management measures cash flows from continuing operations by simply adding back certain non-cash expenses to earnings from continuing operations, which has the effect of excluding normal changes in assets and liabilities such as prepaid expenses, inventories, accounts payable and accrued, prepaid and deferred income taxes, all of which can and often do fluctuate widely from year to year. These non-cash expenses include items such as depreciation, gains and losses on dispositions of assets, charges for impairment of long-lived assets (if any), stock based compensation costs and pension costs in excess of plan contributions. The result of this approach is shown as a sub-total in the Consolidated Statement of Cash Flows: $20,570 in Fiscal Year 2014, $19,301 in Fiscal Year 2013 and $18,288 in Fiscal Year 2012.
Net cash provided by discontinued operations in Fiscal Year 2012 was determined as follows: normal changes in assets and liabilities plus certain non-cash expenses, such as depreciation, the loss on the sale of 29 restaurants net of the gain on the sale of other properties, and charges for the impairment of long-lived assets, were added back to the loss from discontinued operations, net of tax.
Investing Activities
Capital spending is the principal component of the Company’s continuing investing activities. Capital spending was $13,160 during Fiscal Year 2014 up from $9,837 in Fiscal Year 2013, and $10,731 in Fiscal Year 2012 . These capital expenditures typically consist of site acquisitions for expansion, new restaurant construction (one, two and two new Frisch's Big Boy restaurants were

28


opened respectively in Fiscal Years 2014, 2013 and 2012), plus ongoing reinvestments in existing restaurants including remodeling jobs, dining room expansions, routine equipment replacements and other maintenance capital outlays.
Proceeds from disposition of property amounted to $1,543 in Fiscal Year 2014 ($1,513 in real property and $30 in other operating assets), $2,680 in Fiscal Year 2013 ($2,636 in real property and $44 in other operating assets) and $461 in Fiscal Year 2012 ($393 in real property and $68 in other operating assets). The specifics of the real property sold in each of the last three fiscal years may be found in the earlier discussion on gains and losses under the caption "Operating Profit".
Proceeds of $1,963 were received in July 2014 (subsequent to the end of Fiscal Year 2014) from the sale of a Frisch's Big Boy restaurant that had closed permanently two days earlier. In addition, a contract was accepted in July 2014 to sell a parcel of land which has situated on it a former restaurant building that has been leased to a third party for more than 15 years. If the sale is successfully completed (the due diligence period extends into December 2014), the proceeds are expected to be in excess of $2,000. Two former Golden Corral restaurants (closed August 2011) and seven pieces of surplus property are currently held for sale at an aggregate asking price of approximately $4,900.
Net cash provided by discontinued investing activities amounted to $46,872 during Fiscal Year 2012, primarily from the sale proceeds of the 29 Golden Corral restaurants in May 2012, together with proceeds from the sale of two of the six Golden Corral restaurants (permanently closed August 2011) and net of all capital expenditures that occurred prior to the sale of the 29 restaurants and the six permanent closures.
Financing Activities
When the 2013 Loan Agreement was executed on October 31, 2013, $2,000 was simultaneously drawn under the Revolving Credit Facility (Revolver) to refinance certain high interest Construction Term Loans. As part of the refinancing, six outstanding Construction Term Loans were retired with a single payment of $3,835, which was sourced from $1,835 in cash on hand and $2,000 drawn on the Revolver. Additionally, $1,500 was borrowed on the Revolver in February 2014 to meet working capital needs during the winter. Scheduled and other payments of long-term debt and capital lease obligations amounted to $11,438 during Fiscal Year 2014, which included $3,500 to retire the amounts that had been borrowed on the Revolver.
Regular quarterly cash dividends to shareholders amounted to $3,560 in Fiscal Year 2014, or $0.70 per share. The dividend per share was $0.64 in Fiscal Year 2013. In addition, an $0.18 per share quarterly dividend was declared on June 12, 2014. Its payment on July 10, 2014 was the 214th consecutive quarterly dividend paid by the Company. The Company currently expects to continue its 54 year practice of paying regular quarterly cash dividends.
In addition to regular quarterly cash dividends, a special one-time cash dividend of $9.50 per share was paid in Fiscal Year 2013 (on September 14, 2012), which amounted to $47,963 (financed principally with the proceeds from the sale of 29 Golden Corral restaurants in May 2012).
During Fiscal Year 2014, 12,502 shares of the Company's common stock were re-issued from the Company's treasury pursuant to the exercise of "cashless" stock options. The aggregate strike price was $172, all of which was received by the Company in cash, as all of the transactions were settled through a stock broker. As of June 3, 2014, 56,501 shares granted under the Company's stock option plans remained outstanding, all of which were fully vested at a weighted average exercise price of $18.73 per share. The closing price of the Company's stock on June 3, 2014 was $23.55. The intrinsic value of 49,667 fully vested "in-the-money" options was $317, which, if exercised, would yield $852 in proceeds to the Company. Shortly after the end of the fiscal year (June 8, 2014), 6,834 of the fully vested option shares expired (none of which were "in-the-money" as the exercise price was $30.13 per share). And in July 2014, 6,000 fully vested "in-the-money" option shares were exercised, which yielded $108 in proceeds to the Company.
During Fiscal Year 2013, 320,416 shares of the Company’s common stock were re-issued from the Company's treasury pursuant to the exercise of stock options. The aggregate strike price for the options was $7,467, of which $2,398 was received in cash and $5,069 was charged to the treasury stock account to record shares re-acquired in connection with the exercise of "cashless" stock options that would normally be settled through a broker on the open market.
No stock options have been granted since June 2010. The run out of expense associated with the three year step vesting was completed in Fiscal Year 2013.
On October 2, 2013, 11,984 shares of restricted stock were granted to non-employee members of the Board of Directors and an award of 1,712 restricted shares was granted to the Chief Executive Officer (CEO) pursuant to the terms of his employment contract. The total fair value of the awards amounted to $320, which is being expensed ratably (which began in the second quarter of Fiscal Year 2014) over a one year vesting period ($197 in Fiscal Year 2014). On October 3, 2012 (Fiscal Year 2013), 14,245 shares of restricted stock were granted to non-employee members of the Board of Directors and an award of 2,035 restricted shares was granted to the CEO. The total fair value of the October 2012 transactions also amounted to $320, of which the run out of

29


the final $123 was expensed in Fiscal Year 2014. Restricted shares granted in October 2011 (Fiscal Year 2012) also amounted to $320, which followed the same expense pattern.
All restricted shares vest in full on the first anniversary date of the award, unless accelerated by the Compensation Committee of the Board of Directors. Full voting and dividend rights are 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 grants.
Under the CEO's three year Employment Agreement that was effective May 30, 2012 (the first day of Fiscal Year 2013), the Compensation Committee of the Board of Directors will consider the CEO for the grant of a Performance Award as permitted by the 2003 Stock Option and Incentive Plan (2003 Plan). The Committee granted a Performance Award (under the 2003 Plan) to the CEO on May 30, 2012 to govern the CEO's incentive compensation for Fiscal Year 2013. The CEO's Employment Agreement was amended in June 2013 to allow the Committee to grant Performance Awards to the CEO under the 2012 Stock Option and Incentive Plan (2012 Plan). The Committee granted a new two year Performance Award to the CEO effective May 29, 2013 to govern the CEO's incentive compensation for the last two years of the Employment Agreement (Fiscal Years 2014 and 2015).
In recognition of their performance during Fiscal Year 2014, a group of executive officers (excluding the CEO) and other key employees was granted an aggregate award of 9,685 shares of unrestricted stock (2012 Plan) in July 2014. The total value of the award amounted to $221, which was accrued in Fiscal Year 2014. An aggregate award of 13,450 shares of unrestricted stock (2012 Plan) was granted in June 2013 to the same group, the total value of which amounted to $244, which was accrued in Fiscal Year 2013.
In June 2012, the same group of executive officers (excluding the CEO) and other key employees was granted an aggregate award of 4,850 unrestricted shares (2003 Plan) of the Company's common stock, the total value of which amounted to $127 and which was expensed immediately (Fiscal Year 2013). In June 2011, the CEO was granted an unrestricted stock award of 17,364 shares (2003 Plan) and a group of executive officers and other key employees were granted an aggregate award of 7,141 restricted shares (2003 Plan) of common stock. The total value of the unrestricted award to the CEO amounted to $371, which was expensed immediately (Fiscal Year 2012). The total value of the restricted awards to the executive officers and other key employees amounted to $141, which was expensed ratably over the one year vesting period (all in Fiscal Year 2012).
The fair value of stock options granted and restricted stock issued is recognized as compensation cost on a straight-line basis over the vesting periods of the awards. Although no stock options have been granted since June 2010, compensation cost continued from the run-out of the vesting period. Compensation costs arising from all share-based payments are charged to administrative and advertising expense in the Consolidated Statement of Earnings:
 
Fiscal Year 2014
 
Fiscal Year 2013
 
Fiscal Year 2012
 
 
 
(in thousands)
 
 
Stock options granted
$

 
$
54

 
$
137

Restricted stock issued
320

 
320

 
430

Unrestricted stock issued

 
127

 
371

Unrestricted stock accrued
221

 
244

 

Share-based compensation cost, pretax
$
541

 
$
745

 
$
938

On July 25, 2012, the Board of Directors authorized the purchase over a three year period, on the open market and in transactions negotiated privately, up to 450,000 shares of the Company's common stock. No shares were acquired under the program during the Fiscal Year 2014. During Fiscal Year 2013, the Company re-acquired 212,929 shares under the program at a cost of $6,708, which includes 32,000 shares that had been beneficially owned by the CEO and 180,929 shares that were re-acquired in connection with the exercise of "cashless" stock options that normally settle through a stock broker on the open market.
Separate from the repurchase program (to cover withholding tax obligations in connection with restricted and unrestricted stock awards), the Company's treasury acquired 5,381 shares of its common stock during Fiscal Year 2014 at a cost of $105 and 5,227 shares were acquired during Fiscal Year 2013 at a cost of $119.
Other Information
One new Frisch's Big Boy restaurant opened for business during Fiscal Year 2014, in Lexington, Kentucky, in early December 2013. No construction of any new Frisch's Big Boy restaurants was in progress as of June 3, 2014. Although there are no contracts currently pending to acquire or lease land on which to build, the Company owns five land tracts at various locations on Ohio, Kentucky and Indiana for which development has been deferred for the time being.

30


Including land and land improvements, the cost required to build and equip each new Frisch's Big Boy restaurant opened by the Company over the last three fiscal years has ranged from $2,250 to $3,825. The actual cost depends greatly on the price paid for the land and the cost of land improvements, both of which can vary widely from location to location, and whether the land is purchased or leased. Costs also depend on whether new restaurants are constructed using plans for the original 2001 building prototype (5,700 square feet with seating for 172 guests) or its smaller adaptation, the 2010 building prototype (5,000 square feet with seating for 148 guests), which is used in smaller trade areas. The larger 2001 building prototype was used to build the Frisch's Big Boy restaurant that opened in December 2013. Its total cost amounted to approximately $3,825, of which $1,100 was for the land.
Approximately one-fifth of the Frisch's Big Boy restaurants are routinely renovated or decoratively updated each year. The renovations not only refresh and upgrade interior finishes, but are also designed to synchronize the interiors and exteriors of older restaurants with that of newly constructed restaurants. Depending on age and other factors, the current cost to renovate/update a Frisch's Big Boy restaurant approximates $100 to $110 for a minor remodeling and ranges from $150 to $230 for a major remodeling. During Fiscal Year 2014, approximately $3,000 was spent on 18 remodel jobs. The Fiscal Year 2015 remodeling plan calls for 22 restaurants to be remodeled at a budgeted cost of approximately $3,200.
Certain high-volume restaurants are regularly evaluated to determine whether their kitchens should be redesigned for increased efficiencies and whether an expansion of the dining room is warranted. A typical kitchen redesign costs approximately $150 and a dining room expansion can cost more than $800. One restaurant received a dining room expansion and a third cook line added to its kitchen during Fiscal Year 2014, at a total cost in excess of $900.
Part of the Company’s strategic plan entails owning the land on which it builds new restaurants. However, it is sometimes necessary to enter ground leases to obtain desirable land on which to build. As of June 3, 2014, 15 Frisch's Big Boy restaurants were in operation on non-owned premises - one capital lease and 14 operating leases. Two of the five new Frisch's Big Boy restaurants opened by the Company during the last three fiscal years were constructed on leased land (operating leases).
The Company remains contingently liable under certain ground lease agreements relating to land on which seven of the Company's former Golden Corral restaurants are situated. The seven leases were assigned to Golden Corral Corporation (GCC) as part of the May 2012 transaction to sell the restaurants to GCC. The amount remaining under contingent lease obligations totaled $6,330 as of June 3, 2014, for which the aggregate average annual lease payments approximate $667 in each of the next five years. Since there is no reason to believe that GCC (the owner and franchisor of the Golden Corral brand) is likely to default, no provision has been made in the consolidated financial statements for amounts that would be payable by the Company.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use estimates and assumptions to measure certain items that affect the amounts reported in the financial statements and accompanying footnotes. These judgments are based on knowledge and experience about past and current events, and assumptions about future events. Accounting estimates can and do change as new events occur and additional information becomes available. Actual results may differ markedly from management's current judgment.
Two factors are required for an accounting policy to be deemed critical. The policy must be significant to the fair presentation of a company’s financial condition and its results of operations, and the policy must require management’s most difficult, subjective or complex judgments. Management believes the following to be the Company’s critical accounting policies.
Self Insurance
Subject to a two year cycle, the Company self-insures a significant portion of expected losses from its workers’ compensation program in the state of Ohio. Insurance coverage is purchased from an insurance company for protection against individual claims that exceed $300. This self insured retention level was raised from $300 to $400 effective June 4, 2014.

An actuarial consulting firm provided an independent estimate of the Company's required unpaid loss and allocated loss adjustment expense for accidents occurring since the inception of the Company's self-insured program through each of the fiscal years ended May 28, 2013 (Fiscal Year 2013) and June 3, 2014 (Fiscal Year 2014). As the expected value estimates provided by the actuarial consulting firm are developed over the range of reasonably possible (as opposed to all conceivable) outcomes, unexpected case developments could result in actual costs differing materially from estimated values presently carried in the self-insurance reserves. Based on the consulting firm's independent estimates, management adjusts its self-insured reserves at the end of each fiscal year. Management monitors claim data as presented by its third party administrator (TPA) of the program and will only make interim period adjustments to the self-insured reserves if a catastrophic claim is incurred or if actual payments of claims differ significantly from the the expected payment patterns developed by the actuarial consulting firm.


31


 

The actuarial consulting firm also provided forward estimates (based on historical claims data) of the ultimate value of claims that will be incurred during ensuing fiscal years. Management used the actuarial consulting firm's forward estimates to build the claims reserve for Fiscal Year 2014 and is using the firm's forward estimate to build the claims reserve for Fiscal Year 2015.
Pension Plans
Pension plan accounting requires rate assumptions for future compensation increases and the long-term investment return on plan assets. A discount rate is also applied to the calculations of net periodic pension cost and projected benefit obligations. A committee consisting of executives from the Finance Department and the Human Resources Department, with guidance provided by the Company’s actuarial consulting firm, develops these assumptions each year. The consulting firm also provides services in calculating estimated future obligations and net periodic pension cost.
To determine the long-term rate of return on plan assets, the committee considers a weighted average of the historical broad market return and the forward looking expected return. Returns are developed based on the plan's target asset allocation: 70 percent Domestic Equity, 25 percent Fixed Income and 5 percent Cash. The model to develop the historical broad market return assumes the widest period of historical data available for each asset class (as early as 1926 (in some cases) through 2013). Domestic equity securities are allocated equally between large cap and small cap funds, with fixed income securities allocated equally between long-term corporate/government bonds and intermediate-term government bonds. The model for the forward looking expected return uses a range of expected outcomes over a number of years based on the plan's asset allocation as noted above and assumptions about the return, variance, and co-variance for each asset class. The historical and forward looking returns are adjusted to reflect a 0.20 percent investment expense assumption representative of passive investments. The weighted average of the historical broad market return and the forward looking expected return is rounded to the level of the nearest 25 basis points to determine the overall expected rate of return on plan assets.
The discount rate is selected by matching the cash flows of the pension plan to that of a yield curve that provides the equivalent yields on zero-coupon bonds for each maturity. Benefit cash flows due in a particular year can be "settled" theoretically by "investing" them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the discount rate represents the equivalent single rate under a broad market AA yield curve. (The Above Mean Yield Curve developed by the Company's actuarial consulting firm has been used for this purpose since the May 28, 2013 measurement date.) The yield curve is used to set the discount rate assumption using cash flows on an aggregate basis, which is then rounded to the level of the nearest 10 basis points.
Pension plan assets are targeted to be invested 70 percent in equity securities, as these investments have historically provided the greatest long-term returns. Poor performance in equity securities markets can significantly lower the market values of the investment portfolios, which, in turn, can result in a) material increases in future funding requirements, b) much higher net periodic pension costs to be recognized in future years, and c) increases in underfunded plan status, requiring the Company’s equity to be reduced.
Long-Lived Assets
Long-lived assets include property and equipment, goodwill and other intangible assets. Judgments and estimates are used to determine the carrying value of long-lived assets. This includes the assignment of appropriate useful lives, which affect depreciation and amortization expense. Capitalization policies are continually monitored to assure they remain appropriate.
Management considers a history of cash flow losses on a restaurant-by-restaurant basis to be the primary indicator of potential impairment. Carrying values of property and equipment are tested for impairment at least annually, and whenever events or circumstances indicate that the carrying values of the assets may not be recoverable from the estimated future cash flows expected to result from the use and eventual disposition of the property. When undiscounted expected future cash flows are less than carrying values, an impairment loss is recognized equal to the amount by which carrying values exceed fair value, which is determined as either 1) the greater of the net present value of the future cash flow stream, or 2) by opinions of value provided by real estate brokers and/or management's judgment as developed through its experience in disposing of unprofitable restaurant operations. Broker opinions of value and the judgment of management consider various factors in their fair value estimates such as the sales of comparable area properties, general economic conditions in the area, physical condition and location of the subject property, and general real estate activity in the local market. Future cash flows can be difficult to predict. Changing neighborhood demographics and economic conditions, and many other factors may influence operating performance, which affect cash flows.
Sometimes it becomes necessary to cease operating a certain restaurant due to poor operating performance. The ultimate loss can be significantly different from the original impairment charge, particularly if the eventual market price received from the disposition of the property differs materially from initial estimates of fair values.
Acquired goodwill and other intangible assets are tested for impairment annually or whenever an impairment indicator arises.

32


Income Taxes
The provision for income taxes is based on management's estimate of federal, state and local tax liabilities. These estimates include, but are not limited to, the application of statutory federal, state and local tax rates to estimated taxable income, and the effect of tax credits such as the federal credits allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips and the Work Opportunity Tax Credit (WOTC). All tax returns are timely filed and are subject to audit by all levels of taxing authority. Audits can result in a different interpretation of tax laws from that of management.

Deferred tax assets and liabilities result from timing differences in the recognition of revenue and expense between financial reporting and tax statutes. Deferred tax accounting requires management to evaluate deferred tax assets, including net operating loss carry forwards. These evaluations entail complex projections that require considerable judgment and are ultimately subject to future changes in tax laws including changes in tax rates. Part of the evaluation requires management to assess whether deferred tax assets will more likely than not be realized on a future tax return. If management's evaluation determines that it is more likely that such deferred assets will not be realized, a valuation allowance will be recorded. The Company does not currently carry any valuation allowances against its deferred tax assets.



33


Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Conditions in the financial and commodity markets are subject to change at any time.
Management believes the Company has no significant market risk exposure to interest rate changes. All of the Company's debt is financed with fixed interest rates, or will be converted to fixed rate term loans in the next six months. The Company does not currently use derivative financial instruments to manage its exposure to changes in interest rates. Any cash equivalents maintained by the Company have original maturities of 90 days or less. Cash may be in excess of FDIC limits. The Company does not use any foreign currency in its operations.
Operations are vertically integrated, using centralized purchasing and food preparation, provided through the Company’s commissary and food manufacturing plant. Management believes the commissary operation ensures uniform product quality and safety, timeliness of distribution to restaurants and creates efficiencies that ultimately result in lower food and supply costs.
Commodity pricing affects the cost of many of the Company’s food products. Commodity pricing can be extremely volatile, affected by many factors outside of management's control, including import and export restrictions, the influence of currency markets relative to the U.S. dollar, the effects of supply versus demand, production levels and the impact that adverse weather conditions may have on crop yields.
Certain commodities purchased by the commissary, principally beef, chicken, pork, dairy products, fresh produce, fish, French fries and coffee, are generally purchased based upon market prices established with vendors. Purchase contracts for some of these items may contain contractual provisions that limit the price to be paid. These contracts are normally for periods of one year or less but may have longer terms if favorable long-term pricing becomes available. Food supplies are generally plentiful and may be obtained from any number of suppliers, which mitigates the Company’s overall commodity cost risk. Quality, timeliness of deliveries and price are the principal determinants of source. The Company does not use financial instruments as a hedge against changes in commodity pricing.


34


 
 
Item 8. Financial Statements and Supplementary Data
Page
 
 
The following financial statements and reports are included in Item 8 of this report:
 
 
 
Index to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet – June 3, 2014 and May 28, 2013
 
 
 
 
 
 
 
 
 
 
 
 

35


REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 3, 2014. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 3, 2014 based upon criteria in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of June 3, 2014 based on the criteria in the 1992 Internal Control - Integrated Framework issued by the COSO.
The Board of Directors meets its responsibility for oversight of the integrity of the Company’s financial statements through its Audit Committee, which is composed entirely of three independent directors, none of whom are employees of the Company and two of whom are financial experts. The Audit Committee meets periodically with management and Internal Audit to review their work and confirm that their respective responsibilities are being properly discharged. In addition, Grant Thornton LLP, the Company’s independent registered public accounting firm, has full access to the Audit Committee to discuss the results of their audit work, the effectiveness of internal accounting controls and the quality of financial reporting.
The Company’s internal control over financial reporting as of June 3, 2014 has been audited by Grant Thornton LLP, as is stated in their report that is presented in these financial statements which appears herein.
 
August 7, 2014
 
 
Date
 
 
 
 
 
/s/ Craig F. Maier
 
Craig F. Maier
 
President and Chief Executive Officer
 
 
 
/s/ Mark R. Lanning
 
Mark R. Lanning
 
Vice President-Finance, Chief Financial Officer,
Principal Financial Officer
and Principal Accounting Officer

36


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Frisch’s Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Frisch’s Restaurants, Inc. (an Ohio corporation) and Subsidiaries (the “Company”) as of June 3, 2014 and May 28, 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended June 3, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frisch’s Restaurants, Inc. and Subsidiaries as of June 3, 2014 and May 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended June 3, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 3, 2014, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 7, 2014 expressed an unqualified opinion therein.

/s/ GRANT THORNTON LLP
 
Cincinnati, Ohio
August 7, 2014

37


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Frisch’s Restaurants, Inc.
We have audited the internal control over financial reporting of Frisch's Restaurants, Inc. (an Ohio Corporation) and Subsidiaries (the "Company") as of June 3, 2014, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 3, 2014, based on criteria established in the 1992 Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 3, 2014, and our report dated August 7, 2014 expressed an unqualified opinion on those financial statements.
 
/s/ GRANT THORNTON LLP
 
Cincinnati, Ohio
August 7, 2014

38


FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 3, 2014 and May 28, 2013
ASSETS
 
 
2014
 
2013
 
(in thousands)
Current Assets
 
 
 
Cash and equivalents
$
2,038

 
$
4,256

Trade and other receivables, net
1,900

 
1,297

Inventories
5,637

 
5,765

Prepaid expenses, sundry deposits and other
1,260

 
686

Deferred income taxes and other tax receivables
2,787

 
2,417

Total current assets
13,622

 
14,421

 
 
 
 
Property and equipment
231,931

 
222,095

Less accumulated depreciation and amortization
127,069

 
119,950

Net property and equipment
104,862

 
102,145

 
 
 
 
Other Assets
 
 
 
Goodwill and other intangible assets
773

 
775

Real property not used in operations
6,744

 
8,405

Other
3,261

 
2,966

Total other assets
10,778

 
12,146

 
 
 
 
Total assets
$
129,262

 
$
128,712

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


39


FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 3, 2014 and May 28, 2013
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
2014
 
2013
 
(in thousands, except share data)
Liabilities and Shareholders' Equity
 
 
 
Current Liabilities
 
 
 
Long-term debt, current maturities
$
1,996

 
$
4,846

Accounts payable
6,812

 
5,879

Accrued and other expenses
9,319

 
8,535

Total current liabilities
18,127

 
19,260

 
 
 
 
Long-term debt, less current maturities
4,737

 
9,600

Deferred income taxes
2,340

 
254

Underfunded pension obligation
1,867

 
8,530

Deferred compensation
4,997

 
4,203

Other long-term obligations
2,851

 
3,210

Total long-term obligations
16,792

 
25,797

 
 
 
 
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
7,587

 
7,587

Additional contributed capital
69,513

 
69,408

 
77,100

 
76,995

 
 
 
 
Accumulated other comprehensive loss
(174
)
 
(4,324
)
Retained earnings
56,798

 
50,925

 
56,624

 
46,601

 
 
 
 
Common stock in treasury (2,487,752 and 2,524,309 shares)
(39,381
)
 
(39,941
)
Total shareholders’ equity
94,343

 
83,655

 
 
 
 
Total liabilities and shareholders’ equity
$
129,262

 
$
128,712

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


40


FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
Three years ended June 3, 2014
 
 
2014
 
2013
 
2012
 
(in thousands, except per share data)
Sales
$
209,173

 
$
203,712

 
$
205,083

Cost of sales
 
 
 
 
 
Food and paper
70,088

 
68,268

 
69,042

Payroll and related
74,236

 
71,523

 
72,721

Other operating costs
42,973

 
41,368

 
41,805

Total cost of sales
187,297

 
181,159

 
183,568

 
 
 
 
 
 
Restaurant operating income
21,876

 
22,553

 
21,515

 
 
 
 
 
 
Administrative and advertising
12,599

 
13,074

 
13,379

Franchise fees and other revenue, net
(1,439
)
 
(1,376
)
 
(1,322
)
Loss (gain) on sale of real property
(135
)
 
14

 
(200
)
Impairment of long lived assets

 
390

 
1,229

 
 
 
 
 
 
Operating income
10,851

 
10,451

 
8,429

 
 
 
 
 
 
Interest expense
586

 
964

 
1,414

Earnings from continuing operations before income taxes
10,265

 
9,487

 
7,015

 
 
 
 
 
 
Income taxes
832

 
2,513

 
1,214

Earnings from continuing operations
9,433

 
6,974

 
5,801

 
 
 
 
 
 
Loss from discontinued operations, net of tax

 
(158
)
 
(3,653
)
 
 
 
 
 
 
NET EARNINGS
$
9,433

 
$
6,816

 
$
2,148

 
 
 
 
 
 
Basic net earnings per share:
 
 
 
 
 
Earnings from continuing operations
$
1.85

 
$
1.39

 
$
1.18

Loss from discontinued operations
$

 
$
(0.03
)
 
$
(0.74
)
Basic net earnings per share
$
1.85

 
$
1.36

 
$
0.44

 
 
 
 
 
 
Diluted net earnings per share:
 
 
 
 
 
Earnings from continuing operations
$
1.85

 
$
1.38

 
$
1.17

Loss from discontinued operations
$

 
$
(0.03
)
 
$
(0.74
)
Diluted net earnings per share
$
1.85

 
$
1.35

 
$
0.43

Fiscal year 2014 contained 53 weeks consisting of 371 days. Fiscal years 2013 and 2012 contained 52 weeks consisting of 364 days. The accompanying notes are an integral part of the consolidated financial statements.

41


FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three years ended June 3, 2014


 
2014
 
2013
 
2012
 
(in thousands)
Net earnings
$
9,433

 
$
6,816

 
$
2,148

 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
Amount recognized as a component of net periodic pension cost (1)
842

 
1,705

 
1,017

Current year actuarial gain (loss) on defined benefit pension plans
5,680

 
5,403

 
(6,244
)
Change in defined benefit plans (pretax)
6,522

 
7,108

 
(5,227
)
Tax effect
(2,371
)
 
(2,426
)
 
1,947

Change in defined benefit plans, net of tax
4,151

 
4,682

 
(3,280
)
 
 
 
 
 
 
Comprehensive income (loss)
$
13,584

 
$
11,498

 
$
(1,132
)
 
 
 
 
 
 

(1) Approximately $156 of the amount recognized as a component of net periodic pension cost that was included in other comprehensive income was attributable to Golden Corral during Fiscal Year 2012.
The accompanying notes are an integral part of the consolidated financial statements.


42


FRISCH’S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three years ended June 3, 2014
 
2014
 
2013
 
2012
 
(in thousands)
Cash flows provided by (used in) operating activities:
 
 
 
 
 
Net earnings
$
9,433

 
$
6,816

 
$
2,148

Less loss from discontinued operations

 
(158
)
 
(3,653
)
Earnings from continuing operations
9,433

 
6,974

 
5,801

Adjustments to reconcile net earnings from continuing operations to net cash from operating activities:
 
 
 
 
 
Depreciation and amortization
10,721

 
10,388

 
10,273

Loss (gain) on disposition of assets, including abandonment losses
(12
)
 
195

 
(112
)
Impairment of long lived assets

 
390

 
1,229

Stock-based compensation expense
564

 
501

 
939

Net periodic pension cost
1,864

 
3,247

 
2,259

Contributions to pension plans
(2,000
)
 
(2,394
)
 
(2,100
)
 
20,570

 
19,301

 
18,289

Changes in assets and liabilities:
 
 
 
 
 
Trade and other receivables, net
(603
)
 
386

 
314

Inventories
128

 
(175
)
 
(650
)
Prepaid expenses, sundry deposits and other
(574
)
 
22

 
612

Other assets
(80
)
 
53

 
3

Deferred income taxes and other obligations
(620
)
 
861

 
302

Excess tax benefit from stock-based compensation
(20
)
 
(417
)
 
(4
)
Accounts payable
933

 
(414
)
 
(3,742
)
Accrued and other expenses, including long-term obligations
482

 
157

 
(1,167
)
Deferred compensation
791

 
159

 
301

 
437

 
632

 
(4,031
)
Net cash provided by continuing operations
21,007

 
19,933

 
14,258

Net cash provided by (used in) discontinued operations

 
(651
)
 
9,525

Net cash provided by operating activities
21,007

 
19,282

 
23,783

 
 
 
 
 
 
Cash flows (used in) provided by investing activities:
 
 
 
 
 
Additions to property and equipment
(13,160
)
 
(9,837
)
 
(10,731
)
Proceeds from disposition of property
1,543

 
2,680

 
461

Change in restricted cash

 
3,493

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