-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PEtV43cn+NdT+618KgT5vq5q/4bT4jIAL49ROr342EpaoO3/MdarnXR7VdIQqzMP p0hLfLEZJd5uWrr5AGBpIg== 0000950152-99-003019.txt : 19990405 0000950152-99-003019.hdr.sgml : 19990405 ACCESSION NUMBER: 0000950152-99-003019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990307 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRISCHS RESTAURANTS INC CENTRAL INDEX KEY: 0000039047 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 310523213 STATE OF INCORPORATION: OH FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07323 FILM NUMBER: 99586507 BUSINESS ADDRESS: STREET 1: 2800 GILBERT AVE CITY: CINCINNATI STATE: OH ZIP: 45206 BUSINESS PHONE: 5139612660 MAIL ADDRESS: STREET 1: 2800 GILBERT AVE CITY: CINCINNATI STATE: OH 10-Q 1 FRISCH'S RESTAURANTS, INC. 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 FOR QUARTER ENDED MARCH 7, 1999 COMMISSION FILE NUMBER 1-7323 FRISCH'S RESTAURANTS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 31-0523213 ------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2800 GILBERT AVENUE, CINCINNATI, OHIO 45206 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 513-961-2660 ------------ Not Applicable - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The total number of shares outstanding of the issuer's no par common stock, as of March 30, 1999 was: 5,939,700 2 TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF EARNINGS .................... 3 CONSOLIDATED BALANCE SHEET ............................ 4 - 5 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ........ 6 CONSOLIDATED STATEMENT OF CASH FLOWS .................. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............ 8 - 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... 16 - 18 PART II - OTHER INFORMATION 19
3 FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
Forty Weeks Ended Twelve Weeks Ended -------------------------------- ------------------------------- March 7, March 8, March 7, March 8, 1999 1998 1999 1998 --------------- ---------------- --------------- --------------- REVENUE Sales $ 120,119,234 $ 115,509,644 $ 35,073,195 $ 33,744,073 Other 1,088,810 978,270 440,988 288,167 --------------- ---------------- --------------- --------------- Total revenue 121,208,044 116,487,914 35,514,183 34,032,240 COSTS AND EXPENSES Cost of sales Food and paper 36,947,915 36,143,158 11,024,235 10,662,211 Payroll and related 41,378,246 38,738,211 12,374,557 11,616,123 Other operating costs 27,720,723 27,425,921 8,136,267 8,023,359 --------------- ---------------- --------------- --------------- 106,046,884 102,307,290 31,535,059 30,301,693 General and administrative 4,324,758 3,426,142 1,134,173 1,039,730 Advertising 2,907,477 2,797,266 834,424 815,276 Impairment of Long-Lived Assets 1,125,000 - - - Interest 1,980,461 2,324,583 498,701 774,004 --------------- ---------------- --------------- --------------- Total costs and expenses 116,384,580 110,855,281 34,002,357 32,930,703 --------------- ---------------- --------------- --------------- Earnings before income taxes and extraordinary item 4,823,464 5,632,633 1,511,826 1,101,537 INCOME TAXES 1,736,000 1,802,000 544,000 352,000 --------------- ---------------- --------------- --------------- Earnings before extraordinary item 3,087,464 3,830,633 967,826 749,537 EXTRAORDINARY ITEM (NET OF APPLICABLE TAX) 3,712,000 - - - --------------- ---------------- --------------- --------------- NET EARNINGS $ 6,799,464 $ 3,830,633 $ 967,826 $ 749,537 =============== ================ =============== =============== Basic and diluted net earnings per share of common stock: Before extraordinary item $ .52 $ .61 $ .16 $ .12 Extraordinary item .62 - - - =============== ================ =============== =============== $ 1.14 $ .61 $ .16 $ .12 =============== ================ =============== ===============
The accompanying notes are an integral part of these statements. 3 4 FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
ASSETS March 7, May 31, 1999 1998 (unaudited) --------------- -------------- CURRENT ASSETS Cash $ 908,873 $ 84,260 Receivables Trade 1,207,267 782,101 Other 150,975 236,670 Inventories 3,940,826 3,638,740 Prepaid expenses and sundry deposits 1,097,447 827,571 Prepaid and deferred income taxes 786,267 939,089 --------------- -------------- Total current assets 8,091,655 6,508,431 PROPERTY AND EQUIPMENT Land and improvements 20,871,108 20,171,685 Buildings 51,605,690 50,172,522 Equipment and fixtures 57,551,634 54,750,152 Leasehold improvements and buildings on leased land 28,275,347 26,321,313 Capitalized leases 8,224,712 8,682,298 Construction in Progress 816,223 - --------------- -------------- 167,344,714 160,097,970 Less accumulated depreciation and amortization 83,190,707 77,901,512 --------------- -------------- Net property and equipment 84,154,007 82,196,458 OTHER ASSETS Intangible assets 749,734 752,867 Investments in land 1,771,967 1,737,933 Property held for sale 3,537,913 7,853,073 Net cash surrender value-life insurance policies 3,966,439 3,767,594 Deferred income taxes 891,243 891,243 Other 1,630,649 3,016,124 --------------- -------------- Total other assets 12,547,945 18,018,834 --------------- -------------- $ 104,793,607 $ 106,723,723 =============== ==============
The accompanying notes are an integral part of these statements. 4 5 LIABILITIES
March 7, May 31, 1999 1998 (unaudited) --------------- --------------- CURRENT LIABILITIES Long-term obligations due within one year Long-term debt $ 1,500,000 $ 1,500,000 Obligations under capitalized leases 455,330 458,480 Self insurance 1,100,410 877,725 Accounts payable 7,683,428 6,342,187 Accrued expenses 5,163,794 5,779,923 Income taxes 1,328,019 - --------------- -------------- Total current liabilities 17,230,981 14,958,315 LONG-TERM OBLIGATIONS Long-term debt 22,129,490 29,914,490 Obligations under capitalized leases 5,255,192 5,597,202 Self insurance 3,126,104 3,623,276 Other 2,250,681 2,720,454 --------------- --------------- Total long-term obligations 32,761,467 41,855,422 COMMITMENTS - - SHAREHOLDERS' EQUITY Capital stock Preferred stock - authorized, 3,000,000 shares without par value; none issued - - Common stock - authorized, 12,000,000 shares without par value; issued, 7,362,279 shares - stated value - $1 7,362,279 7,362,279 Additional contributed capital 60,423,818 60,427,299 --------------- --------------- 67,786,097 67,789,578 Retained earnings 8,890,039 3,347,485 --------------- --------------- 76,676,136 71,137,063 Less cost of treasury stock (1,421,019 and 1,356,821 shares) 21,874,977 21,227,077 --------------- --------------- Total shareholders' equity 54,801,159 49,909,986 --------------- --------------- $ 104,793,607 $ 106,723,723 =============== ===============
5 6 FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FORTY WEEKS ENDED MARCH 7, 1999 AND MARCH 8, 1998 (UNAUDITED)
Common stock at $1 per share- Additional Shares and contributed Retained Treasury amount capital earnings shares Total ------------- --------------- ------------- --------------- --------------- Balance at June 1, 1997 7,362,279 60,427,514 432,732 ($3,538,721) 64,683,804 Net earnings for forty weeks - - 3,830,633 - 3,830,633 Treasury shares reissued - (215) - 1,407 1,192 Treasury shares acquired - - - (17,689,763) (17,689,763) Dividends Cash - $.19 per share - - (1,209,597) - (1,209,597) ------------- --------------- ------------- --------------- --------------- Balance at March 8, 1998 7,362,279 60,427,299 3,053,768 (21,227,077) 49,616,269 Net earnings for twelve weeks - - 714,100 - 714,100 Dividends Cash - $.07 per share - - (420,383) - (420,383) ------------- --------------- ------------- --------------- --------------- Balance at May 31, 1998 7,362,279 60,427,299 3,347,485 (21,227,077) 49,909,986 Net earnings for forty weeks - - 6,799,464 - 6,799,464 Treasury shares acquired - - - (661,593) (661,593) Treasury shares reissued - (3,481) - 13,693 10,212 Dividends Cash - $.21 per share - - (1,256,910) - (1,256,910) ------------- -------------- ------------- --------------- --------------- Balance at March 7, 1999 $7,362,279 $60,423,818 $8,890,039 ($21,874,977) $54,801,159 ============= =============== ============= =============== ===============
The accompanying notes are an integral part of these statements. 6 7 FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FORTY WEEKS ENDED MARCH 7, 1999 AND MARCH 8, 1998 (UNAUDITED)
1999 1998 ------------- ------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income $6,799,464 $3,830,633 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 7,575,501 7,078,067 Loss on disposition of assets 286,179 1,612 Impairment of long-lived assets 1,125,000 - Gain on sale of investment in Cincinnati Reds (3,712,000) - Changes in assets and liabilities: Increase in receivables (339,471) (90,844) (Increase) decrease in inventories (302,086) 35,981 Increase in prepaid expenses and sundry deposits (269,876) (103,244) Decrease in prepaid and deferred income taxes 152,822 220,418 Increase in accounts payable 1,341,241 618,877 Decrease in accrued expenses (616,129) (562,174) (Decrease) increase in accrued income taxes (759,981) 218,821 Decrease (increase) in other assets 111,761 (1,034,883) Decrease in self insured obligations (274,487) (300,275) Decrease in other liabilities (469,773) (110,291) ------------- ------------- Net cash provided by operating activities 10,648,165 9,802,698 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Additions to property and equipment (9,886,303) (8,663,169) Proceeds from disposition of property 3,304,380 5,429,011 Proceeds from sale of investment in Cincinnati Reds 7,000,000 - Increase in other assets (203,178) (194,539) ------------- ------------- Net cash provided by (used in) investing activities 214,899 (3,428,697) CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: Proceeds from borrowings 4,000,000 18,644,490 Payment of long-term obligations (12,130,160) (5,661,078) Cash dividends paid (1,256,910) (1,209,597) Treasury share transactions (651,381) (17,688,571) ------------- ------------- Net cash (used in) financing activities (10,038,451) (5,914,756) ------------- ------------- Net increase in cash and equivalents 824,613 459,245 Cash and equivalents at beginning of year 84,260 231,453 ------------- ------------- Cash and equivalents at end of third quarter $908,873 $690,698 ============= ============= Supplemental disclosures: Interest paid $2,017,628 $2,185,641 Income taxes paid 2,343,159 1,485,024 Income tax refunds received - 122,263
The accompanying notes are an integral part of these statements. 7 8 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: Description of the Business - --------------------------- Frisch's Restaurants, Inc. operates and licenses family restaurants, most of which have "drive-thru" service, which use the trade name Frisch's Big Boy. These operations are located in Ohio, Indiana and Kentucky. Additionally, the Company operates one Golden Corral grill buffet restaurant and two hotels with restaurants in metropolitan Cincinnati, where it is headquartered. Trademarks which the Company has the right to use include "Frisch's," "Big Boy," "Quality Hotel," and "Golden Corral." Consolidation Practices - ----------------------- The consolidated financial statements include the accounts of Frisch's Restaurants, Inc. and all of its subsidiaries. Significant inter-company accounts and transactions are eliminated in consolidation. Use of Estimates - ---------------- The preparation of financial statements requires management to use estimates and assumptions in certain areas that affect the amounts reported. These judgments are based on knowledge and experience about past and current events, and assumptions about future events. Although management believes its estimates are reasonable and adequate, future events affecting them may differ markedly from current judgment. Some of the more significant areas requiring the use of estimates include self insurance liabilities, deferred store closing costs, value of goodwill, net realizable value of property held for sale, and deferred executive compensation. Cash and Cash Equivalents - ------------------------- Highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Receivables - ----------- The Company values its trade notes and accounts receivable on the reserve method. The reserve balance was immaterial at March 7, 1999 and May 31, 1998. Inventories - ----------- Inventories, comprised principally of food items, are valued at the lower of cost, determined by the first-in, first-out method, or market. Income Taxes - ------------ Taxes are provided on all items included in the statement of earnings regardless of when such items are reported for tax purposes. Property and Equipment - ---------------------- Property and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the estimated service lives of the assets. Investments in land, consisting of land on which construction is not likely within the next twelve months, is also stated at cost. Intangible Assets and Other Assets - ---------------------------------- The excess of cost over equity in net assets of subsidiaries acquired prior to November 1, 1970, is not currently being amortized because, in the opinion of management, the value has not decreased. 8 9 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A - ACCOUNTING POLICIES (CONTINUED) New Store Opening Costs - ----------------------- New store opening costs consist of new employee training costs, the cost of a team to coordinate the opening and the cost of certain replacement items such as uniforms and china. Effective June 1, 1998, the Company elected early application of The American Institute of Certified Public Accountants' Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires new store opening costs to be expensed as incurred. The Company previously capitalized and amortized these costs over a one-year period from the date each new store opened. Opening costs of $268,000 for the Company's first Golden Corral restaurant were expensed as incurred in the forty weeks ended March 7, 1999. Opening expense was $35,000 for the forty weeks ended March 8, 1998, which consisted of the amortization of new Big Boy store opening costs. There were no unamortized new store opening costs on the balance sheet at March 8, 1998. Benefit Plans - ------------- The Company has two defined benefit pension plans covering substantially all of its employees. The benefits are based on years-of-service and other factors. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. The Company also has a non-qualified supplemental retirement plan for certain key employees. Self Insurance - -------------- The Company self-insures its Ohio workers' compensation claims up to $250,000 per claim. Costs are accrued based on management's estimate for future claims. Recognition of Franchise Fee Revenue - ------------------------------------ Franchise fees, based on sales of Big Boy franchisees, are recorded on the accrual method as earned. Initial franchise fees, of which there has been no significant income, are recognized as revenue when the licensed restaurants begin operations. Fair Value of Financial Instruments - ----------------------------------- The carrying value of the Company's financial instruments approximates fair value. Investment in Sports Franchise - ------------------------------ On September 30, 1998, the Company completed the sale of its limited partnership investment in the Cincinnati Reds professional baseball team for $7,000,000 in cash. The transaction resulted in a pre-tax gain of $5,800,000. After tax proceeds of $4,900,000 were used to reduce debt incurred in August 1997 in connection with the Company's tender offer (see notes C and F). The net gain of approximately $.62 per share was reported as an extraordinary gain in the Company's second quarter ending December 13, 1998. A final partnership distribution of $101,000 was recorded in earnings during the third quarter ended March 7, 1999. No distribution was received in 1998. Stock Based Compensation - ------------------------ The Company accounts for stock options using the intrinsic value method of measuring compensation expense prescribed by Accounting Principles Board Opinion No. 25 (APB 25), as permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation." When required, pro forma disclosures of net income and earnings per share based on options granted and stock issued are reflected in Note F - Capital Stock. 9 10 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A - ACCOUNTING POLICIES (CONTINUED) Accounting for the Impairment of Long-Lived Assets - -------------------------------------------------- The Company considers a history of cash flow losses in established areas to be its primary indicator of potential impairment. During the fourth quarter of fiscal 1997, the Company closed fifteen restaurants in certain markets in which cash flow losses had occurred. A non-cash pre-tax charge of $4,600,000 was recorded as an impairment loss pursuant to Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The impairment loss reduced the carrying costs of the properties to net realizable value as determined by the Company's experience in disposing of unprofitable restaurant properties and estimates provided by real estate brokers. To further lower the net realizable value of the properties remaining to be sold, the Company recorded additional pretax charges of $375,000 in the fourth quarter of fiscal 1998 and $1,125,000 in the second quarter of fiscal 1999. The second quarter 1999 charge is partially based upon contracts with a Big Boy franchise operator, a minority shareholder of which is a related party. NOTE B - PROPERTY HELD FOR SALE Of the fifteen properties closed at the end of fiscal 1997 as described in note A, ten have been disposed of through March 7, 1999. The sale proceeds were used to repay borrowings under the loan agreement that funded the Company's modified "Dutch Auction" self-tender offer (see notes C and F). The remaining five properties are listed for sale with a broker, and are carried at a net realizable value of approximately $2,991,000 on the Company's balance sheet at March 7, 1999 as a component of the caption "Property held for sale." The Company expects to dispose of the majority of these restaurant properties within the next twelve months. Certain surplus land is also currently held for sale and is stated at cost. NOTE C - LONG-TERM DEBT
March 7, 1999 May 31, 1998 --------------------------- ----------------------- Payable Payable Payable Payable within after within after one year one year one year one year -------- -------- -------- -------- (in thousands) Revolving credit loan $ - $ 12,500 $ - $ 12,500 Term loan 1,500 4,250 1,500 5,500 Tender offer - 3,379 - 11,914 Golden Corral facility - 2,000 - - --------- ---------- --------- --------- $ 1,500 $ 22,129 $ 1,500 $ 29,914 ========= ========== ========= =========
The portion payable after one year matures as follows:
Mar. 7, May 31, 1999 1998 ---- ---- (in thousands) Period ending in 2000 $ - $ 25,914 2001 4,879 1,500 2002 16,000 1,500 2003 1,250 1,000 ---------- --------- $ 22,129 $ 29,914 ========== =========
10 11 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C - LONG-TERM DEBT (CONTINUED) The revolving credit loan is a $16,000,000 unsecured line of credit, $12,500,000 of which is outstanding at March 7, 1999. This credit loan was renegotiated in October 1998 to mature on September 1, 2001, unless extended. Interest rates are determined by various indices as selected by the Company, currently 5.93%. Interest is payable in arrears on the last day of the rate period chosen by the Company, which may be monthly, bi-monthly or quarterly. The term loan is also unsecured and is payable in monthly installments of $125,000 through December 31, 2002. Interest is also payable monthly at a rate equal to the prime rate, currently 7.75%, not to exceed 8.5%. The tender offer loan was arranged to fund the Company's repurchase of up to 1,000,000 shares of the Company's common stock in August 1997 (see note F). Of the $17,144,000 borrowed, $13,765,000 had been repaid as of March 7, 1999 (see note B), reducing the balance outstanding to $3,379,000. The loan agreement was renegotiated in October 1998 to mature on August 15, 2000. Interest is payable monthly at the lender's prime rate or a LIBOR-adjusted rate, at the option of the Company. The LIBOR-adjusted rate of 6.19% was in effect as of March 7, 1999. The loan is collateralized by the real property and equipment owned by the Company at the five remaining closed restaurant locations (see note B), the cash value of all life insurance policies owned by the Company and a security assignment of the after tax proceeds from the sale of the Company's limited partnership investment in the Cincinnati Reds professional baseball team. Borrowings under the loan agreement are being repaid through the sale of the remaining restaurant properties and the Company's interest in the Cincinnati Reds. The loan agreement requires the after tax proceeds from the sale of these assets to be immediately applied against the outstanding indebtedness. The investment in the Cincinnati Reds was sold on September 30, 1998. The after tax proceeds of $4,900,000 were used to further reduce this debt. (See note A). The Company believes the expected sale proceeds from the remaining property will be sufficient to extinguish the debt. Upon its retirement, the Company's $16,000,000 revolving line of credit will be increased to $20,000,000. In October 1998, the Company entered into an unsecured draw credit facility under which it may borrow up to $20,000,000 to enable the Company to construct and open Golden Corral Restaurants. The Company borrowed $2,000,000 against this credit line through March 7, 1999. No more than $8,000,000 may be advanced for new restaurants under construction at any one time. Availability of draws ceases on September 1, 2001. During the construction phase, payment will be on an interest only basis. At the Company's option, interest on prime rate based borrowings will be payable monthly, or, in the case of LIBOR or CD based adjusted rate borrowings, payable at the end of each specific rate period selected by the Company, which may be monthly, bi-monthly or quarterly. The quarterly LIBOR adjusted rate of 5.93% is in effect until April 2, 1999. Within six months of the completion and opening of each restaurant, the balance outstanding under each draw note will be converted to a term note amortized for a period not to exceed seven years. Upon conversion, the Company will have the option to fix the interest rate at the lender's then cost of funds plus 150 basis points. These loan agreements contain covenants relating to tangible net worth, interest expense, cash flow, debt levels, capitalization changes, asset dispositions, investments, and restrictions on pledging certain restaurant operating assets. The Company was in compliance with all financial covenants at March 7, 1999. The Company also has three outstanding letters of credit totaling $1,546,000 in support of its self insurance program. NOTE D - LEASED PROPERTY The Company has capitalized the leased property of 40% of its non-owned restaurant locations. The majority of the leases are for fifteen or twenty years and contain renewal options for ten to fifteen years. Delivery equipment is held under capitalized leases expiring during periods to 2004. The Company also occupies office space under an operating lease which expires during 2003, with a renewal option available through 2013. 11 12 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE D - LEASED PROPERTY (CONTINUED) An analysis of the capitalized leased property follows: Asset balances at -------------------------- Mar. 7, May 31, 1999 1998 -------- -------- (in thousands) Restaurant facilities $ 7,248 $ 7,705 Equipment 977 977 --------- -------- 8,225 8,682 Less accumulated amortization (4,996) (5,059) --------- -------- $ 3,229 $ 3,623 ========= ======== Total rental expense of operating leases for the forty weeks was $1,131,000 at March 7, 1999 and $1,082,000 at March 8, 1998. Future minimum lease payments under capitalized leases and operating leases having an initial or remaining term of one year or more follow: Capitalized Operating Period ending March 7, leases leases ---------------------- ------ ------ (in thousands) 2000 $ 1,046 $ 1,236 2001 951 1,215 2002 893 1,005 2003 873 871 2004 873 623 2005 to 2020 4,751 2,683 ------- -------- Total 9,387 $ 7,633 ======== Amount representing interest (3,677) ------- Present value of obligations 5,710 Portion due within one year (455) ------- Long-term obligations $ 5,255 ======= NOTE E - INCOME TAXES The provision for income taxes in all periods has been computed based on management's estimate of the tax rate for the entire fiscal year. In March 1999, the Company reached an agreement with the Internal Revenue Service (IRS) regarding the IRS examination of the Company's Federal income tax returns for fiscal years 1994, 1995 and 1996. The Company has agreed to pay additional tax to the IRS of approximately $145,000 for the three years plus interest. The agreement had no material impact on the Company's statement of earnings, as such taxes will be recovered in future years. 12 13 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F - CAPITAL STOCK Stock Options - ------------- The 1993 Stock Option Plan authorizes the grant of stock options for up to 562,432 shares of the common stock of the Company for a ten-year period beginning May 9, 1994. Shares may be optioned to employees at not less than 75% of fair market value on the date granted. Shareholders approved the Amended and Restated 1993 Stock Option Plan (Amended Plan) in October 1998 which provides for automatic, annual stock option grants of 1,000 shares to each of the Company's non-employee directors. The per share exercise price for options granted to non-employee directors must equal 100% of fair market value on the date of grant. The Amended Plan adds a Company right to repurchase shares acquired on exercise of options if an optionee chooses to dispose of such shares. Stock appreciation rights are not provided for under the Amended Plan. Outstanding options under the 1993 Plan were granted at fair market value and vest in three equal annual installments and expire 10 years from the date of grant. The 1984 Stock Option Plan expired May 8, 1994. As of March 7, 1999, 96,913 options remain outstanding, which are exercisable within 10 years from the date of grant. The exercise price is the fair market value as of the date granted, subsequently adjusted for stock dividends in accordance with the anti-dilution provisions of the Plan. Transactions involving both the 1993 and the 1984 Plans are summarized below:
Forty weeks ended Forty weeks ended March 7, 1999 March 8, 1998 --------------------------- -------------------------- No. of Option No. of Option Shares Price Shares Price ------ ----- ------ ----- Outstanding at beginning of year 134,413 $12.38 to $20.83 259,835 $14.38 to $20.83 Exercisable at beginning of year 96,913 $14.38 to $20.83 259,835 $14.38 to $20.83 Granted during the forty weeks 35,500 $8.31 to $11.25 0 Exercised during the forty weeks 0 0 Expired during the forty weeks 2,250 $11.25 to $12.38 0 Outstanding at end of quarter 167,663 $8.31 to $20.83 259,835 $14.38 to $20.83 Exercisable at end of quarter 96,913 $14.38 to $20.83 259,835 $14.38 to $20.83
Based upon information presented in the above table, pro forma disclosures of net income and earnings per share as required by SFAS 123 are unnecessary. Shareholders approved the Employee Stock Option Plan in October 1998. The Plan is effective November 1, 1998 and provides employees who have completed 90 days continuous service an opportunity to purchase shares of the Company's common stock through payroll deduction. Immediately following the end of each semi-annual offering period, participant account balances are used to purchase shares of stock at the lesser of 85% of the fair market value of shares at the beginning of the offering period or at the end of the offering period. The Plan authorizes a maximum of 1,000,000 shares which may be purchased on the open market or from the Company's treasury. The Company also has reserved 58,492 common shares for issuance under the Frisch Executive Savings Plan. Shares reserved under these plans have been adjusted for stock dividends. There are no other outstanding options, warrants or rights. Modified "Dutch Auction" Self-Tender Offer - ------------------------------------------ On July 8, 1997, the Board of Directors approved the repurchase of up to 1,000,000 shares of the Company's common stock from existing shareholders subject to the terms of a modified "Dutch Auction" self-tender offer. The tender offer provided for a net cash price not greater than $17.00 nor less than $15.00 per share. Repurchases of 1,142,966 shares at $15.00 per share were completed on August 15, 1997 at a cost of approximately $17,690,000. As permitted by the terms of the offer, the Company increased the number of shares repurchased by 142,966 shares. Since 1,212,479 shares were tendered at $15.00 per share, a proration was made among the shareholders who tendered at that price. Before the repurchase of the shares, the Company had 7,148,334 shares of common stock outstanding. Immediately following the repurchase, the Company had 6,005,368 shares of common stock outstanding. 13 14 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F - CAPITAL STOCK (CONTINUED) Stock Repurchase Program - ------------------------ On October 5, 1998, the Board of Directors authorized a program to repurchase up to 500,000 shares of the Company's common stock on the open market. Purchases may be made from time to time within a two-year time frame. Through March 7, 1999, 64,763 shares had been repurchased at a cost of $659,000. Earnings Per Share - ------------------ The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," on December 15, 1997. SFAS 128 simplifies established standards by requiring a presentation of basic earnings per share (EPS), and if applicable, diluted EPS, instead of primary and fully diluted EPS. The adoption of SFAS 128 had no impact on the recalculation of prior period earnings per share. The computation of basic EPS is based on the weighted average number of outstanding common shares during the period. Weighted average Common Shares Outstanding ------------------------- Quarter ending March 7, 1999 5,943,311 Year-to-date March 7, 1999 5,980,150 Quarter ending March 8, 1998 6,005,416 Year-to-date March 8, 1998 6,307,452 Diluted EPS includes the effect of common stock equivalents, which assumes the exercise of dilutive stock options. For the forty weeks ended March 7, 1999, 822 shares of common stock equivalents were included in the computation of diluted EPS. The twelve weeks ended March 7, 1999 included 1,581 shares in the diluted EPS computation. Stock options outstanding for the forty weeks and twelve weeks ended March 8, 1998 were not included in the computation of diluted EPS because their exercise prices exceeded the average market price of the common shares. 14 15 Frisch's Restaurants, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G - PENSION PLANS The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheet at May 31, 1998 and June 1, 1997 (latest available data, in thousands):
1998 1997 --------- --------- Plan assets at fair market value, primarily marketable securities and insurance funds $ 23,189 $19,242 --------- --------- Actuarial present value of benefit obligations: Vested benefits 10,178 9,217 Non vested benefits 1,037 1,033 --------- --------- Accumulated benefit obligations 11,215 10,250 Effect of projected future salary increases 3,550 3,542 --------- --------- Projected benefit obligations 14,765 13,792 --------- --------- Plan assets in excess of projected benefit obligations (including approximately $380 at 1998 and $361 at 1997 withdrawable by participants upon demand) 8,424 5,450 Unrecognized net gains (7,761) (5,284) Unrecognized prior service cost 669 739 Unrecognized net transition (assets) (948) (1,185) ---------- ---------- Net prepaid (accrued) pension cost included in the balance sheet $ 384 $ (280) ========== ==========
Assumptions used to develop net periodic pension cost and the actuarial present value of projected benefit obligations: 1998 1997 ------ ------ Expected long-term rate of return on plan assets 8.50% 8.50% Weighted average discount rate 7.25 7.25 Rate of increase in compensation levels 5.50 5.50 Pension expense for the forty weeks ended March 7, 1999 and March 8, 1998 was a credit of $78,000 and a charge of $217,000 respectively. Effective June 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in the benefit obligations and fair values of plan assets. Since SFAS 132 does not change the measurement or recognition of these plans, its adoption had no affect on the Company's statement of earnings. NOTE H - COMPANY REPRESENTATIONS The financial information is unaudited, but in the opinion of management includes all adjustments (all of which were normal and recurring with the exception of the $1,125,000 pretax impairment of assets charge) necessary for a fair presentation of results of operations for such periods. 15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- Total revenue for the twelve-week third quarter ended March 7, 1999 was $35,514,000, an increase of $1,482,000 or 4.4 percent from the comparable period last year. Net earnings were $968,000, or $.16 per share for the quarter compared to $749,000, or $.12 per share last year. For the three quarters ended March 7, 1999, revenue increased 4.1 percent to $121,208,000 from $116,488,000 a year ago. Net earnings, which include an extraordinary gain of $3,712,000, or $.62 per share from the sale of the Company's limited interest in the Cincinnati Reds professional baseball team, rose to $6,799,000, or $1.14 per share, from $3,831,000 or $.61 per share. Excluding the extraordinary gain and a pre-tax impairment of assets charge of $1,125,000 (see notes A and B to the consolidated financial statements) taken in the second quarter, operating earnings per share through three quarters of fiscal 1999 would have been $.64, compared to $.61 last year. RESULTS OF OPERATIONS - --------------------- Same store sales in Big Boy restaurants improved more than 4 percent during the first three quarters of fiscal year 1999. The sales gains were especially strong from carryout and drive-thru trade, which have been driven by an emphasis on combo-meals. Menu prices were increased approximately 2 percent in the first and third quarters of fiscal 1998, and additional increases of 2 percent were implemented in the first and third quarters of fiscal 1999. Strong hotel revenue gains achieved during the twelve week third quarter nearly erased year-to-date hotel sales declines that were posted in the first half of the year. The Company did not open or close any Big Boy restaurants during the first three quarters of the fiscal year and currently operates 88 Big Boy restaurants and two Quality Hotels. The Company's first Golden Corral restaurant opened January 25, 1999, contributing in excess of $500,000 in sales in its first six weeks, greatly exceeding initial expectations. The Company plans to build 23 Golden Corrals and expects average annual sales volumes of $3,000,000. Other revenue increased 11.3 percent year-to-date, principally due to a final partnership distribution from the Cincinnati Reds professional baseball team that was received during the third quarter. Cost of sales increased $3,740,000 or 3.7 percent during the first three quarters this year. However, as a percentage of revenue, cost of sales fell to 87.5 percent from 87.8 percent last year, reflecting an overall improvement in restaurant margins, primarily from sales increases. An analysis of the components of cost of sales follows. Food and paper costs decreased as a percentage of revenue during this year's first three quarters, falling to 30.5 percent of revenue from 31.0 percent compared to last year. Lower pork and beef prices aided the improvement. In addition, the food cost of typical carryout and drive-thru meals is usually lower than for dining room meals. Payroll and related expenses rose as a percentage of revenue during this year's first three quarters to 34.1 percent of revenue from 33.3 percent in last year's first three quarters. Higher hourly pay rates, driven by continuing tight labor conditions in all of the Company's markets, were the principal cause. A new variable compensation program for restaurant managers was instituted at the beginning of fiscal 1999. As had been expected, the program has resulted in higher management payroll costs. However, these higher payroll costs have been offset by the elimination of service trainer management positions plus a 15 percent reduction in field supervisors. Favorable claims experience in the Company's self-insurance programs resulted in credits to payroll and related expenses of $549,000 and $494,000, respectively, in the first quarters of fiscal 1999 and 1998. There is increasing speculation that the federal minimum wage might be increased by as much as $1 an hour as early as the year 2000. Based on current labor conditions, such an increase would not have a material effect on the Company's payroll costs. Other operating expenses decreased to 22.9 percent of revenue during this year's first three quarters from 23.5 percent for the same period last year. The percentage improvement is largely due to the sales increase, as these expenses tend to be more fixed in nature. Opening costs approximating $260,000 for the Company's first Golden Corral restaurant were expensed as incurred as other operating expense throughout the 1999 fiscal year, reflecting the Company's early adoption of new accounting rules. Due to the high opening costs, Golden Corral is expected to have a negative impact on earnings during fiscal 1999. 16 17 Total cost of sales also increased due to higher depreciation charges for the hotels during this year's first three quarters. Combined with hotel revenue below expectations, hotel operating results have been disappointing through the forty weeks ending March 7, 1999. While sales improvements were initially encouraging for "Highlands Bar and Grill", the restaurant has not performed well. The Company is exploring avenues to re-flag the Quality Hotel Riverview in Covington, Kentucky with a more upscale name. Extensive renovations qualify the Riverview property for a more upscale market and should allow the hotel to charge premium rates for its rooms, resulting in a much higher return on invested capital. General and administrative expense during the first three quarters of fiscal 1999 increased $899,000 or 26.2 percent over the first three quarters of fiscal 1998. The increase is principally due to gains recorded last year from the disposition of three properties unrelated to fifteen Big Boy restaurants that were closed at the end of fiscal 1997. Also, this year's general and administrative expense includes higher roll-out costs for point-of-sale systems in Big Boy restaurants. Results for the first three quarters of fiscal 1999 were adversely affected by a $1,125,000 impairment of assets charge taken during the second quarter associated with the closing of fifteen unprofitable restaurants at the end of fiscal 1997. Eight of these former Big Boy restaurants had been disposed of through the first half of fiscal 1999, generally at prices above original estimates. However, during the second quarter, it became apparent that the remaining seven restaurants would ultimately have to be disposed of for values significantly below the initial estimates that were used when the restaurants closed. Contracts were accepted at prices lower than originally estimated on four of the properties during the second quarter, and the Company lowered expectations for the remaining three. Three of the four accepted contracts are with a Big Boy franchise operator, a minority shareholder of which is an officer of the Company. The terms of these transactions are no less favorable than would be agreed upon with persons having no relationship with the Company. During the third quarter, two of the four contracts accepted during the second quarter were consummated, with a third sale taking place shortly after the close of the third quarter. A fifth contract was accepted during the third quarter, also with the same Big Boy franchise operator mentioned above. Through the date of the filing of this Form 10-Q, two of the four remaining properties are under contract. Interest expense during the 40 weeks ended March 7, 1999 decreased $344,000 or 14.8 percent lower than the comparable period a year ago. Interest attributable to the tender offer loan (see notes C and F to the consolidated financial statements) was $430,000 during this year's first three quarters, compared with $580,000 last year. Interest associated with other borrowings declined $194,000 during the three quarters due to a combination of lower interest rates and the timing of borrowing and repayment of debt. Interest on the tender offer loan will continue to spiral downward as the current year progresses, as more of the principal is repaid. The outstanding principal balance of the tender offer loan was $3,379,000 as of March 7, 1999, a reduction of $9,605,000 in the last twelve months. Savings from the reduction in tender offer interest will likely be tempered by borrowing needed to construct Golden Corral restaurants during the next three fiscal years. Provision for income tax expense as a percentage of pre-tax earnings was increased to 36 percent from 33 percent in the second quarter of fiscal 1999. In the comparable period last year the effective tax rate was 32 percent. The increased tax rate reflects higher state income taxes associated with the extraordinary gain from the sale of the Company's limited partner interest in the Cincinnati Reds. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided by operating activities during the first three quarters of fiscal 1999 was $10,650,000, an increase of $850,000 from last year's first three quarters. These funds were generated principally from net income and depreciation, and were utilized for discretionary capital improvements, dividends, and to service debt. Investing activities during the first three quarters of fiscal 1999 included $9,890,000 in capital costs, an increase of $1,220,000 from last year's first three quarters. This year's costs consisted of $2,230,000 for new point-of-sale systems, $2,180,000 to renovate the hotel properties, $700,000 to remodel Big Boy restaurants, $3,020,000 for Golden Corral which includes all costs of the first restaurant now in operation and land for the next restaurant to be constructed, and $1,760,000 in routine equipment replacements and other capital outlays. Proceeds from property sales were $3,300,000, substantially all of which came from the disposal of four of the fifteen restaurants closed at the end of fiscal 1997. The Company expects to complete the disposal of the remaining five closed restaurants within the next twelve months. On September 30, 1998, the Company completed the sale of its limited partner interest in the Cincinnati Reds for $7,000,000 in cash. 17 18 Financing activities in the first three quarters of fiscal 1999 included $2,000,000 of new debt borrowed against the Company's revolving line of credit and $2,000,000 borrowed against the Company's Golden Corral credit facility. Scheduled long-term debt payments of $1,600,000 were made and $3,630,000 was paid against the tender offer loan principally with proceeds from the sale of four of the fifteen closed restaurants. On September 30, 1998, the Company used the after tax proceeds from the sale of its interest in the Cincinnati Reds to repay $4,900,000 against the tender offer loan. The Company used $2,000,000 from the Reds' sale proceeds to pay down its revolving line of credit. Regular quarterly cash dividends to shareholders totaling $1,260,000 were also paid during the three quarters ended March 7, 1999. On October 5, 1998, the Board of Directors authorized a program to repurchase up to 500,000 shares of the Company's common stock on the open market. Through March 7, 1999, the Company repurchased 64,763 shares at a cost of $660,000. The Company expects funds from operations to be sufficient to cover near term capital spending on Big Boy and hotel facilities, scheduled debt service unrelated to the tender offer loan and regular quarterly cash dividends. The Company does not currently plan to build any new Big Boy restaurants during the remainder of calendar year 1999. Costs to remodel Big Boy restaurants scheduled over the remainder of the fiscal year are expected to be approximately $600,000. The installation of point-of-sale systems in Big Boy restaurants was substantially completed during the quarter ended March 7, 1999. The terms of a development agreement with Golden Corral Franchising Systems, Inc. call for the Company to open 23 Golden Corral restaurants through 2004. The Company plans to have five restaurants opened and in operation by the end of calendar year 1999 as required by the agreement. Costs are being funded through cash flow and a new credit facility under which the Company may borrow up to $20,000,000 through September 1, 2001. The average cost to build and equip each Golden Corral restaurant is expected to be $2,400,000, including land. YEAR 2000 IMPACT - ---------------- The Company has identified its Year 2000 compliance issues and is currently executing a plan to insure that its information systems are fully Year 2000 compliant. All of the required date fields that need to be modified have been identified for the Company's custom written headquarters software, and the programming necessary to bring these systems into compliance is expected to be completed in May 1999. The Company is utilizing internal resources to convert and test these systems without material additional expense. Certain prepackaged software, principally point-of-sale, will require upgrade or replacement, the estimated cost of which will have no material adverse effect on the Company's financial position, results of operations or cash flows. The plan calls for these systems to be compliant in September 1999. Certain other systems that have embedded chip technology are not expected to have a significant effect on operations. The Company can not determine the full extent of its major suppliers' software compliance, and is unable to estimate the effect that their non-compliance may have on food and other product delivery. However, management believes the risk is minimal as product is generally plentiful and may be obtained from any number of suppliers. Other than the Company's main depository bank, which the Company believes will be compliant, the Company does not have any material relationships with third parties involving the electronic transmission of data. SAFE HARBOR STATEMENT - --------------------- Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results. Such risks and uncertainties include, but are not limited to, the following: estimates used in preparing financial statements; seasonal weather conditions, particularly in the third quarter; intense competition; changes in business strategy and development plans; consumer perceptions of value, food quality and food safety; changing demographics and consumer preferences; changes in the supply and cost of food and labor; the effects of inflation and variable interest rates; legal claims; and changes in governmental regulations regarding the environment and changes in tax laws. The Company undertakes no obligation to update the forward-looking statements that may be contained in this MD&A. 18 19 PART II - OTHER INFORMATION - --------------------------- Items 1, 2, 3, 4, and 5, the answers to which are either "none" or "not applicable", are omitted. Item 6. Exhibits and reports on Form 8-K. a) Exhibits (27) Financial Data Schedule b) Reports on Form 8-K. None SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRISCH'S RESTAURANTS, INC. -------------------------- (registrant) 4-2-99 DATE________________ 4-2-99 BY /s/ Donald H. Walker ----------------------- Donald H. Walker Vice President - Finance and Principal Financial Officer 19 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF EARNINGS OF FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAY-30-1999 JUN-01-1998 MAR-07-1999 908,873 0 1,358,242 0 3,940,826 8,091,655 167,344,714 83,190,707 104,793,607 17,230,981 27,384,682 0 0 7,362,279 47,438,880 104,793,607 120,119,234 121,208,044 106,046,884 106,046,884 8,357,235 0 1,980,461 4,823,464 1,736,000 3,087,464 0 3,712,000 0 6,799,464 1.14 1.14
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