<PAGE> 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 September 21, 1997 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
-------------
<TABLE>
<CAPTION>
<S> <C>
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report.
</TABLE>
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 September 30, 1997 was:
6,005,368
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 - 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...........................15 - 16
PART II - OTHER INFORMATION ....................................................16
</TABLE>
<PAGE> 3
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
SIXTEEN WEEKS ENDED SEPTEMBER 21, 1997 AND SEPTEMBER 22, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
REVENUE
Sales $ 46,136,477 $ 51,284,261
Other 392,696 445,517
------------- -------------
Total revenue 46,529,173 51,729,778
COSTS AND EXPENSES
Cost of sales
Food and paper 14,415,040 16,218,678
Payroll and related 15,201,802 16,854,329
Other operating costs 10,983,838 12,658,085
------------- -------------
40,600,680 45,731,092
General and administrative 1,521,548 1,835,338
Advertising 1,114,932 1,251,028
Interest 786,944 699,521
------------- -------------
Total costs and expenses 44,024,104 49,516,979
------------- -------------
Earnings before income taxes 2,505,069 2,212,799
INCOME TAXES 802,000 786,000
------------- -------------
NET EARNINGS $ 1,703,069 $ 1,426,799
============= =============
Primary and fully diluted net earnings
per share of common stock $ .25 $ .20
============= =============
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 21, June 1,
1997 1997
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 185,450 $ 231,453
Receivables
Trade 981,490 1,037,001
Other 165,232 190,312
Inventories 3,728,971 3,657,844
Prepaid expenses and sundry deposits 1,634,994 957,311
Prepaid and deferred income taxes 642,191 808,198
------------ ------------
Total current assets 7,338,328 6,882,119
PROPERTY AND EQUIPMENT - AT COST
Land and improvements 20,199,678 19,788,269
Buildings 49,204,614 48,319,998
Equipment and fixtures 52,715,307 51,021,079
Leasehold improvements and buildings on leased land 25,004,147 24,913,657
Capitalized leases 8,961,650 9,096,008
------------ ------------
156,085,396 153,139,011
Less accumulated depreciation and amortization 74,653,933 72,374,953
------------ ------------
Net property and equipment 81,431,463 80,764,058
OTHER ASSETS
Intangible assets 755,689 756,943
Investments in land - at cost 1,951,854 1,953,130
Property held for sale 11,236,427 13,628,457
Net cash surrender value-life insurance policies 3,794,607 3,613,878
Deferred income taxes 1,530,868 1,530,868
Other 2,149,875 2,130,512
------------ ------------
Total other assets 21,419,320 23,613,788
------------ ------------
$110,189,111 $111,259,965
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
LIABILITIES
<TABLE>
<CAPTION>
September 21, June 1,
1997 1997
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Long-term obligations due within one year
Long-term debt $ 1,700,000 $ 1,723,890
Obligations under capitalized leases 469,725 470,497
Self insurance 1,032,131 1,095,993
Accounts payable 8,143,660 6,357,177
Accrued expenses 4,912,778 6,051,004
Income Taxes 368,372 --
------------ ------------
Total current liabilities 16,626,666 15,698,561
LONG-TERM OBLIGATIONS
Long-term debt 33,324,490 17,875,000
Obligations under capitalized leases 5,934,180 6,055,682
Self insurance 3,660,193 4,151,229
Other 2,735,694 2,795,689
------------ ------------
Total long term obligations 45,654,557 30,877,600
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 60,427,514 60,427,514
------------ ------------
67,789,793 67,789,793
Retained earnings 1,346,579 432,732
------------ ------------
69,136,372 68,222,525
Less cost of treasury stock (1,356,911 and 213,945 shares) 21,228,484 3,538,721
------------ ------------
Total shareholders' equity 47,907,888 64,683,804
------------ ------------
$110,189,111 $111,259,965
============ ============
</TABLE>
5
<PAGE> 6
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIXTEEN WEEKS ENDED SEPTEMBER 21, 1997 AND SEPTEMBER 22, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock
at $1 per share - Additional
Shares and contributed Retained Treasury
amount capital earnings shares Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 2, 1996 $ 7,080,195 $ 56,794,272 $ 4,860,713 ($ 3,428,146) $ 65,307,034
Net earnings for sixteen weeks -- -- 1,426,799 -- 1,426,799
Dividends
Cash - $.12 per share -- -- (825,914) -- (825,914)
------------ ------------ ------------ ------------ ------------
Balance at September 22, 1996 7,080,195 56,794,272 5,461,598 (3,428,146) 65,907,919
Net loss for thirty-six weeks -- -- (240,152) -- (240,152)
Treasury shares acquired -- -- -- (110,575) (110,575)
Dividends
Cash - $.12 per share -- -- (873,388) -- (873,388)
Stock - 4% 282,084 3,633,242 (3,915,326) -- --
------------ ------------ ------------ ------------ ------------
Balance at June 1, 1997 7,362,279 60,427,514 432,732 (3,538,721) 64,683,804
Net earnings for sixteen weeks -- -- 1,703,069 -- 1,703,069
Treasury shares acquired -- -- -- (17,689,763) (17,689,763)
Dividends
Cash - $.12 per share -- -- (789,222) -- (789,222)
------------ ------------ ------------ ------------ ------------
Balance at September 21, 1997 $ 7,362,279 $ 60,427,514 $ 1,346,579 ($21,228,484) $ 47,907,888
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIXTEEN WEEKS ENDED SEPTEMBER 21, 1997 AND SEPTEMBER 22, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 1,703,069 $ 1,426,799
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 2,808,569 3,131,999
Loss on disposition of assets 57,221 240,885
Changes in assets and liabilities:
Decrease in receivables 80,723 256,807
Increase in inventories (71,127) (257,942)
Increase in prepaid expenses and sundry deposits (677,683) (911,408)
Decrease in prepaid and deferred income taxes 166,007 586,272
Increase in accounts payable 1,426,161 675,726
Decrease in accrued expenses (1,138,226) (767,283)
Increase in accrued income taxes 368,372 415,545
(Increase) decrease in other assets (405,694) 8,934
Decrease in self insured obligations (554,898) (751,031)
(Decrease) increase in other liabilities (59,995) 280,564
------------ ------------
Net cash provided by operating activities 3,702,499 4,335,867
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Additions to property (3,676,415) (4,151,095)
Proceeds from disposition of property 2,904,758 310,930
Increase in other assets (161,508) (124,980)
------------ ------------
Net cash (used in) investing activities (933,165) (3,965,145)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from borrowings 18,144,490 1,000,000
Payment of long-term obligations (2,841,164) (870,558)
Cash dividends paid (428,900) (412,957)
Tender offer stock acquisition (17,689,763) --
------------ ------------
Net cash (used in) financing activities (2,815,337) (283,515)
------------ ------------
Net (decrease) increase in cash and equivalents (46,003) 87,207
Cash and equivalents at beginning of year 231,453 134,944
------------ ------------
Cash and equivalents at end of quarter $ 185,450 $ 222,151
============ ============
Supplemental disclosures:
Interest paid $ 584,196 $ 709,489
Income taxes paid 376,044 370,455
Income tax refunds received 108,423 586,272
Dividends declared but not paid 360,322 412,957
</TABLE>
The accompanying notes are an integral part of these statements
7
<PAGE> 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 with
drive-thru service under the name Frisch's Big Boy. These operations are located
in Ohio, Indiana and Kentucky. Additionally, the Company operates 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,"
and "Quality Hotel."
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. Outstanding checks totaling $388,000 were
included in accounts payable at September 21, 1997.
Receivables
- -----------
The Company values its trade notes and accounts receivable on the reserve
method. The reserve balance was immaterial at September 21, 1997 and June 1,
1997.
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
- ----------------------
Depreciation is provided principally on the straight-line method over the
estimated service lives of the assets.
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
<PAGE> 9
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - ACCOUNTING POLICIES (CONTINUED)
Net cash surrender value of life insurance policies includes the cash values of
two policies written by a life insurance company that has been under an order of
rehabilitation since August, 1994. As had been expected, an assumption
reinsurance agreement has been reached with a creditworthy carrier that fully
preserves cash values and which contains rights and benefits comparable with the
original policies. Restraints on policy loans, surrenders and reductions in face
amounts, which were imposed by the order of rehabilitation, will remain in
effect for six months after the agreement is closed. The closing, which is
subject to court and regulatory approval, is anticipated during the fourth
quarter of calendar 1997.
New Store Opening Costs
- -----------------------
New store opening costs are capitalized and amortized over a one year period
from the date each new store opened. Items capitalized include new employee
training costs, the cost of an employee team to coordinate the opening and the
cost of certain replacement items such as uniforms and china. Opening expense
for the sixteen weeks was $35,000 at September 21, 1997 and $204,000 at
September 22, 1996.
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 portions of its casualty insurance coverages. Self
insurance costs are accrued based on management's estimate for future claims.
There is insurance in place which provides for catastrophic losses.
Revenue Recognition
- -------------------
Franchise fees, based on sales of franchisees, are recorded on the accrual
method as earned. There was no significant income from initial fees.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of the Company's financial instruments approximates fair
value.
Investment in Sports Franchise
- ------------------------------
The Company's limited partnership investment in the Cincinnati Reds professional
baseball team is carried at cost. Distributions of partnership income are
recorded in earnings when received. The Company has committed to actively pursue
the sale of this asset (see note C).
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
<PAGE> 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
- --------------------------------------------------
In the first quarter of fiscal 1997, the Company adopted 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." SFAS 121
requires impairment losses to be recognized on long-lived assets, whether used
in the operation of the business or held for disposal, when events or changes in
circumstances indicate that the assets' carrying amount may not be fully
recoverable. The Company considers a history of cash flow losses in established
areas to be its primary indicator of potential impairment. The immediate effect
upon adoption was immaterial.
During the fourth quarter of fiscal 1997, the Company made a further review of
operations in those markets in which losses occurred and determined that all ten
restaurants in the Indianapolis market and five other restaurants in three other
areas should be closed. The restaurants chosen for closing incurred a combined
pre-tax operating loss of approximately $2,200,000 in fiscal 1997, of which
$700,000 was incurred in the quarter that ended September 22, 1996. A non-cash
pre-tax charge of $4,600,000 was recorded as an impairment loss to reduce the
carrying costs of the properties to net realizable value as determined by the
Company's experience in disposing of other unprofitable restaurant properties
and estimates provided by real estate brokers.
NOTE B - PROPERTY HELD FOR SALE
Of the fifteen properties closed at the end of fiscal 1997 as described in note
A, three were disposed of during the quarter ended September 21, 1997. The sale
proceeds were used to repay borrowings under the loan agreement that funded the
Company's recent modified "Dutch Auction" self-tender offer (see notes C and F).
The remaining twelve properties are listed for sale with a broker, and are
carried at a net realizable value of approximately $10,250,000 on the Company's
balance sheet at September 21, 1997 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 nine to fifteen months. Certain surplus land and one
other former restaurant location are also currently held for sale.
NOTE C - LONG-TERM DEBT
<TABLE>
<CAPTION>
September 21, 1997 June 1, 1997
--------------------------- ----------------------
Payable Payable Payable Payable
within after within after
one year one year one year one year
------- --------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revolving credit loan $ - $ 12,000 $ - $ 11,000
Term loan 1,500 6,500 1,500 6,875
Tender offer loan - 14,824 - -
Other 200 - 224 -
------- --------- ------- ---------
$ 1,700 $ 33,324 $ 1,724 $ 17,875
======= ========= ======= =========
</TABLE>
The portion payable after one year matures as follows:
<TABLE>
<CAPTION>
September 21, June 1,
1997 1997
--------- ---------
(in thousands)
<S> <C> <C>
Period ending in 1999 $ 28,324 $ 1,500
2000 1,500 12,500
2001 1,500 1,500
2002 1,500 1,500
Subsequent to 2002 500 875
--------- ---------
$ 33,324 $ 17,875
========= =========
</TABLE>
10
<PAGE> 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 line of credit, $12,000,000 of which
is outstanding at September 21, 1997. This credit loan matures on September 1,
1999, unless extended. Interest is payable quarterly determined by various
indices, currently 6.65%. The term loan 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 up to a maximum of 7.5% through December 31, 1997. The
rate for the final five years shall also be equal to the prime rate, 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
$17,144,000 borrowed, $2,320,000 had been repaid as of September 21, 1997 (see
note B), reducing the balance outstanding to $14,824,000. The loan agreement
matures on August 15, 1999. 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 7.16% was in effect as of September 21, 1997. The loan is collateralized
by the real property and equipment owned by the Company at the twelve remaining
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 possible sale of the Company's limited partnership investment in the
Cincinnati Reds professional baseball team. The Company expects to repay
borrowings under the loan agreement through the sale of the remaining restaurant
properties and its interest in the Cincinnati Reds, and is required by the loan
agreement to immediately apply the after tax proceeds from the sale of these
assets against the outstanding indebtedness. Internally generated funds may also
be needed to service the debt. When the credit facility is retired, the
Company's $16,000,000 revolving line of credit will be restored to $20,000,000.
These loan agreements contain covenants relating to net worth, interest expense,
debt and capitalization changes, asset dispositions, investments, leases, and
restrictions on pledging certain restaurant operating assets.
Other debt includes industrial revenue bonds that were issued in 1978, payable
in annual installments of $200,000 through 1998 and bear interest at 7.4%.
Property and equipment having a book value at September 21, 1997 of $4,032,000
is pledged as collateral for the bonds.
The Company also has a $1,978,000 outstanding letter of credit in support of its
self insurance program.
NOTE D - LEASED PROPERTY
The Company has capitalized the leased property of 50% 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.
An analysis of the leased property follows:
<TABLE>
<CAPTION>
Asset balances at
--------------------------
Sept. 21, June 1,
--------- --------
1997 1997
(in thousands)
<S> <C> <C>
Restaurant facilities $ 7,985 $ 8,119
Equipment 977 977
--------- --------
8,962 9,096
Less accumulated amortization (4,931) (4,924)
--------- -------
$ 4,031 $ 4,172
========= ========
</TABLE>
Total rental expense of operating leases for the sixteen weeks was $420,000 at
September 21, 1997 and $481,000 at September 22, 1996.
11
<PAGE> 12
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LEASED PROPERTY (CONTINUED)
Future minimum lease payments under capitalized leases and operating leases
having an initial or remaining term of one year or more follow:
<TABLE>
<CAPTION>
Capitalized Operating
Period ending September 21, leases leases
--------------------------- --------- --------
(in thousands)
<S> <C> <C> <C>
1998 $ 1,133 $ 1,162
1999 1,068 1,108
2000 1,014 1,010
2001 903 885
2002 876 674
2003 to 2020 6,063 3,528
-------- --------
Total 11,057 $ 8,367
========
Amount representing interest (4,653)
--------
Present value of obligations 6,404
Portion due within one year (470)
--------
Long-term obligations $ 5,934
========
</TABLE>
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.
The Company is currently being examined by the Internal Revenue Service for the
year 1994. The Company believes that it will prevail on most of the issues that
have been raised and that, in any event, the ultimate liability for these issues
will have no material impact on the Company's statement of earnings.
NOTE F - CAPITAL STOCK
Stock Options
- -------------
Shareholders approved the 1993 Stock Option Plan on October 4, 1993. The 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 at not less than seventy-five percent of fair market value on the date
granted and may include stock appreciation rights. No options have been granted
under the 1993 plan.
The 1984 Stock Option Plan expired May 8, 1994. Outstanding options are
exercisable within ten years from the date of grant, the majority of which will
expire in May 1998. 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 the 1984 plan are
summarized below:
<TABLE>
<CAPTION>
Sixteen weeks ended Sixteen weeks ended
September 21, 1997 September 22, 1996
-------------------------- ----------------------
No. of Option No. of Option
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding and exercisable at
beginning of year 259,835 $14.38 to $20.83 259,423 $14.95 to $21.66
Granted during the quarter 0 0
Exercised during the quarter 0 0
Expired during the quarter 0 (4,787) $17.48
--------- ---------
Outstanding and exercisable at
end of quarter 259,835 $14.38 to $20.83 254,636 $14.95 to $21.66
========= =========
</TABLE>
12
<PAGE> 13
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
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.
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. After the repurchase, the Company has 6,005,368 shares of common
stock outstanding.
Earnings Per Share
- ------------------
Earnings per common share are based on the weighted average number of common and
common equivalent shares outstanding during each period, which gives effect to
stock options.
<TABLE>
<CAPTION>
Weighted average
common shares
(Primary and
fully diluted)
--------------
<S> <C>
Quarter ending September 21, 1997 6,760,542
Quarter ending September 22, 1996 7,156,789
</TABLE>
The Company is required to adopt Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings Per Share" in the third quarter of fiscal year 1998.
SFAS 128 simplifies current standards by requiring a presentation of basic
earnings per share (EPS), and if applicable, diluted EPS, instead of primary and
fully diluted EPS. There is expected to be no material effect on restatement of
prior period EPS data.
13
<PAGE> 14
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 June 1, 1997 and June 2, 1996 (latest
available data, in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Plan assets at fair market value, primarily marketable securities and insurance funds $ 19,242 $ 18,597
-------- --------
Actuarial present value of benefit obligations:
Vested benefits 9,217 9,895
Non vested benefits 1,033 802
-------- --------
Accumulated benefit obligations 10,250 10,697
Effect of projected future salary increases 3,542 2,997
-------- --------
Projected benefit obligations 13,792 13,694
-------- --------
Plan assets in excess of projected benefit obligations (including approximately
$361 at 1997 and $369 at 1996 withdrawable by participants upon demand) 5,450 4,903
Unrecognized net gains (5,284) (4,349)
Unrecognized prior service cost 739 641
Unrecognized net transition (assets) (1,185) (1,421)
-------- --------
Net accrued pension cost included in the balance sheet $ (280) $ (226)
======== ========
</TABLE>
Assumptions used to develop net periodic pension cost and the actuarial present
value of projected benefit obligations:
<TABLE>
<CAPTION>
1997 1996
--------- ------
<S> <C> <C>
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
</TABLE>
Pension expense for the sixteen weeks ended September 21, 1997 and September 22,
1996 was approximately $82,000 and $63,000, respectively.
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) necessary for
a fair presentation of results of operations for such periods.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Total revenue was $46,529,000 for the first quarter of fiscal 1998, a decrease
of $5,201,000 or 10.1% from a year ago. The closing of fifteen unprofitable Big
Boy restaurants at the end of last year accounted for $4,625,000 of the
decrease. Also, same store sales were down for the quarter. Menu prices were
increased approximately 3% and 2%, respectively, in the second and third
quarters of fiscal 1997. Another menu increase of approximately 2% was
implemented shortly before the quarter ended September 21, 1997. Hotel revenue
was flat during the quarter.
Cost of sales decreased $5,130,000 or 11.2%, as costs fell to 87.3% of revenue
from 88.4% last year. Closing the fifteen restaurants was the principal factor
behind the improvement. In addition, favorable claims experience in the
Company's self insurance programs allowed estimates for future obligations to be
lowered again. However, this year's favorable adjustment was $1,030,000 below
last year's first quarter adjustment. Had these reserve adjustments not been
made, payroll and related expense would have been 33.7% and 34.9% of revenue,
respectively, in the first quarters of fiscal 1998 and 1997. The reduction
reflects the elimination of higher payroll costs in the Indianapolis area where
ten of the closed restaurants operated. Included in last year's other operating
costs was a charge of $485,000 to write off future occupancy costs of leased
property.
General and administrative expense was $314,000 or 17.1% lower than last year
due primarily to the costs of the proxy contest last year and a gain on the sale
of a former Big Boy restaurant this year.
Interest expense increased $87,000 or 12.5%, increasing to 1.7% of revenue from
1.4% last year. The increase included $121,000 on the loan that funded the
Company's recent repurchase of common stock. Despite the increase, the ratio of
pre-tax earnings to total interest expense remained approximately the same.
Average interest rates on the Company's revolving credit loan were slightly
higher this year. Interest expense is expected to continue increasing as the
year progresses because of the additional debt that funded the stock repurchase.
The estimated annual income tax rate is 32% this year versus 35.5% last year.
Lower state income taxes are anticipated this year. The Taxpayer Relief Act of
1997 expanded the Work Opportunity Tax Credit and created a new Welfare-to-Work
tax credit for hiring certain disadvantaged workers. The Company is currently
evaluating the potential impact of these credits on its 1998 effective tax rate.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities was $3,700,000, generated principally from
net income and depreciation. These funds were utilized for capital expenditures,
debt service and dividends.
Investing activities included $3,680,000 in capital expenditures. These
consisted of $1,230,000 to remodel Big Boy restaurants and renovate the hotel
properties, $1,280,000 for management information systems, including the new
point-of-sale system, and $1,170,000 in routine equipment replacements and other
capital outlays. Proceeds from property sales were $2,900,000, of which
$2,300,000 was from the disposal of three of the fifteen restaurants closed last
year.
Financing activities consisted principally of transactions involving the stock
repurchase plan that was completed on August 15, 1997, which is more fully
described in note F to the consolidated financial statements. During the
quarter, 1,142,966 shares of common stock were repurchased at a cost of
$17,690,000. Funding was provided by a loan agreement under which $17,144,000
was borrowed. The terms of the agreement required the application of $2,320,000
of the proceeds from property sales to be used to repay the debt. Until the loan
is substantially reduced, the Company does not plan to build any new Big Boy
restaurants. Financing activities also included $1,000,000 of new debt.
Scheduled long-term debt payments of $520,000 were made and a regular quarterly
dividend to shareholders of $430,000 was paid. Future dividend pay-outs will be
lower, reflecting the lower number of shares outstanding after 1,142,966 shares
of stock were repurchased.
Looking ahead, the Company expects funds from operations, supplemented with
seasonal borrowing during the low-volume winter months, to be sufficient to
cover planned capital spending, scheduled debt service and regular quarterly
dividends. Hotel renovations and Big Boy remodelings will continue. Through
September 21, 1997, the point of sale system has been installed in sixteen
restaurants. Eight installations are scheduled during the second quarter
requiring a capital outlay of approximately $50,000 per restaurant.
15
<PAGE> 16
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 that item is 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.
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.
The Company filed the following Forms 8-K:
On June 17, 1997 consisting of a copy of the Company's press
release dated June 10, 1997 pertaining to the closing of
fifteen underperforming Big Boy restaurants.
On October 8, 1997 consisting of a copy of the Company's
press release dated October 3, 1997 pertaining to the
election of directors at the annual Shareholders Meeting
scheduled for November 24, 1997.
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)
DATE November 3, 1997
--------------------------
November 3, 1997
BY /s/ DONALD H. WALKER
---------------------
Donald H. Walker
Vice President - Finance and
Principal Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> SEP-21-1997
<CASH> 185,450
<SECURITIES> 0
<RECEIVABLES> 1,146,722
<ALLOWANCES> 0
<INVENTORY> 3,728,971
<CURRENT-ASSETS> 7,338,328
<PP&E> 156,085,396
<DEPRECIATION> 74,653,933
<TOTAL-ASSETS> 110,189,111
<CURRENT-LIABILITIES> 16,626,666
<BONDS> 39,258,670
7,362,279
0
<COMMON> 0
<OTHER-SE> 40,545,609
<TOTAL-LIABILITY-AND-EQUITY> 110,189,111
<SALES> 46,136,477
<TOTAL-REVENUES> 46,529,173
<CGS> 40,600,680
<TOTAL-COSTS> 40,600,680
<OTHER-EXPENSES> 2,636,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 786,944
<INCOME-PRETAX> 2,505,069
<INCOME-TAX> 802,000
<INCOME-CONTINUING> 1,703,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,703,069
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
