<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 MARCH 8, 1998 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 31, 1998 was:
6,005,458
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <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.................................................................................17
</TABLE>
<PAGE> 3
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended Twelve Weeks Ended
-------------------------------- ----------------------------
March 8, March 9, March 8, March 9,
1998 1997 1998 1997
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Sales $115,509,644 $126,147,004 $33,744,073 $35,639,008
Other 978,270 1,116,901 288,167 287,842
------------ ------------ ----------- -----------
Total revenue 116,487,914 127,263,905 34,032,240 35,926,850
COSTS AND EXPENSES
Cost of sales
Food and paper 36,143,158 40,024,735 10,662,211 11,257,682
Payroll and related 38,738,211 42,388,536 11,616,123 12,297,233
Other operating costs 27,425,921 31,475,315 8,023,359 9,401,623
------------ ------------ ----------- -----------
102,307,290 113,888,586 30,301,693 32,956,538
General and administrative 3,426,142 4,502,138 1,039,730 1,232,905
Advertising 2,797,266 3,062,286 815,276 854,665
Interest 2,324,583 1,832,527 774,004 568,841
------------ ------------ ----------- -----------
Total costs and expenses 110,855,281 123,285,537 32,930,703 35,612,949
------------ ------------ ----------- -----------
Earnings before income taxes 5,632,633 3,978,368 1,101,537 313,901
INCOME TAXES 1,802,000 1,412,000 352,000 111,000
------------ ------------ ----------- -----------
NET EARNINGS $ 3,830,633 $ 2,566,368 $ 749,537 $ 202,901
============ ============ =========== ===========
Basic and diluted net earnings
per share of common stock $ .61 $ .36 $ .12 $ .03
============ ============ =========== ===========
</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>
March 8, June 1,
1998 1997
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 690,698 $ 231,453
Receivables
Trade 1,146,642 1,037,001
Other 171,515 190,312
Inventories 3,621,862 3,657,844
Prepaid expenses and sundry deposits 1,060,555 957,311
Prepaid and deferred income taxes 587,780 808,198
------------ ------------
Total current assets 7,279,052 6,882,119
PROPERTY AND EQUIPMENT
Land and improvements 20,174,675 19,788,269
Buildings 50,092,269 48,319,998
Equipment and fixtures 54,011,353 51,021,079
Leasehold improvements and buildings on leased land 25,777,239 24,913,657
Capitalized leases 8,682,298 9,096,008
------------ ------------
158,737,834 153,139,011
Less accumulated depreciation and amortization 76,798,539 72,374,953
------------ ------------
Net property and equipment 81,939,295 80,764,058
OTHER ASSETS
Intangible assets 753,808 756,943
Investments in land 1,734,033 1,953,130
Property held for sale 9,372,135 13,628,457
Net cash surrender value-life insurance policies 3,834,532 3,613,878
Deferred income taxes 1,530,868 1,530,868
Other 2,597,076 2,130,512
------------ ------------
Total other assets 19,822,452 23,613,788
------------ ------------
$109,040,799 $111,259,965
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
LIABILITIES
<TABLE>
<CAPTION>
March 8, June 1,
1998 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 463,469 470,497
Self insurance 1,811,883 1,095,993
Accounts payable 6,976,054 6,357,177
Accrued expenses 5,488,829 6,051,004
Income Taxes 218,821 -
------------ ------------
Total current liabilities 16,659,056 15,698,561
LONG-TERM OBLIGATIONS
Long-term debt 31,234,490 17,875,000
Obligations under capitalized leases 5,710,522 6,055,682
Self insurance 3,135,064 4,151,229
Other 2,685,398 2,795,689
------------ ------------
Total long term obligations 42,765,474 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 60,427,299 60,427,514
------------ ------------
67,789,578 67,789,793
Retained earnings 3,053,768 432,732
------------ ------------
70,843,346 68,222,525
Less cost of treasury stock (1,356,821 and 213,945 shares) 21,227,077 3,538,721
------------ ------------
Total shareholders' equity 49,616,269 64,683,804
------------ ------------
$109,040,799 $111,259,965
============ ============
</TABLE>
5
<PAGE> 6
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FORTY WEEKS ENDED MARCH 8, 1998 AND MARCH 9, 1997
(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 forty weeks - - 2,566,368 - 2,566,368
Treasury shares acquired - - - (110,575) (110,575)
Dividends
Cash - $.18 per share - - (1,270,402) - (1,270,402)
Stock - 4% 282,084 3,633,242 (3,915,326) - -
---------- ----------- ----------- ------------ ------------
Balance at March 9, 1997 7,362,279 60,427,514 2,241,353 (3,538,721) 66,492,425
Net loss for twelve weeks (1) - - (1,379,721) - (1,379,721)
Dividends
Cash - $.06 per share - - (428,900) - (428,900)
---------- ----------- ----------- ------------ ------------
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
========== =========== =========== ============= ============
</TABLE>
(1) Includes an impairment loss of $3,040,000, net of tax, resulting from the
closing of fifteen underperforming restaurants.
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FORTY WEEKS ENDED MARCH 8, 1998 AND MARCH 9, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 3,830,633 $ 2,566,368
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 7,078,067 8,108,763
Loss on disposition of assets 1,612 414,699
Changes in assets and liabilities:
(Increase) decrease in receivables (90,844) 611,633
Decrease (Increase) in inventories 35,981 (272,597)
Increase in prepaid expenses and sundry deposits (103,244) (270,524)
Decrease in prepaid and deferred income taxes 220,418 585,311
Increase (decrease) in accounts payable 618,877 (1,048,909)
Decrease in accrued expenses (562,174) (11,990)
Increase (decrease) in accrued income taxes 218,821 (50,161)
Increase in other assets (1,034,883) (13,173)
Decrease in self insured obligations (300,275) (1,606,495)
(Decrease) increase in other liabilities (110,291) 222,182
------------ ------------
Net cash provided by operating activities 9,802,698 9,235,107
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Additions to property and equipment (8,663,169) (8,478,362)
Proceeds from disposition of property 5,429,011 452,815
Increase in other assets (194,539) (88,672)
------------ ------------
Net cash (used in) investing activities (3,428,697) (8,114,219)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from borrowings 18,644,490 3,000,000
Payment of long-term obligations (5,661,078) (1,932,874)
Cash dividends paid (1,209,597) (1,270,402)
Treasury share transactions (17,688,571) (110,575)
------------ ------------
Net cash (used in) financing activities (5,914,756) (313,851)
------------ ------------
Net increase in cash and equivalents 459,245 807,037
Cash and equivalents at beginning of year 231,453 134,944
------------ ------------
Cash and equivalents at end of third quarter $ 690,698 $ 941,981
============ ============
Supplemental disclosures:
Stock dividends issued $ - $ 3,915,326
Interest paid 2,185,641 1,894,992
Income taxes paid 1,485,024 1,513,395
Income tax refunds received 122,263 636,545
Lease transaction capitalized - 407,247
</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,"
"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 8, 1998 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
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
<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 transaction was
completed on December 31, 1997. New policies are currently being processed.
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 forty weeks was $35,000 at March 8, 1998 and $466,000 at March 9, 1997.
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.
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
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. Distributions were not received in 1998 or
1997. 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
$1,710,000 was incurred through the three quarters that ended March 9, 1997. 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, five have been disposed of through the three quarters ended March 8, 1998.
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 ten properties are listed for sale with a broker,
and are carried at a net realizable value of approximately $8,622,000 on the
Company's balance sheet at March 8, 1998 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 six to twelve months. Certain surplus land
is also currently held for sale and is stated at cost.
NOTE C - LONG-TERM DEBT
<TABLE>
<CAPTION>
March 8, 1998 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 $ - $12,500 $ - $11,000
Term loan 1,500 5,750 1,500 6,875
Tender offer loan - 12,984 - -
Other 200 - 224 -
------ ------- ------ -------
$1,700 $31,234 $1,724 $17,875
====== ======= ====== =======
</TABLE>
The portion payable after one year matures as follows:
<TABLE>
<CAPTION>
March 8, June 1,
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
Period ending in 1999 $ - $ 1,500
2000 26,984 12,500
2001 1,500 1,500
2002 1,500 1,500
Subsequent to 2002 1,250 875
------- -------
$31,234 $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, $12,500,000 of which
is outstanding at March 8, 1998. This credit loan matures on September 1, 1999,
unless extended. Interest is payable quarterly determined by various indices,
currently 6.62%. 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, 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, $4,160,000 had been repaid as of March 8, 1998 (see note
B), reducing the balance outstanding to $12,984,000. 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
7.1% was in effect as of March 8, 1998. The loan is collateralized by the real
property and equipment owned by the Company at the ten 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 consists of industrial revenue bonds bearing interest at 7.4% that
were issued in 1978. A final installment of $200,000 is due June 1, 1998.
Property and equipment having a book value at March 8, 1998 of $4,490,000 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 47% 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
------------------------
Mar. 8, June 1,
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
Restaurant facilities $ 7,705 $ 8,119
Equipment 977 977
-------- -------
8,682 9,096
Less accumulated amortization (4,923) (4,924)
-------- ------
$ 3,759 $ 4,172
======== =======
</TABLE>
Total rental expense of operating leases for the forty weeks was $1,082,000 at
March 8, 1998 and $1,136,000 at March 9, 1997.
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 March 8, leases leases
---------------------- ------ ------
(in thousands)
<S> <C> <C>
1999 $ 1,102 $1,197
2000 1,046 1,190
2001 950 1,083
2002 893 858
2003 873 698
2004 to 2020 5,625 3,221
------- ------
Total 10,489 $8,247
======
Amount representing interest (4,315)
-------
Present value of obligations 6,174
Portion due within one year (463)
-------
Long-term obligations $ 5,711
=======
</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 Internal Revenue Service (IRS) has completed its examination of the
Company's 1994 Federal income tax return. During the examination, the scope of
the audit was expanded to include returns for 1995 and 1996 as well. The IRS has
proposed additional taxes aggregating $236,000 plus interest. The Company
continues to believe that it has meritorious defenses to most of the proposed
deficiencies and is vigorously contesting this action. In any event, the
ultimate liability will have no material impact on the Company's statement of
earnings, as such taxes would be recovered in future years.
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. However, it is the intention of the Company to grant
options to officers and other key employees in May, 1998.
12
<PAGE> 13
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
The 1984 Stock Option Plan expired May 8, 1994. Outstanding options are
exercisable within ten years from the date of grant, 162,922 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>
Forty weeks ended Forty weeks ended
March 8, 1998 March 9, 1997
--------------------- ---------------------
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 forty weeks 0 0
Exercised during the forty weeks 0 0
Expired during the forty weeks 0 (4,787) $17.48
Increase for 4% stock dividend 0 10,177 $14.38 to $20.83
------- -------
Outstanding and exercisable at
end of quarter 259,835 $14.38 to $20.83 264,813 $14.38 to $20.83
======= =======
</TABLE>
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. Immediately following the repurchase, the Company had 6,005,368
shares of common stock outstanding.
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.
<TABLE>
<CAPTION>
Weighted average
Common Shares Outstanding
-------------------------
<S> <C>
Quarter ending March 8, 1998 6,005,416
Year-to-date March 8, 1998 6,307,452
Quarter ending March 9, 1997 7,148,334
Year-to-date March 9, 1997 7,151,988
</TABLE>
13
<PAGE> 14
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
Diluted EPS includes the effect of common stock equivalents which assumes the
exercise of dilutive stock options. Stock options outstanding for the forty
weeks ended March 8, 1998 and March 9, 1997, and for the 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. For the
twelve weeks ended March 9, 1997, 344 shares of common stock equivalents were
included in the computation of diluted EPS.
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 forty weeks ended March 8, 1998 and March 9, 1997 was
approximately $217,000 and $248,000, respectively.
The Company is required to adopt Statement of Financial Accounting Standards No.
132 (SFAS 132), "Employers' Disclosures about Pensions and Other Postretirement
Benefits" in fiscal year 1999. 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 will not affect 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) 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 $116,488,000 for the forty weeks ended March 8, 1998, a
decrease of $10,776,000 or 8.5% from the comparable period last year. Last
year's revenue included sales of $10,970,000 from fifteen unprofitable Big Boy
restaurants that ceased operating at the end of fiscal 1997. Strong same store
sales gains achieved during the twelve weeks ending March 8, 1998, stimulated in
part by mild winter weather in the Company's markets, erased year-to-date
declines that were posted through the twenty-eight weeks ended December 14,
1997. The third quarter sales gain is particularly noteworthy considering that
the 1997 winter was equally mild. Menu prices were increased approximately 3%
and 2%, respectively, in the second and third quarters of fiscal 1997, and
additional increases of 2% were implemented in the first and third quarters of
fiscal 1998.
Other revenue decreased 12.4% year-to-date due to lower fees earned from
licensees.
At the end of the quarter, the Company operated 88 Big Boy restaurants and two
Quality Hotels. The Company did not open or close any restaurants during the
quarter.
Cost of sales decreased $11,581,000 or 10.2% for the forty week period, as costs
fell to 87.8% of revenue from 89.5% last year. Closing the fifteen unprofitable
restaurants was the principal factor behind the improvement. Food and paper
costs were lower for the remaining 88 restaurants; however, higher payroll
costs, driven by the tight labor market, more than offset the food cost savings.
As previously noted in the first quarter discussion, favorable claims experience
in the Company's self-insurance programs allowed estimates for future
obligations to be lowered. However, this year's favorable adjustment was
$1,030,000 less than last year's adjustment. Without benefit of these reserve
adjustments, payroll and related expense would have been 33.7% and 34.2% of
revenue, respectively, for the forty week periods of fiscal 1998 and 1997. This
percentage reduction reflects the elimination of higher than average payroll
costs in the Indianapolis area where ten of the closed restaurants had operated.
Additional cost reductions this year include lower manager trainee expenses and
lower pre-opening costs. Also, included in last year's other operating costs was
a charge of $485,000 to write-off future occupancy costs of leased property.
Hotel operations sustained an operating loss during the three quarters, due to
the combination of lower room revenue and higher payroll, maintenance and
depreciation expenses.
General and administrative expense for the forty weeks was $1,076,000 or 23.9%
lower than last year. The reduction was due primarily to the cost of the proxy
contest last year plus gains recorded this year from dispositions of property
unrelated to the fifteen restaurants closed at the end of fiscal 1997.
Advertising expense declined proportionately with the lower revenue, reflecting
the Company's policy of spending a constant percentage of sales dollars.
Interest expense increased $492,000 or 26.9% year-to-date, increasing to 2% of
revenue from 1.4% last year. The increase included $580,000 on the loan that
funded the Company's repurchase of common stock in the first quarter. Despite
the increase, improved earnings caused the ratio of pre-tax earnings before
interest to total interest expense to improve to 3.42 to 1 from 3.17 to l a year
ago. 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 effective income tax rate is 32% this year versus 35.5%
last year.
Liquidity and Capital Resources
Cash provided by operating activities was $9,800,000, generated principally from
net income and depreciation. These funds were utilized for capital improvements,
debt service and dividends.
Investing activities included $8,660,000 in capital costs. These costs consisted
of $2,870,000 for management information systems, which includes the new
point-of-sale system, $2,920,000 to renovate the hotel properties, $680,000 to
remodel Big Boy restaurants, $520,000 for commissary improvements and $1,670,000
in routine equipment replacements and other capital outlays. Proceeds from
property sales amounted to $5,430,000, of which $4,040,000 was from the disposal
of five of the fifteen restaurants closed last year.
15
<PAGE> 16
Financing activities consisted principally of transactions involving the stock
repurchase plan that was completed during the first quarter, when 1,142,966
shares of the Company's common stock were repurchased at a cost of $17,690,000.
This transaction is more fully described in note F to the consolidated financial
statements. Funding was provided by a loan agreement under which $17,140,000 was
borrowed. The terms of the agreement required the application of $4,160,000 of
the proceeds from property sales to be used to repay the debt. Financing
activities also included $1,500,000 of new debt. Scheduled long-term debt
payments of $1,500,000 were made and three regular quarterly dividends to
shareholders totaling $1,210,000 were paid.
The Company expects funds from operations to be sufficient to cover near term
capital spending, scheduled debt service and regular quarterly dividends. The
Company does not plan to build any new Big Boy restaurants through December 31,
1998. Hotel renovations and Big Boy remodelings will continue. Through the end
of the quarter, the point-of-sale system has been installed in 31 restaurants.
Eleven more installations are scheduled during the fourth quarter requiring a
capital outlay of approximately $55,000 to $60,000 per restaurant.
The terms of a recently signed agreement with Golden Corral Franchising Systems,
Inc. call for the Company to open two Golden Corral restaurants during calendar
year 1998. Site selection work is currently underway. Construction will commence
as soon as land acquisitions are completed. Construction and equipment costs
will be funded through existing lines of credit, cash flow and additional
borrowing if needed.
Year 2000 Impact
The Company has identified its Year 2000 compliance issues and is currently
executing a plan to ensure that its information systems are fully Year 2000
compliant. The cost of compliance is not expected to have a material impact on
the Company's financial position, results of operations, or cash flows. Although
the Company has not yet determined the extent of vendors' software compliance,
management believes the risk due to third-party non-compliance will be
immaterial.
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.
16
<PAGE> 17
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 Form 8-K:
On January 12, 1998, under item 5, to report the Area
Development Agreement and Addendum executed between the
Registrant and Golden Corral Franchising Systems, Inc.
effective January 6, 1998. Financial statements were not
required to be filed.
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 April 7, 1998
-----------------------------
BY /s/ DONALD H. WALKER
--------------------
Donald H. Walker
Vice President - Finance and
Principal Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION 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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> MAR-08-1998
<CASH> 690,698
<SECURITIES> 0
<RECEIVABLES> 1,318,157
<ALLOWANCES> 0
<INVENTORY> 3,621,862
<CURRENT-ASSETS> 7,279,052
<PP&E> 158,737,834
<DEPRECIATION> 76,798,539
<TOTAL-ASSETS> 109,040,799
<CURRENT-LIABILITIES> 16,659,056
<BONDS> 36,945,012
0
0
<COMMON> 7,362,279
<OTHER-SE> 42,253,990
<TOTAL-LIABILITY-AND-EQUITY> 109,040,799
<SALES> 115,509,644
<TOTAL-REVENUES> 116,487,914
<CGS> 102,307,290
<TOTAL-COSTS> 102,307,290
<OTHER-EXPENSES> 6,223,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,324,583
<INCOME-PRETAX> 5,632,633
<INCOME-TAX> 1,802,000
<INCOME-CONTINUING> 3,830,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,830,633
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
