<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
======================
Form 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7323
======================
Frisch's Restaurants, Inc.
<TABLE>
<S> <C>
Incorporated in the IRS Employer Identification number
State of Ohio 31-0523213
2800 Gilbert Avenue
Cincinnati, Ohio 45206
513/961-2660
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock of No Par Value American Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of August 1, 1999, 5,852,614 common shares were outstanding, and the
aggregate market value of the common shares (based upon the August 1, 1999
closing price of these shares on the American Stock Exchange) of Frisch's
Restaurants, Inc. held by nonaffiliates was approximately $38.6 million.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after May 30, 1999 are
incorporated by reference into Part III.
<PAGE> 2
PART I
(Items 1 through 4)
-------------------
Item 1. - Business
- -------------------
Frisch's Restaurants, Inc. ("Company") is an Ohio Corporation incorporated in
1947, and has been publicly held since 1961. The Company and its subsidiaries
are engaged in the food service business, including operating and licensing
others to operate restaurants, and in the lodging business.
Operations in the food service industry are vertically integrated, and include
the manufacture and distribution of food products and supplies to the Company's
restaurants and to licensees for resale to the general public. Fees are charged
to licensees for use of trademarks and trade names and for advertising services
based principally on percentages of sales. Operations in the lodging industry
consist of two high-rise hotels located in greater Cincinnati which are licensed
through Choice Hotels International. One of the hotels operates under the name
"Quality Hotel" which contains 148 guest rooms, banquet facilities for 400, a
restaurant and cocktail lounge. Extensive renovations over the last five years
qualified the other hotel to be re-flagged to the upscale "Clarion Hotel"
(formerly "Quality Hotel") shortly after the end of fiscal 1999. It contains 236
guest rooms, banquet facilities for 700, and two full-service restaurants with
cocktail lounges. Financial information by industry segment as of and for the
three fiscal years in the period ended May 30, 1999 appears in Note H - Segment
Information - to the Consolidated Financial Statements included in Part II, Item
8 of this Form 10-K.
The Company operates or licenses others to operate family restaurants, most of
which have "drive-thru" service, located in Ohio, Kentucky and Indiana which use
the trade name `Big Boy". The Company also has the right to operate or license
others to operate Big Boy family restaurants in Florida, Texas, Oklahoma,
portions of Kansas, the unfranchised areas of Tennessee and Georgia and, under
certain circumstances, in prescribed areas of states adjacent to Tennessee and
Georgia. As of May 30, 1999, there were 88 Big Boy restaurants operated by the
Company and 37 operated by licensees.
In 1998 the Company entered into an area development agreement with Golden
Corral Franchising Systems, Inc. under which development rights were granted to
the Company to establish and operate twenty-three Golden Corral restaurants in
certain markets in Ohio, Kentucky and Indiana. The development schedule calls
for the restaurants to be opened over a seven year period. The first Golden
Corral restaurant opened in January 1999. The Company plans to have four more
Golden Corral restaurants opened and in operation by February 2000. Golden
Corral is a grill-buffet style restaurant featuring steaks and a wide variety of
buffet items on its menu.
The following tabulation sets forth restaurant openings and closings for both
operated and licensed restaurants for the five years ended May 30, 1999:
<TABLE>
<CAPTION>
Year ended
5/28/95 6/2/96 6/1/97 5/31/98 5/30/99
<S> <C> <C> <C> <C> <C>
Operated Restaurants
Big Boy
Opened 9 4 3 - -
Replaced by new units (1) (1) (2) - -
Closed (1) (3) *(16) - -
------ ------ ------ ------ -----
Total Big Boy 103 103 88 88 88
*15 of these restaurants were closed on June 10, 1997.
Hardee's
Closed - (6) - - -
------ ------ ------ ------ -----
Total Hardee's 6 0 - - -
</TABLE>
2
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<TABLE>
<S> <C> <C> <C> <C> <C>
Golden Corral
Opened - - - - 1
------ ------ ------ ------ -----
Total Golden Corral - - - - 1
------ ------ ------ ------ -----
Total Operated Restaurants 109 103 88 88 89
====== ====== ====== ====== =====
Licensed Restaurants
Big Boy
Opened - - 2 - 3
Closed (13) (12) (5) (5) -
------ ------ ------ ------ -----
Total Licensed Big Boy 54 42 39 34 37
====== ====== ====== ====== =====
</TABLE>
Big Boy restaurants are family restaurants which the Company operates under the
name of "Frisch's". Two of the licensed Big Boy restaurants do not use the name
"Frisch's". Menus are generally standardized with a wide variety of items at
moderate prices, featuring the "Big Boy" double-deck hamburger sandwich and
other sandwiches, pasta, chicken and seafood dinners, desserts and other items.
In addition, a full breakfast menu is offered, and most of the restaurants also
contain breakfast bars, soup and salad bars and drive-thru service. The
Company's customers have not shown any significant preference for highly
nutritional, low fat foods, although such items are available on the menu and
salad bars.
The agreements with licensees are not uniform, but most of the licenses for
individual restaurants are covered by agreements containing the following
provisions:
1. The Licensor grants to the Licensee the right to use the name "Frisch" and/or
"Frisch's" and related trademarks and names in connection with the operation of
a food and restaurant business, in return for which the Licensee pays a license
fee equal to three and three-quarters percent (3 3/4 %) of its gross sales.
2. The Licensor provides local and regional advertising through publications,
radio, television, etc., in return for which the Licensee pays an amount equal
to two and one-half percent (2 1/2 %) of its gross sales.
3. The Licensee agrees to conduct its business on a high scale, in an efficient
manner, with cleanliness and good service, all to the complete satisfaction of
the Licensor, and to comply with all food, sanitary and other regulations, and
to serve only quality foods.
4. The term of the license is for a period of five (5) years. The license can be
renewed for two further periods of five (5) years each provided the terms are
similar to those contained in license agreements given by the Licensor at such
time.
To service its owned and certain licensed Big Boy restaurants, the Company
operates a commissary at Cincinnati, Ohio, where it prepares foods, and stocks
foods, forms, paper products and other supplies. Some companies in the
foodservice industry operate commissaries, while others purchase from outside
sources. Seventeen of the licensed Big Boy restaurants (46%) currently purchase
items from the commissary. Big Boy restaurants licensed in northern Indiana and
northwestern Ohio do not buy food and supplies from the Company. The commissary
does not supply the Company's Golden Corral restaurants.
The Company provides bookkeeping and payroll services to its owned and some of
its licensed Big Boy restaurants. Five of the licensed Big Boy restaurants (14%)
currently purchase these services from the Company. The Company also provides
bookkeeping and payroll services to its Golden Corral restaurants.
Pursuant to an agreement with Elias Brothers Restaurants, Inc., the Company has
the right to use and sub-license others to use the registered trademark and
trade name "Big Boy" for a perpetually renewable term at no license fee in Ohio,
Kentucky, Indiana, Florida, Texas, Oklahoma, parts of Kansas, the unfranchised
areas of Tennessee and Georgia and, under certain circumstances, prescribed
areas of states adjacent to Tennessee and Georgia.
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Raw materials used in the Company's business (which consist principally of food
items) are generally plentiful and may be obtained from any number of suppliers.
Quality and price are the principal determinants of source. Centralized
purchasing and food preparation through the Company's commissary ensures uniform
product quality, timeliness of distribution to restaurants, and results in lower
food and supply costs.
The Company's business is moderately seasonal, with the third quarter of the
fiscal year normally accounting for a smaller share of annual revenues.
Additionally, severe winter weather can have a marked negative impact upon
revenue in the third quarter (December through February). Occupancy and other
fixed operating costs have a greater negative impact on operating results during
any quarter that may experience lower sales.
The Company is able to operate with negative working capital, which is not
uncommon in the restaurant industry, as substantially all its retail sales are
cash or equivalent sales. The Company's working capital practices are further
defined as incorporated herein by reference to Management's Discussion and
Analysis in part II, Item 7 of this Form 10-K, under the caption "Liquidity and
Capital Resources."
The Company's business does not have any material dependence upon a single
customer or on any group of a few customers. No backlog of orders exist and no
material portion of the Company's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
government.
The business in which the Company is engaged is highly competitive and many of
the Company's competitors are substantially larger and possess greater financial
resources than does the Company. The Company has numerous competitors, none of
which is dominant in the family restaurant sector of the foodservice industry.
The principal methods of competition in the foodservice industry are brand name
recognition and advertising, menu prices, food quality and customer perception
of value, speed and quality of service, cleanliness and fresh, attractive
facilities.
The Company does not believe that various federal, state and local environmental
regulations will have any material impact upon its capital expenditures,
earnings or competitive position. However, the Company cannot predict the effect
of any future environmental legislation or regulations.
As of May 30, 1999, the Company and its subsidiaries employed approximately
5,500 persons, approximately 3,200 of whom were full-time and 2,300 of whom were
part-time.
Item 2. - Properties
- ---------------------
Substantially all of the Company's restaurants are free standing facilities,
most of which have a "drive-thru" window. The following tabulation sets forth
the range and average floor space and the range and average seating capacity by
type of restaurant operated by the Company (similar information for licensed
restaurants is not available):
<TABLE>
<CAPTION>
Floor space - Sq. Ft. Seating capacity
------------------------------------- ------------------------------------
Range Range
---------------------- --------------------
Smallest Largest Average Smallest Largest Average
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Big Boy 3,578 6,820 5,598 105 200 155
Golden Corral 9,952 9,952 9,952 348 348 348
</TABLE>
Sites acquired for development of new restaurants are identified and evaluated
for potential long-term sales and profits. A variety of factors are analyzed
including demographics, traffic patterns, competition and other relevant
information. Older restaurants are generally located in suburban or urban
neighborhoods that cater to local trade rather than highway travel. Restaurants
opened in recent years have generally been located near expressways. As control
of property rights is important to the Company, it is the Company's policy to
own its restaurant locations whenever possible. Of the 88 Big Boy restaurants
operated by the Company in Ohio, Kentucky and Indiana as of May 30, 1999,
fifty-eight (58) locations are owned and thirty (30) locations are leased. The
leases generally provide for prime terms of fifteen (15) or twenty (20) years
with options aggregating ten (10) or fifteen (15) years.
4
<PAGE> 5
During the next five years, leases for restaurant facilities will expire as
follows:
Fiscal year ending in Number of leases expiring
--------------------- -------------------------
2000 4
2001 4
2002 2
2003 3
2004 3
All of the above sixteen leases have options to renew for from 5 to 25 years,
and/or favorable purchase options.
The Company owns the Golden Corral restaurant locations. Sites currently with
construction in progress are also owned by the Company.
The Company owns and operates two hotels in greater Cincinnati, one of which is
located on land that is owned and the other of which is on land leased through
April 30, 2020, with renewal options aggregating 50 years. The Company has the
option to purchase this land at any time during the current term or any renewal
thereof.
With the exception of delivery equipment utilized under leases expiring during
periods to 2004, substantially all of the furniture, fixtures and equipment used
in the operation of the business is owned by the Company.
The Company owns the building which houses its commissary in Cincinnati, Ohio.
The area of this building is approximately 79,000 square feet. The Facility
normally operates one shift daily so that additional productive capacity is
available when needed. It is suitable and adequate to supply Company restaurants
and franchise needs in all of the Company's market areas for the foreseeable
future. The Company also maintains administrative office space in Cincinnati,
approximating 49,000 square feet, under a lease expiring December 31, 2002, with
a renewal option through December 31, 2012 .
During fiscal 1999, the Company disposed of its one-fifteenth limited partner's
share in the Cincinnati Reds professional baseball team. The transaction was
recorded as an extraordinary gain and is more fully described in Note I to the
Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
The Company has assigned or sub-let certain leases of closed restaurants with
average annual obligations approximating $164,000 over the next five years. In
the event of default by assignees or sub-lessees, the Company generally retains
the right to re-assign or sub-let the properties.
Three closed Big Boy restaurants yet to be sold (of the fifteen closed at the
end of fiscal year 1997) are listed for sale with a broker, and are carried at a
net realizable value of approximately $1,548,000 on the Company's May 30, 1999
balance sheet under the caption "Property held for sale." The Company expects to
dispose of these properties within the next nine to twelve months. These
restaurant properties have been pledged as collateral under a loan agreement
dated July 9, 1997 (see Exhibits 10(p), 10(q) and 10(r) of this Form 10-K) and
the Company is required to immediately apply the after-tax sale proceeds against
the outstanding indebtedness.
Four other surplus land locations are also currently held for sale. Two of these
sites are in Ohio, and one each in Indiana and Texas.
Item 3. - Legal Proceedings
- ---------------------------
From time to time, the Company is subject to various claims and suits in the
ordinary course of its business. The Company does not believe that any ultimate
liability for these claims will have a material impact on its earnings or
financial condition.
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
Not applicable.
5
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Executive Officers of the Registrant
- ------------------------------------
The executive officers are chosen at the annual meeting of the Board of
Directors for a term of one year and until their successors are chosen and
qualified. With the exception of Paul F. McFarland, each of the executive
officers listed below has been continuously employed by the Company for at least
the past five years:
<TABLE>
<CAPTION>
Present
Office
Held
Name Age Office Since
---- --- ------ -----
<S> <C> <C> <C>
Jack C. Maier 74 Chairman of the Board 1970
Craig F. Maier 49 President and Chief Executive Officer 1989
Paul F. McFarland 53 Vice President - Chief Operating Officer 1998
Donald H. Walker 53 Vice President, Treasurer - Chief Financial Officer 1996
W. Gary King 62 Secretary - Counsel 1996
</TABLE>
Prior to joining the Company in September 1998, Mr. McFarland was Executive Vice
President of Operations and Chief Operating Officer for Long John Silvers from
1992 to 1997.
PART II
-------
(Items 5 through 9)
-------------------
Item 5. - Market for the Registrant's Common Equity and Related Stockholder
- ---------------------------------------------------------------------------
Matters
- -------
The Company's common stock is traded on the American Stock Exchange under the
symbol "FRS". The following table sets forth the high and low sales prices for
the common stock for each quarter within the Company's two most recent fiscal
years:
<TABLE>
<CAPTION>
Year Ended May 30, 1999 Year Ended May 31, 1998
------------------------------------ ------------------------------------
Stock Prices Dividend Stock Prices Dividend
-------------------- ---------------------
High Low per share High Low per share
---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 12 8 11/16 7(cent) 17 3/8 12 7/8 6(cent)
2nd Quarter 11 3/8 8 1/4 7(cent) 14 12 6(cent)
3rd Quarter 11 1/4 10 1/4 7(cent) 13 7/8 12 7(cent)
4th Quarter 10 5/8 9 1/8 7(cent) 13 3/8 11 13/16 7(cent)
</TABLE>
Through July 9,1999, the Company has paid 154 consecutive quarterly cash
dividends during its thirty- nine year history as a public company. The closing
price of the Company's common stock as reported by the American Stock Exchange
on May 28, 1999 was $10.25. There were approximately 2,800 shareholders of
record as of June 25, 1999.
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Item 6. - Selected Financial Data
- ---------------------------------
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Sales $ 158,197 $ 150,999 $ 164,521 $ 165,426 $ 161,429
Other 1,354 1,223 1,410 1,519 1,630
--------- --------- --------- --------- ---------
Total revenue 159,551 152,222 165,931 166,945 163,059
COSTS AND EXPENSES
Cost of sales
Food and paper 48,674 47,027 52,033 53,123 52,299
Payroll and related 54,603 50,978 55,479 58,572 56,335
Other operating costs 36,459 36,066 41,086 41,650 40,781
--------- --------- --------- --------- ---------
139,736 134,071 148,598 153,345 149,415
Administrative and advertising 9,296 7,887 8,632 7,771 8,590
Impairment of long-lived assets 1,125 375 4,600 -- --
Interest 2,437 3,076 2,373 2,411 1,961
--------- --------- --------- --------- ---------
Total costs and expenses 152,594 145,409 164,203 163,527 159,966
--------- --------- --------- --------- ---------
Earnings before income taxes
and extraordinary item 6,957 6,813 1,728 3,418 3,093
INCOME TAXES
Current 2,806 1,871 1,555 1,438 843
Deferred (267) 397 (1,014) (330) (108)
--------- --------- --------- --------- ---------
2,539 2,268 541 1,108 735
--------- --------- --------- --------- ---------
Earnings before extraordinary item 4,418 4,545 1,187 2,310 2,358
Extraordinary item (net of applicable tax) 3,712 -- -- -- --
--------- --------- --------- --------- ---------
NET EARNINGS $ 8,130 $ 4,545 $ 1,187 $ 2,310 $ 2,358
========= ========= ========= ========= =========
BASIC AND DILUTED NET EARNINGS
PER SHARE OF COMMON STOCK:
Before extraordinary item $ .74 $ .73 $ .17 $ .32 $ .33
Extraordinary item (net of applicable tax) .62 -- -- -- --
--------- --------- --------- --------- ---------
$ 1.36 $ .73 $ .17 $ .32 $ .33
========= ========= ========= ========= =========
DIVIDENDS PER SHARE
Cash $ .28 $ .26 $ .24 $ .24 $ .24
Stock -- -- 4% 4% 4%
OTHER FINANCIAL STATISTICS
Capital expenditures $ 12,709 $ 11,235 $ 10,221 $ 15,362 $ 23,283
Total assets 103,426 106,724 111,260 118,396 115,548
Long-term obligations 31,605 41,855 30,878 34,631 32,696
Shareholders' equity 55,288 49,910 64,684 65,307 64,627
Per share $ 9.27 $ 8.00 $ 9.05 $ 9.12 $ 9.03
Return on investment 16.3% 7.0% 1.8% 3.6% 3.7%
Average number of common shares outstanding 5,967 6,238 7,151 7,157 7,157
Percentage increase (decrease) in total revenue 4.8% (8.3%) (.6%) 2.4% 1.9%
Earnings as a percentage of total revenue
Earnings before income taxes and
extraordinary item 4.4% 4.5% 1.0% 2.0% 1.9%
Net earnings 5.1% 3.0% .7% 1.4% 1.4%
</TABLE>
Note: Per share data, except for dividends, are based on the weighted average
number of common shares outstanding.
7
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Item 7. - Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
- --------
Net earnings for the fiscal year ended May 30, 1999, 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 $8,130,000, or $1.36 per share, from $4,545,000 or $.73 per share in
fiscal 1998 and $1,187,000 or $.17 per share in fiscal 1997. Excluding the
extraordinary gain and pre-tax impairment of assets charges of $1,125,000,
$375,000 and $4,600,000 taken in fiscal years 1999, 1998 and 1997, respectively,
(see notes A and B to the consolidated financial statements) operating earnings
per share would have been $.86 in fiscal 1999, compared to $.77 in fiscal 1998,
and $.59 in fiscal 1997.
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE increased 4.8 percent to $159,551,000 for fiscal 1999, an increase
of $7,329,000 from last year, and a $6,380,000 decrease when compared to two
years ago. The decrease is due to the closing of fifteen unprofitable Big Boy
restaurants at the end of fiscal 1997, during which they contributed $14,576,000
to sales.
Same store sales in Big Boy restaurants improved more than four percent during
fiscal year 1999, continuing the strong gains that began in the second half of
fiscal 1998, when new radio and television commercials began airing. Production
of the new commercials, featuring customers' "favorite things"- distinct
signature items like the Super Big Boy sandwich, hot fudge cake and freshly made
onion rings, were the result of extensive consumer research designed to
influence strategic marketing direction that strengthens the Company's position
in the ever changing marketplace. To continue to fuel same store sales and
competitive differentiation, the Company has undertaken a process to review the
entire dining experience to better accommodate shifts in customer expectations.
Consumer research is being channeled to leverage the strengths of the existing
concept to develop the next generation of Frisch's Big Boy. The new
architecture, which will further signal to the customer that something new and
exciting has taken place in the dining room, will be used to build future Big
Boy restaurants.
For the past two years, the sales gains have been especially strong from
carryout and drive-thru trade, which have been driven by a marketing emphasis on
combo meals. No Big Boy restaurants were opened or closed during fiscal 1999, as
management's focus continued on building same store sales and margins in the 88
existing Big Boy restaurants operated by the Company. Menu prices were increased
approximately 3 percent and 2 percent, respectively, in the second and third
quarters of fiscal 1997, 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. Another menu price increase is currently being
planned for autumn 1999. Average annual sales volume of a Big Boy restaurant in
operation for the entire fiscal 1999 year increased to $1,577,000 from
$1,512,000 in fiscal 1998 and $1,406,000 in fiscal 1997.
The Company believes sales gains in fiscal 1999 have also resulted from lower
employee turnover, as more experienced employees provide certain operating
efficiencies and better responsiveness to customer needs, generating repeat
business. The improvement in turnover is attributed to restaurant management use
of the Company's innovative software products: the STAR employee selection
program, the GROW interactive employee training system, and CREWS, a
telephone-processed program that provides information to restaurant managers on
employee job satisfaction. A significant turnover reduction was also achieved in
the ranks of restaurant managers, largely due to the new variable compensation
program, more fully described in the payroll and related expenses discussion
appearing below.
The Company's first Golden Corral restaurant opened January 25, 1999,
contributing in excess of $1,500,000 in sales in the eighteen week period that
it operated during fiscal 1999, greatly exceeding initial expectations. The
Company plans to build 22 more Golden Corrals and expects average annual sales
volumes of $3,000,000. Sales for the two hotels operated by the Company were
flat in fiscal 1999 compared to fiscal 1998, after reporting a 3.5% sales
decline in fiscal 1998 compared to fiscal 1997.
OTHER REVENUE increased over fiscal 1998 principally due to a final partnership
distribution from the Cincinnati Reds professional baseball team that was
received during the third quarter of fiscal 1999. Other revenue was less than
two years ago, however, due to lower fees earned from Big Boy licensees. At the
end of fiscal 1999, there were
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<PAGE> 9
37 licensed Big Boy restaurants in operation, including three that opened during
fiscal 1999 in restaurant facilities formerly operated by the Company in the
Indianapolis area, compared with 42 such restaurants at the beginning of the
three year period.
COST OF SALES increased $5,666,000 or 4.2 percent during fiscal 1999. However,
as a percentage of revenue, cost of sales fell to 87.6 percent from 88.1 percent
last year. Cost of sales were 89.6 percent of revenue in fiscal 1997. The
decreasing trend reflects an overall improvement in restaurant margins that
primarily resulted from sales increases. Also, closing the fifteen unprofitable
restaurants greatly aided the fiscal 1998 improvement from fiscal 1997.
An analysis of the components of cost of sales follows.
Lower FOOD AND PAPER COSTS were once again achieved in fiscal 1999, falling to
30.5 percent of revenue from 30.9 percent in fiscal 1998 and 31.4 percent in
fiscal 1997. Lower pork and beef prices aided the improvement. In addition,
carryout and drive-thru meals, which have been fueling the sales increases,
usually have lower food cost than typical dining room meals. The economies of
scale afforded by an efficient commissary operation and effective menu
management also helped to reduce food costs.
PAYROLL AND RELATED EXPENSES continued to rise during fiscal 1999, driven by
higher hourly pay rates, the direct result of continuing tight labor conditions
in all of the Company's markets. Favorable claims experience in the Company's
self-insurance programs resulted in significant credits to payroll and related
expenses in all three fiscal years. Without these adjustments, payroll and
related expenses would have been 34.6 percent, 33.8 percent and 34.2 percent of
revenue, respectively, in fiscal years 1999, 1998 and 1997. The percentage
reduction in fiscal 1998 from fiscal 1997 reflected the elimination of higher
than average payroll costs in the Indianapolis area where ten of the fifteen
closed restaurants had operated. Additionally, payroll and related expenses
continue to benefit greatly from the permanent structural cost reduction
associated with the Company's withdrawal from the Ohio Workers' Compensation
System at the beginning of fiscal 1997. A new variable compensation program for
restaurant managers was instituted at the beginning of fiscal 1999. It allows
restaurant managers to earn variable compensation based on cash flows generated
at their restaurant. As had been expected, the program has resulted in higher
management payroll costs. However, these higher payroll costs have been largely
offset by the elimination of service trainer management positions, a 15 percent
reduction in field supervisors, and lower management turnover.
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 an immediate material effect on the
Company's payroll costs. However, the long-term effects of such legislation
would likely create additional pressure on profit margins, especially if
provisions are included in the legislation for automatic increases each year
that would rise in proportion to increases in the consumer price index.
OTHER OPERATING EXPENSES decreased to 22.9 percent of revenue during fiscal 1999
from 23.7 percent in fiscal 1998 and 24.8 percent in fiscal 1997. The percentage
improvement is largely due to the sales increase, as these expenses tend to be
more fixed in nature. The elimination of fixed costs in the fifteen low-volume
closed restaurants also aided the fiscal 1998 improvement. Fiscal 1997 included
a charge of $490,000 to write-off future occupancy costs of certain leased
property. Opening costs approximating $260,000 for the Company's first Golden
Corral restaurant and $145,000 for future Golden Corrals were expensed as
incurred as other operating expense in fiscal 1999, reflecting the Company's
early adoption of new accounting rules. The charges for opening costs resulted
in Golden Corral having a negative impact on the Company's earnings during
fiscal 1999.
Total cost of sales also increased in fiscal 1999 and fiscal 1998 due to higher
depreciation charges for the hotels. Combined with hotel revenue below
expectations, these higher charges resulted in operating losses in the hotel
division in fiscal years 1999 and 1998, after having enjoyed many years of hotel
operating profits. Shortly after fiscal 1999, the Company announced that it has
reached an agreement with Choice Hotels International to re-flag the Quality
Hotel Riverview in Covington, Kentucky to the upscale "Clarion" brand. Extensive
renovations over the last few years qualified 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.
ADMINISTRATIVE AND ADVERTISING EXPENSE in fiscal 1999 increased $1,409,000 or
17.9 percent over fiscal 1998, and 7.7 percent higher than fiscal 1997. The
fiscal 1999 increase over fiscal 1998 is principally due to gains recorded in
fiscal 1998 from the disposition of six properties unrelated to fifteen Big Boy
restaurants that were closed at the end of fiscal 1997. Also, fiscal 1999's
administrative and advertising expense includes higher charges than fiscal 1998
9
<PAGE> 10
for advertising costs, roll-out costs for point-of-sale systems in Big Boy
restaurants, and franchise advisory charges. Fiscal 1997 included the cost of
the Strategic Planning Committee's initiatives with respect to the stock
repurchase plan, a proxy contest and a charge to lower the carrying cost of
certain property held for sale, all of which were largely offset by an $880,000
gain on the sale of the Big Boy Farm property.
Results for all three fiscal years were adversely affected by charges for the
IMPAIRMENT OF LONG-LIVED ASSETS. Charges of $1,125,000, $375,000 and $4,600,000
respectively, were taken in fiscal years 1999, 1998 and 1997, in connection with
the closing of fifteen unprofitable restaurants at the end of fiscal 1997. These
restaurants sustained pre-tax losses of approximately $2,200,000 in 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 of fiscal 1999, 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 were
with a Big Boy franchise operator, a minority shareholder of which is an officer
of the Company. The terms of these transactions were no less favorable than
would have been agreed upon with persons having no relationship with the
Company. All of the four contracts accepted during the second quarter were
consummated by May 30, 1999. Of the three remaining properties, two are
currently under contract with the same Big Boy franchise operator discussed
above.
INTEREST EXPENSE in fiscal 1999 decreased $638,000 or 20.8 percent lower than
the comparable period a year ago, but was 2.7 percent higher than fiscal 1997.
Interest attributable to the tender offer loan (see notes C and F to the
consolidated financial statements) was $462,000 in fiscal 1999, compared with
$794,000 last year and zero in fiscal 1997. Interest associated with other
borrowings and capitalized leases declined $306,000 in fiscal 1999 compared to
fiscal 1998, and was $398,000 lower than fiscal 1997, due to a combination of
lower interest rates, scheduled debt reduction and the timing of borrowing and
repayment of revolving debt. Interest on the tender offer loan will continue to
spiral downward in fiscal 2000, during which the loan is expected to be retired.
The outstanding principal balance of the tender offer loan was $1,780,000 as of
May 30, 1999, a reduction of $10,134,000 in the last twelve months, and a
reduction of $15,364,000 since the debt was incurred in August 1997. 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 36.3
percent in fiscal 1999, compared with 33.3 percent in fiscal 1998 and 31.3
percent in fiscal 1997. The increased tax rate in fiscal 1999 reflects higher
state income taxes associated with the extraordinary gain from the sale of the
Company's limited partner interest in the Cincinnati Reds. Also, improved
operating profits in fiscal 1999 and 1998 caused total federal tax credits to be
a lower percentage of pre-tax earnings, adding to the higher effective tax rates
when compared to fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES in fiscal 1999 was $12,940,000, an
increase of $480,000 over last year and $190,000 higher than two years ago.
These funds were generated principally from net income and depreciation, and
were utilized for discretionary capital improvements, dividends, and to service
debt.
INVESTING ACTIVITIES in fiscal 1999 included $12,710,000 in capital costs, an
increase of $1,470,000 from the prior year and $2,490,000 higher than fiscal
1997. Fiscal 1999's capital spending included $4,620,000 for Golden Corral,
which includes all costs of the first restaurant now in operation, along with
land and construction costs to date for the next two Golden Corrals scheduled to
open later in the summer of 1999. This year's capital costs also consisted of
$2,230,000 to complete installation of the new point-of-sale systems in Big Boy
restaurants, $1,110,000 to remodel Big Boy restaurants, $2,480,000 to renovate
the hotel properties, and $2,270,000 in routine equipment replacements and other
capital outlays. Proceeds from property sales were $4,850,000, substantially all
of which came from the disposal of six of the fifteen restaurants closed at the
end of fiscal 1997. The Company expects to complete the disposal of the
remaining three closed restaurants within the next nine to 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.
FINANCING ACTIVITIES in fiscal 1999 included $3,000,000 of new debt borrowed
against the Company's revolving line of credit and $3,000,000 borrowed against
the Company's Golden Corral credit facility. Scheduled long-term debt
10
<PAGE> 11
payments of $2,750,000 were made and $5,240,000 was paid against the tender
offer loan principally with proceeds from the sale of six 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 also used $2,000,000 from the Reds' sale proceeds
to pay down its revolving line of credit. Regular quarterly cash dividends to
shareholders totaling $1,670,000 were also paid in fiscal 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 May 30, 1999,
the Company repurchased 104,798 shares at a cost of $1,060,000.
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. If
needed, the Company's revolving credit loan is available to meet additional
borrowing requirements. The Company currently plans to build four new Big Boy
restaurants in calendar year 2000, one of which will replace an older existing
restaurant. These new restaurants will introduce the new building design
discussed earlier. Costs to remodel 22 Big Boy restaurants scheduled in fiscal
2000 are expected to be approximately $1,500,000. Capital spending on the hotel
properties should approximate $1,000,000 in fiscal 2000.
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 February 2000.
One of the five has already opened and two are currently under construction. In
addition, current plans call for four more Golden Corrals to open in calendar
year 2000. 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 cost to build and equip each Golden Corral restaurant is expected to average
$2,500,000, 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. Modifications have been completed to all of the required date fields
for the Company's custom written headquarters software. Testing of the modified
software is underway and should be completed by August 1999. The Company has
utilized internal resources to convert and test these systems without material
incremental cost. Point-of-sale systems will require upgrade, 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 October 1999. Certain other systems that have embedded chip
technology are not expected to pose a significant effect on the Company's
operations.
Surveys have been sent to the Company's critical suppliers and service providers
to determine their readiness for the Year 2000 issue. The Company will develop
contingency plans by September 1999 for any third parties the Company believes
will have material Year 2000 problems. Although the Company has not been
informed by any third parties of material Year 2000 problems, there is no
absolute assurance that any of these entities will in fact be compliant on
January 1, 2000. The Company is unable to estimate the effect that multiple
third parties' 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. The Company does not
have any material relationships with third parties involving the electronic
transmission of data, other than the Company's main depository bank, which has
assured the Company that it is compliant.
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.
11
<PAGE> 12
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------------
Not applicable.
<TABLE>
<CAPTION>
Item 8. - Financial Statements and Supplementary Data Page
- ----------------------------------------------------- ----
<S> <C>
Index to Consolidated Financial Statements
Auditors' Report 12
Consolidated Balance Sheet - May 30, 1999 and May 31, 1998 13-14
Consolidated Statement of Earnings - Three years ended May 30, 1999 15
Consolidated Statement of Cash Flows - Three years ended May 30, 1999 16
Consolidated Statement of Shareholders' Equity - Three years ended May 30, 1999 17
Notes to Consolidated Financial Statements - Three years ended May 30, 1999 18-27
Quarterly Results (Unaudited) 28
</TABLE>
AUDITORS' REPORT
Shareholders
Frisch's Restaurants, Inc.
We have audited the accompanying consolidated balance sheet of Frisch's
Restaurants, Inc. (an Ohio corporation) and Subsidiaries as of May 30, 1999 and
May 31, 1998 and the related consolidated statements of earnings, cash flows,
and shareholders' equity for each of the three years in the period ended May 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Frisch's
Restaurants, Inc. and Subsidiaries as of May 30, 1999 and May 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 30, 1999, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Cincinnati, Ohio
July 7, 1999
12
<PAGE> 13
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 30, 1999 and May 31, 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 200,200 $ 84,260
Receivables
Trade 1,117,431 782,101
Other 219,299 236,670
Inventories 3,732,458 3,638,740
Prepaid expenses and sundry deposits 910,193 827,571
Prepaid and deferred income taxes 744,097 939,089
------------ ------------
Total current assets 6,923,678 6,508,431
PROPERTY AND EQUIPMENT
Land and improvements 21,089,875 20,171,685
Buildings 51,362,095 50,172,522
Equipment and fixtures 57,947,430 54,750,152
Leasehold improvements and buildings on leased land 28,449,043 26,321,313
Capitalized leases 8,224,712 8,682,298
Construction in progress 2,305,822 --
------------ ------------
169,378,977 160,097,970
Less accumulated depreciation and amortization 85,010,213 77,901,512
------------ ------------
Net property and equipment 84,368,764 82,196,458
OTHER ASSETS
Intangible assets 748,794 752,867
Investments in land 1,960,781 1,737,933
Property held for sale 2,076,484 7,853,073
Net cash surrender value-life insurance policies 4,045,080 3,767,594
Deferred income taxes 1,272,286 891,243
Other 2,030,296 3,016,124
------------ ------------
Total other assets 12,133,721 18,018,834
------------ ------------
$103,426,163 $106,723,723
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 14
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 30, 1999 and May 31, 1998
LIABILITIES
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Long-term obligations due within one year
Long-term debt $ 1,730,964 $ 1,500,000
Obligations under capitalized leases 451,024 458,480
Self insurance 1,092,733 877,725
Accounts payable 7,431,751 6,342,187
Accrued expenses 5,401,819 5,779,923
Income taxes 425,383 --
------------ ------------
Total current liabilities 16,533,674 14,958,315
LONG-TERM OBLIGATIONS
Long-term debt 21,248,526 29,914,490
Obligations under capitalized leases 5,146,170 5,597,202
Self insurance 3,019,947 3,623,276
Other 2,190,343 2,720,454
------------ ------------
Total long-term obligations 31,604,986 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 60,401,456 60,427,299
------------ ------------
67,763,735 67,789,578
Retained earnings 9,804,637 3,347,485
------------ ------------
77,568,372 71,137,063
Less cost of treasury stock (1,461,054 and 1,356,821 shares) 22,280,869 21,227,077
------------ ------------
Total shareholders' equity 55,287,503 49,909,986
------------ ------------
$103,426,163 $106,723,723
============ ============
</TABLE>
14
<PAGE> 15
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
Three years ended May 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE
Sales $ 158,197,295 $ 150,999,125 $ 164,521,025
Other 1,354,184 1,222,580 1,410,384
------------- ------------- -------------
Total revenue 159,551,479 152,221,705 165,931,409
COSTS AND EXPENSES
Cost of sales
Food and paper 48,674,392 47,027,012 52,032,873
Payroll and related 54,602,706 50,977,525 55,478,791
Other operating costs 36,459,564 36,066,384 41,086,258
------------- ------------- -------------
139,736,662 134,070,921 148,597,922
Administrative and advertising 9,296,154 7,887,052 8,632,624
Impairment of long-lived assets 1,125,000 375,000 4,600,000
Interest 2,437,117 3,075,615 2,373,313
------------- ------------- -------------
Total costs and expenses 152,594,933 145,408,588 164,203,859
------------- ------------- -------------
Earnings before income taxes
and extraordinary item 6,956,546 6,813,117 1,727,550
INCOME TAXES
Current
Federal 2,575,508 1,862,251 1,732,149
Less tax credits (217,325) (198,532) (233,396)
State and municipal 447,568 207,632 56,228
Deferred (267,046) 397,033 (1,014,078)
------------- ------------- -------------
2,538,705 2,268,384 540,903
------------- ------------- -------------
Earnings before extraordinary item 4,417,841 4,544,733 1,186,647
Extraordinary item (net of applicable tax) 3,712,000 -- --
------------- ------------- -------------
NET EARNINGS $ 8,129,841 $ 4,544,733 $ 1,186,647
============= ============= =============
Basic and diluted net earnings per share of common stock:
Before extraordinary item $ .74 $ .73 $ .17
Extraordinary item (net of applicable tax) .62 -- --
------------- ------------- -------------
$ 1.36 $ .73 $ .17
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 16
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three years ended May 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 8,129,841 $ 4,544,733 $ 1,186,647
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 9,937,195 9,256,466 10,486,163
Loss (gain) on disposition of assets 340,242 (896) (561,918)
Impairment of long-lived assets 1,125,000 375,000 4,600,000
Gain on sale of investment in Cincinnati Reds (3,712,000) -- --
Changes in assets and liabilities:
(Increase) decrease in receivables (317,959) 208,542 843,428
(Increase) decrease in inventories (93,718) 19,104 67,911
(Increase) decrease in prepaid expenses and sundry deposits (82,622) 129,740 322,695
(Increase) decrease in prepaid and deferred income taxes (186,051) 508,735 (435,679)
Increase (decrease) in accounts payable 1,089,564 (14,990) (1,751,847)
(Decrease) increase in accrued expenses (378,104) (271,081) 245,742
Decrease in accrued income taxes (1,662,617) -- (50,161)
Increase in other assets (330,243) (1,469,493) (80,346)
Decrease in self insured obligations (388,321) (746,221) (2,494,846)
(Decrease) increase in other liabilities (530,111) (75,235) 372,204
------------ ------------ ------------
Net cash provided by operating activities 12,940,096 12,464,404 12,749,993
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to property and equipment (12,708,832) (11,235,376) (10,221,353)
Proceeds from disposition of property 4,852,765 6,798,563 2,696,741
Proceeds from sale of investment in Cincinnati Reds 7,000,000 -- --
Increase in other assets (322,277) (201,336) (156,845)
------------ ------------ ------------
Net cash (used in) investing activities (1,178,344) (4,638,149) (7,681,457)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings 6,000,000 18,644,490 3,000,000
Payment of long-term debt and capital lease obligations (14,893,488) (7,299,387) (6,162,150)
Cash dividends paid (1,672,689) (1,629,980) (1,699,302)
Treasury share transactions (1,079,635) (17,688,571) (110,575)
------------ ------------ ------------
Net cash (used in) financing activities (11,645,812) (7,973,448) (4,972,027)
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 115,940 (147,193) 96,509
Cash and equivalents at beginning of year 84,260 231,453 134,944
------------ ------------ ------------
Cash and equivalents at end of year $ 200,200 $ 84,260 $ 231,453
============ ============ ============
Supplemental disclosures:
Stock dividends issued $ -- $ -- $ 3,915,326
Interest paid 2,638,569 2,700,697 2,474,985
Income taxes paid 4,388,158 1,984,439 1,919,485
Income tax refunds received 785 224,789 892,742
Lease transactions capitalized -- -- 407,247
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three years ended May 30, 1999
<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 the year -- -- 1,186,647 -- 1,186,647
Treasury shares acquired -- -- -- (110,575) (110,575)
Dividends
Cash - $.24 per share -- -- (1,699,302) -- (1,699,302)
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 the year -- -- 4,544,733 -- 4,544,733
Treasury shares reissued -- (215) -- 1,407 1,192
Treasury shares acquired -- -- -- (17,689,763) (17,689,763)
Dividends
Cash - $.26 per share -- -- (1,629,980) -- (1,629,980)
------------ ------------ ------------ ------------ ------------
Balance at May 31, 1998 7,362,279 60,427,299 3,347,485 (21,227,077) 49,909,986
Net earnings for the year -- -- 8,129,841 -- 8,129,841
Treasury shares acquired -- -- -- (1,067,485) (1,067,485)
Treasury shares reissued -- (3,481) -- 13,693 10,212
Employee Stock Ownership Plan -- (22,362) -- -- (22,362)
Dividends
Cash - $.28 per share -- -- (1,672,689) -- (1,672,689)
------------ ------------ ------------ ------------ ------------
Balance at May 30, 1999 $ 7,362,279 $ 60,401,456 $ 9,804,637 ($22,280,869) $ 55,287,503
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended May 30, 1999
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," "Clarion 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.
Fiscal Year
- -----------
The Company's fiscal year ends on the Sunday nearest to the last day of May.
Fiscal years 1999, 1998 and 1997 were each comprised of 52 weeks.
Reclassification
- ----------------
Certain reclassifications have been made to prior year information to conform to
the current year presentation.
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, 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 in the amount of $691,000
are included in accounts payable at May 30, 1999.
Receivables
- -----------
The Company values its trade notes and accounts receivable on the reserve
method. The reserve balance was immaterial at May 30, 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.
18
<PAGE> 19
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.
Advertising
- -----------
Advertising costs are charged to expense as incurred. Advertising expense for
fiscal years 1999, 1998 and 1997 was $3,813,000, $3,670,000 and $4,007,000,
respectively.
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 $259,000 for the Company's first Golden Corral restaurant were
expensed as incurred in the fiscal year ended May 30, 1999 together with an
additional $145,000 for Golden Corrals under construction. Opening expense was
$35,000 for fiscal 1998 and $584,000 for fiscal 1997. These costs consisted of
the amortization of new Big Boy store opening costs.
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. Cost 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 during the last three years, 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.
19
<PAGE> 20
Investment in Sports Franchise
- ------------------------------
On September 30, 1998, the Company completed the sale of its 1/15 limited
partnership investment in the Cincinnati Reds professional baseball team for
$7,000,000 in cash. The transaction was reported as an extraordinary gain which
is more fully described in Note I. A final partnership distribution of $101,000
was recorded in earnings during fiscal 1999. No distributions were received in
1998 or 1997.
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.
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 combined
pre-tax operating losses of approximately $2,200,000 in fiscal 1997. A non-cash
pre-tax charge of $4,600,000 was recorded in fiscal 1997 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. During the
fourth quarter of fiscal 1998 and the second quarter of fiscal 1999, the Company
recorded additional non-cash pre-tax charges of $375,000 and $1,125,000
respectively, to further lower the net realizable value of the properties
remaining to be sold. The fiscal 1999 charge is partially based upon
transactions 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, twelve have been disposed of through May 30, 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
three properties are listed for sale with a broker, and are carried at a net
realizable value of approximately $1,548,000 on the Company's balance sheet at
May 30, 1999 as a component of the caption "Property held for sale." The Company
expects to dispose of these restaurant properties within the next nine to twelve
months. Certain surplus land is also currently held for sale and is stated at
cost.
20
<PAGE> 21
NOTE C - LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------------
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 $ - $ 13,500 $ - $ 12,500
Term loan 1,500 3,200 1,500 5,500
Tender offer - 1,780 - 11,914
Golden Corral facility - construction loan - 1,000 - -
Golden Corral facility - term loan 231 1,769 - -
--------- -------- --------- ---------
$ 1,731 $ 21,249 $ 1,500 $ 29,914
========= ======== ========= =========
</TABLE>
The portion payable after one year matures as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
Period ending in 2000 $ - $ 25,914
2001 3,527 1,500
2002 16,266 1,500
2003 485 1,000
2004 305 -
Subsequent to 2004 666 -
--------- --------
$ 21,249 $ 29,914
========= ========
</TABLE>
The revolving credit loan is a $16,000,000 unsecured line of credit, $13,500,000
of which is outstanding at May 30, 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 5.88%.
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, $15,364,000 had been repaid as of May 30, 1999 (see
note B), reducing the balance outstanding to $1,780,000. 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 6.00% was in effect as of May 30, 1999.
The loan is collateralized by the real property and equipment owned by the
Company at the three remaining closed restaurant locations (see note B) and the
cash value of all life insurance policies owned by the Company. Borrowings under
the loan agreement are being repaid through the sale of the remaining restaurant
properties. The loan agreement requires the after tax proceeds from the sale of
these assets to be immediately applied against the outstanding indebtedness. In
addition, the after tax proceeds of $4,900,000 from the September 30, 1998 sale
of the Company's interest in the Cincinnati Reds professional baseball team were
used to further reduce this debt. (See notes A and I). Upon the retirement of
the tender offer loan, 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. No more than $8,000,000 may be advanced for
new restaurants under construction (Construction Loan) at any one time. As of
May 30, 1999, the Company had borrowed $3,000,000, of which $1,000,000 was a
Construction Loan and $2,000,000 had been converted to a Term Loan. Availability
of draws ceases on September 1, 2001. Payments on Construction Loans are on an
interest only basis. At the Company's option, interest on prime rate based
borrowings are 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 monthly CD based
rate of 5.86% was in effect as of May 30, 1999. Within six months of the
completion and opening of each restaurant, the
21
<PAGE> 22
balance outstanding under each Construction Loan is converted to a Term Note
amortized for a period not to exceed seven years. Upon conversion, the Company
has the option to fix the interest rate at the lender's then cost of funds plus
150 basis points. The interest rate for the $2,000,000 that has been converted
to a term loan is fixed at 7.00% for the 84-month selected term and is being
repaid in equal monthly payments of principal and interest of $30,304 beginning
June 1, 1999.
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 May 30, 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 through 2013.
An analysis of the capitalized leased property follows:
<TABLE>
<CAPTION>
Assets balances at
-------------------------
1999 1998
----------- ---------
(in thousands)
<S> <C> <C>
Restaurant facilities $ 7,248 $ 7,705
Equipment 977 977
----------- ---------
8,225 8,682
Less accumulated amortization (5,125) (5,059)
----------- ---------
$ 3,100 $ 3,623
=========== =========
</TABLE>
Total rental expense of operating leases was approximately $1,461,000 in 1999,
$1,416,000 in 1998 and $1,438,000 in 1997.
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
Year ending in: leases leases
--------------- ----------- -----------
(in thousands)
<S> <C> <C>
2000 $ 1,030 $ 1,221
2001 927 1,185
2002 886 961
2003 873 815
2004 873 577
2005 to 2020 4,533 2,551
--------- -------
Total 9,122 $ 7,310
=======
Amount representing interest (3,525)
--------
Present value of obligations 5,597
Portion due within one year (451)
--------
Long-term obligations $ 5,146
=======
</TABLE>
22
<PAGE> 23
NOTE E - INCOME TAXES
The variations between the statutory Federal rate and the effective rates are
summarized as follows:
<TABLE>
<CAPTION>
Percent of pretax earnings
-----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Statutory U.S. Federal income tax 34.0 34.0 34.0
Tax credits (1.7) (2.9) (13.5)
State and municipal income taxes
(net of Federal tax benefit) 3.9 2.0 2.1
Other .1 .2 8.7
--------- --------- --------
Effective Rate 36.3 33.3 31.3
========= ========= ========
</TABLE>
Deferred tax assets and liabilities result from timing differences in the
recognition of revenue and expense between financial reporting and tax purposes.
The components of the deferred tax asset (liability) were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Deferred compensation $ 681 $ 665
Compensated absences 607 590
Self insurance 1,202 1,385
Impairment of assets 675 1,331
Other 450 369
-------- -------
Total deferred tax assets 3,615 4,340
Partnership interest - (62)
Investment in tax benefits (234) (430)
Depreciation (651) (1,652)
Pension contributions (368) (195)
Other (346) (508)
-------- -------
Total deferred tax liabilities (1,599) (2,847)
-------- -------
Net deferred tax asset $ 2,016 $ 1,493
======== =======
</TABLE>
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.
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 May 30, 1999, 96,913
options remain outstanding, which are exercisable within 10 years from the date
of grant. The majority of these options will expire in less than one
23
<PAGE> 24
year. 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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- ------------------------
NO. OF OPTION No. of Option No. of Option
SHARES PRICE Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 134,413 $12.38 - $20.83 259,835 $14.38 - $20.83 259,423 $14.95 - $21.66
Exercisable at
beginning of year 96,913 $14.38 - $20.83 259,835 $14.38 - $20.83 259,423 $14.95 - $21.66
Granted during the year 38,000 $8.31 - $11.25 37,500 $12.38 -
Exercised during the year - - -
Expired during the year (3,250) $11.25 - $12.38 (162,922) $16.81 (9,765) $16.81 - $17.48
Increase for 4% stock dividend - - 10,177 $14.38 - $20.83
-------- -------- -------
Outstanding at
end of year 169,163 $8.31 - $20.83 134,413 $12.38 - $20.83 259,835 $14.38 - $20.83
======== ======== =======
Exercisable at
end of year 108,580 $12.38 - $20.83 96,913 $14.38 - $20.83 259,835 $14.38 - $20.83
======== ======== =======
</TABLE>
The pro forma effect of these options on net earnings, basic and diluted
earnings per share was immaterial in 1999 and 1998. Pro forma net income and net
income per common share would be determined as if the Company had accounted for
the stock options granted in 1999 and 1998 using the fair value method as
prescribed by SFAS 123. The fair value of each option granted was estimated on
the date of the grant using the modified Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividend yield 2.75% 2.38%
Expected volatility 30% 22%
Risk free interest rate 5.08% 5.75%
Expected lives 5 YEARS 5 years
Weighted average fair value of
options granted $2.94 $2.93
</TABLE>
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
24
<PAGE> 25
outstanding. Immediately following the repurchase, the Company had 6,005,368
shares of common stock outstanding.
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 May 30,
1999, 104,798 shares had been repurchased at a cost of $1,064,000.
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 year: 5,966,672 in 1999, 6,237,761 in 1998
and 7,151,145 in 1997.
Diluted EPS includes the effect of common stock equivalents which assumes the
exercise of dilutive stock options. The years ended May 30, 1999 and June 1,
1997 included 916 and 132 shares of common stock equivalents, respectively, in
the computation of diluted EPS. Stock options outstanding for the year ended May
31, 1998 were not included in the computation of diluted EPS because their
exercise prices exceeded the average market price of the common shares.
NOTE G - PENSION PLANS
Effective June 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pensions and other post retirement benefit plans. As required,
disclosures for 1998 and 1997 have been restated for comparative purposes.
The changes in the Company's benefit obligation are computed as follows:
<TABLE>
<CAPTION>
(in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Projected benefit obligation at beginning of year $14,765 $13,793 $13,694
Service cost 1,264 1,209 1,127
Interest cost 1,018 1,013 1,020
Actual (gain) loss (289) 203 429
Benefits paid (990) (1,452) (2,478)
------- ------- -------
Projected benefit obligation at end of year $15,768 $14,766 $13,792
======= ======= =======
</TABLE>
The changes in the Plans' assets are computed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fair value of plan assets at beginning of year $23,189 $19,782 $18,947
Actual return on plan assets 1,317 4,449 2,893
Employer contribution 402 410 540
Benefits paid (1,182) (1,452) (2,598)
------- ------- -------
Fair value of plan assets at end of year $23,726 $23,189 $19,782
======= ======= =======
</TABLE>
25
<PAGE> 26
The following table sets forth the Plans' funded status and amounts recognized
on the Company's accompanying balance sheet:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funded Status $7,958 $8,424
Unrecognized net actuarial (gain) loss (6,865) (7,761)
Unrecognized prior service cost 599 669
Unrecognized net transition (asset) (711) (948)
------ ------
Prepaid benefit cost $ 981 $ 384
====== ======
</TABLE>
The weighted - average actuarial assumptions used were:
<TABLE>
<CAPTION>
As of MAY 30, 1999 May 31, 1998 June 1, 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.25% 7.25%
Weighted average rate of compensation increase 5.50% 5.50% 5.50%
Weighted average expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $1,264 $1,209 $1,128
Interest cost 1,018 1,013 1,021
Expected return on plan assets (1,907) (1,632) (1,561)
Amortization of prior service cost 70 70 70
Amortization of net transition asset (237) (237) (237)
Recognized net actuarial (gain) loss (316) (136) (69)
------ ------ ------
Net periodic pension (benefit) cost $ (108) $ 287 $ 352
====== ====== ======
</TABLE>
26
<PAGE> 27
NOTE H - SEGMENT INFORMATION
The Company operates principally in the food service and lodging industries.
Operations in the food service industry are vertically integrated, and include
the manufacture and distribution of food products and supplies to the Company's
restaurants and to licensees for resale to the general public. Fees are charged
to licensees for use of trademarks and tradenames and for advertising services
based principally on percentage of sales. Intersegment sales are immaterial.
On June 1, 1998 the Company adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. The Company does not believe that it
presently operates in more than the two segments identified in the table below:
<TABLE>
<CAPTION>
(in thousands)
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue
Food Service $ 148,024 $ 140,697 $ 153,981
Lodging 11,527 11,525 11,950
--------- --------- ---------
$ 159,551 $ 152,222 $ 165,931
========= ========= =========
Operating profit (loss)
Food Service $ 13,748 $ 13,055 $ 6,848
Lodging (224) (172) 468
--------- --------- ---------
$ 13,524 $ 12,883 $ 7,316
========= ========= =========
Identifiable assets
Food Service $ 88,448 $ 92,463 $ 99,383
Lodging 14,978 14,261 11,877
--------- --------- ---------
$ 103,426 $ 106,724 $ 111,260
========= ========= =========
Depreciation and amortization
Food Service $ 8,176 $ 7,828 $ 9,301
Lodging 1,761 1,428 1,185
--------- --------- ---------
$ 9,937 $ 9,256 $ 10,486
========= ========= =========
Capital expenditures
Food Service $ 10,227 $ 7,141 $ 6,554
Lodging 2,482 4,094 3,667
--------- --------- ---------
$ 12,709 $ 11,235 $ 10,221
========= ========= =========
</TABLE>
Impairment losses of $1,125,000, $375,000 and $4,600,000 respectively were
charged against food service operating profit in 1999, 1998 and 1997.
NOTE I - EXTRAORDINARY ITEM
On September 30, 1998, the Company completed the sale of its 1/15 limited
partnership in the Cincinnati Reds professional baseball team for $7,000,000 in
cash. 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 $3,712,000 resulted in net earnings per share of
common stock of $.62 per share, which is shown as an extraordinary item in the
accompanying statements.
27
<PAGE> 28
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended May 30, 1999 Year Ended May 31, 1998
----------------------------------------------------- ------------------------------------------
(In Thousands) (In Thousands)
---------------------------------------- ------------------------------
Earnings
Gross before Net Earnings Gross Net Earnings
Revenue profit x-item earnings per share Revenue profit earnings per share
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ 47,882 $ 5,590 $ 1,378 $ 1,378 $ .23 $ 46,529 $ 5,536 $ 1,703 $ .25
2nd Quarter 37,812 4,944 742 4,454 .74 35,927 4,224 1,378 .23
3rd Quarter 35,514 3,538 968 968 .16 34,032 3,442 750 .12
4th Quarter 38,343 4,389 1,330 1,330 .23 35,734 3,726 714 .12
-------- -------- -------- -------- -------- -------- -------- -------- --------
Year's Total $159,551 $ 18,461 $ 4,418 $ 8,130 $ 1.36 $152,222 $ 16,928 $ 4,545 $ .73
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The first quarter of each year contained sixteen weeks, while the last three
quarters each contained twelve weeks.
Net earnings for the first quarters of 1999 and 1998 included favorable
adjustments of $410,000 and $450,000 respectively, resulting from lower than
anticipated claims in the Company's self insured casualty insurance program.
The second quarter of fiscal 1999 and the fourth quarter of fiscal 1998 included
an impairment loss of $740,000 and $250,000 respectively, net of tax, resulting
from the closing of fifteen underperforming restaurants in 1997. In addition,
the fourth quarters of fiscal 1999 and 1998 include charges to income tax
expense of $30,000 and $75,000, respectively, to reflect the actual effective
tax rate for the years.
During the second quarter of fiscal 1999, the Company completed the sale of its
limited partner ship investment in the Cincinnati Reds professional baseball
team for $7,000,000 in cash. The net gain of $3,712,000 or approximately $.62
per share was reported as an extraordinary gain.
Quarterly earnings per share amounts for 1998 do not sum to the earnings per
share for the year due to changes in the weighted average number of shares
resulting from the Company's repurchase of 1,142,966 shares of common stock.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
28
<PAGE> 29
PART III
--------
(Items 10 through 13)
---------------------
Item 10. - Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
Information regarding directors is incorporated by reference to the Registrant's
proxy statement to be filed with the Securities and Exchange Commission within
120 days after May 30, 1999.
Information regarding executive officers appears at the end of Part I.
Item 11. - Executive Compensation
- ---------------------------------
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission within 120 days after May 30, 1999.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission within 120 days after May 30, 1999.
Item 13. - Certain Relationships and Related Transactions
- ---------------------------------------------------------
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission within 120 days after May 30, 1999.
PART IV
-------
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
a). List of documents filed as part of this report.
1. Financial Statements
All financial statements of the Registrant as set forth under Part II,
Item 8
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are not applicable and, therefore,
have been omitted.
3. Exhibits
(3) Articles of Incorporation and By-Laws
-----------------------------------------
(3) (a) Exhibit (3) (a) to the Registrant's Form 10-K Annual Report
for 1993, being the Third Amended Articles of Incorporation, is
incorporated herein by reference.
(3) (b) Exhibit (3) (a) to the Registrant's Form 10-Q Quarterly
Report for December 15, 1996, being the Code of Regulations, is
incorporated herein by reference.
(3) (c) Exhibit (3) (b) to the Registrant's Form 10-Q Quarterly
Report for December 15, 1996, being Amendments to Regulations
adopted October 1, 1984, is incorporated herein by reference.
(3) (d) Exhibit (3) (c) to the Registrant's Form 10-Q Quarterly
Report for December 15, 1996, being Amendments to Regulations
adopted October 24, 1996, is incorporated herein by reference.
29
<PAGE> 30
(10) Material Contracts
-----------------------
(10) (a) Exhibit (10) (a) to the Registrant's Form 10-Q Quarterly
Report for December 14, 1997, being Area Development Agreement and
Addendum between the Registrant and Golden Corral Franchising
Systems, Inc. effective January 6, 1998, is incorporated herein by
reference.
(10) (b) Exhibit (10) (a) to the Registrant's Form 10-K Annual
Report for 1997, being employment agreement between the Registrant
and Jack C. Maier effective June 2, 1997, is incorporated herein by
reference.
(10) (c) Exhibit (10) (a) to the Registrant's Form 10-K Annual
Report for 1995, being employment contract between the Registrant
and Jack C. Maier effective May 29, 1995, is incorporated herein by
reference.
(10) (d) Exhibit (10) (b) to the Registrant's Form 10-K Annual
Report for 1995, being employment contract between the Registrant
and Craig F. Maier effective May 29, 1995, is incorporated herein
by reference.
(10) (e) Exhibit (10) (a) to the Registrant's Form 10-Q Quarterly
Report for December 13, 1998, being amendment dated November 24,
1998 to employment contract between the Registrant and Craig F.
Maier dated May 29, 1995, is incorporated herein by reference.
(10) (f) Exhibit (10) (a) to the Registrant's Form 10-Q Quarterly
Report for September 17, 1995, being the Frisch's Executive Savings
Plan effective November 15, 1993, is incorporated herein by
reference.
(10) (g) Exhibit (10) (b) to the Registrant's Form 10-Q Quarterly
Report for September 17, 1995, being the Frisch's Executive
Retirement Plan effective June 1, 1994, is incorporated herein by
reference.
(10) (h) Exhibit A to the Registrant's Proxy Statement dated
September 9, 1998, being the Amended and Restated 1993 Stock Option
Plan, is incorporated herein by reference.
(10) (i) Exhibit (10) (a) to the Registrant's Form 10-K annual
report for 1994, being the 1993 Stock Option Plan (Appendix A to
the Registrant's Proxy statement dated August 24, 1993), is
incorporated herein by reference.
(10) (j) Exhibit B to the Registrant's Proxy Statement dated
September 9, 1998, being the Employee Stock Option Plan, is
incorporated herein by reference.
(10) (k) Exhibit (10) (a) to the Registrant's Form 10-K Annual
Report for 1990, being employment contract between the Registrant
and Jack C. Maier dated July 20, 1990, is incorporated herein by
reference.
(10) (l) Exhibit (10) (e) to the Registrant's Form 10-K Annual
Report for 1985, being the 1984 Stock Option Plan, is incorporated
herein by reference.
(10) (m) Exhibit (10) (f) to the Registrant's Form 10-K Annual
Report for 1990, being First Amendment to the 1984 Stock Option
Plan, is incorporated herein by reference.
(10) (n) Exhibit (10) (g) to the Registrant's Form 10-K Annual
Report for 1990, being Agreement between the Registrant and Craig
F. Maier dated November 21, 1989, is incorporated herein by
reference. There is an identical agreement between the Registrant
and Marvin G. Fields.
(10) (o) Exhibit (10) (f) to the Registrant's amended Form 10-K
Annual Report for 1988, being the Restated and Amended Area
Franchise Agreement between Elias Brothers Restaurants, Inc. and
the Registrant, is incorporated herein by reference.
30
<PAGE> 31
(10) (p) Exhibit (99) (b) to the Registrant's Schedule 13E-4 Issuer
Tender Offer Statement dated July 14, 1997, being loan agreement
between the Registrant and Star Bank, N.A. dated July 9, 1997, is
incorporated herein by reference.
(10) (q) Exhibit (10) (b) to the Registrant's Form 10-Q Quarterly
Report for December 14, 1997 being amendment dated November 26,
1997 to loan agreement between the Registrant and Star Bank, N.A.
dated July 9, 1997, is incorporated herein by reference.
(10) (r) Exhibit (10) (a) to the Registrant's Form 10-Q Quarterly
Report for September 20, 1998 being amendment dated October 9, 1998
to loan agreement between the Registrant and Star Bank, N.A. dated
July 9, 1997, is incorporated herein by reference.
(21) Subsidiaries of the Registrant
-----------------------------------
(27) Financial Data Schedule
----------------------------
b). Reports on Form 8-K:
None
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ Donald H. Walker August 13, 1999
--------------------------- --------------------
Donald H. Walker Date
Vice President, Treasurer
Chief Financial Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board
/s/ Jack C. Maier Director August 14, 1999
- --------------------------- -------------------
Jack C. Maier
President and Chief Executive Officer
/s/ Craig F. Maier Director August 14, 1999
- --------------------------- -------------------
Craig F. Maier
/s/ Daniel W. Geeding Director August 22, 1999
- --------------------------- -------------------
Daniel W. Geeding
/s/ Christopher B. Hewett Director August 16, 1999
- ---------------------------- -------------------
Christopher B. Hewett
/s/ Lorrence T. Kellar Director August 25, 1999
- ---------------------------- -------------------
Lorrence T. Kellar
/s/ Malcolm M. Knapp Director August 21, 1999
- ---------------------------- -------------------
Malcolm M. Knapp
/s/ Blanche F. Maier Director August 16, 1999
- --------------------------- -------------------
Blanche F. Maier
/s/ William A. Mauch Director August 23, 1999
- --------------------------- -------------------
William A. Mauch
/s/ William J. Reik, Jr. Director August 23, 1999
- ---------------------------- -------------------
William J. Reik, Jr.
</TABLE>
32
<PAGE> 1
EXHIBIT 21
Subsidiaries
------------
State of
Corporate Name Incorporation
-------------- -------------
Subsidiaries of Registrant:
Frisch Kentucky, Inc. Kentucky
Frisch Indiana, Inc. Indiana
Frisch Florida, Inc. Florida
Frisch Ohio, Inc. Ohio
<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> YEAR
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-30-1999
<CASH> 200,200
<SECURITIES> 0
<RECEIVABLES> 1,336,730
<ALLOWANCES> 0
<INVENTORY> 3,732,458
<CURRENT-ASSETS> 6,923,678
<PP&E> 169,378,977
<DEPRECIATION> 85,010,213
<TOTAL-ASSETS> 103,426,163
<CURRENT-LIABILITIES> 16,533,674
<BONDS> 26,394,696
0
0
<COMMON> 7,362,279
<OTHER-SE> 47,925,224
<TOTAL-LIABILITY-AND-EQUITY> 103,426,163
<SALES> 158,197,295
<TOTAL-REVENUES> 159,551,479
<CGS> 139,736,662
<TOTAL-COSTS> 139,736,662
<OTHER-EXPENSES> 10,421,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,437,117
<INCOME-PRETAX> 6,956,546
<INCOME-TAX> 2,538,705
<INCOME-CONTINUING> 4,417,841
<DISCONTINUED> 0
<EXTRAORDINARY> 3,712,000
<CHANGES> 0
<NET-INCOME> 8,129,841
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.36
</TABLE>
