<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED SEPTEMBER 19, 1999 COMMISSION FILE NUMBER 1-7323
FRISCH'S RESTAURANTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0523213
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 GILBERT AVENUE, CINCINNATI, OHIO 45206
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 513-961-2660
------------
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The total number of shares outstanding of the issuer's no par common stock, as
of September 28, 1999 was:
5,823,724
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS ................... 3
CONSOLIDATED BALANCE SHEET ........................... 4 - 5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ....... 6
CONSOLIDATED STATEMENT OF CASH FLOWS ................. 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........... 8 - 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................. 17 - 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .......................................... 19
PART II - OTHER INFORMATION 20 - 21
</TABLE>
<PAGE> 3
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
SIXTEEN WEEKS ENDED SEPTEMBER 19, 1999 AND SEPTEMBER 20, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Sales $52,437,002 $47,518,926
Other 402,020 362,970
----------- -----------
Total revenue 52,839,022 47,881,896
COSTS AND EXPENSES
Cost of sales
Food and paper 16,316,251 14,490,385
Payroll and related 17,931,884 16,285,639
Other operating costs 12,351,097 11,153,086
----------- -----------
46,599,232 41,929,110
Administrative and advertising 2,944,102 3,005,405
Interest 642,955 890,393
----------- -----------
Total costs and expenses 50,186,289 45,824,908
----------- -----------
Earnings before income taxes 2,652,733 2,056,988
INCOME TAXES 902,000 679,000
----------- -----------
NET EARNINGS $ 1,750,733 $ 1,377,988
=========== ===========
Basic and diluted net earnings per share $ .30 $ .23
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 19, May 30,
1999 1999
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 72,025 $ 200,200
Receivables
Trade 1,192,803 1,117,431
Other 186,901 219,299
Inventories 4,103,951 3,732,458
Prepaid expenses and sundry deposits 1,900,357 910,193
Prepaid and deferred income taxes 744,097 744,097
------------ ------------
Total current assets 8,200,134 6,923,678
PROPERTY AND EQUIPMENT
Land and improvements 22,801,439 21,089,875
Buildings 53,392,026 51,362,095
Equipment and fixtures 59,037,508 57,947,430
Leasehold improvements and buildings on leased land 28,939,924 28,449,043
Capitalized leases 8,224,712 8,224,712
Construction in progress 2,893,684 2,305,822
------------ ------------
175,289,293 169,378,977
Less accumulated depreciation and amortization 87,276,756 85,010,213
------------ ------------
Net property and equipment 88,012,537 84,368,764
OTHER ASSETS
Intangible assets 747,540 748,794
Investments in land 1,285,894 1,960,781
Property held for sale 2,526,160 2,076,484
Net cash surrender value-life insurance policies 4,137,810 4,045,080
Deferred income taxes 1,272,286 1,272,286
Other 1,962,535 2,030,296
------------ ------------
Total other assets 11,932,225 12,133,721
------------ ------------
$108,144,896 $103,426,163
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
LIABILITIES
<TABLE>
<CAPTION>
September 19, May 30,
1999 1999
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Long-term obligations due within one year
Long-term debt $ 1,736,401 $ 1,730,964
Obligations under capitalized leases 446,470 451,024
Self insurance 979,763 1,092,733
Accounts payable 9,064,029 7,431,751
Accrued expenses 5,121,917 5,401,819
Income Taxes 371,605 425,383
------------ ------------
Total current liabilities 17,720,185 16,533,674
LONG-TERM OBLIGATIONS
Long-term debt 25,109,167 21,248,526
Obligations under capitalized leases 5,034,429 5,146,170
Self insurance 2,786,968 3,019,947
Other 2,127,130 2,190,343
------------ ------------
Total long-term obligations 35,057,694 31,604,986
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 60,386,509 60,401,456
------------ ------------
67,748,788 67,763,735
Retained earnings 10,676,901 9,804,637
------------ ------------
78,425,689 77,568,372
Less cost of treasury stock (1,537,375 and 1,461,054 shares) 23,058,672 22,280,869
------------ ------------
Total shareholders' equity 55,367,017 55,287,503
------------ ------------
$108,144,896 $103,426,163
============ ============
</TABLE>
5
<PAGE> 6
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIXTEEN WEEKS ENDED SEPTEMBER 19, 1999 AND SEPTEMBER 20, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock
at $1 per share- Additional
Shares and contributed Retained Treasury
amount capital earnings shares Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1998 $ 7,362,279 $ 60,427,299 $ 3,347,485 $(21,227,077) $ 49,909,986
Net earnings for sixteen weeks - - 1,377,988 - 1,377,988
Treasury shares reissued - (2,528) - 10,658 8,130
Dividends
Cash - $.14 per share - - (840,859) - (840,859)
------------ ------------ ------------ ------------ ------------
Balance at September 20, 1998 7,362,279 60,424,771 3,884,614 (21,216,419) 50,455,245
Net earnings for thirty-six weeks - - 6,751,853 - 6,751,853
Treasury shares acquired - - - (1,067,485) (1,067,485)
Treasury shares reissued - (953) - 3,035 2,082
Employee Stock Ownership Plan - (22,362) - - (22,362)
Dividends
Cash - $.14 per share - - (831,830) - (831,830)
------------ ------------ ------------ ------------ ------------
Balance at May 30, 1999 7,362,279 60,401,456 9,804,637 (22,280,869) 55,287,503
Net earnings for sixteen weeks - - 1,750,733 - 1,750,733
Treasury shares acquired - - - (822,825) (822,825)
Treasury shares reissued - (14,947) - 45,022 30,075
Dividends
Cash - $.15 per share - - (878,469) - (878,469)
------------ ------------ ------------ ------------ ------------
Balance at September 19, 1999 $ 7,362,279 $ 60,386,509 $ 10,676,901 $(23,058,672) $ 55,367,017
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIXTEEN WEEKS ENDED SEPTEMBER 19, 1999 AND SEPTEMBER 20, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 1,750,733 $ 1,377,988
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 3,026,417 2,966,470
Loss on disposition of assets 90,404 152,693
Changes in assets and liabilities:
Increase in receivables (42,974) (42,178)
(Increase) decrease in inventories (371,493) 264,642
Increase in prepaid expenses and sundry deposits (990,164) (933,885)
Decrease in prepaid and deferred income taxes - 152,822
Increase in accounts payable 1,166,336 1,600,665
Decrease in accrued expenses (279,902) (866,911)
(Decrease) increase in accrued income taxes (53,778) 284,243
Increase in other assets (34,484) (23,184)
Decrease in self insured obligations (345,949) (468,405)
Decrease in other liabilities (63,213) (79,146)
----------- -----------
Net cash provided by operating activities 3,851,933 4,385,814
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Additions to property and equipment (6,517,483) (5,017,137)
Proceeds from disposition of property 5,490 1,001,699
Increase in other assets (12,621) (132,372)
----------- -----------
Net cash (used in) investing activities (6,524,614) (4,147,810)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings 4,500,000 2,000,000
Payment of long-term obligations (750,217) (1,741,493)
Cash dividends paid (412,527) (420,429)
Treasury share transactions (792,750) 8,130
----------- -----------
Net cash provided by (used in) financing activities 2,544,506 (153,792)
----------- -----------
Net (decrease) increase in cash and equivalents (128,175) 84,212
Cash and equivalents at beginning of year 200,200 84,260
----------- -----------
Cash and equivalents at end of quarter $ 72,025 $ 168,472
=========== ===========
Supplemental disclosures:
Interest paid $ 590,660 $ 861,058
Income taxes paid 971,565 241,934
Income tax refunds received 15,789 -
Dividends declared but not paid 465,942 420,430
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows:
Description of the Business
- ---------------------------
Frisch's Restaurants, Inc. operates and licenses family restaurants, most of
which have "drive-thru" service, which use the trade name Frisch's Big Boy, and
the Company operates Golden Corral grill buffet restaurants. These operations
are located in various regions of Ohio, Kentucky and Indiana. Additionally, the
Company operates two high rise hotels with restaurants in metropolitan
Cincinnati, where it is headquartered. Trademarks which the Company has the
right to use include "Frisch's," "Big Boy," "Golden Corral," "Clarion Hotel,"
and "Quality Hotel."
Consolidation Practices
- -----------------------
The consolidated financial statements include the accounts of Frisch's
Restaurants, Inc. and all of its subsidiaries. Significant inter-company
accounts and transactions are eliminated in consolidation.
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
were 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 September 19, 1999 and May 30,
1999.
Inventories
- -----------
Inventories, comprised principally of food items, are valued at the lower of
cost, determined by the first-in, first-out method, or market.
Income Taxes
- ------------
Taxes are provided on all items included in the statement of earnings regardless
of when such items are reported for tax purposes.
8
<PAGE> 9
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - ACCOUNTING POLICIES (CONTINUED)
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.
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. The Company accounts for these costs in accordance with 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.
Opening costs of $379,000 for Golden Corral restaurants were expensed as
incurred in the sixteen weeks ended September 19, 1999. Opening costs were zero
for the sixteen weeks ended September 20, 1998.
Benefit Plans
- -------------
The Company has two defined benefit pension plans covering substantially all of
its eligible employees. The benefits are based on years-of-service and other
factors. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service-to-date, but
also for those expected to be earned in the future. The Company also has a
non-qualified supplemental retirement plan for certain key employees.
Self Insurance
- --------------
The Company self-insures its Ohio workers' compensation claims up to $250,000
per claim. Costs are accrued based on management's estimate for future claims.
Recognition of Franchise Fee Revenue
- ------------------------------------
Revenue from franchise fees, based on sales of Big Boy franchisees, is recorded
on the accrual method as earned. Initial franchise fees, which have been
insignificant, are recognized as revenue when the licensed restaurants begin
operations.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of the Company's financial instruments approximates fair
value.
Investment in Sports Franchise
- ------------------------------
On September 30, 1998, the Company completed the sale of its limited partnership
investment in the Cincinnati Reds professional baseball team for $7,000,000 in
cash. The net gain of $3,712,000 or $.62 per share was reported as an
extraordinary gain in the Company's second quarter of Fiscal 1999 ending
December 13, 1998.
9
<PAGE> 10
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - ACCOUNTING POLICIES (CONTINUED)
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
- --------------------------------------------------
The Company considers a history of cash flow losses in established areas to be
its primary indicator of potential impairment pursuant to Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." During the
fourth quarter of fiscal year 1997, the Company closed fifteen Big Boy
restaurants in certain markets in which cash flow losses had occurred. A
non-cash pretax impairment charge of $4,600,000 was recorded in the fourth
quarter of fiscal 1997. Additional non-cash pretax charges of $375,000 and
$1,125,000 were recorded respectively, during the fourth quarter of fiscal 1998
and the second quarter of fiscal 1999 to further lower the net realizable values
of the remaining properties to be sold. The fiscal 1999 charge was partially
based upon transactions with a Big Boy franchise operator, a minority
shareholder of which is an officer of the Company.
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 September 19, 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 $1,649,000 on the Company's balance sheet at
September 19, 1999 as a component of the caption "Property held for sale." The
Company expects to dispose of these restaurant properties within the next six to
twelve months. Certain surplus land is also currently held for sale and is
stated at cost.
NOTE C - LONG-TERM DEBT
September 19, 1999 May 30, 1999
------------------ ------------------
Payable Payable Payable Payable
within after within after
one year one year one year one year
-------- -------- -------- --------
(in thousands)
Revolving credit loan $ - $13,500 $ - $13,500
Term loan 1,500 2,700 1,500 3,200
Tender offer - 1,720 - 1,780
Golden Corral facility -
Construction loan - 5,500 - 1,000
Term loan 237 1,689 231 1,769
------- ------- ------- -------
$ 1,737 $25,109 $ 1,731 $21,249
======= ======= ======= =======
10
<PAGE> 11
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - LONG-TERM DEBT (CONTINUED)
The portion payable after one year matures as follows:
Sept. 19, May 30,
1999 1999
-------- --------
(in thousands)
Period ending in 2001 $ 22,473 $ 3,527
2002 1,472 16,266
2003 291 485
2004 313 305
Subsequent to 2004 560 666
-------- --------
$ 25,109 $ 21,249
======== ========
The revolving credit loan is a $20,000,000 unsecured line of credit, $13,500,000
of which is outstanding at September 19, 1999. Unless extended, this credit loan
matures on September 1, 2001. Interest rates are determined by various indices
as selected by the Company, currently 6.22%. 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 in August 1997, under which the Company
borrowed $17,144,000 to finance the repurchase of 1,142,966 shares of the
Company's common stock (see note F). In October 1999 the Company converted the
$1,720,000 outstanding balance of the loan into the $20,000,000 revolving credit
loan. Interest had been payable monthly at the lender's prime rate or a
LIBOR-adjusted rate, at the option of the Company. The LIBOR-adjusted rate of
6.32% was in effect as of September 19, 1999. The loan had been 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.
The Golden Corral credit facility is an unsecured draw credit line under which
the Company may borrow up to $20,000,000 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 September 19, 1999, the
Company had cumulatively borrowed $7,500,000, of which $5,500,000 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 6.24% is currently in effect. Within six months of the completion and
opening of each restaurant, the balance outstanding under each Construction Loan
is converted to a Term Loan amortized over 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 loan covenants at September 19, 1999.
Compensating balances are not required by any of these loan agreements.
The Company also has three outstanding letters of credit totaling $1,296,000 is
support of its self insurance program.
11
<PAGE> 12
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LEASED PROPERTY
The Company has capitalized the leased property of 40% of its non-owned
restaurant locations. The majority of the leases are for fifteen or twenty years
and contain renewal options for ten to fifteen years. Delivery equipment is held
under capitalized leases expiring during periods to 2004. The Company also
occupies office space under an operating lease which expires during 2003, with a
renewal option available through 2013.
An analysis of the capitalized leased property follows:
Asset balances at
--------------------------
Sept. 19, May 30,
1999 1999
-------- --------
(in thousands)
Restaurant facilities $ 7,248 $ 7,248
Equipment 977 977
-------- --------
8,225 8,225
Less accumulated amortization (5,253) (5,125)
-------- --------
$ 2,972 $ 3,100
======== ========
Total rental expense of operating leases for the sixteen weeks was $456,000 at
September 19, 1999 and $439,000 at September 20, 1998.
Future minimum lease payments under capitalized leases and operating leases
having an initial or remaining term of one year or more follow:
Capitalized Operating
Period ending September 19, leases leases
--------------------------- ------ ------
(in thousands)
2000 1,014 1,222
2001 903 1,129
2002 878 947
2003 873 750
2004 867 538
2005 to 2020 4,321 2,419
------ ------
Total 8,856 $7,005
======
Amount representing interest (3,375)
------
Present value of obligations 5,481
Portion due within one year (447)
------
Long-term obligations $5,034
======
NOTE E - INCOME TAXES
The provision for income taxes in all periods has been computed based on
management's estimate of the tax rate for the entire fiscal year.
12
<PAGE> 13
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK
Stock Options
- -------------
The 1993 Stock Option Plan authorizes the grant of stock options for up to
562,432 shares of the common stock of the Company for a ten-year period
beginning May 9, 1994. Shares may be optioned to employees at not less than 75%
of fair market value on the date granted. Shareholders approved the Amended and
Restated 1993 Stock Option Plan (Amended Plan) in October 1998 which provides
for automatic, annual stock option grants of 1,000 shares to each of the
Company's non-employee directors. The per share exercise price for options
granted to non-employee directors must equal 100% of fair market value on the
date of grant. The Amended Plan adds a Company right to repurchase shares
acquired on exercise of options if an optionee chooses to dispose of such
shares. Stock appreciation rights are not provided for under the Amended Plan.
Outstanding options under the 1993 Plan were granted at fair market value and
vest in three equal annual installments and expire 10 years from the date of
grant.
The 1984 Stock Option Plan expired May 8, 1994. As of September 19, 1999, 96,913
options remain outstanding, which are exercisable within 10 years from the date
of grant. The majority of these options will expire before the end of the second
quarter of fiscal 2000. 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>
Sixteen weeks ended Sixteen weeks ended
September 19, 1999 September 20, 1998
--------------------------- --------------------------
No. of Option No. of Option
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 169,163 $8.31 to $20.83 134,413 $12.38 to $20.83
Exercisable at beginning of year 108,580 $12.38 to $20.83 96,913 $14.38 to $20.83
Granted during the sixteen weeks 20,750 $10.25 28,500 $11.25
Exercised during the sixteen weeks 0 0
Expired during the sixteen weeks 0 0
Outstanding at end of quarter 189,913 $8.31 to $20.83 162,913 $11.25 to $20.83
Exercisable at end of quarter 121,830 $11.25 to $20.83 96,913 $14.38 to $20.83
</TABLE>
Based upon information presented in the above table, pro forma disclosures of
net income and earnings per share as required by SFAS 123 are immaterial.
Shareholders approved the Employee Stock Option Plan in October 1998. The Plan
was 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
- ------------------------------------------
In August 1997 the Company repurchased 1,142,966 shares of its common stock at
$15.00 per share, a total cost of approximately $17,690,000. The transaction
reduced the number of common shares outstanding from 7,148,334 to 6,005,368.
13
<PAGE> 14
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
Stock Repurchase Program
- ------------------------
On October 5, 1998, the Board of Directors approved a program to repurchase up
to 500,000 shares of the Company's common stock on the open market. Purchases
will be made from time to time within a two-year time frame. During the quarter
ended September 19, 1999, the Company repurchased 79,280 shares at a cost of
$823,000, bringing total repurchases since the inception of the program to
184,078 shares at a cost of $1,887,000.
Earnings Per Share
- ------------------
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share," on December 15, 1997. SFAS 128 simplifies
established standards by requiring a presentation of basic earnings per share
(EPS), and if applicable, diluted EPS, instead of primary and fully diluted EPS.
The adoption of SFAS 128 had no impact on the recalculation of prior period
earnings per share.
The computation of basic EPS is based on the weighted average number of
outstanding common shares during the period.
Weighted average
Common Shares Outstanding
-------------------------
Quarter ending September 19, 1999 5,866,919
Quarter ending September 20, 1998 6,006,011
Diluted EPS includes the effect of common stock equivalents which assumes the
exercise of dilutive stock options. The sixteen weeks ended September 19, 1999
included 1,540 shares of common stock equivalents in the computation of diluted
EPS. Stock options outstanding for the sixteen weeks ended September 20, 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 revised employers'
disclosures about pensions and other post retirement benefit plans. As required,
disclosures for 1998 have been restated for comparative purposes.
The changes in the Company's benefit obligation are computed as follows for the
years ended May 30, 1999 and May 31, 1998 (latest available data):
<TABLE>
<CAPTION>
(in thousands)
1999 1998
---- ----
<S> <C> <C>
Projected benefit obligation at beginning of year $ 14,765 $ 13,792
Service cost 1,264 1,209
Interest cost 1,018 1,013
Actual (gain) loss (289) 203
Benefits paid (990) (1,452)
-------- --------
Projected benefit obligation at end of year $ 15,768 $ 14,765
======== ========
The changes in the Plans' assets are computed as follows:
1999 1998
---- ----
Fair value of plan assets at beginning of year $ 23,189 $ 19,782
Actual return on plan assets 1,317 4,449
Employer contribution 402 410
Benefits paid (1,182) (1,452)
-------- -------
Fair value of plan assets at end of year $ 23,726 $ 23,189
======== ========
</TABLE>
14
<PAGE> 15
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - PENSION PLANS (CONTINUED)
The following table sets forth the Plans' funded status and amounts recognized
on the Company's balance sheet at May 30, 1999 and May 31, 1998 (latest
available data):
<TABLE>
<CAPTION>
(in thousands)
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
======= =======
The weighted - average actuarial assumptions used were:
1999 1998
---- ----
Weighted average discount rate 7.25% 7.25%
Weighted average rate of compensation increase 5.50% 5.50%
Weighted average expected long-term rate of return on plan assets 8.50% 8.50%
</TABLE>
Pension expense for the sixteen weeks ended September 19, 1999 and September 20,
1998 was $37,000 and $94,000 respectively.
15
<PAGE> 16
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
(in thousands)
Sept. 19, Sept. 20
1999 1998
-------- --------
Revenue
Food Service $ 48,922 $ 44,178
Lodging 3,917 3,704
-------- --------
$ 52,839 $ 47,882
======== ========
Operating profit (loss)
Food Service $ 4,404 $ 4,335
Lodging 186 94
-------- --------
$ 4,590 $ 4,429
======== ========
Identifiable assets
Food Service $ 93,407 $ 92,968
Lodging 14,738 15,450
-------- --------
$108,145 $108,418
======== ========
Depreciation and amortization
Food Service $ 2,492 $ 2,443
Lodging 534 523
-------- --------
$ 3,026 $ 2,966
======== ========
Capital expenditures
Food Service $ 6,279 $ 3,194
Lodging 238 1,823
-------- --------
$ 6,517 $ 5,017
======== ========
NOTE I - COMPANY REPRESENTATIONS
The financial information is unaudited, but in the opinion of management
includes all adjustments (all of which were normal and recurring) necessary for
a fair presentation of results of operations for such periods.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Overview
- ---------
Net earnings rose to $1,751,000 or $.30 per share for the sixteen-week first
quarter of fiscal 2000 that ended September 19, 1999, from $1,378,000 or $.23
per share in the comparable period last year. Total revenue increased 10.4
percent to $52,839,000, an increase of $4,957,000 from last year's first
quarter.
Results of Operations
- ---------------------
Same store sales in Big Boy restaurants improved nearly 5 percent during the
quarter, marking the eighth consecutive quarter that Big Boy same store sales
gains have been achieved. Improved dining room sales increases complemented the
continuing strong sales from carryout and drive-thru trade. Menu prices were
increased approximately 2 percent shortly before last year's first quarter ended
and were again raised 2 percent in the third quarter of fiscal 1999. Another
price increase of 1.5 percent was implemented in September 1999. No Big Boy
restaurants were opened or closed during the last twelve months, as management's
focus has continued on building same store sales and margins in the 88 existing
Big Boy restaurants operated by the Company.
Sales in Golden Corral restaurants accounted for roughly 5 percent of the total
increase in revenue during the quarter, greatly exceeding initial expectations
of average annual sales volumes of $3,000,000. One Golden Corral restaurant was
in operation for the entire first quarter, while two more restaurants were
opened during the quarter, one in late July 1999, the other in mid September
1999. The Company plans to build 22 more Golden Corrals through 2005, two of
which are expected to be in operation by February 2000.
Hotel sales improved 5.7 percent compared to the first quarter of fiscal 1999.
The re-flagging of the Riverview Hotel to the upscale "Clarion" brand in July
1999 was the prime driver behind the increase, as higher room rates were charged
and occupancy levels improved over last year.
Cost of sales increased $4,670,000 or 11.1 percent during this year's first
quarter, roughly equivalent to the 10.4 percent revenue increase. An analysis of
the components of cost of sales follows.
Food and paper costs in Big Boy restaurants continued to improve during the
quarter falling to 29.3 percent of Big Boy sales from 29.5 percent last year.
Carryout and drive-thru meals, which have been fueling the Big Boy sales
increases, usually have lower food cost than typical dining room meals. On a
consolidated basis, food and paper costs increased as a percentage of revenue,
reflecting the impact of cost of food in Golden Corral restaurants. Food cost as
a percentage of sales in Golden Corral restaurants is higher than in Big Boy
restaurants.
Favorable claims experience in the Company's self insurance programs resulted in
significant credits to payroll and related expenses in the first quarters of
both fiscal years. Without these adjustments, payroll and related expenses would
have been 34.7 percent and 35.2 percent of revenue, respectively, in the first
quarters of 2000 and 1999. Two factors drove the percentage downward in spite of
higher pay rates. The costs of certain employee benefits are fixed and do not
rise with higher pay rates or higher sales levels. Secondly, payroll and related
expenses for Golden Corral restaurants have been a lower percentage of sales
than Big Boy restaurants.
Other operating expenses increased to 23.4 percent of revenue during this year's
first quarter from 23.3 percent last year. As these expenses tend to be more of
the fixed cost variety, a sales increase would normally result in these costs
being a lower percentage of revenue. However, opening costs approximating
$379,000 for the Company's Golden Corral restaurants caused the percentage in
this year's first quarter to increase.
Opening costs resulted in Golden Corral having a negative impact on the
Company's earnings during the first quarter. Golden Corral is expected to
produce a positive contribution to earnings by the second half of fiscal 2000,
based on the experience that the Company's first Golden Corral restaurant took
approximately six months to overcome opening costs.
Administrative and advertising expense during the first quarter of fiscal 2000
decreased $61,000 or 2 percent lower than the first quarter of fiscal 1999. The
decrease is principally due to costs incurred last year in connection with
rolling out the point-of-sale systems in Big Boy restaurants.
17
<PAGE> 18
Interest expense in the first quarter of fiscal 2000 decreased $247,000 or 27.8
percent lower than the comparable period a year ago. Interest attributable to
the tender offer loan (see notes C and F to the consolidated financial
statements) was $33,000 in the first quarter of fiscal 2000, compared with
$265,000 during last year's comparable period. Interest associated with other
borrowings and capitalized leases declined $15,000 in the first quarter of
fiscal 2000 compared to last year's first quarter. Shortly after the end of the
quarter, the balance outstanding on the tender offer loan was refinanced into
the Company's revolving line of credit. Savings from the reduction in tender
offer interest will 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 34
percent in the first quarter of fiscal 2000, compared with 33 percent in the
comparable period last year. This year's higher estimated rate is due to the
improvement in operating profits, which caused total federal tax credits to be a
lower percentage of pre-tax earnings.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities during the first quarter of fiscal 2000
was $3,852,000. These funds were generated principally from net income and
depreciation, and were utilized for discretionary capital improvements,
dividends, and to service debt.
Investing activities during the quarter included $6,517,000 in capital costs, an
increase of $1,500,000 from last year's first quarter. This year's first
quarter's capital spending included $5,214,000 for Golden Corral, $350,000 to
remodel Big Boy restaurants, $238,000 for improvements to the hotel properties,
and $715,000 in routine equipment replacements and other capital outlays. No
property sales were transacted during the first quarter. The Company expects to
complete the disposal of the final three former Big Boy restaurants (of the
fifteen that closed at the end of fiscal 1997) in the next six to twelve months.
The proceeds from these sales will be used for working capital.
Financing activities in the first quarter of fiscal 2000 included $4,500,000 of
new debt borrowed against the Golden Corral credit facility. Scheduled long-term
debt payments of $690,000 were made and $60,000 was paid against the tender
offer loan, before the tender offer loan was converted into the Company's
$20,000,000 revolving line of credit in October 1999. A regular quarterly cash
dividend to shareholders totaling $413,000 was also paid during the quarter
ended September 19, 1999. In October 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. During the first quarter the Company repurchased 79,280 shares at a
cost of $823,000, bringing the total repurchases since the inception of the
program to 184,078 shares at a cost of $1,887,000.
The Company expects funds from operations to be sufficient to cover near term
capital spending on Big Boy and hotel facilities, scheduled debt service 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
a new building prototype designed to leverage the strengths of the existing
concept to better accommodate shifts in customer expectations. Including land,
the cost to build and equip each of these restaurants is expected to range from
$1,600,000 to $1,800,000. Costs to remodel 14 Big Boy restaurants scheduled over
the remainder of fiscal 2000 are expected to be approximately $1,000,000.
Capital spending on the hotel properties should approximate $750,000 during the
rest of fiscal 2000.
The terms of the Company's development agreement with Golden Corral Franchising
Systems, Inc. were amended in October 1999 to allow the Company to open 25
Golden Corral restaurants through 2005. The Company plans to have five
restaurants opened and in operation by February 2000. Three of the five have
already opened and two are currently under construction. In addition, current
plans call for four more Golden Corrals to be open by February 2001. Costs are
being funded through cash flow and a 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 to and testing of the Company's custom written
headquarters software has been completed and the programs are now in production.
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
18
<PAGE> 19
position, results of operations or cash flows. The plan calls for restaurant
systems to be compliant in October 1999 with hotel systems to be compliant in
November 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. 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, and the bank
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- -------------------------------------------------------------------
Not applicable.
19
<PAGE> 20
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 2, 3, and 5, the answers to which are either "none" or "not
applicable", are omitted.
Item 4. Submission of matters to a vote of Security Holders.
a) The Annual Meeting of Shareholders was held on October 4, 1999.
b) Directors elected on October 4, 1999:
Craig F. Maier Daniel W. Geeding
Malcolm M. Knapp Blanche F. Maier
Dale P. Brown
Directors whose terms continued after the meeting:
Jack C. Maier William J. Reik, Jr.
William A. Mauch Lorrence T. Kellar
c) The following matters were voted upon:
1) Election of Directors:
Withheld
Name For Authority
---- --- ---------
Blanche F. Maier 4,480,478 501,159
Craig F. Maier 4,484,427 497,210
Dale P. Brown 4,483,686 497,951
Daniel W. Geeding 4,495,374 486,263
Malcolm M. Knapp 4,310,033 671,604
2) Management proposal to ratify and approve the appointment of
Grant Thornton LLP as independent auditors was approved. It
received the following votes:
For Against Abstain
--- ------- -------
4,592,933 346,504 42,200
3) Shareholder proposal to retain an investment banking firm to
explore alternatives to enhance shareholder value was defeated.
It received the following votes:
For Against Abstain
--- ------- -------
700,320 3,453,845 14,788
Item 6. Exhibits and reports on Form 8-K.
a) Exhibits
(15) Letter re unaudited interim financial information
(27) Financial Data Schedule
b) Reports on Form 8-K.
None
20
<PAGE> 21
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRISCH'S RESTAURANTS, INC.
--------------------------
(registrant)
DATE October 22, 1999
----------------------
BY /s/ Donald H. Walker
-------------------------------
Donald H. Walker
Vice President - Finance, Treasurer and
Principal Financial and Accounting Officer
21
<PAGE> 1
Exhibit 15
Independent Accountant's Report
-------------------------------
Shareholders
Frisch's Restaurants, Inc.
We have reviewed the accompanying consolidated balance sheet of Frisch's
Restaurants, Inc. (an Ohio Corporation) and subsidiaries as of September 19,
1999, and the related consolidated statements of earnings, shareholders' equity
and cash flows for the sixteen weeks then ended. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance as of May 30, 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year then ended and in our report dated July 7, 1999, we expressed an
unqualified opinion on those consolidated financial statements.
GRANT THORTON LLP
Cincinnati, Ohio
October 14, 1999
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF EARNINGS OF FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-28-2000
<PERIOD-START> MAY-31-1999
<PERIOD-END> SEP-19-1999
<CASH> 72,025
<SECURITIES> 0
<RECEIVABLES> 1,379,704
<ALLOWANCES> 0
<INVENTORY> 4,103,951
<CURRENT-ASSETS> 8,200,134
<PP&E> 175,289,293
<DEPRECIATION> 87,276,756
<TOTAL-ASSETS> 108,144,896
<CURRENT-LIABILITIES> 17,720,185
<BONDS> 30,143,596
0
0
<COMMON> 7,362,279
<OTHER-SE> 48,004,738
<TOTAL-LIABILITY-AND-EQUITY> 108,144,896
<SALES> 52,437,002
<TOTAL-REVENUES> 52,839,022
<CGS> 46,599,232
<TOTAL-COSTS> 46,599,232
<OTHER-EXPENSES> 2,944,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 642,955
<INCOME-PRETAX> 2,652,733
<INCOME-TAX> 902,000
<INCOME-CONTINUING> 1,750,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,750,733
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
