<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED MARCH 5, 2000 COMMISSION FILE NUMBER 1-7323
FRISCH'S RESTAURANTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0523213
- ----------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 GILBERT AVENUE, CINCINNATI, OHIO 45206
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 513-961-2660
------------
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The total number of shares outstanding of the issuer's no par common stock, as
of March 24, 2000 was:
5,435,443
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS .................. 3
CONSOLIDATED BALANCE SHEET .......................... 4 - 5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ...... 6
CONSOLIDATED STATEMENT OF CASH FLOWS ................ 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......... 8 - 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................17 - 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK .........................................20
PART II - OTHER INFORMATION 21
<PAGE> 3
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended Twelve Weeks Ended
----------------------------------- ---------------------------------
March 5, March 7, March 5, March 7,
2000 1999 2000 1999
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Sales $ 125,058,491 $ 111,336,708 $37,215,596 $ 32,731,831
Other 999,883 1,082,855 297,414 439,188
----------------- ---------------- ---------------- ---------------
Total revenue 126,058,374 112,419,563 37,513,010 33,171,019
COSTS AND EXPENSES
Cost of sales
Food and paper 41,058,699 35,691,393 12,312,158 10,637,141
Payroll and related 43,367,155 38,243,822 13,092,185 11,448,949
Other operating costs 26,509,813 23,316,713 7,653,550 6,874,601
----------------- ---------------- ---------------- ---------------
110,935,667 97,251,928 33,057,893 28,960,691
Administrative and advertising 6,905,697 6,978,065 2,003,134 1,900,649
Impairment of long lived assets - 1,125,000 - -
Interest 1,760,958 1,980,461 620,599 498,701
----------------- ---------------- ---------------- ---------------
Total costs and expenses 119,602,322 107,335,454 35,681,626 31,360,041
----------------- ---------------- ---------------- ---------------
Earnings from continuing operations
before income tax and extraordinary item 6,456,052 5,084,109 1,831,384 1,810,978
Income taxes 2,195,000 1,830,000 623,000 652,000
----------------- ---------------- ---------------- ---------------
EARNINGS FROM CONTINUING OPERATIONS 4,261,052 3,254,109 1,208,384 1,158,978
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (207,316) (166,645) (353,699) (191,152)
(NET OF APPLICABLE TAX)
EXTRAORDINARY ITEM (NET OF APPLICABLE TAX) - 3,712,000 - -
----------------- ---------------- ---------------- ---------------
NET EARNINGS $ 4,053,736 $ 6,799,464 $ 854,685 $ 967,826
================= ================ ================ ===============
Basic and diluted net earnings
per share of common stock:
Continuing operations $.74 $.55 $.22 $.19
Discontinued operations (.03) (.03) (.06) (.03)
Extraordinary item - .62 - -
----------------- ---------------- ---------------- ---------------
$.71 $1.14 $.16 $.16
================= ================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 5, May 30,
2000 1999
(unaudited)
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,262,031 $ 200,200
Receivables
Trade 1,246,235 1,117,431
Other 220,757 219,299
Inventories 3,964,559 3,732,458
Prepaid expenses and sundry deposits 838,602 910,193
Hotel assets held for sale - net 13,749,987 -
Prepaid and deferred income taxes 740,000 744,097
---------------- ----------------
Total current assets 22,022,171 6,923,678
PROPERTY AND EQUIPMENT
Land and improvements 24,047,579 21,089,875
Buildings 49,949,629 51,362,095
Equipment and fixtures 53,125,590 57,947,430
Leasehold improvements and buildings on leased land 14,693,535 28,449,043
Capitalized leases 7,282,687 8,224,712
Construction in progress 265,891 2,305,822
---------------- ----------------
149,364,911 169,378,977
Less accumulated depreciation and amortization 75,239,584 85,010,213
---------------- ----------------
Net property and equipment 74,125,327 84,368,764
OTHER ASSETS
Intangible assets 745,659 748,794
Investments in land 1,174,043 1,960,781
Property held for sale 2,822,248 2,076,484
Net cash surrender value-life insurance policies 4,198,353 4,045,080
Deferred income taxes 1,270,000 1,272,286
Other 2,149,177 2,030,296
---------------- ----------------
Total other assets 12,359,480 12,133,721
---------------- ----------------
$ 108,506,978 $ 103,426,163
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 5, May 30,
2000 1999
(unaudited)
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Long-term obligations due within one year
Long-term debt $ 2,412,033 $ 1,730,964
Obligations under capitalized leases 369,231 451,024
Self insurance 926,748 1,092,733
Accounts payable 8,606,493 7,431,751
Accrued expenses 5,988,670 5,401,819
Income taxes 7,214 425,383
---------------- ----------------
Total current liabilities 18,310,389 16,533,674
LONG-TERM OBLIGATIONS
Long-term debt 27,239,544 21,248,526
Obligations under capitalized leases 4,597,387 5,146,170
Self insurance 2,766,307 3,019,947
Other 2,001,729 2,190,343
---------------- ----------------
Total long-term obligations 36,604,967 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 60,365,268 60,401,456
---------------- ----------------
67,727,547 67,763,735
Retained earnings 12,539,748 9,804,637
---------------- ----------------
80,267,295 77,568,372
Less cost of treasury stock (1,899,476 and 1,461,054 shares) 26,675,673 22,280,869
---------------- ----------------
Total shareholders' equity 53,591,622 55,287,503
---------------- ----------------
$ 108,506,978 $ 103,426,163
================ ================
</TABLE>
5
<PAGE> 6
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FORTY WEEKS ENDED MARCH 5, 2000 AND MARCH 7, 1999
(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 forty weeks - - 6,799,464 - 6,799,464
Treasury shares acquired - - - (661,593) (661,593)
Treasury shares reissued - (3,481) - 13,693 10,212
Dividends
Cash - $.21 per share - (1,256,910) (1,256,910)
------------ ------------ ------------ ------------ ------------
Balance at March 7, 1999 7,362,279 60,423,818 8,890,039 (21,874,977) 54,801,159
Net earnings for twelve weeks - - 1,330,377 - 1,330,377
Treasury shares acquired - - - (405,892) (405,892)
Employee Stock Ownership Plan - (22,362) - - (22,362)
Dividends
Cash - $.07 per share - - (415,779) - (415,779)
------------ ------------ ------------ ------------ ------------
Balance at May 30, 1999 7,362,279 60,401,456 9,804,637 (22,280,869) 55,287,503
Net earnings for forty weeks - - 4,053,736 - 4,053,736
Treasury shares acquired - - - (4,440,915) (4,440,915)
Treasury shares reissued - (15,343) - 46,111 30,768
Employee Stock Ownership Plan - (20,845) - - (20,845)
Dividends
Cash - $.23 per share - (1,318,625) (1,318,625)
------------ ------------ ------------ ------------ ------------
Balance at March 5, 2000 $ 7,362,279 $ 60,365,268 $ 12,539,748 $(26,675,673) $ 53,591,622
============ ============ ============ ============ ============
</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
Forty weeks ended March 5, 2000 and March 7, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net earnings $ 4,053,736 $ 6,799,464
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 7,700,985 7,575,501
Loss on disposition of assets 307,437 286,179
Impairment of long-lived assets - 1,125,000
Gain on sale of investment in Cincinnati Reds - (3,712,000)
Changes in assets and liabilities:
Increase in receivables (130,262) (339,471)
Increase in inventories (232,101) (302,086)
Decrease (increase) in prepaid expenses and sundry deposits 71,591 (269,876)
Decrease in prepaid and deferred income taxes 4,097 152,822
Increase in accounts payable 1,174,742 1,341,241
Increase (decrease) in accrued expenses 586,852 (616,129)
Decrease in accrued income taxes (418,168) (759,981)
(Increase) decrease in other assets (237,322) 111,761
Decrease in self insured obligations (419,625) (274,487)
Decrease in other liabilities (188,614) (469,773)
------------ ------------
Net cash provided by operating activities 12,273,348 10,648,165
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Additions to property and equipment (11,599,062) (9,886,303)
Proceeds from disposition of property 173,109 3,304,380
Proceeds from sale of investment in Cincinnati Reds - 7,000,000
Increase in other assets (77,457) (203,178)
------------ ------------
Net cash (used in) provided by investing activities (11,503,410) 214,899
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings 11,000,000 4,000,000
Payment of long-term obligations (4,958,490) (12,130,160)
Cash dividends paid (1,318,625) (1,256,910)
Treasury share transactions (4,410,147) (651,381)
Other (20,845) -
------------ ------------
Net cash provided by (used in) financing activities 291,893 (10,038,451)
------------ ------------
Net increase in cash and equivalents 1,061,831 824,613
Cash and equivalents at beginning of year 200,200 84,260
------------ ------------
Cash and equivalents at end of third quarter $ 1,262,031 $ 908,873
============ ============
Supplemental disclosures:
Interest paid $ 1,636,493 $ 2,017,628
Income taxes paid 2,582,104 2,343,159
Income tax refunds received 82,318 -
</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., headquartered in Cincinnati, Ohio, 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, which are accounted for as
discontinued operations (see note B). 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 intangible assets, 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 March 5, 2000 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 ranging from 10 to
25 years for buildings or components thereof and 5 to 10 years for equipment.
Leasehold improvements are depreciated over 10 to 25 years or the remaining
lease term, whichever is shorter. Interest on borrowings is capitalized during
active construction periods of major capital projects. The cost of land not yet
in service is included in "construction in progress" if construction has begun
or if construction is likely within the next twelve months. The cost of land on
which construction is not likely within the next twelve months is included in
other assets under the caption "investments in land".
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." Carrying values
are reviewed for impairment when events or changes in circumstances indicate
that the assets' carrying values may not be recoverable from the estimated
future cash flows expected to result from the properties' use and eventual
disposition. When undiscounted expected future cash flows are less than carrying
values, an impairment loss is recognized equal to the amount by which the
carrying values exceed the net realizable values of the assets.
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.
Accordingly, a $4,600,000 non-cash pretax impairment charge was recorded to
reduce the carrying costs of the properties to net realizable value, as
determined by estimates provided by real estate brokers and the Company's past
experience in disposing of other unprofitable restaurant properties. 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 $1,125,000 charge recorded in the second quarter of 1999 was
necessitated when it became apparent that the seven remaining restaurants to
then be sold 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 of fiscal 1999, and expectations were
lowered for the remaining three. Three of the four accepted contracts were with
a Big Boy franchise operator, a minority shareholder and the president of which
is an officer of the Company (see note J ).
Twelve of the fifteen properties closed at the end of fiscal 1997 have been
disposed of through March 5, 2000. 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 $1,653,000 on the Company's balance sheet at March 5, 2000 as a
component of the long-term asset caption "Property held for sale." Disposition
of these properties is expected within the next six to twelve months, the
proceeds of which will be used for working capital. Certain surplus land is also
currently held for sale and is stated at the lower of cost or market.
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.
The Golden Corral license agreement requires the Company to pay initial license
fees for each new restaurant. Amortization begins when the restaurant opens and
is computed using the straight-line method over 15 years, the terms of the
individual restaurant franchise agreements.
9
<PAGE> 10
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - ACCOUNTING POLICIES (CONTINUED)
New Store Opening Costs
- -----------------------
New store opening costs consist of new employee training costs, the cost of a
team to coordinate the opening and the cost of certain replacement items such as
uniforms and china. 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 $1,025,000 for Golden Corral restaurants were expensed as
incurred in the forty weeks ended March 5, 2000. Opening costs for Golden Corral
were $358,000 during the forty weeks ended March 7, 1999.
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 annually contribute amounts
sufficient to satisfy legal funding requirements plus such additional tax
deductible amounts deemed advisable under the circumstances. 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.
Licensing Agreements
- --------------------
Revenue from franchise fees, based on sales of Big Boy restaurants licensed to
other operators, is recorded on the accrual method as earned. Initial license
fees are recognized as revenue when the licensed restaurants begin operations.
Under the terms of the Golden Corral license agreement, the Company is obligated
to pay fees based on defined gross sales. These costs are charged to operations
as incurred.
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 1/15 limited
partnership investment in the Cincinnati Reds professional baseball team for
$7,000,000 cash (see note I). A final partnership distribution of $101,000 was
recorded in earnings during the third quarter of fiscal 1999.
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." Pro forma disclosures
of net income and earnings per share based on options granted and stock issued
are reflected in Note F - Capital Stock.
10
<PAGE> 11
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - DISCONTINUED OPERATIONS
In March 2000, the Board of Directors authorized management to develop a plan to
divest the Company's hotel operations, consisting of two high rise hotels - the
Clarion Riverview Hotel and the Quality Central Hotel. The Company plans to
operate the hotels until a buyer is found, which is anticipated to take up to
one year. The services of a broker have been engaged for this purpose. Hotel
operations are accounted for as a discontinued operation, and accordingly,
amounts in the financial statements for all periods shown have been restated to
reflect discontinued operations accounting. The investment in the hotels is
comprised of the hotels' real property, leasehold improvements, equipment,
furnishings and fixtures, and is carried as a current asset under the caption
"Hotel assets held for sale - net". The sale proceeds, which are expected to
exceed the carrying values, will be used in the short-term to repay debt and
ultimately will be reinvested in Big Boy and Golden Corral restaurant expansion.
Certain information with respect to discontinued hotel operations is summarized
below:
<TABLE>
<CAPTION>
Forty weeks ended Twelve weeks ended
March 5, 2000 March 7, 1999 March 5, 2000 March 7, 1999
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 8,951 $ 8,788 $ 2,058 $ 2,343
Cost of sales $ 9,033 $ 8,795 $ 2,541 $ 2,574
Administrative and advertising 232 254 54 68
------- ------- ------- -------
Total costs and expenses 9,265 9,049 2,595 2,642
------- ------- ------- -------
(Loss) before income tax (314) (261) (537) (299)
Income tax benefit (107) (94) (183) (108)
------- ------- ------- -------
(Loss) from discontinued operations $ (207) $ (167) $ (354) $ (191)
======= ======= ======= =======
</TABLE>
NOTE C - LONG-TERM DEBT
<TABLE>
<CAPTION>
March 5, 2000 May 30, 1999
---------------------- ---------------------
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 $ - $ 17,500 $ - $ 13,500
Term loan 1,500 1,950 1,500 3,200
Tender offer - - - 1,780
Golden Corral facility -
Construction loan - 1,000 - 1,000
Term loans 912 6,790 231 1,769
--------- ---------- --------- ---------
$ 2,412 $ 27,240 $ 1,731 $ 21,249
========= ========== ========= =========
</TABLE>
The portion payable after one year matures as follows:
<TABLE>
<CAPTION>
Mar. 5, May 30,
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
Period ending in 2001 $ - $ 3,527
2002 20,987 16,266
2003 1,519 485
2004 1,157 305
2005 1,243 666
Subsequent to 2005 2,334 -
---------- ---------
$ 27,240 $ 21,249
========== =========
</TABLE>
11
<PAGE> 12
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - LONG-TERM DEBT (CONTINUED)
The revolving credit loan is a $20,000,000 unsecured line of credit, $17,500,000
of which is outstanding at March 5, 2000. Unless extended, this credit loan
matures on September 1, 2001. Interest rates, currently ranging from 6.76% to
7.06%, are determined by various indices as selected by the Company. 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 July 31, 2002. Interest is also payable monthly at a rate equal
to the prime rate, currently 8.5%, 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.
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 March 5, 2000, the
Company had cumulatively borrowed $9,000,000, of which $1,000,000 was a
Construction Loan and $8,000,000 had been converted to Term Loans. 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 quarterly CD based
rate of 6.96% 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. Five Term Loans totaling
$8,000,000 have fixed interest rates, the weighted average of which is 7.88%,
and are being repaid in 84 equal monthly installments of principal and interest
aggregating $124,684 through periods expiring in 2007.
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 March 5, 2000.
Compensating balances are not required by any of these loan agreements.
The Company also has three outstanding letters of credit totaling $1,296,000 in
support of its self insurance program.
NOTE D - LEASED PROPERTY
The Company has capitalized the leased property of 37% 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:
<TABLE>
<CAPTION>
Asset balances at
----------------------
Mar. 5, May 30,
2000 1999
--------- ------
(in thousands)
<S> <C> <C>
Restaurant facilities $ 6,306 $ 7,248
Equipment 977 977
-------- --------
7,283 8,225
Less accumulated amortization (4,721) (5,125)
-------- --------
$ 2,562 $ 3,100
======== ========
</TABLE>
12
<PAGE> 13
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LEASED PROPERTY (CONTINUED)
Total rental expense of operating leases for the forty weeks was $1,140,000 at
March 5, 2000 and $1,131,000 at March 7, 1999.
Future minimum lease payments under capitalized leases and operating leases
having an initial or remaining term of one year or more follow:
<TABLE>
<CAPTION>
Capitalized Operating
Period ending March 5, leases leases
---------------------- ------------- ----------
(in thousands)
<S> <C> <C>
2001 $ 885 $ 1,317
2002 828 1,198
2003 808 1,064
2004 808 810
2005 768 642
2006 to 2020 3,847 2,130
------- --------
Total 7,944 $ 7,161
========
Amount representing interest (2,978)
-------
Present value of obligations 4,966
Portion due within one year (369)
-------
Long-term obligations $ 4,597
=======
</TABLE>
NOTE E - INCOME TAXES
The provision for income taxes in all periods has been computed based on
management's estimate of the tax rate for the entire fiscal year.
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 have been granted at fair market value
and expire 10 years from the date of grant. Outstanding options to employees
vest in three equal annual installments, while outstanding options to
non-employee directors vest after one year.
The 1984 Stock Option Plan expired May 8, 1994. As of March 5, 2000, 28,488
options remain outstanding, which are exercisable within 10 years from the date
of grant, expiring during periods to 2003. 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.
13
<PAGE> 14
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
Transactions involving both the 1993 and the 1984 Plans are summarized below:
<TABLE>
<CAPTION>
Forty weeks ended Forty weeks ended
March 5, 2000 March 7, 1999
------------------------------ ----------------------------
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 forty weeks 27,750 $10.06 to $10.25 35,500 $8.31 to $11.25
Exercised during the forty weeks 0 0
Expired during the forty weeks 68,425 $20.83 0
Forfeited during the forty weeks 1,000 $8.31 2,250 $11.25 to $12.38
Outstanding at end of quarter 127,488 $8.31 to $17.05 167,663 $8.31 to $20.83
Exercisable at end of quarter 59,404 $8.31 to $17.05 96,913 $14.38 to $20.83
</TABLE>
Using the fair value on the grant date under the methodology prescribed by SFAS
123, the respective pro forma effect on net income for options granted in fiscal
1999 and 1998 amounted to charges of approximately $16,000 and $1,400, with no
effect on basic and diluted net earnings per share. These estimates were
determined 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>
Pro forma disclosures of net income and basic and diluted net earnings per share
for the forty weeks ended March 7, 2000 and March 5, 1999 were similarly not
materially different from reported results.
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 had
the immediate effect of reducing the number of common shares outstanding from
7,148,334 to 6,005,368.
14
<PAGE> 15
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
are being made from time to time within a two-year time frame. On December 8,
1999, the Board of Directors authorized an additional repurchase of up to
200,000 shares. During the forty weeks ended March 5, 2000, the Company
repurchased 441,458 shares at a cost of $4,441,000, bringing total repurchases
since the inception of the program to 546,256 shares at a cost of $5,505,000.
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.
Basic earnings per share is based on the weighted average number of outstanding
common shares during the period. Diluted earnings per share includes the effect
of common stock equivalents, which assumes the exercise of dilutive stock
options.
<TABLE>
<CAPTION>
Weighted Average
Common Shares Outstanding Stock Total
(used for Basic EPS) Equivalents (used for Diluted EPS)
-------------------- ----------- ----------------------
<S> <C> <C> <C>
Quarter ending March 5, 2000 5,495,070 754 5,495,824
Year-to-date March 5, 2000 5,731,333 1,132 5,732,465
Quarter ending March 7, 1999 5,943,311 1,581 5,944,892
Year-to-date ending March 7, 1999 5,980,150 822 5,980,972
</TABLE>
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>
15
<PAGE> 16
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>
Net periodic pension cost (benefit) for the forty weeks ended March 5, 2000 and
March 7, 1999 was $36,000 and $(78,000) respectively.
NOTE H - SEGMENT INFORMATION
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 established standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. An operating segment is defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The Company has historically had food service and lodging operations. In March
2000, the Board of Directors authorized management to develop plans to divest
the lodging segment (see note B).
NOTE I - EXTRAORDINARY ITEM
On September 30, 1998, the Company completed an unusual and infrequent
transaction when it sold its 1/15 limited partnership interest in the Cincinnati
Reds professional baseball team for $7,000,000 cash. The net gain of $3,712,000
resulted in basic and diluted net earnings per share of $.62. The investment,
originally made in June 1985, had been carried at cost and was the Company's
only passive non-operating asset. Prior to 1985, the Company had not owned any
other such assets, and it is extremely unlikely that another investment of this
nature will be made in the future.
NOTE J - RELATED PARTY TRANSACTIONS
During the forty weeks ended March 5, 2000 and March 7, 1999, a Big Boy
franchised restaurant owned by an officer and director of the Company and two
Big Boy franchised restaurants owned by children and other family members of an
officer and directors of the Company paid the Company franchise and advertising
fees, employee leasing and other fees, and made purchases from the Company's
commissary.
16
<PAGE> 17
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - RELATED PARTY TRANSACTIONS (CONTINUED)
During the fiscal year ended May 30, 1999, three of the unprofitable Big Boy
restaurants closed at the end of 1997 were sold and franchised to a Big Boy
franchise operator, a minority shareholder and the president of which is an
officer of the Company. Another of the unprofitable Big Boy restaurants that
closed in 1997 is currently leased and franchised to this Big Boy franchise
operator. In addition, this Big Boy franchise operator has acquired two other
Big Boy franchised restaurants from other franchisees of the Company. During the
forty weeks ended March 5, 2000 and March 7, 1999, certain of these restaurants
paid the Company rent, franchise and advertising fees and other fees and made
purchases from the Company's commissary.
These transactions were effected on substantially similar terms as transactions
with persons having no relationship with the Company.
NOTE K - COMPANY REPRESENTATIONS
The financial information is unaudited, but in the opinion of management
includes all adjustments (all of which were normal and recurring with the
exception of last year's second quarter $1,125,000 pretax impairment of assets
charge) necessary for a fair presentation of results of operations for such
periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Overview
- --------
In March 2000, the Board of Directors authorized management to develop a plan to
divest the Company's hotel operations. Proceeds from the sale are expected to
result in a gain on disposal sufficient to cover any operating losses that may
be incurred during the phase-out period. The Company's net income for the twelve
and forty weeks ended March 5, 2000 included hotel losses of $354,000 or ($.06)
per share and $207,000 or ($.03) per share, respectively, and the twelve and
forty weeks ended March 7, 1999 included hotel losses of $191,000 or ($.03) per
share and $167,000 or ($.03) per share, respectively. Comparisons in the
discussion of results of operations have been adjusted to exclude the hotel loss
summary information in the below table, which has been accounted for as
discontinued operations:
<TABLE>
<CAPTION>
Forty weeks ended Twelve weeks ended
March 5, 2000 March 7, 1999 March 5, 2000 March 7, 1999
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Total revenue $ 8,951 $ 8,788 $ 2,058 $ 2,343
Cost of sales $ 9,033 $ 8,795 $ 2,541 $ 2,574
Administrative and advertising 232 254 54 68
------- ------- ------- -------
Total costs and expenses 9,265 9,049 2,595 2,642
------- ------- ------- -------
(Loss) before income tax (314) (261) (537) (299)
Income tax benefit (107) (94) (183) (108)
------- ------- ------- -------
(Loss) from discontinued operations $ (207) $ (167) $ (354) $ (191)
======= ======= ======= =======
</TABLE>
For continuing operations, total revenue for the twelve-week third quarter ended
March 5, 2000 was $37,513,000, an increase of $4,342,000 or 13.1 percent from
the comparable period last year. Earnings from continuing operations for the
quarter were $1,208,000, or $.22 per share, compared to $1,159,000 or $.19 per
share last year.
For the forty weeks ended March 5, 2000, revenue from continuing operations
increased 12.1 percent to $126,058,000 from $112,420,000 a year ago. Earnings
from continuing operations were $4,261,000 or $.74 per share versus $3,254,000
or $.55 per share last year, which included a pretax impairment of assets charge
of $1,125,000 ($720,000 net of taxes, or $.12 per share) to lower the carrying
value of certain property held for sale.
17
<PAGE> 18
An extraordinary gain of $3,712,000 or $.62 per share was also recorded last
year from the sale of the company's limited partnership interest in the
Cincinnati Reds major league baseball team.
Results of Operations
- ---------------------
Same store sales in Big Boy restaurants improved by over 4 percent during the
first three quarters, including more than a 4 percent gain for the twelve-week
period ending March 5, 2000, marking the tenth 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 in last year's first quarter,
2 percent in last year's third quarter, approximately 1.5 percent at the end of
this year's first quarter and just under 2 percent near the end of this year's
third quarter. No Big Boy restaurants have been opened or closed during the last
twelve months as management has continued to focus on building same store sales
and margins in the 88 existing Big Boy restaurants operated by the Company.
Sales volume of Golden Corral restaurants accounted for approximately two-thirds
of the total 12.1 percent increase in consolidated revenue during the first
three quarters, continuing to exceed initial expectations. Menu prices have not
been increased. Only one Golden Corral restaurant was in operation for the
entire three-quarter period, while two more were opened during the first
quarter, a fourth one opened near the end of the second quarter and a fifth one
opened in the third quarter, during January 2000. The Company plans to build 20
more Golden Corrals through 2005. The next one is scheduled to open during the
summer of 2000.
Cost of sales increased $13,684,000 or 14.1 percent during this year's first
three quarters, roughly proportionate to the 12.1 percent revenue increase. An
analysis of the components of cost of sales follows.
As a percentage of Big Boy sales, food and paper costs in Big Boy restaurants
were equal for the forty week period for both this year and last year. Increased
sales of carryout and drive-thru meals, which usually have lower food cost than
typical dining room meals, continue to result in food cost reductions. However,
this decrease has been offset by higher prices paid for pork, beef and fish. On
a consolidated basis, food and paper costs increased as a percentage of revenue
during the first three quarters of the year, reflecting the impact of food cost
in Golden Corral restaurants, which as a percentage of sales, is much 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 and 34.5 percent of revenue in each of the forty week periods of
fiscal years 2000 and 1999. Higher pay rates and the allowance of a small
increase in the number of hours worked combined to drive payroll costs higher.
However, two factors kept the payroll percentage from rising more dramatically.
First, the costs of certain employee benefits are fixed and do not rise with
higher levels of pay or higher sales levels. Second, the payroll and related
expenses percentage for Golden Corral restaurants is slightly lower than for Big
Boy restaurants. It has become increasingly likely that the federal minimum wage
will soon be increased by a dollar per hour to be phased in over a two to three
year period. Based on current labor conditions, such an increase would not be
expected to have an immediate material effect on the Company's payroll costs,
especially if the final legislation does not change the cash wage for tipped
employees.
Other operating expenses increased to 21 percent of revenue during this year's
first three quarters from 20.7 percent last year. As these expenses tend to be
more fixed in nature, the sales increase would normally cause these costs to be
a lower percentage of revenue. However, opening costs of approximately
$1,025,000, for the Company's Golden Corral restaurants, compared with $358,000
last year, caused the percentage in this year's first three quarters to increase
over the comparable period a year ago. These opening costs, including $225,000
this year and $103,000 last year for Golden Corral restaurants not yet in
operation, resulted in the Golden Corrals having a negative impact on the
Company's earnings during the first three quarters of both years. Excluding all
opening expenses, pretax earnings for Golden Corral through the three quarter
period would be in excess of $500,000 this year compared with approximately
$60,000 in last year's comparable period, which included only six weeks of
results for the first restaurant that opened in January 1999.
Administrative and advertising expense during the first three quarters of fiscal
2000 decreased $72,000 or 1 percent lower than the first three quarters 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,
offset by higher advertising costs that are commensurate with the sales
increases.
18
<PAGE> 19
Results for the first three quarters of last year were adversely affected by a
$1,125,000 impairment of assets charge in the second quarter to lower the
carrying value of certain property held for sale (see note A to the consolidated
financial statements).
Interest expense during the three quarters ended March 5, 2000, decreased
$220,000 or 11.1 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 $38,000 during this year's first three quarters,
compared with $430,000 during last year's comparable period. In October 1999,
the outstanding balance of $1,779,000 on the tender offer loan was refinanced
into the Company's revolving line of credit. Borrowing in fiscal 2000 to
construct Golden Corral restaurants and to finance repurchases of the Company's
common stock has tempered the year to date savings from the reduction in tender
offer interest, and has resulted in increased interest costs for the twelve week
third quarter over the comparable period last year. Continued borrowing for
Golden Corral restaurants may be necessary during the next three fiscal years.
Provision for income tax expense as a percentage of pre-tax earnings was 34
percent in the first three quarters of fiscal 2000. Last year's 36 percent tax
rate reflected higher state income taxes associated with the extraordinary gain
from the sale of the Company's limited partner interest in the Cincinnati Reds
major league baseball team.
Liquidity and Capital Resources
- -------------------------------
The Company has historically maintained a strategic negative working capital
position, which is not uncommon in the restaurant industry. The deficit is often
substantial, but management believes it does not hinder the Company's ability to
satisfactorily retire its obligations when due, as substantially all the
Company's retail sales are cash or credit card sales, and the Company's
revolving credit lines are readily available when needed. A positive working
capital position has been established as of March 5, 2000, reflecting the
classification of the assets of the Company's discontinued hotel operations as
current assets, in anticipation of their sale.
Cash provided by operating activities through the third quarter of fiscal 2000
was $12,273,000, an increase of $1,625,000 over last year's three quarters.
These funds, generated principally from net income and depreciation and
supplemented by external borrowing, were utilized for discretionary capital
projects (principally Golden Corral expansion), dividends, repurchases of the
Company's common stock, and to service debt.
Investing activities through the third quarter of fiscal 2000 included
$11,599,000 in capital costs, an increase of $1,713,000 from last year's first
three quarters. This year's capital spending included $8,457,000 for Golden
Corral, $835,000 to remodel Big Boy restaurants, $555,000 for improvements to
the hotel properties, and $1,752,000 in routine equipment replacements and other
capital outlays. Proceeds from property sales were $173,000. The Company expects
to receive at least $14,000,000, net of expenses, from the sale of its hotel
properties. These funds will be used in the short term to repay debt and
ultimately will be reinvested in Big Boy and Golden Corral restaurant expansion.
Financing activities through the third quarter of fiscal 2000 included
$6,000,000 of new debt borrowed against the Golden Corral credit facility. In
addition, $5,000,000 of new debt was borrowed on the $20,000,000 revolving line
of credit, of which $1,779,000 was used to retire the tender offer loan, and
$1,000,000 was repaid during the third quarter. Scheduled long-term debt
payments of $2,180,000 were made. Regular quarterly cash dividends to
shareholders totaling $1,320,000 were also paid during the three quarters ended
March 5, 2000. In addition, on March 14, 2000, the Board of Directors declared
the Company's 157th consecutive quarterly dividend, payable April 10, 2000,
approximating $435,000. In early December 1999, the Board of Directors
authorized an additional repurchase of up to 200,000 shares of the Company's
common stock. This approval supplemented the Board's authorization in October
1998 to purchase up to 500,000 shares. Purchases are being made from time to
time on the open market or through block trades during a two-year time frame
that expires October 5, 2000. During the three quarters ended March 5, 2000 the
Company repurchased 441,458 shares at a cost of $4,441,000, bringing the total
repurchases since the inception of the program to 546,256 shares at a cost of
$5,505,000.
The Company expects funds from operations to be sufficient to cover near term
capital spending on Big Boy facilities, scheduled debt service, stock
repurchases and regular quarterly cash dividends. If needed, the Company's
revolving credit loan is available to meet additional borrowing requirements.
The Company has suspended previous plans to build four new Big Boy restaurants
in calendar year 2000, while the design of the new building prototype is
reworked. Costs to remodel six Big Boy restaurants scheduled over the remainder
of fiscal 2000 are expected to be approximately $350,000. There are only minor
capital spending plans on the discontinued hotel properties, which are necessary
to comply with license agreements with Choice Hotels International.
19
<PAGE> 20
The terms of the Company's development agreement with Golden Corral Franchising
Systems, Inc. call for the Company to open 25 Golden Corral restaurants through
2005. Five restaurants are currently operating. In addition, current plans call
for four more Golden Corrals to be open by February 2001, the next of which is
scheduled to open during the summer of 2000. 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, of which $11,000,000 remains currently available. On
average, the approximate cost to build and equip each Golden Corral restaurant
is $2,500,000, including land.
Year 2000 Impact
- ----------------
The Company successfully completed its plan to insure that its information
systems are fully Year 2000 compliant, as no significant problems were
encountered during the rollover from 1999 to 2000. The Company utilized internal
resources to convert and test its custom written headquarters software without
material incremental cost. Point-of-sale systems required upgrade, the cost of
which had no material adverse effect on the Company's financial position,
results of operations or cash flows. Certain other systems that have embedded
chip technology did not affect the Company's operations. The Company's plan also
addressed the readiness of mission critical third party suppliers and service
providers. The Company did not experience any significant interruption of food
or other product delivery resulting from third-party non-compliance. All of the
Company's information systems have continued to operate properly through the
first calendar quarter of 2000.
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
- -------------------------------------------------------------------
The Company has market risk exposure to interest rate changes primarily relating
to the $20,000,000 revolving credit loan, the outstanding balance of which was
$17,500,000 as of March 5, 2000. Interest rates are determined by various
indices for periods of one, two or three months as selected by the Company. The
indices include the London Interbank Offered Rate (LIBOR) and the average rate
being offered by top quality banks in the national secondary market for
certificates of deposit (CD), plus the then applicable LIBOR/CD spread as
periodically adjusted, ranging from a minimum of 87.5 basis points to a maximum
of 150 basis points. Any portion of the note with respect to which a LIBOR or CD
based rate is not in effect bears interest equal to the prime rate. The Company
does not use derivative financial instruments to manage its exposure to changes
in interest rates.
Food supplies for Big Boy restaurants 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 and safety, timeliness of
distribution to restaurants and results in lower food and supply costs. Certain
commodities, principally beef, chicken, pork, dairy products, fish, french fries
and coffee, are generally purchased based upon market prices established with
vendors. Purchase contracts for some of these items may contain contractual
provisions that limit the price to be paid. The Company does not use financial
instruments as a hedge against changes in commodity pricing.
20
<PAGE> 21
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 2, 3, 4, and 5, the answers to which are either "none" or "not
applicable", are omitted.
Item 6. Exhibits and reports on Form 8-K.
a) Exhibits
(15) Letter re unaudited interim financial information
(27) Financial Data Schedule
b) Reports on Form 8-K.
On December 21, 1999 under Item 5, to report that on December
8, 1999 the Company's Board of Directors authorized an
additional repurchase of up to 200,000 shares of the
Company's common stock on the open market. This supplements
the Board's authorization on October 5, 1998 to purchase up
to 500,000 shares. Financial statements were not required to
be filed.
On March 20, 2000 under Item 5, to report that on March 14,
2000 the Company's Board of Directors, authorized management
to develop a plan to divest the Company's hotel operations.
Financial statements were not required to be filed.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRISCH'S RESTAURANTS, INC.
--------------------------
(Registrant)
DATE April 4, 2000
------------------
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 March 5, 2000,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the twelve and forty week periods 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 sheet 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 THORNTON LLP
Cincinnati, Ohio
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY 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 FIANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-28-2000
<PERIOD-START> MAY-31-1999
<PERIOD-END> MAR-05-2000
<CASH> 1,262,031
<SECURITIES> 0
<RECEIVABLES> 1,466,992
<ALLOWANCES> 0
<INVENTORY> 3,964,559
<CURRENT-ASSETS> 22,022,171
<PP&E> 149,364,911
<DEPRECIATION> 75,239,584
<TOTAL-ASSETS> 108,506,978
<CURRENT-LIABILITIES> 18,310,389
<BONDS> 31,836,931
0
0
<COMMON> 7,362,279
<OTHER-SE> 46,229,343
<TOTAL-LIABILITY-AND-EQUITY> 108,506,978
<SALES> 125,058,491
<TOTAL-REVENUES> 126,058,374
<CGS> 110,935,667
<TOTAL-COSTS> 110,935,667
<OTHER-EXPENSES> 6,905,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,760,958
<INCOME-PRETAX> 6,456,052
<INCOME-TAX> 2,195,000
<INCOME-CONTINUING> 4,261,052
<DISCONTINUED> (207,316)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,053,736
<EPS-BASIC> .71
<EPS-DILUTED> .71
</TABLE>
