<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 DECEMBER 10, 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 December 29, 2000 was:
5,076,814
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
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 - 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................19 - 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ..........................................................23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION ON MATTERS TO A VOTE OF SECURITY HOLDERS ..................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................24 - 26
SIGNATURE ................................................................................27
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Twenty-Eight Weeks Ended Twelve Weeks Ended
----------------------------- -----------------------------
December 10, December 12, December 10, December 12,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUE
<S> <C> <C> <C> <C>
Sales $97,369,021 $87,842,895 $43,480,650 $39,320,205
Other 780,749 702,469 362,262 302,848
----------- ----------- ----------- -----------
Total revenue 98,149,770 88,545,364 43,842,912 39,623,053
COSTS AND EXPENSES
Cost of sales
Food and paper 32,271,715 28,746,541 14,486,022 12,926,656
Payroll and related 33,439,935 30,274,971 14,949,885 13,611,417
Other operating costs 19,802,870 18,856,263 8,591,360 8,367,638
----------- ----------- ----------- -----------
85,514,520 77,877,775 38,027,267 34,905,711
Administrative and advertising 5,652,703 4,902,562 2,757,928 2,061,973
Impairment of long lived assets 474,062 -- 474,062 --
Interest 1,495,356 1,140,359 646,846 497,404
----------- ----------- ----------- -----------
Total costs and expenses 93,136,641 83,920,696 41,906,103 37,465,088
----------- ----------- ----------- -----------
Earnings from continuing operations
before income tax 5,013,129 4,624,668 1,936,809 2,157,965
Income taxes 1,804,000 1,572,000 697,000 733,000
----------- ----------- ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS 3,209,129 3,052,668 1,239,809 1,424,965
Income from discontinued operations
(net of applicable tax) 540,227 146,383 153,901 23,353
Gain on disposal of discontinued
operations (net of applicable tax) 539,716 -- 539,716 --
----------- ----------- ----------- -----------
EARNINGS FROM DISCONTINUED OPERATIONS 1,079,943 146,383 693,617 23,353
----------- ----------- ----------- -----------
NET EARNINGS $ 4,289,072 $ 3,199,051 $ 1,933,426 $ 1,448,318
=========== =========== =========== ===========
Basic and diluted net earnings
per share of common stock:
Continuing operations $ .62 $ .52 $ .24 $ .25
Discontinued operations .21 .03 .14 --
----------- ----------- ----------- -----------
$ .83 $ .55 $ .38 $ .25
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 10, May 28,
2000 2000
(unaudited)
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 220,900 $ 565,089
Receivables
Trade 1,375,476 1,051,129
Other 287,885 183,053
Inventories 3,681,384 3,736,857
Prepaid expenses and sundry deposits 930,629 818,591
Hotel assets held for sale - net 3,346,685 13,737,251
Prepaid and deferred income taxes 690,000 686,371
------------ ------------
Total current assets 10,532,959 20,778,341
PROPERTY AND EQUIPMENT
Land and improvements 25,705,353 24,058,978
Buildings 48,690,106 49,249,644
Equipment and fixtures 53,593,686 53,198,304
Leasehold improvements and buildings on leased land 16,422,564 14,885,289
Capitalized leases 7,317,687 7,282,687
Construction in progress 6,401,163 1,472,138
------------ ------------
158,130,559 150,147,040
Less accumulated depreciation and amortization 78,485,733 76,246,478
------------ ------------
Net property and equipment 79,644,826 73,900,562
OTHER ASSETS
Intangible assets 742,525 744,719
Investments in land 885,298 1,268,912
Property held for sale 2,609,846 2,823,309
Net cash surrender value-life insurance policies 4,280,200 4,210,900
Deferred income taxes 1,540,000 1,536,701
Other 2,522,307 2,515,884
------------ ------------
Total other assets 12,580,176 13,100,425
------------ ------------
$102,757,961 $107,779,328
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
LIABILITIES
<TABLE>
<CAPTION>
December 10, May 28,
2000 2000
(unaudited)
------------ ------------
CURRENT LIABILITIES
<S> <C> <C>
Long-term obligations due within one year
Long-term debt $ 2,690,803 $ 2,424,211
Obligations under capitalized leases 387,912 354,755
Self insurance 857,681 851,096
Accounts payable 9,928,746 7,377,357
Accrued expenses 5,459,304 6,277,932
Income Taxes 623,708 436,715
------------ ------------
Total current liabilities 19,948,154 17,722,066
LONG-TERM OBLIGATIONS
Long-term debt 18,625,226 26,330,582
Obligations under capitalized leases 4,716,196 4,511,312
Self insurance 2,996,069 2,924,433
Other 2,092,862 2,124,272
------------ ------------
Total long-term obligations 28,430,353 35,890,599
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 60,289,165 60,345,436
------------ ------------
67,651,444 67,707,715
Retained earnings 17,252,789 14,196,749
------------ ------------
84,904,233 81,904,464
Less cost of treasury stock (2,281,865 and 2,017,526 shares) 30,524,779 27,737,801
------------ ------------
Total shareholders' equity 54,379,454 54,166,663
------------ ------------
$102,757,961 $107,779,328
============ ============
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TWENTY-EIGHT WEEKS ENDED DECEMBER 10, 2000 AND DECEMBER 12, 1999
(UNAUDITED)
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 30, 1999 $ 7,362,279 $ 60,401,456 $ 9,804,637 $(22,280,869) $ 55,287,503
Net earnings for twenty-eight weeks -- -- 3,199,051 -- 3,199,051
Treasury shares acquired -- -- -- (4,012,917) (4,012,917)
Treasury shares reissued -- (14,947) -- 45,022 30,075
Employee Stock Ownership Plan -- (20,845) -- -- (20,845)
Cash dividends - $.23 per share -- -- (1,319,045) -- (1,319,045)
------------ ------------ ------------ ------------ ------------
Balance at December 12, 1999 7,362,279 60,365,664 11,684,643 (26,248,764) 53,163,822
Net earnings for twenty-four weeks -- -- 2,946,490 -- 2,946,490
Treasury shares reissued -- (396) -- 1,089 693
Treasury shares acquired -- -- (1,490,126) (1,490,126)
Employee Stock Ownership Plan -- (19,832) -- -- (19,832)
Cash dividends - $.08 per share -- -- (434,384) -- (434,384)
------------ ------------ ------------ ------------ ------------
Balance at May 28, 2000 7,362,279 60,345,436 14,196,749 (27,737,801) 54,166,663
Net earnings for twenty-eight weeks -- -- 4,289,072 -- 4,289,072
Treasury shares reissued -- (30,994) -- 121,564 90,570
Treasury shares acquired -- -- -- (2,908,542) (2,908,542)
Employee Stock Ownership Plan -- (25,277) -- (25,277)
Cash dividends - $.24 per share -- -- (1,233,032) -- (1,233,032)
------------ ------------ ------------ ------------ ------------
Balance at December 10, 2000 $ 7,362,279 $ 60,289,165 $ 17,252,789 $(30,524,779) $ 54,379,454
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
TWENTY-EIGHT WEEKS ENDED DECEMBER 10, 2000 AND DECEMBER 12, 1999
(UNAUDITED)
2000 1999
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,289,072 $ 3,199,051
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 4,628,674 5,373,742
(Gain) loss on disposition of assets (678,170) 242,360
Impairment of long-lived assets 474,062 --
Changes in assets and liabilities:
Increase in receivables (429,179) (141,086)
Decrease (increase) in inventories 55,473 (243,421)
Increase in prepaid expenses and sundry deposits (112,038) (121,986)
Increase in accounts payable 2,145,244 1,370,680
Decrease in accrued expenses (818,628) (92,604)
Increase (decrease) in accrued income taxes 183,364 (187,220)
Increase in other assets (107,346) (133,887)
Increase (decrease) in self insured obligations 78,221 (520,913)
Decrease in other liabilities (81,410) (189,115)
------------ ------------
Net cash provided by operating activities 9,627,339 8,555,601
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to property and equipment (11,389,061) (9,965,051)
Proceeds from disposition of property 12,685,578 170,214
Decrease (increase) in other assets 27,814 (43,174)
------------ ------------
Net cash provided by (used in) investing activities 1,324,331 (9,838,011)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from borrowings 5,500,000 9,500,000
Payment of long-term obligations (13,125,723) (3,318,971)
Cash dividends paid (826,887) (878,432)
Treasury share transactions (2,817,972) (3,982,842)
Employee Stock Ownership Plan (25,277) (20,845)
------------ ------------
Net cash (used in) provided by financing activities (11,295,859) 1,298,910
------------ ------------
Net (decrease) increase in cash and equivalents (344,189) 16,500
Cash and equivalents at beginning of year 565,089 200,200
------------ ------------
Cash and equivalents at end of quarter $ 220,900 $ 216,700
============ ============
Supplemental disclosures:
Interest paid $ 1,693,784 $ 1,255,533
Income taxes paid 2,231,935 1,915,252
Income tax refunds received -- 82,318
Dividends declared but not paid 406,145 440,613
The accompanying notes are an integral part of these statements
</TABLE>
7
<PAGE> 8
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Second Quarter ended December 10, 2000
NOTE A - DESCRIPTION OF THE BUSINESS
Frisch's Restaurants, Inc., headquartered in Cincinnati, Ohio, operates and
sub-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 a high rise hotel
in metropolitan Cincinnati, which is accounted for as a discontinued operation
(see note C). Trademarks which the Company has the right to use include
"Frisch's," "Big Boy," "Golden Corral" and "Quality Hotel."
NOTE B - ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows:
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. Certain
reclassifications have been made to prior year information to conform to the
current year presentation.
Fiscal Year
-----------
The Company's fiscal year is the 52 or 53 week period ending the Sunday nearest
to the last day of May. The first quarter of each fiscal year contains sixteen
weeks, while the last three quarters each normally contain twelve weeks. Every
fifth year, the additional week needed to make a 53-week year is added to the
fourth quarter, resulting in a thirteen-week fourth quarter. The current 2001
fiscal year will have a thirteen-week fourth quarter.
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 $410,000
were included in accounts payable as of December 10, 2000.
Receivables
-----------
The Company values its trade notes and accounts receivable on the reserve
method. The reserve balance was immaterial at December 10, 2000 and May 28,
2000.
Inventories
-----------
Inventories, comprised principally of food items, are valued at the lower of
cost, determined by the first-in, first-out method, or market.
8
<PAGE> 9
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - 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 quarter ended December 10, 2000, a Big Boy restaurant in which cash
flow losses had been experienced was identified for closing. A non-cash pretax
charge of $500,000 was recorded as an impairment loss to reduce the carrying
value of the property to estimated net realizable value, as determined by the
Company's past experience in disposing of unprofitable restaurant properties.
The Company expects to dispose of this property within the next twelve months.
Its net realizable value is carried on the Company's balance sheet as a
component of the long-term asset caption "Property held for sale." Certain
surplus property 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, approximating $710,000, 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 of the initial fee begins when the
restaurant opens and is computed using the straight-line method over the 15-year
term of the individual restaurant franchise agreement.
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 replaceable items such as
uniforms and china. New store opening costs are charged to expense as incurred.
Opening costs for Golden Corral restaurants for the twenty-eight weeks ended
December 10, 2000 and December 12, 1999 were $624,000 and $761,000 respectively,
and was $238,000 and $306,000 respectively, for the twelve weeks ended December
10, 2000 and December 12, 1999. No opening costs were incurred for Big Boy
restaurants during the comparable twenty-eight and twelve week periods.
9
<PAGE> 10
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - ACCOUNTING POLICIES (CONTINUED)
Benefit Plans
-------------
The Company has two qualified defined benefit pension plans covering
substantially all of its eligible employees. Plan benefits are based on
years-of-service and other factors. The Company's funding policy is to
contribute at least annually 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. In addition, the Company has an unfunded Executive Retirement Plan that
provides a supplemental retirement benefit to the executive officers of the
Company and certain other "highly compensated employees" whose benefits under
the qualified plans are reduced when their compensation exceeds Internal Revenue
Code imposed limitations or when elective salary deferrals are made to the
Company's non-qualified Executive Savings Plan.
Commencing in the year 2000, the executive officers of the Company and certain
other "highly compensated employees" began receiving comparable pension benefits
through a non-qualified Nondeferred Cash Balance Plan instead of accruing
additional benefits under the qualified defined benefit pension plans and the
unfunded Executive Retirement Plan.
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
--------------------
The agreement under which the Company has the right to operate and sub-license
others to operate Big Boy restaurants calls for no license fees to be paid by
the Company. Revenue from franchise fees, based on sales of Big Boy restaurants
sub-licensed to other operators, is recorded on the accrual method as earned.
Initial license fees are recognized as revenue when the sub-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.
Income Taxes
------------
Taxes are provided on all items included in the statement of earnings regardless
of when such items are reported for tax purposes. The provision for income taxes
in all periods has been computed based on management's estimate of the tax rate
for the entire year.
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 C - DISCONTINUED OPERATIONS
In March 2000, the Company announced strategic plans to divest the Company's two
hotel operations - the Clarion Riverview Hotel and the Quality Hotel Central.
The plans called for continuing to operate the hotels until buyers were found
and accordingly, amounts in the financial statements and related notes for all
periods shown have been restated to reflect discontinued operations accounting.
In November 2000, the Company disposed of the Clarion Hotel Riverview for
$12,000,000 cash. Net of selling expenses, the sale resulted in a gain on
disposal of approximately $765,000 net of taxes. The sale of the Quality Hotel
Central is anticipated to be completed before the end of the current fiscal
year. Net of selling expenses, the sale is expected to result in an estimated
loss on disposal of approximately $225,000 net of taxes. Provision for the
estimated loss is reflected in the overall net gain on disposition of
discontinued operations, as reported in conjunction with the related results of
discontinued operations. The carrying value of the Quality Hotel Central, which
is comprised of real property, equipment, furnishings and fixtures, has been
lowered to reflect the anticipated loss, and is carried as a current asset under
the caption "Hotel assets held for sale - net".
The following information summarizes results of discontinued operations:
<TABLE>
<CAPTION>
Twenty-eight weeks ended Twelve weeks ended
Dec. 10, Dec. 12, Dec. 10, Dec. 12,
2000 1999 2000 1999
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Total revenue $5,786 $6,892 $2,077 $2,975
Total costs and expenses 4,942 6,670 1,837 2,939
------ ------ ------ ------
Earnings before income tax 844 222 240 36
Income tax 304 76 86 13
------ ------ ------ ------
Earnings from discontinued operations 540 146 154 23
Gain on disposal of discontinued
operations (net of tax of $303) 540 -- 540 --
------ ------ ------ ------
Net earnings from discontinued operations $1,080 $ 146 $ 694 $ 23
====== ====== ====== ======
</TABLE>
The current year information does not include provisions for depreciation
expense. The prior year includes depreciation charges of $411,000 and $945,000
respectively, for the twelve and twenty-eight weeks ended December 12, 1999.
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
December 10, 2000 May 28, 2000
---------------------------- ----------------------------
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 $ -- $ 7,000 $ -- $17,000
Term loan 1,500 825 1,500 1,700
Golden Corral facility -
Construction loan -- 3,000 -- 1,000
Term loans 1,191 7,800 924 6,631
------- ------- ------- -------
$ 2,691 $18,625 $ 2,424 $26,331
======= ======= ======= =======
</TABLE>
11
<PAGE> 12
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LONG-TERM DEBT (CONTINUED)
The portion payable after one year matures as follows:
<TABLE>
<CAPTION>
December 10, May 28,
2000 2000
----------- ---------
(in thousands)
<S> <C> <C>
Period ending in 2002 $ 12,115 $ 20,501
2003 1,398 1,283
2004 1,513 1,172
2005 1,641 1,270
2006 1,607 1,372
Subsequent to 2006 351 733
--------------- ---------------
$ 18,625 $ 26,331
=============== ===============
</TABLE>
The revolving credit loan is a $20,000,000 unsecured line of credit, $7,000,000
of which is outstanding at December 10, 2000. In September 2000, the maturity
date of this credit loan was extended to September 1, 2002. Interest rates,
ranging from 7.51% to 7.70% as of December 10, 2000, 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, but not to exceed 8.5%. The rate in effect as of December 10,
2000 was 8.5%.
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 December 10, 2000, the
Company had cumulatively borrowed $13,000,000 of which $3,000,000 was a
Construction Loan and $10,000,000 had been converted to Term Loans. In September
2000, the availability of draws was extended to August 31, 2002. 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. Quarterly CD based rates ranging from 7.51% to 7.73% were in effect
as of December 10, 2000. 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. Six Term Loans totaling $10,000,000 have fixed
interest rates, the weighted average of which is 7.95%, and are being repaid in
84 equal monthly installments of principal and interest aggregating $156,224
through periods expiring in 2007. Any outstanding construction loan that has not
been converted into a Term Loan shall mature and be payable in full on September
1, 2002.
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 December 10, 2000.
Compensating balances are not required by any of these loan agreements.
As of December 10, 2000, the Company had three outstanding letters of credit
totaling $598,000 in support of its self-insurance program.
12
<PAGE> 13
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - LEASED PROPERTY
The Company has capitalized the leased property of 34% 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 2005. The Company also
occupies office space under an operating lease that expires during 2003, with a
renewal option available through 2013.
An analysis of the capitalized leased property follows:
<TABLE>
<CAPTION>
Asset balances at
------------------------------------------
December 10, May 28,
2000 2000
------------- -------------
(in thousands)
<S> <C> <C>
Restaurant facilities $ 6,306 $ 6,306
Equipment 1,012 977
------------- -------------
7,318 7,283
Less accumulated amortization (4,659) (4,839)
------------- --------------
$ 2,659 $ 2,444
============= =============
</TABLE>
Total rental expense of operating leases for continuing operations was $907,000
and $752,000 respectively, for the twenty eight weeks ended December 10, 2000
and December 12, 1999, and was $412,000 and $315,000 respectively, for the
twelve weeks ended December 10, 2000 and December 12, 1999.
Future minimum lease payments under capitalized leases and operating leases for
continuing operations having an initial or remaining term of one year or more
follow:
<TABLE>
<CAPTION>
Capitalized Operating
Period ending December 10, leases leases
-------------------------- -------------- ------------
(in thousands)
<S> <C> <C>
2001 $ 930 $ 1,271
2002 902 1,192
2003 902 917
2004 879 758
2005 812 473
2006 to 2018 3,409 2,771
---------- ------------
Total 7,834 $ 7,382
============
Amount representing interest (2,730)
----------
Present value of obligations 5,104
Portion due within one-year (388)
----------
Long-term obligations $ 4,716
==========
</TABLE>
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. 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.
13
<PAGE> 14
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
The 1984 Stock Option Plan expired May 8, 1994. As of December 10, 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 (the
latest of which was declared and paid in fiscal year 1997) in accordance with
the anti-dilution provisions of the Plan.
Transactions involving both the 1993 and the 1984 Plans are summarized below:
<TABLE>
<CAPTION>
Twenty-eight weeks ended Twenty-eight weeks ended
December 10, 2000 December 12, 1999
------------------------------ -------------------------------
No. of Option No. of Option
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 118,738 $8.31 to $17.05 169,163 $ 8.31 to $20.83
Exercisable at
beginning of year 69,987 $8.31 to $17.05 108,580 $12.38 to $20.83
Granted during the twenty-eight weeks 107,478 $9.94 to $12.06 27,750 $10.06 to $10.25
Exercised during the twenty-eight weeks 0 0
Expired during the twenty-eight weeks 0 68,425 $20.83
Forfeited during the twenty-eight weeks 1,417 $9.94 to $12.38 0
Outstanding at end of quarter 224,799 $8.31 to $17.05 128,488 $ 8.31 to $17.05
Exercisable at end of quarter 83,155 $8.31 to $17.05 60,404 $ 8.31 to $17.05
</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
years 2000 and 1999 would have amounted to annual charges of approximately
$14,000 and $16,000, respectively, 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>
2000 1999
---- ----
<S> <C> <C>
Dividend yield 3.18% 2.75%
Expected volatility 24% 30%
Risk free interest rate 5.82% 5.08%
Expected lives 5 years 5 years
Weighted average fair value of options granted $2.32 $2.94
</TABLE>
Pro forma disclosures of net income and basic and diluted net earnings per share
for the twelve and twenty-eight weeks ended December 10, 2000 and December 12,
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 that 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
non-qualified Executive Savings Plan. Shares reserved under all plans have been
adjusted for stock dividends. There are no other outstanding options, warrants
or rights.
14
<PAGE> 15
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - CAPITAL STOCK (CONTINUED)
Stock Repurchase Program
------------------------
The program that authorized the repurchase of up to 1,000,000 shares of the
Company's common stock was completed in September 2000. A total of 875,986
shares were repurchased over the two-year life of the program at a cost of
$8,779,000, including 211,680 shares at a cost of $2,211,000 since the beginning
of fiscal year 2001. On October 2, 2000, the Board of Directors authorized a
replacement program to repurchase up to 500,000 additional shares from time to
time on the open market or through block trades during a two-year time frame.
Through December 10, 2000, the Company repurchased 61,500 shares at a cost of
$697,000 pursuant to the new authorization. During the twenty-eight weeks ended
December 10, 2000, the Company repurchased a total of 273,180 shares at a cost
of $2,908,000.
Earnings Per Share
------------------
Basic earnings per share is based on the weighted average number of outstanding
common shares during the period presented. Diluted earnings per share includes
the effect of common stock equivalents, which assumes the exercise and
conversion 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 December 10, 2000 5,122,414 15,664 5,138,078
Year to date December 10, 2000 5,167,366 12,801 5,180,167
Quarter ending December 12, 1999 5,786,815 1,147 5,787,962
Year to date December 12, 1999 5,832,589 1,293 5,833,882
</TABLE>
NOTE G - PENSION PLANS
The Company sponsors two qualified defined benefit pension plans covering
substantially all of its eligible employees, plus two non-qualified supplemental
retirement plans for "highly compensated employees." The changes in the
Company's benefit obligation are computed as follows for the years ended May 28,
2000 and May 30, 1999 (latest available data):
<TABLE>
<CAPTION>
(in thousands)
2000 1999
---- ----
<S> <C> <C>
Projected benefit obligation at beginning of year $ 15,768 $ 14,765
Service cost 1,306 1,264
Interest cost 1,114 1,018
Actuarial gain (176) (289)
Benefits paid (2,120) (990)
-------------- -----------
Projected benefit obligation at end of year $ 15,892 $ 15,768
============== ===========
</TABLE>
The changes in the plans' assets are computed as follows for the years ended May
28, 2000 and May 30, 1999 (latest available data):
<TABLE>
<CAPTION>
(in thousands)
2000 1999
---- ----
<S> <C> <C>
Fair value of plan assets at beginning of year $ 23,726 $ 23,189
Actual return on plan assets 1,615 1,317
Employer contributions 421 402
Benefits paid (2,284) (1,182)
------------ ----------
Fair value of plan assets at end of year $ 23,478 $ 23,726
============ ==========
</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 28, 2000 and May 30, 1999 (latest
available data):
<TABLE>
<CAPTION>
(in thousands)
2000 1999
---- ----
<S> <C> <C>
Funded status $ 7,585 $ 7,958
Unrecognized net actuarial gain (6,277) (6,865)
Unrecognized prior service cost 529 599
Unrecognized net transition (asset) (474) (711)
------- -------
Prepaid benefit cost $ 1,363 $ 981
======= =======
</TABLE>
The weighted - average actuarial assumptions used were:
<TABLE>
<CAPTION>
As of
May 28, May 30,
2000 1999
------- -------
<S> <C> <C>
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 twenty-eight weeks ended December
10, 2000 and December 12, 1999 was $91,000 and $33,000 respectively, and was
$42,000 and $(4,000) respectively, for the twelve weeks ended December 10, 2000
and December 12, 1999.
16
<PAGE> 17
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - SEGMENT INFORMATION
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 operation (see note C - Discontinued Operations). Under Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of
an Enterprise and Related Information" the Company now has two reportable
segments within the food service industry: Big Boy restaurants and Golden Corral
restaurants. Financial information by operating segment is as follows:
<TABLE>
<CAPTION>
Twenty-eight weeks ended Twelve Weeks ended
Dec. 10, Dec. 12, Dec. 10, Dec. 12,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Revenue
<S> <C> <C> <C> <C>
Big Boy $ 86,116 $ 82,752 $ 37,945 $ 36,367
Franchise & other fees from sub-licenses 714 627 335 258
--------- --------- --------- ---------
Total Big Boy 86,830 83,379 38,280 36,625
Golden Corral 11,320 5,166 5,563 2,998
--------- --------- --------- ---------
$ 98,150 $ 88,545 $ 43,843 $ 39,623
========= ========= ========= =========
Operating profit (loss)
Big Boy $ 9,066 $ 8,357 $ 3,978 $ 3,663
Opening expense -- -- -- --
--------- --------- --------- ---------
Total Big Boy 9,066 8,357 3,978 3,663
Golden Corral 690 315 245 148
Opening expense (624) (761) (238) (306)
--------- --------- --------- ---------
Total Golden Corral 66 (446) 7 (158)
$ 9,132 $ 7,911 $ 3,985 $ 3,505
========= ========= ========= =========
Depreciation and amortization
Big Boy $ 4,207 $ 4,284 $ 1,734 $ 1,843
Golden Corral 422 145 211 94
Discontinued operations -- 945 -- 411
--------- --------- --------- ---------
$ 4,629 $ 5,374 $ 1,945 $ 2,348
========= ========= ========= =========
Capital Expenditures
Big Boy $ 2,069 $ 1,667 $ 867 $ 602
Golden Corral 9,300 7,818 4,330 2,604
Discontinued operations 20 480 -- 242
--------- --------- --------- ---------
$ 11,389 $ 9,965 $ 5,197 $ 3,448
========= ========= ========= =========
<CAPTION>
As of
December 10, May 28,
2000 2000
----------- ---------
Identifiable assets
<S> <C> <C>
Big Boy $ 74,751 $ 78,289
Golden Corral 24,261 15,096
Discontinued operations 3,746 14,394
--------- ---------
$ 102,758 $ 107,779
========= =========
</TABLE>
17
<PAGE> 18
Frisch's Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - RELATED PARTY TRANSACTIONS
During the twenty-eight weeks ended December 10, 2000 and December 12, 1999, a
Big Boy sub-licensed restaurant owned by an officer and director of the Company
and two Big Boy sub-licensed 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.
During the fiscal year ended May 30, 1999, three unprofitable Big Boy
restaurants that closed at the end of 1997 were sold and sub-licensed to a Big
Boy franchise operator, a minority shareholder and the president of which was an
officer of the Company prior to May 31, 2000. During the year ended May 31,
2000, another unprofitable Big Boy restaurant that closed in 1997 was sub-leased
and sub-licensed to this Big Boy franchise operator. In addition, this Big Boy
franchise operator has acquired three other Big Boy sub-licensed restaurants
from other sub-licensees of the Company. During the twenty-eight weeks ended
December 10, 2000 and December 12, 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 J - SUBSEQUENT EVENTS
In January 2001, the Company reached an agreement with Liggett Restaurant
Enterprises LLC, giving the Company exclusive, irrevocable ownership of certain
rights to the "Big Boy" trademark, trade name and service mark in its core
operating areas in Ohio, Kentucky and Indiana, and in parts of Tennessee. In
exchange for these rights and the sum of $1,230,000, the Company sold Liggett
the Company's sub-franchise "Big Boy" rights in the states of Florida, Texas,
Oklahoma and Kansas. The Company is to receive $500,000 in cash initially, and a
note receivable for $730,000. After discounting the note, the Company will
record pretax income of $1,100,000 in the third quarter of fiscal 2001.
Also in January 2001, the Company announced the closing of an unprofitable Big
Boy restaurant in Downtown Cincinnati. The Company expects to record a charge to
pretax earnings in the third quarter of fiscal 2001 of approximately $1,075,000,
principally for a write-off of leasehold improvements and future occupancy
costs, including rent, property taxes and other executory costs.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
------------------------------------------------------------------------------
OF OPERATIONS
-------------
Overview
--------
Earnings from continuing operations for the twelve-week second quarter ended
December 10, 2000 were $1,240,000, or $.24 per share, compared to $1,425,000 or
$.25 per share in last year's comparable quarter. This year's second quarter was
adversely impacted by an impairment of assets charge of $500,000 ($320,000 net
after income tax, or $.06 per share) to lower the carrying value of a Big Boy
restaurant that management decided to close prior to quarter end. Total revenue
from continuing operations for the second quarter ended December 10, 2000 was
$43,843,000, an increase of $4,220,000 or 10.7 percent from the comparable
quarter last year.
For the twenty-eight weeks ended December 10, 2000, earnings from continuing
operations were $3,209,000 (including the impairment charge), or $.62 per share,
versus $3,053,000, or $.52 per share last year. Total revenue increased 10.8
percent to $98,150,000 from $88,545,000 a year ago.
In March 2000, the Company announced strategic plans to divest the Company's two
hotel operations. The plans called for continuing to operate the hotels until
they were sold. The Company's net earnings for the twelve and twenty-eight weeks
ended December 10, 2000 included earnings from discontinued operations of
$694,000 or $.14 per share and $1,080,000 or $.21 per share, respectively. Net
earnings for the twelve and twenty-eight weeks ended December 10, 1999 included
earnings from discontinued operations of $23,000 or $.00 per share and $146,000
or $.03 per share, respectively. Included in the twelve and twenty-eight weeks
ended December 10, 2000 is an overall net gain on disposal of discontinued
operations of $540,000 or $.11 per share. This reflects the actual disposal of
the Clarion Hotel Riverview for $12,000,000 cash in November 2000, which
resulted in a gain of approximately $765,000 net of selling expenses and tax.
Also reflected in the net gain is the future sale of the Quality Hotel Central,
anticipated to be completed before the end of the current fiscal year, which is
expected to result in a loss of approximately $225,000 net of selling expenses
and tax.
The twelve and twenty-eight weeks ended December 10, 2000 do not include a
provision for hotel depreciation, in accordance with discontinued operations
accounting standards. Depreciation expense of $411,000 and $945,000 is reflected
in discontinued operations for last year's twelve and twenty-eight weeks ended
December 12, 1999. The discussion of results of operations has been adjusted to
exclude comparisons of the hotel summary information shown in the table below:
<TABLE>
<CAPTION>
Twenty-eight weeks ended Twelve Weeks Ended
Dec. 10, Dec. 12, Dec. 10, Dec. 12,
2000 1999 2000 1999
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Total revenue $5,786 $6,892 $2,077 $2,975
Total costs and expenses 4,942 6,670 1,837 2,939
------ ------ ------ ------
Earnings before income tax 844 222 240 36
Income tax 304 76 86 13
------ ------ ------ ------
Earnings from discontinued operations 540 146 154 23
Gain on disposal of discontinued
operations (net of tax) 540 -- 540 --
------ ------ ------ ------
Net earnings from discontinued operations $1,080 $ 146 $ 694 $ 23
====== ====== ====== ======
</TABLE>
Results of Operations
---------------------
Same store sales in Big Boy restaurants improved by 4.3 percent during the first
two quarters, including 4.4 percent for the twelve week period ending December
10, 2000, marking the thirteenth consecutive quarter that Big Boy same store
sales gains have been achieved. While introductions of new menu items with
higher price points helped to produce higher dining room sales, strong sales
from carryout and drive-thru trade continued to drive the majority of the sales
increase. In addition, menu prices were increased 1.5 percent shortly before
last year's first quarter ended and were raised just under 2 percent near the
end of the third quarter of fiscal 2000, and approximately 1.5 percent at the
end of this year's first quarter. Another price increase is currently being
planned for February 2001. The Company decided to close one Big Boy restaurant
during the second quarter. Four new Big Boy restaurants, including the
replacement of an older restaurant on its existing site, are currently being
planned to open in calendar
19
<PAGE> 20
year 2001. These new restaurants will debut a redesigned prototype. After the
second quarter ended, an additional underperforming Big Boy restaurant was
identified for closing.
Sales from Golden Corral restaurants were $11,320,000 during the first two
quarters, an increase of $6,154,000 from last year's first two quarters. The
increase accounted for approximately two-thirds of the Company's 10.8 percent
increase in revenue. Menu prices have not been increased. Five Golden Corral
restaurants were in operation for the entire first two-quarter period this year,
a sixth one opened at the end of July 2000, and a seventh in September 2000.
Only one Golden Corral was in operation for the entire two-quarter period last
year, while two more were opened during last year's first quarter, and a fourth
one opened near the end of last year's second quarter. The Company plans to
build a total of 41 Golden Corrals through 2007, including four more that are
currently under construction, one each planned to open respectively in January,
February, April and June 2001.
Cost of sales for the first two quarters ended December 10, 2000 increased
$7,637,000 or 9.8 percent higher than last year's two quarter period, roughly
proportionate to the 10.8 percent revenue increase. As a percentage of revenue,
cost of sales was 87.1 percent and 87.9 percent, respectively, in the first two
quarters of fiscal years 2001 and 2000. 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 31.8 percent and 31.6 percent of revenue, respectively, during the first
two quarters of fiscal years 2001 and 2000. Food cost for Big Boy restaurants
continues to benefit from higher sales of carryout and drive-thru meals, which
usually have lower food cost percentages than typical dining room meals.
However, higher prices paid for certain commodities, especially pork and beef,
continue to drive food and paper costs higher. The impact of food cost in Golden
Corral restaurants, which as a percentage of sales is much higher than in Big
Boy restaurants, resulted in consolidated food and paper costs of 32.9 percent
and 32.5 percent of revenue, respectively, during the first two quarters of
fiscal years 2001 and 2000.
Payroll and related expenses were 34.1 percent and 34.2 percent of revenue,
respectively, during the first two quarters of fiscal years 2001 and 2000.
Payroll and related expenses benefited from favorable claims experience in the
Company's self-insurance programs, as reserve estimates were lowered in the
first quarters of both fiscal years. Without these adjustments, payroll and
related expenses would have been 34.4 percent and 34.6 percent of revenue,
respectively, in the first two quarters of fiscal years 2001 and 2000. Higher
pay rates driven by tight labor conditions continue to adversely affect these
percentages. In addition, the first two quarters ended December 10, 2000
included higher expense for the Company's variable compensation program for
restaurant management. However, two factors kept this year's first two quarters'
payroll percentage below the percentage for last year's first two quarters.
First, the costs of certain employee benefits are fixed and do not rise with
higher levels of pay or higher sales levels. Second, payroll and related expense
percentages for Golden Corral restaurants are lower than for Big Boy
restaurants. Therefore, more Golden Corral restaurants in operation during this
year's first two quarters resulted in lower consolidated percentages when
compared against last year.
It remains likely that the federal minimum wage will soon be increased by a
dollar per hour to be phased in over a two-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 decreased to 20.2 percent of revenue during the first
two quarters ended December 10, 2000 from 21.3 percent in last year's first
half. As these expenses tend to be more fixed in nature, the sales increases
cause these costs to be a lower percentage of revenue. Other operating costs in
this year's first two quarters include opening costs of approximately $624,000
for the Company's Golden Corral restaurants (including $296,000 for future
restaurants). Last year's first half included opening costs of $761,000
(including $174,000 for restaurants that were not yet in operation). Excluding
all opening expenses, pretax operating earnings for Golden Corral restaurants
would have been $690,000 in this year's first two quarters compared with
$315,000 in the first half of last year.
Results for the first two quarters of Fiscal 2001 were adversely affected by a
$500,000 impairment of assets charge taken in the second quarter to lower the
carrying value of a Big Boy restaurant.
Administrative and advertising expense during the first two quarters of fiscal
2001 increased $750,000 or 15.3 percent higher than last year's two quarter
period. This year's increase is principally due to higher spending for Big Boy
advertising. The Company's policy is to spend a constant percentage of sales for
advertising. Other components of the increase include higher corporate bonus
accruals commensurate with the earnings improvement and professional fees
incurred while investigating whether it was feasible to purchase certain assets
that became available due to the bankruptcy of Elias Brothers Restaurants, Inc.,
the holder of the Big Boy trademark.
20
<PAGE> 21
Interest expense during the two quarters ended December 10, 2000, increased
$355,000 or 31 percent higher than last year's first two quarters. The increase
primarily resulted from the impact of borrowing $11,000,000 over the course of
fiscal 2000 together with $5,500,000 borrowed to date in fiscal 2001. Proceeds
from the sale of the hotel properties are being used to repay debt which should
result in substantial, albeit temporary, interest savings, as continued
borrowing is likely for the foreseeable future to fund construction of Golden
Corral restaurants and Big Boy restaurant expansion.
The estimated effective tax rate as a percentage of pre-tax earnings is 36
percent for the two quarters ended December 10, 2000, compared with 34 percent
in last year's first two quarters. This year's tax rate is higher for two
reasons. Higher earnings expectations in fiscal 2001 causes federal tax credits
to be a lower percentage of pretax earnings which in turn results in a higher
effective tax rate. This year's estimated tax rate also contains higher
provisions for state income taxes principally associated with expected gains
from the sale of the hotel properties.
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 that such position does not hinder the
Company's ability to satisfactorily retire its obligations when due, as
significant cash flow is provided by operations and substantially all of the
Company's retail sales are cash or credit card sales. In addition, the Company's
revolving credit line is readily available when needed. As of December 10, 2000,
the Company's working capital deficit was $9,415,000. The positive working
capital position that had been established since the third quarter of fiscal
2000, which reflected the classification of the assets of the Company's
discontinued hotel operations as current assets, was eliminated during the
second quarter by the sale of the Clarion Hotel Riverview, the proceeds of which
were used to retire long-term debt.
Cash provided by operating activities through the second quarter of fiscal 2001
was $9,627,000, an increase of $1,071,000 over last year's first two quarters.
These cash flows were generated principally from net income and depreciation.
Together with funds from external borrowing, these cash flows 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 second quarter of fiscal 2001 included
$11,389,000 in capital costs, an increase of $1,424,000 from last year's first
two quarters. This year's capital spending included $9,300,000 for Golden
Corral, $780,000 to remodel Big Boy restaurants, $130,000 for new Big Boy
restaurant construction, and $1,179,000 in routine equipment replacements and
other capital outlays. Proceeds from property sales were $12,686,000 during this
year's first two quarters, principally from the sale of the Clarion Hotel
Riverview. Proceeds from property sales transacted during last year's first two
quarters were $170,000. During the next two quarters, the Company is expecting
sale proceeds of at least $4,000,000 from the sale of the Quality Hotel Central
and certain closed restaurants and/or excess property. Sale proceeds from the
hotels are being used in the short term to repay debt and will ultimately be
reinvested in Big Boy and Golden Corral restaurant expansion. Sale proceeds from
closed restaurants and excess properties are generally used for working capital.
Financing activities through the second quarter of fiscal 2001 included
$4,000,000 of new debt borrowed against the Golden Corral credit facility. In
addition, $1,500,000 of new debt was borrowed on the $20,000,000 revolving line
of credit. Proceeds from the sale of the Clarion Hotel Riverview allowed the
Company to repay $11,500,000 against the revolving line of credit during the
quarter ended December 10, 2000. Scheduled long-term debt payments of $1,626,000
were also made. Regular quarterly $.08 per share cash dividends to shareholders
totaling $827,000 were paid during the two quarters ended December 10, 2000. The
Company had a two-year stock repurchase program that expired October 5, 2000.
Through the first two quarters of fiscal 2001, the Company repurchased 211,700
of its common shares at a cost of $2,211,000, completing the two-year program
with 876,000 shares repurchased at a cost of $8,779,000. On October 2, 2000, the
Board of Directors authorized a replacement program to repurchase up to 500,000
additional shares from time to time on the open market or through block trades
during a two-year time frame. Through December 10, 2000, the Company repurchased
61,500 shares at a cost of $697,000 pursuant to the replacement program. During
the twenty-eight weeks ended December 10, 2000, the Company repurchased a total
of 273,200 shares costing $2,908,000.
The grand opening of the first new Company-owned Big Boy restaurant in over
three years is set for April 2001. Current Big Boy restaurant expansion plans
also call for opening three Big Boy restaurants in calendar 2001, one of which
is a replacement of an older restaurant on its existing site. Construction of
all three restaurants should be underway by the end of the fiscal year in May
2001. The estimated cash outlay to build and equip each of these
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restaurants is $1,550,000, excluding land. Several new sites for Big Boy
expansion will likely also be acquired during the year. Costs to remodel eight
Big Boy restaurants scheduled over the remainder of fiscal 2001 are expected to
be approximately $500,000.
The Company's development agreements with Golden Corral Franchising Systems,
Inc. call for the Company to open 41 Golden Corral restaurants through December
31, 2007. Seven restaurants were in operation as of December 10, 2000. In
addition, four more Golden Corrals are scheduled to be open by June 2001. On
average, the cost to build and equip each Golden Corral restaurant is
approximately $2,700,000, including land.
Expansion costs are being funded through a combination of cash flow, an
exclusive credit facility for Golden Corral construction and a revolving credit
loan. The Company's Golden Corral credit facility provides for unsecured
borrowing of up to $20,000,000 for Golden Corral construction through August 31,
2002, of which $7,000,000 remained available as of December 10, 2000. The
revolving loan is a $20,000,000 unsecured line of credit, of which $13,000,000
was available for borrowing as of December 10, 2000.
Risk Factors and 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; incorrect restaurant site
selection; 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. Many of these risks and uncertainties could cause significant sales
and cash flow reductions at existing restaurants that could result in the
permanent closure of the affected restaurant(s) with an impairment of assets
charge taken against earnings. The Company undertakes no obligation to update
the forward-looking statements that may be contained in this MD&A.
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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
$7,000,000 as of December 10, 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 currently 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.
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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 2,
2000.
b) Directors elected on October 2, 2000 to serve until the 2002
annual meeting of shareholders:
Jack C. Maier William J. Reik, Jr.
William A. Mauch Lorrence T. Kellar
Directors whose terms continued after the meeting (serving
until the 2001 annual meeting of shareholders):
Craig F. Maier Daniel W. Geeding
Malcolm M. Knapp Blanche F. Maier
Dale P. Brown
c) The following matters were voted upon:
1) Election of Directors to serve until the 2002 annual
meeting of shareholders:
Withheld
Name For Authority
---- --- ---------
Jack C. Maier 4,735,325 132,900
William A. Mauch 4,710,337 157,888
William J. Reik, Jr. 4,719,048 149,177
Lorrence T. Kellar 4,709,048 159,177
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
--- ------- -------
4,802,891 61,565 3,749
d) Not applicable
Item 6. Exhibits and reports on Form 8-K.
a) Exhibits
(3) Articles of Incorporation and By-Laws
-----------------------------------------
(3) (a) Exhibit (3) (a) to the Registrant's Form
10-K Annual Report for 1993, being the Third
Amended Articles of Incorporation, is incorporated
herein by reference.
(3) (b) Exhibit (3) (a) to the Registrant's Form
10-Q Quarterly Report for December 15, 1996, being
the Code of Regulations, is incorporated herein by
reference.
(3) (c) Exhibit (3) (b) to the Registrant's Form
10-Q Quarterly Report for December 15, 1996, being
Amendments to Regulations adopted October 1, 1984,
is incorporated herein by reference.
(3) (d) Exhibit (3) (c) to the Registrant's Form
10-Q Quarterly Report for December 15, 1996, being
Amendments to Regulations adopted October 24, 1996,
is incorporated herein by reference.
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<PAGE> 25
(10) Material Contracts
-----------------------
(10) (a) Exhibit 10(a) to the Registrant's Form
10-K Annual Report for 2000, being the Area
Development Agreement and Addendum effective July
25, 2000 between the Registrant and Golden Corral
Franchising Systems, Inc., is incorporated herein
by reference.
(10) (b) Exhibit (10) (a) to the Registrant's Form
10-Q Quarterly Report for December 14, 1997, being
Area Development Agreement and Addendum between the
Registrant and Golden Corral Franchising Systems,
Inc. effective January 6, 1998, is incorporated
herein by reference.
(10) (c) Exhibit (10) (a) to the Registrant's Form
10-Q Quarterly Report for December 12, 1999, being
Second Amendment dated October 6, 1999 to Area
Development Agreement between the Registrant and
Golden Corral Franchising Systems, Inc. effective
January 6, 1998, is incorporated herein by
reference.
(10) (d) Exhibit (10) (d) to the Registrant's Form
10-Q Quarterly Report for September 17, 2000, being
Employment Agreement between the Registrant and
Jack C. Maier effective May 29, 2000 is
incorporated herein by reference.*
(10) (e) Exhibit (10) (a) to the Registrant's Form
10-K Annual Report for 1997, being employment
agreement between the Registrant and Jack C. Maier
effective June 2, 1997, is incorporated herein by
reference.*
(10) (f) Exhibit 10 (f) to the Registrant's Form
10-Q Quarterly Report for September 17, 2000, being
Employment Agreement and Amendment between the
Registrant and Craig F. Maier effective June 4,
2000 is incorporated herein by reference.*
(10) (g) Exhibit (10) (b) to the Registrant's Form
10-K Annual Report for 1995, being employment
contract between the Registrant and Craig F. Maier
effective May 29, 1995, is incorporated herein by
reference.*
(10) (h) Exhibit (10) (a) to the Registrant's Form
10-Q Quarterly Report for December 13, 1998, being
amendment dated November 24, 1998 to employment
contract between the Registrant and Craig F. Maier
dated May 29, 1995, is incorporated herein by
reference.*
(10) (i) Exhibit (10) (a) to the Registrant's Form
10-Q Quarterly Report for September 17, 1995, being
the Frisch's Executive Savings Plan effective
November 15, 1993, is incorporated herein by
reference.*
(10) (j) Exhibit (10) (b) to the Registrant's Form
10-Q Quarterly Report for September 17, 1995, being
the Frisch's Executive Retirement Plan effective
June 1, 1994, is incorporated herein by reference.*
(10) (k) Exhibit A to the Registrant's Proxy
Statement dated September 9, 1998, being the
Amended and Restated 1993 Stock Option Plan, is
incorporated herein by reference.*
(10)(l) Exhibit B to the Registrant's Proxy
Statement dated September 9, 1998, being the
Employee Stock Option Plan, is incorporated herein
by reference. *
(10) (m) Exhibit (10) (e) to the Registrant's Form
10-K Annual Report for 1985, being the 1984 Stock
Option Plan, is incorporated herein by reference.*
(10) (n) Exhibit (10) (f) to the Registrant's Form
10-K Annual Report for 1990, being First Amendment
to the 1984 Stock Option Plan, is incorporated
herein by reference.*
(10) (o) Exhibit (10) (g) to the Registrant's Form
10-K Annual Report for 1990, being the Agreement
between the Registrant and Craig F. Maier dated
November 21, 1989, is incorporated herein by
reference.*
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(10) (p) Real Estate Purchase and Sale Agreement
between the Registrant (seller) and Remington Hotel
Corporation (buyer) dated August 10, 2000 to sell
the Clarion Riverview Hotel is filed herewith.
(10) (q) Amendment and Restatement of Real Estate
Purchase and Sale Agreement between the Registrant
(seller) and Remington Hotel Corporation (buyer)
dated October 9, 2000 to sell the Clarion Riverview
Hotel is filed herewith.
(10) (r) Frisch's Nondeferred Cash Balance Plan
effective January 1, 2000 is filed herewith,
together with the Trust Agreement established by
the Registrant between Firstar Bank, N. A.,
(Trustee) and Donald H. Walker (Grantor). There
are identical Trust Agreements between Firstar
Bank, N. A. (Trustee) and Craig F. Maier, Paul F.
McFarland, W. Gary King, Karen F. Maier and
certain other "highly compensated employees"
(Grantors). *
*denotes compensatory plan or agreement.
(15) Letter re unaudited interim financial information
b) Reports on Form 8-K.
On October 4, 2000 under Item 5, to report that on
October 2, 2000 the Company's Board of Directors
approved a program to repurchase up to 500,000
shares of the Company's common stock to replace a
similar expiring program. Purchases will be made
from time to time within a two year time frame.
Financial statements were not required to be
filed.
On November 22, 2000 under Item 5, to report the
sale of the Company's Clarion Riverview Hotel to
Remington Hotel Corporation for $12,000,000 cash.
Financial statements were not required to be
filed.
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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 January 12, 2001
----------------------
BY /s/ Donald H. Walker
-------------------------------------
Donald H. Walker
Vice President - Finance, Treasurer and
Principal Financial and Accounting Officer
27
