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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of

the Securities Exchange Act of 1934

FOR QUARTERLY PERIOD ENDED MARCH 6, 2012

COMMISSION FILE NUMBER 001-7323

 

 

FRISCH’S RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)

 

OHIO   31-0523213

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨      Accelerated filer  x
Non-accelerated filer  ¨      Smaller reporting company  ¨
(Do not check if a smaller reporting company)     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

There were 4,937,865 shares outstanding of the issuer’s no par common stock, as of March 27, 2012.

 

 

 


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 - 30

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    31 - 43

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    43 - 44

Item 4.

   Controls and Procedures    44

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings    44

Item 1A.

   Risk Factors    44 - 47

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    47

Item 3.

   Defaults Upon Senior Securities    47

Item 4.

   (Removed and Reserved)    47

Item 5.

   Other Information    47

Item 6.

   Exhibits    48 - 50

SIGNATURE

   51


Frisch’s Restaurants, Inc. and Subsidiaries

Consolidated Statement of Earnings

(Unaudited)

 

     40 weeks ended     12 weeks ended  
     March 6,
2012
    March 8,
2011
    March 6,
2012
    March 8,
2011
 

Sales

   $ 230,876,216      $ 231,067,733      $ 68,406,274      $ 67,490,452   

Cost of sales

        

Food and paper

     81,323,384        79,607,930        24,100,334        23,527,960   

Payroll and related

     76,921,402        77,224,245        22,761,243        22,841,840   

Other operating costs

     51,164,246        51,552,685        14,287,947        14,755,945   
  

 

 

   

 

 

   

 

 

   

 

 

 
     209,409,032        208,384,860        61,149,524        61,125,745   

Gross profit

     21,467,184        22,682,873        7,256,750        6,364,707   

Administrative and advertising

     13,300,330        12,487,369        3,816,075        3,682,818   

Franchise fees and other revenue

     (993,769     (1,004,996     (300,169     (309,361

(Gain) loss on sale of assets

     (177,722     —          (177,722     —     

Impairment of long-lived assets

     4,421,734        —          421,734        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     4,916,611        11,200,500        3,496,832        2,991,250   

Interest expense

     1,136,068        1,227,025        328,112        377,931   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     3,780,543        9,973,475        3,168,720        2,613,319   

Income taxes

     454,000        2,892,000        356,000        758,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings

   $ 3,326,543      $ 7,081,475      $ 2,812,720      $ 1,855,319   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share (EPS) of common stock:

        

Basic net earnings per share

   $ 0.67      $ 1.40      $ 0.57      $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings per share

   $ 0.67      $ 1.39      $ 0.57      $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Frisch’s Restaurants, Inc. and Subsidiaries

Consolidated Balance Sheet

ASSETS

     March 6,
2012
     May 31,
2011
 
     (unaudited)         

Current Assets

     

Cash and equivalents

   $ 5,182,844       $ 2,449,448   

Trade and other accounts receivable

     2,099,160         1,997,428   

Inventories

     6,812,510         5,717,264   

Prepaid expenses, sundry deposits and property held for sale

     1,315,263         1,482,344   

Prepaid and deferred income taxes

     2,796,182         3,213,527   
  

 

 

    

 

 

 

Total current assets

     18,205,959         14,860,011   

Property and Equipment

     

Land and improvements

     75,565,474         81,402,037   

Buildings

     101,496,595         104,968,167   

Equipment and fixtures

     100,622,906         101,385,187   

Leasehold improvements and buildings on leased land

     25,899,453         24,731,195   

Capitalized leases

     2,554,870         2,554,870   

Construction in progress

     1,449,228         6,532,591   
  

 

 

    

 

 

 
     307,588,526         321,574,047   

Less accumulated depreciation and amortization

     148,405,092         148,651,557   
  

 

 

    

 

 

 

Net property and equipment

     159,183,434         172,922,490   

Other Assets

     

Goodwill

     740,644         740,644   

Other intangible assets

     380,112         495,725   

Investments in land

     3,384,421         923,435   

Property held for sale

     8,234,084         2,921,818   

Other long term assets

     2,509,196         2,409,612   
  

 

 

    

 

 

 

Total other assets

     15,248,457         7,491,234   
  

 

 

    

 

 

 

Total assets

   $ 192,637,850       $ 195,273,735   
  

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

4


LIABILITIES AND SHAREHOLDERS’ EQUITY

 

     March 6,
2012
    May 31,
2011
 
     (unaudited)        

Current Liabilities

    

Long-term obligations due within one year

    

Long-term debt

   $ 7,279,788      $ 7,753,562   

Obligations under capitalized leases

     185,683        266,358   

Self insurance

     1,003,871        778,181   

Accounts payable

     11,132,894        10,216,467   

Accrued expenses

     9,797,820        10,083,229   

Income taxes

     39,903        1,862   
  

 

 

   

 

 

 

Total current liabilities

     29,439,959        29,099,659   

Long-Term Obligations

    

Long-term debt

     17,626,966        22,572,677   

Obligations under capitalized leases

     1,561,106        1,677,230   

Self insurance

     1,385,396        1,127,615   

Deferred income taxes

     1,654,031        1,966,819   

Underfunded pension obligation

     8,992,561        8,912,781   

Deferred compensation and other

     4,590,184        4,389,062   
  

 

 

   

 

 

 

Total long-term obligations

     35,810,244        40,646,184   

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, 7,586,764 and 7,586,764 shares - stated value - $1

     7,586,764        7,586,764   

Additional contributed capital

     65,813,360        65,535,634   
  

 

 

   

 

 

 
     73,400,124        73,122,398   

Accumulated other comprehensive loss

     (5,205,749     (5,726,555

Retained earnings

     97,258,038        96,249,483   
  

 

 

   

 

 

 
     92,052,289        90,522,928   

Less cost of treasury stock (2,648,899 and 2,666,956 shares)

     38,064,766        38,117,434   
  

 

 

   

 

 

 

Total shareholders’ equity

     127,387,647        125,527,892   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 192,637,850      $ 195,273,735   
  

 

 

   

 

 

 

 

5


Frisch’s Restaurants, Inc. and Subsidiaries

Consolidated Statement of Shareholders’ Equity

40 weeks ended March 6, 2012 and March 8, 2011

(Unaudited)

 

     Common stock
at $1 per share -
Shares and
amount
     Additional
contributed
capital
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Treasury
shares
    Total  

Balance at June 1, 2010

   $ 7,585,764       $ 65,222,878      $ (7,856,427   $ 89,701,652      $ (34,559,851   $ 120,094,016   

Net earnings for 40 weeks

     —           —          —          7,081,475        —          7,081,475   

Other comprehensive income, net of tax

     —           —          612,711        —          —          612,711   

Stock options exercised

     1,000         (182,490     —          —          855,444        673,954   

Excess tax benefit from stock options exercised

     —           208,223        —          —          —          208,223   

Issuance of restricted stock

     —           (166,338     —          —          166,338        —     

Stock based compensation expense

     —           306,037        —          —          —          306,037   

Treasury shares acquired

     —           —          —          —          (2,559,711     (2,559,711

Other treasury shares re-issued

     —           16,308        —          —          34,237        50,545   

Employee stock purchase plan

     —           3,057        —          —          —          3,057   

Cash dividends - $0.58 per share

     —           —          —          (2,924,929     —          (2,924,929
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 8, 2011

     7,586,764         65,407,675        (7,243,716     93,858,198        (36,063,543     123,545,378   

Net earnings for 12 weeks

     —           —          —          2,391,114        —          2,391,114   

Other comprehensive income, net of tax

     —           —          1,517,161        —          —          1,517,161   

Stock options exercised

     —           (3,944     —          —          66,622        62,678   

Excess tax benefit from stock options exercised

     —           15,073        —          —          —          15,073   

Stock based compensation expense

     —           114,885        —          —          —          114,885   

Treasury shares acquired

     —           —          —          —          (2,120,513     (2,120,513

Employee stock purchase plan

     —           1,945        —          —          —          1,945   

Cash dividends

     —           —          —          171        —          171   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 31, 2011

     7,586,764         65,535,634        (5,726,555     96,249,483        (38,117,434     125,527,892   

Net earnings for 40 weeks

     —           —          —          3,326,543        —          3,326,543   

Other comprehensive income, net of tax

     —           —          520,806        —          —          520,806   

Stock options exercised

     —           22,286        —          —          88,526        110,812   

Excess tax benefit from stock options exercised

     —           3,800        —          —          —          3,800   

Issuance of restricted stock

     —           (334,903     —          —          334,903        —     

Stock based compensation expense

     —           569,679        —          —          248,132        817,811   

Treasury shares acquired

     —           —          —          —          (640,140     (640,140

Other treasury shares re-issued

     —           8,886        —          —          21,247        30,133   

Employee stock purchase plan

     —           7,978        —          —          —          7,978   

Cash dividends - $0.47 per share

     —           —          —          (2,317,988     —          (2,317,988
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 6, 2012

   $ 7,586,764       $ 65,813,360      ($ 5,205,749   $ 97,258,038      ($ 38,064,766   $ 127,387,647   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     40 weeks ended
March 6, 2012
     12 weeks ended
May 31, 2011
     40 weeks ended
March 8, 2011
 

Comprenhensive income:

        

Net earnings for the period

   $ 3,326,543       $ 2,391,114       $ 7,081,475   

Change in defined benefit pension plans, net of tax

     520,806         1,517,161         612,711   
  

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 3,847,349       $ 3,908,275       $ 7,694,186   
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


Frisch’s Restaurants, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

Forty weeks ended March 6, 2012 and March 8, 2011

(unaudited)

 

     40 weeks ended  
     March 6,
2012
    March 8,
2011
 

Cash flows provided by (used in) operating activities:

    

Net earnings

   $ 3,326,543      $ 7,081,475   

Adjustments to reconcile net earnings to net cash from operating activities:

    

Depreciation and amortization

     11,592,944        11,925,141   

(Gain) Loss on disposition of assets, including abandonment losses

     (1,990     123,546   

Impairment of long-lived assets

     4,421,734        —     

Stock-based compensation expense

     817,811        306,037   

Net periodic pension cost

     2,118,880        2,565,510   

Contributions to pension plans

     (1,250,000     (850,000
  

 

 

   

 

 

 
     21,025,922        21,151,709   

Changes in assets and liabilities:

    

Trade and other receivables

     (101,732     (137,508

Inventories

     (1,095,246     (282,327

Prepaid expenses, sundry deposits and other

     167,081        (1,115,041

Other assets

     55,310        514,395   

Prepaid, accrued and deferred income taxes

     (121,896     1,728,178   

Excess tax benefit from stock options exercised

     (3,800     (208,223

Accounts payable

     916,427        593,052   

Accrued expenses

     (515,870     665,575   

Self insured obligations

     483,471        316,969   

Deferred compensation and other liabilities

     201,122        185,962   
  

 

 

   

 

 

 
     (15,133     2,261,032   
  

 

 

   

 

 

 

Net cash provided by operating activities

     21,010,789        23,412,741   

Cash flows provided by (used in) investing activities:

    

Additions to property and equipment

     (11,340,119     (14,504,871

Proceeds from disposition of property

     1,592,413        47,297   

Change in other assets

     (107,997     (285,500
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (9,855,703     (14,743,074

Cash flows provided by (used in) financing activities:

    

Proceeds from borrowings

     2,000,000        5,000,000   

Payment of long-term debt and capital lease obligations

     (7,616,284     (6,258,232

Cash dividends paid

     (2,317,988     (2,172,864

Proceeds from stock options exercised

     110,811        673,954   

Excess tax benefit from stock options exercised

     3,800        208,223   

Treasury shares acquired

     (640,140     (2,559,711

Treasury shares re-issued

     30,133        50,545   

Employee stock purchase plan

     7,978        3,057   
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (8,421,690     (5,055,028
  

 

 

   

 

 

 

Net increase in cash and equivalents

     2,733,396        3,614,639   

Cash and equivalents at beginning of year

     2,449,448        647,342   
  

 

 

   

 

 

 

Cash and equivalents at end of quarter

   $ 5,182,844      $ 4,261,981   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid

   $ 1,254,475      $ 1,262,922   

Income taxes paid

     576,095        1,166,357   

Income taxes refunds received

     200        2,535   

Dividends declared but not paid

     —          752,065   

Lease transactions capitalized (non-cash)

     —          171,380   

The accompanying notes are an integral part of the consolidated financial statements.

 

7


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

NOTE A — ACCOUNTING POLICIES

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying interim consolidated financial statements follows:

Description of the Business

Frisch’s Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name “Frisch’s Big Boy.” The Company also operates grill buffet style restaurants under the name “Golden Corral” pursuant to certain licensing agreements. All 95 Big Boy restaurants owned and operated by the Company as of March 6, 2012 are located in various regions of Ohio, Kentucky and Indiana. All 29 Golden Corral restaurants operated by the Company as of March 6, 2012 are located primarily in the greater metropolitan areas of Cincinnati, Columbus, Dayton, Toledo and Cleveland, Ohio, Louisville, Kentucky and Pittsburgh, Pennsylvania.

The Company owns the trademark “Frisch’s” and has exclusive, irrevocable ownership of the rights to the “Big Boy” trademark, trade name and service marks in the states of Kentucky and Indiana, and in most of Ohio and Tennessee. All of the Frisch’s Big Boy restaurants also offer “drive-thru” service. The Company also licenses 25 Big Boy restaurants to other operators, which are located in certain parts of Ohio, Kentucky and Indiana. In addition, the Company operates a commissary and food manufacturing plant near its headquarters in Cincinnati, Ohio that services all Big Boy restaurants operated by the Company, and is available to supply restaurants licensed to others.

In October 2011, the Company announced that it had engaged an investment banking firm specializing in the restaurant industry to assist the Company in its evaluation of strategic alternatives relating to its Golden Corral business segment. The purpose of the engagement has been to optimize the value of the Company’s investments in its Golden Corral segment. (See Note J – Subsequent Event.)

Consolidation Practices

The accompanying interim consolidated financial statements (unaudited) include all of the Company’s accounts, prepared in conformity with generally accepted accounting principles in the United States of America (US GAAP). Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, these interim consolidated financial statements include all adjustments (all of which were normal and recurring) necessary for a fair presentation of all periods presented.

Reclassification

Certain previous year amounts have been reclassified to conform to the current year presentation.

Fiscal Year

The Company’s fiscal year is the 52 week (364 days) or 53 week (371 days) period ending on the Tuesday nearest to the last day of May. The first quarter of each fiscal year contains 16 weeks, while the last three quarters each normally contain 12 weeks. Every fifth or sixth year, the additional week needed to make a 53 week year is added to the fourth quarter, resulting in a 13 week fourth quarter. The current fiscal year will end on Tuesday, May 29, 2012 (fiscal year 2012), a period of 52 weeks. The year that ended May 31, 2011 (fiscal year 2011) was also a 52 week year.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with US GAAP requires management to use estimates and assumptions to measure certain items 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.

 

8


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

Significant estimates and assumptions are used to measure self-insurance liabilities, deferred executive compensation obligations, net periodic pension cost and future pension obligations, the fair values of property held for sale and investments in land and the carrying values of long-lived assets including property and equipment, goodwill and other intangible assets.

Management considers the following accounting policies to be critical accounting policies because the application of estimates to these policies requires management’s most difficult, subjective or complex judgments: self-insurance liabilities, net periodic pension cost and future pension obligations, and the carrying values of long-lived assets.

Cash and Cash Equivalents

Funds in transit from credit card processors are classified as cash. Highly liquid investments with original maturities of three months or less are considered as cash equivalents.

Receivables

Trade and other accounts receivable are valued on the reserve method. The reserve balance was $30,000 as of March 6, 2012 and May 31, 2011. The reserve is monitored for adequacy based on historical collection patterns and write-offs, and current credit risks.

Inventories

Inventories, comprised principally of food items, are valued at the lower of cost, determined by the first-in, first-out method, or market.

Accounting for Rebates

Cash consideration received from certain food vendors is treated as a reduction of cost of sales and is recognized in the same periods in which the rebates are earned.

Leases

Minimum scheduled lease payments on operating leases, including escalating rental payments, are recognized as rent expense on a straight-line basis over the term of the lease. Under certain circumstances, the lease term used to calculate straight-line rent expense includes option periods that have yet to be legally exercised. Contingent rentals, typically based on a percentage of restaurant sales in excess of a fixed amount, are expensed as incurred. Rent expense is also recognized during that part of the lease term when no rent is paid to the landlord, often referred to as a “rent holiday,” that generally occurs while a restaurant is being constructed on leased land. The Company does not typically receive leasehold incentives from landlords.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the estimated service lives, which range from 10 to 25 years for new buildings or components thereof and five to 10 years for equipment. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the lease term. Property betterments are capitalized while the cost of maintenance and repairs is expensed as incurred.

The cost of land not yet in service is included in “construction in progress” in the consolidated balance sheet if construction has begun or if construction is likely within the next 12 months. No new Big Boy restaurant buildings were under construction as of March 6, 2012. Construction in progress as of March 6, 2012 is comprised of one tract of land on which near term Big Boy development is likely, together with remodeling work at various stages of completion in existing restaurants.

 

9


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A—ACCOUNTING POLICIES (CONTINUED)

 

Interest on borrowings is capitalized during active construction periods of new restaurants. Capitalized interest was $19,000 and $67,000 respectively, for the 40 weeks ended March 6, 2012 and March 8, 2011, and was zero and $7,000 respectively, for the 12 week periods ended March 6, 2012 and March 8, 2011.

Costs incurred during the application development stage of computer software that is developed or obtained for internal use is capitalized, while the costs of the preliminary project stage are expensed as incurred, along with certain other costs such as training. Capitalized computer software is amortized on the straight-line method over the estimated service lives, which range from three to 10 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining service life.

Impairment of Long-Lived Assets

Management considers a history of cash flow losses on a restaurant-by-restaurant basis to be its primary indicator of potential impairment of long-lived assets. Carrying values are tested for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable from the estimated future cash flows expected to result from the use and eventual disposition of the property. 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 fair value, which is determined as either 1) the greater of the net present value of the future cash flow stream, or 2) by opinions of value provided by real estate brokers and/or management’s judgment as developed through its experience in disposing of unprofitable restaurant properties.

Six underperforming Golden Corral restaurants were permanently closed on August 23, 2011. As a result, a non-cash pretax asset impairment charge (with related closing costs) of $4,000,000 was recorded in the first quarter of fiscal year 2012, which ended September 20, 2011. The impairment charge lowered the carrying values of the six restaurant properties (all are owned in fee simple) to their fair values, which in the aggregate amount to approximately $6,909,000 (see Property Held for Sale / Investments in Land elsewhere in Note A — Accounting Policies). The total impairment charge included a) $69,000 in impaired intangible assets associated with unamortized initial franchise fees relating to the six impaired Golden Corral restaurants (see Goodwill and Other Intangible Assets, Including Licensing Agreements elsewhere in Note A — Accounting Policies) and b) $180,000 in other costs that were incurred in connection with closing the restaurants.

During the 12 week period ended March 6, 2012, an impairment charge of $422,000 was recorded to lower the fair values of one of the six Golden Corrals (a sales contract was accepted for $94,000 less than original estimated fair value) that were closed in August 2011 and two former Big Boy restaurants ($328,000 based on management’s estimates - due to continued soft market conditions - which approximated broker quotes obtained) that have been held for sale for several years. These fair value determinations are considered level three under the fair value hierarchy. No impairment losses were recognized during the 40 weeks ended March 8, 2011 nor during the 12 week period ended March 8, 2011.

Restaurant Closing Costs

Any liabilities associated with exit or disposal activities are recognized only when the liabilities are incurred, rather than upon the commitment to an exit or disposal plan. Conditional obligations that meet the definition of an asset retirement obligation are currently recognized if fair value is reasonably estimable.

The carrying values of closed restaurant properties that are held for sale are reduced to fair value in accordance with the accounting policy for impairment of long-lived assets (see above). When leased restaurant properties are closed, a provision is made equal to the present value of remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. The carrying values of leasehold improvements are also reduced in accordance with the accounting policy for impairment of long-lived assets.

 

10


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

Property Held for Sale / Investments in Land

Surplus property that is no longer needed by the Company is classified as “Property held for sale” in the consolidated balance sheet. As of March 6, 2012, “Property held for sale” consisted of two former Big Boy restaurants, five former Golden Corral restaurants and seven other surplus pieces of land. All of the surplus property is stated at fair value expected to be received upon sale. The fair value of any property held for sale for which a viable sales contract is pending at the balance sheet date is reclassified to current assets. The fair value of seven additional tracts of land for which no specific plans have been made is classified as “Investments in land” in the consolidated balance sheet.

Fair values are generally determined by opinions of value provided by real estate brokers and/or management’s judgment, and are considered level three under the fair value hierarchy.

Goodwill and Other Intangible Assets, Including Licensing Agreements

As of March 6, 2012 and May 31, 2011, the carrying amount of Big Boy goodwill that was acquired in prior years amounted to $741,000. Acquired goodwill is tested for impairment on the first day of the fourth quarter of each fiscal year and whenever an impairment indicator arises. Impairment losses are recorded when impairment is determined to have occurred.

Other intangible assets principally consist of initial franchise fees that were paid for each Golden Corral restaurant that the Company opened. The $40,000 fee began amortizing when each restaurant opened, computed using the straight-line method over the 15 year term of each restaurant’s individual franchise agreement. Unamortized initial franchise fees relating to six impaired Golden Corral restaurants (see Impairment of Long-Lived Assets elsewhere in Note A – Accounting Policies) amounting to $69,000 were written-off as part of an impairment charge recorded during the first quarter of fiscal year 2012, which ended September 20, 2011. Other intangible assets are otherwise tested for impairment on the first day of the fourth quarter of each fiscal year.

An analysis of other intangible assets follows:

 

     March 6,
2012
    May 31,
2011
 
     (in thousands)  

Golden Corral initial franchise fees subject to amortization

   $ 1,080      $ 1,280   

Less accumulated amortization

     (677     (750
  

 

 

   

 

 

 

Carrying amount of Golden Corral initial franchise fees subject to amortization

     403        530   

Current portion of Golden Corral initial franchise fees subject to amortization

     (72     (85
  

 

 

   

 

 

 

Golden Corral — total intangible fees

     331        445   

Other intangible assets subject to amortization — net

     15        17   

Other intangible assets not yet subject to amortization

     34        34   
  

 

 

   

 

 

 

Total other intangible assets

   $ 380      $ 496   
  

 

 

   

 

 

 

 

11


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

Amortization of Golden Corral initial franchise fees was $58,000 and $66,000 respectively, in the 40 week periods ended March 6, 2012 and March 8, 2011, and was $16,000 and $20,000 respectively, in the 12 week periods ended March 6, 2012 and March 8, 2011. The fees for the remaining operations will continue to amortize as scheduled below:

 

Annual period ending:

   (in thousands)  

March 6, 2013

   $ 72   

March 6, 2014

     72   

March 6, 2015

     66   

March 6, 2016

     59   

March 6, 2017

     47   

Subsequent to 2017

     87   
  

 

 

 
   $ 403   
  

 

 

 

An aggregate deposit of $135,000 in initial franchise fees that had been paid through the years in anticipation of additional Golden Corral development was written off during the second quarter of fiscal year 2011 (the 12 week period that ended December 14, 2010).

The franchise agreements with Golden Corral Franchising Systems, Inc. also require the Company to pay fees based on defined gross sales. These costs are charged as incurred to “Other operating costs” in the consolidated statement of earnings.

Revenue Recognition

Revenue from restaurant operations is recognized upon the sale of products as they are sold to customers. All sales revenue is recorded on a net basis, which excludes sales tax collected from being reported as sales revenue and sales tax remitted from being reported as a cost. Revenue from the sale of commissary products to Big Boy restaurants licensed to other operators is recognized upon shipment of product. Revenue from franchise fees, based on certain percentages of sales volumes generated in Big Boy restaurants licensed to other operators, is recorded on the accrual method as earned. Initial franchise fees are recognized as revenue when the fees are deemed fully earned and non-refundable, which ordinarily occurs upon the execution of the license agreement, in consideration of the Company’s services to that time.

Revenue from the sale of gift cards is deferred for recognition until the gift card is redeemed by the cardholder, or when the probability becomes remote that the cardholder will demand full performance from the Company and there is no legal obligation to remit the value of the unredeemed gift card under applicable state escheatment statutes.

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 (all for Big Boy) are charged as incurred to “Other operating costs” in the consolidated statement of earnings:

 

    40 weeks ended      12 weeks ended  
    March 6,
2012
     March 8,
2011
     March 6,
2012
     March 8,
2011
 
           (in thousands)  
  $ 398       $ 982       $ —         $ 66   
 

 

 

    

 

 

    

 

 

    

 

 

 
  $ 398       $ 982       $ —         $ 66   
 

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

Benefit Plans

The Company sponsors two qualified defined benefit pension plans: the Pension Plan for Operating Unit Hourly Employees (the Hourly Pension Plan) and the Pension Plan for Managers, Office and Commissary Employees (the Salaried Pension Plan). (See Note E — Pension Plans.) Both plans are in compliance with the Pension Protection Act of 2006 (PPA), the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), the technical corrections promulgated by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) and guidance on the HEART Act provided by the Internal Revenue Service. A merger of the two plans is expected to be completed by May 31, 2012. The merger will not affect plan benefits; however, lower administrative costs are anticipated.

Benefits under both plans are based on years-of-service and other factors. The Company’s funding policy is to contribute at least the minimum annual amount sufficient to satisfy legal funding requirements plus additional discretionary tax-deductible amounts that may be deemed advisable, even when no minimum funding is required. 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 Hourly Pension Plan covers hourly restaurant employees. The Hourly Pension Plan was amended on July 1, 2009 to freeze all future accruals for credited service after August 31, 2009. The Hourly Pension Plan had previously been closed to all hourly paid restaurant employees that were hired after December 31, 1998. Hourly restaurant employees hired January 1, 1999 or after have been eligible to participate in the Frisch’s Restaurants, Inc. Hourly Employees 401(k) Savings Plan (the Hourly Savings Plan), a defined contribution plan that provided a 40 percent match by the Company on the first 10 percent of earnings deferred by the participants. The Company’s match had vested on a scale based on length of service that reached 100 percent after four years of service. The Hourly Savings Plan was amended effective September 1, 2009 to provide for immediate vesting along with a 100 percent match from the Company on the first 3 percent of earnings deferred by participants. All hourly restaurant employees are now eligible to participate in the Hourly Savings Plan, regardless of when hired.

The Salaried Pension Plan covers restaurant management, office and commissary employees (salaried employees). The Salaried Pension Plan was amended on July 1, 2009 to close entry into the Plan to employees hired after June 30, 2009. Salaried employees hired before June 30, 2009 continue to participate in the Salaried Pension Plan and are credited with normal benefits for years of service. Salaried employees are automatically enrolled, unless otherwise elected, in the Frisch’s Employee 401(k) Savings Plan (the Salaried Savings Plan), a defined contribution plan. The Salaried Savings Plan provides immediate vesting under two different Company matching schedules. Employees who are participants in the Salaried Pension Plan (hired before June 30, 2009) may continue to defer up to 25 percent of their compensation under the Salaried Savings Plan, with the Company contributing a 10 percent match on the first 18 percent deferred. Beginning September 1, 2009, salaried employees hired after June 30, 2009 receive a 100 percent match from the Company on the first 3 percent of compensation deferred.

The executive officers of the Company and certain other “highly compensated employees” (HCE’s) are disqualified from participation in the Salaried Savings Plan. A non-qualified savings plan – Frisch’s Executive Savings Plan (FESP) — provides a means by which the HCE’s may continue to defer a portion of their compensation. FESP allows deferrals of up to 25 percent of a participant’s compensation into a choice of mutual funds or common stock of the Company. Matching contributions are added to the first 10 percent of salary deferred at a rate of 10 percent for deferrals into mutual funds, while a 15 percent match is added to deferrals into the Company’s common stock. HCE’s hired after June 30, 2009 receive a 100 percent matching contribution from the Company on the first 3 percent of compensation deferred into either mutual funds or common stock.

Although the Company owns the mutual funds of the FESP until the retirement of the participants, the funds are invested at the direction of the participants. FESP assets are the principal component of “Other long-term assets” in the consolidated balance sheet. The common stock is a “phantom investment” that may be paid in actual shares or in cash upon retirement of the participant. The FESP liability to the participants is included in “Deferred compensation and other” long term obligations in the consolidated balance sheet.

 

13


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

The mutual funds and the corresponding liability to FESP participants were decreased $54,000 (due to market losses) during the 40 week period ended March 6, 2012, and were increased $446,000 (due to market gains) during the 40 week period ended March 8, 2011. During the 12 weeks ended March 6, 2012, the mutual funds and corresponding liability were increased $231,000 (due to market gains) and were increased $114,000 (due to market gains) during the 12 week period ended March 8, 2011. These changes were effected through offsetting investment income or loss and charges (market gains) or credits (market losses) to deferred compensation expense within administrative and advertising expense in the consolidated statement of earnings.

The Company also sponsors an unfunded non-qualified Supplemental Executive Retirement Plan (SERP) that was originally intended to provide a supplemental retirement benefit to the HCE’s whose benefits under the Salaried Pension Plan were reduced when their compensation exceeded Internal Revenue Code imposed limitations or when elective salary deferrals were made to FESP. The SERP was amended effective January 1, 2000 to exclude any benefit accruals after December 31, 1999 (interest continues to accrue) and to close entry into the Plan by any HCE hired after December 31, 1999.

Effective January 1, 2000, a Nondeferred Cash Balance Plan was adopted to provide comparable retirement type benefits to the HCE’s in lieu of future accruals under the Salaried Pension Plan and the SERP. The comparable benefit amount is determined each year and converted to a lump sum (reported as W-2 compensation) from which taxes are withheld and the net amount is deposited into the HCE’s individual trust account (see Note E — Pension Plans).

Self-Insurance

The Company self-insures its Ohio workers’ compensation claims up to $300,000 per claim. Initial self-insurance liabilities are accrued based on prior claims history, including an amount developed for incurred but unreported claims. Management performs a comprehensive review each fiscal quarter and adjusts the self-insurance liabilities as deemed appropriate based on claims experience, which continues to benefit from active claims management and post accident drug testing. Below is a summary of reductions or (increases) to the self-insurance liabilities that were credited to or (charged against) earnings:

 

     40 weeks ended     12 weeks ended  
     March 6,
2012
    March 8,
2011
    March 6,
2012
    March 8,
2011
 
           (in thousands)        
   $ (224   $ (162   $ (191   $ 25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Taxes

Income taxes are provided on all items included in the consolidated statement of earnings regardless of when such items are reported for tax purposes, which gives rise to deferred income tax assets and liabilities. The provision for income taxes in all periods presented has been computed based on management’s estimate of the effective tax rate for the entire year.

The effective tax rate was estimated at 12 percent at the end of the 40 week period that ended March 6, 2012, down from 16 percent estimated at the end of the 28 weeks ended December 13, 2011. The change resulted in an effective tax rate of 11.2 percent for the 12 weeks ended March 6, 2012. The lower effective rates continue to be driven by lower projected pretax earnings for fiscal year 2012, reflecting the $4,094,000 impairment charge relating to the six Golden Corrals ($4,000,000 recorded in the 12 weeks ended September 20, 2011 and $94,000 in the 12 weeks ended March 6, 2012), which had minimal impact on the general business tax credits expected for the full year.

 

14


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE A — ACCOUNTING POLICIES (CONTINUED)

 

In last year’s results, the effective tax rate was estimated at 29 percent at the end of the 40 weeks March 8, 2011 and for the 12 weeks ended March 8, 2011.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts payable and accounts receivable, investments and long-term debt. The carrying values of cash and cash equivalents together with accounts payable and accounts receivable approximate their fair value based on their short-term character. The fair value of long-term debt is disclosed in Note B — Long-Term Debt.

The Company does not use the fair value option for reporting financial assets and financial liabilities and therefore does not report unrealized gains and losses in the consolidated statement of earnings. Fair value measurements for non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. The Company does not use derivative financial instruments.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 was issued to amend Accounting Standards Codification Topic 220, “Comprehensive Income.” Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, the presentation must show each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, which is the Company’s current presentation. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” was issued in December 2011 to defer the effective date of the guidance in ASU 2011-05 relating to the presentation of reclassification adjustments. All other requirements of ASU 2011-05 are not affected by the issuance of ASU 2011-12, including the requirement to report income either in a single continuous financial statement or in two separate but consecutive financial statements, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects to adopt the remaining provisions of ASU 2011-05 on May 30, 2012 (the first day of the fiscal year that will end May 28, 2013).

In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 was issued to amend Accounting Standards Codification Topic 350, “Intangibles – Goodwill and Other.” Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.

ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill tests performed as of a date before September 15, 2011, if an entity’s financial statements have not yet been issued.

The Company reviewed all other significant newly issued accounting pronouncements and concluded that they are either not applicable to the Company’s business or that no material effect is expected on the financial statements as a result of future adoption.

 

15


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE B — LONG-TERM DEBT

 

     March 6, 2012      May 31, 2011  
     Payable
within
one year
     Payable
after

one  year
     Payable
within
one year
     Payable
after

one  year
 
     (in thousands)  

Construction Loan —

           

Construction Phase

   $ —         $ —         $ 220       $ 2,780   

Term Loans

     6,120         16,136         6,428         17,415   

Revolving Loan

     —           —           —           —     

Stock Repurchase Loan —

           

Draw Phase

     —           —           104         896   

Term Loans

     131         784         —           —     

2009 Term Loan

     1,029         707         1,002         1,481   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,280       $ 17,627       $ 7,754       $ 22,572   
  

 

 

    

 

 

    

 

 

    

 

 

 

The portion payable after one year matures as follows:

 

     March 6,
2012
     May 31,
2011
 
     (in thousands)  

Annual period ending in 2013

   $ —         $ 6,848   

2014

     5,542         5,118   

2015

     4,274         3,943   

2016

     3,395         3,031   

2017

     2,167         1,984   

2018

     1,738         1,421   

Subsequent to 2018

     511         227   
  

 

 

    

 

 

 
   $ 17,627       $ 22,572   
  

 

 

    

 

 

 

The Company has four unsecured loans in place, all with the same lending institution. A single Amended and Restated Loan Agreement (2010 Loan Agreement), under which the Company may not assume or permit to exist any other indebtedness, governs the four loans. The 2010 Loan Agreement amended and restated two prior loan agreements that consisted of a construction draw facility (Construction Loan) and a revolving credit agreement (Revolving Loan), and added a Stock Repurchase Loan. Borrowing under these three credit lines is permitted through April 15, 2012. The 2009 Term Loan, previously governed by the revolving credit agreement, is also governed under the 2010 Loan Agreement. The renegotiation of 2010 Loan Agreement is anticipated to expand present borrowing capacity when it is completed in April 2012, providing uninterrupted access to credit facilities for construction and working capital.

Construction Loan

The Construction Loan is an unsecured draw credit line intended to finance construction and opening and/or the refurbishing of restaurant operations. The 2010 Loan Agreement made $15,000,000 available to be borrowed for its intended purpose when it went into effect in October 2010. As of March 6, 2012, the amount available to be borrowed had been reduced to $8,500,000, which is net of the sum of $6,500,000 borrowed since the inception of the 2010 Loan Agreement, including $2,000,000 borrowed since the beginning of fiscal year 2012.

 

16


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE B — LONG-TERM DEBT (CONTINUED)

 

The Construction Loan is subject to an unused commitment fee equal to 0.25 percent of the amount available to be borrowed. Funds borrowed are initially governed as a Construction Phase loan on an interest only basis. Interest is calculated with a pricing matrix that uses changeable basis points, determined by certain of the Company’s financial ratios. Interest is payable at the end of each specific rate period selected by the Company, which may be monthly, bi-monthly or quarterly. Payment of principal without penalty is permitted at the end of any rate period.

Within six months of borrowing (assuming no prepayment at the end of the rate period), the balance outstanding under each loan in the Construction Phase must be converted to a Term Loan, with an amortization period of not less than seven nor more than 12 years as chosen by the Company. For funds borrowed between September 2007 and September 2010, any Term Loan converted with an initial amortization period of less than 12 years, a one-time option, without penalty or premium, is available during the chosen term to extend the amortization period up to a total of 12 years. Outstanding balances of loans initiated prior to September 2007 had to be converted with an amortization period not to exceed seven years. Upon conversion to an amortizing Term Loan, the Company may select a fixed interest rate over the chosen term or may choose among various adjustable rate options.

Prepayments of Term Loans that were initiated prior to September 2009 are permissible upon payment of sizable prepayment fees and other amounts. For Term Loans initiated after September 2009, the Company has the option at the time of conversion to include a small breakfunding premium over the otherwise applicable fixed interest rate in exchange for the right to prepay in whole or in part at any time without incurring a prepayment fee. After September 2010, the breakfunding premium included at conversion is also necessary in order to be permitted to extend the amortization period up to 12 years without incurring additional costs.

As of March 6, 2012, the aggregate outstanding balance under the Construction Loan was $22,256,000, which consisted entirely of Term Loans; no balance was in the Construction Phase awaiting conversion. Since the inception of the Construction Loan (including prior agreements), 22 of the Term Loans ($52,500,000 out of $97,000,000 in original notes) had been retired as of March 6, 2012, together with $1,000,000 that was retired without penalty in December 2011 (the end of its specific rate period) directly from the Construction Phase. All of the outstanding Term Loans are subject to fixed interest rates, the weighted average of which is 4.92 percent, all of which are being repaid in 84 equal monthly installments of principal and interest aggregating $642,000, expiring in various periods ranging from September 2012 through February 2019.

Revolving Loan

The Revolving Loan provides an unsecured credit line that allows for borrowing of up to $5,000,000 to fund temporary working capital needs. Amounts repaid may be re-borrowed so long as the amount outstanding does not exceed $5,000,000 at any time. The Revolving Loan, none of which was outstanding as of March 6, 2012, is subject to a 30 consecutive day out-of-debt period each fiscal year. Interest is determined by the same pricing matrix used for loans in the Construction Phase as described above under the Construction Loan. Interest is payable at the end of each specific rate period selected by the Company, which may be monthly, bi-monthly or quarterly. The loan is also subject to a 0.25 percent unused commitment fee.

Stock Repurchase Loan

The Stock Repurchase Loan is an unsecured draw credit line intended to finance repurchases of the Company’s common stock, under which up to $10,000,000 may be borrowed. As of March 6, 2012, $9,000,000 remained available to be borrowed. Amounts drawn are on an interest-only basis for six months (Draw Phase). Interest is determined by the same pricing matrix used for loans in the Construction Phase as described above under the Construction Loan. Interest is payable at the end of each specific rate period selected by the Company, which may be monthly, bi-monthly or quarterly. Prepayment of principal without penalty is permitted at the end of any rate period during the Draw Phase. The balance outstanding must be converted semi-annually to a Term Loan amortized over seven years. The Stock Repurchase Loan is not subject to an unused commitment fee.

Borrowing capacity under the Stock Repurchase Loan will expire April 15, 2012. It is not expected to be included under the renewal of the 2010 Loan Agreement that is currently being renegotiated.

 

17


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE B — LONG-TERM DEBT (CONTINUED)

 

The balance of the $1,000,000 that was converted into a Term Loan in July 2011 had been reduced to $915,000 as of March 6, 2012. The loan requires 84 equal installments of $13,000 including principal and interest at a fixed 3.56 percent interest rate, which matures in July 2018.

2009 Term Loan

The unsecured 2009 Term Loan originated in September 2009 when $4,000,000 was borrowed to fund the acquisition of five Big Boy restaurants from the landlord of the facilities. The 2009 Term Loan, the outstanding balance of which was $1,735,000 as of March 6, 2012, requires 48 monthly installments of $89,000 including principal and interest at a fixed 3.47 percent interest rate. The final payment of the loan is due October 21, 2013.

Loan Covenants

The 2010 Loan Agreement contains covenants relating to cash flows, debt levels, lease expense, asset dispositions, investments and restrictions on pledging certain restaurant operating assets. The Company was in compliance with all loan covenants as of March 6, 2012. The 2010 Loan Agreement does not require compensating balances.

Fair Values

The fair values of the fixed rate Term Loans within the Construction Loan as shown in the following table are based on fixed rates that would have been available at March 6, 2012 if the loans could have been refinanced with terms similar to the remaining terms under the present Term Loans. The carrying value of substantially all other long-term debt approximates its fair value.

 

     Carrying Value      Fair Value  

Term Loans under the Construction Loan

   $ 22,256,000       $ 23,115,000   

NOTE C — LEASED PROPERTY

Although the Company’s policy is to own the property on which it operates restaurants, the Company occupies certain of its restaurants pursuant to lease agreements. As of March 6, 2012, 22 restaurants were in operation on non-owned premises, 21 of which were classified as operating leases. Seven of the operating leases are for Golden Corral operations. Big Boy restaurants are operated under the terms of 14 operating leases and one capital lease.

Since the beginning of fiscal year 2012, one new Big Boy restaurant was opened on non-owned premises pursuant to the terms of an operating lease and one big Boy restaurant was permanently closed due to the expiration of its operating lease. Another operating lease will expire in May 2012, with the underlying Big Boy restaurant expected to be vacated. Most of the remaining operating leases are for 15 or 20 years and contain multiple five year renewal options.

Office space is occupied under an operating lease that expires during fiscal year 2013, with renewal options available through fiscal year 2023. A purchase option is available in 2023 to acquire the office property in fee simple estate.

 

18


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE C — LEASED PROPERTY (CONTINUED)

 

Rent expense under operating leases:

 

     40 weeks ended      12 weeks ended  
     Mar. 6,
2012
     Mar. 8,
2011
     Mar 6,
2012
     Mar. 8,
2011
 
     (in thousands)  

Minimum rentals

   $ 1,400       $ 1,308       $ 418       $ 392   

Contingent payments

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,400       $ 1,308       $ 418       $ 392   
  

 

 

    

 

 

    

 

 

    

 

 

 

The capital lease used in Big Boy operations is for land on which a Big Boy restaurant opened for business in July 2010. Under the terms of the lease, the Company is required to purchase the land in fee simple estate after the 10th year. Delivery and other equipment is held under capitalized leases expiring during various periods extending into fiscal year 2019.

An analysis of the capitalized leased property is shown in the following table. Amortization of capitalized delivery and other equipment is based on the straight-line method over the primary terms of the leases.

 

     Asset balances at  
     Mar. 6,
2012
    May 31,
2011
 
     (in thousands)  

Restaurant property (land)

   $ 825      $ 825   

Delivery and other equipment

     1,730        1,730   

Less accumulated amortization

     (864     (662
  

 

 

   

 

 

 
   $ 1,691      $ 1,893   
  

 

 

   

 

 

 

Future minimum lease payments under capitalized leases and operating leases are summarized below:

 

     Capitalized     Operating  

Period ending March 6,

   leases     leases  
     (in thousands)  

2013

   $ 284      $ 1,628   

2014

     245        1,601   

2015

     245        1,547   

2016

     245        1,414   

2017

     245        1,450   

2018 to 2033

     1,238        13,689   
  

 

 

   

 

 

 

Total

     2,502      $ 21,329   
    

 

 

 

Amount representing interest

     (755  
  

 

 

   

Present value of obligations

     1,747     

Portion due within one-year

     (186  
  

 

 

   

Long-term obligations

   $ 1,561     
  

 

 

   

 

19


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK

The Company has two equity compensation plans adopted respectively in 1993 and 2003.

2003 Stock Option and Incentive Plan

Shareholders approved the 2003 Stock Option and Incentive Plan ((the 2003 Incentive Plan) or (Plan)) in October 2003. The 2003 Incentive Plan provides for several forms of awards including stock options, stock appreciation rights, stock awards including restricted and unrestricted awards of stock, and performance awards. The Plan is in full compliance with the American Jobs Creation Act of 2004 and Section 409A of the Internal Revenue Code (IRC).

No award shall be granted under the Plan on or after October 6, 2013 or after such earlier date on which the Board of Directors may terminate the Plan. The maximum number of shares of common stock that the Plan may issue is 800,000, subject, however, to proportionate and equitable adjustments determined by the Compensation Committee of the Board of Directors (the Committee) as deemed necessary following the event of any equity restructuring that may occur.

Employees of the Company and non-employee members of the Board of Directors are eligible to be selected to participate in the Plan. Participation is based on selection by the Committee. Although there is no limitation on the number of participants in the Plan, approximately 40 persons have historically participated.

The Plan provides that the total number of shares of common stock covered by options plus the number of stock appreciation rights granted to any one individual may not exceed 80,000 during any fiscal year. Additionally, no more than 80,000 shares of common stock may be issued in payment of performance awards denominated in shares, and no more than $1,000,000 in cash (or fair market value, if paid in shares) may be paid pursuant to performance awards denominated in dollars, granted to any one individual during any fiscal year if the awards are intended to qualify as performance based compensation.

Options to purchase shares of the Company’s common stock permit the holder to purchase a fixed number of shares at a fixed price. When options are granted, the Committee determines the number of shares subject to the option, the term of the option, which may not exceed 10 years, the time or times when the option will become exercisable and the price per share that a participant must pay to exercise the option. No option will be granted with an exercise price that is less than 100 percent of fair market value on the date of the grant. The option price and obligatory withholding taxes may be paid pursuant to a “cashless” exercise/sale procedure involving the simultaneous sale by a broker of shares covered by the option.

Stock appreciation rights (SAR’s) are rights to receive payment, in cash, shares of common stock or a combination of the two, equal to the excess of (1) the fair market value of a share of common stock on the date of exercise over (2) the price per share of common stock established in connection with the grant of the SAR (the reference price). The reference price must be at least 100 percent of the common stock’s fair market value on the date the SAR is granted. SAR’s may be granted by the Committee in its discretion to any participant, and may have terms no longer than 10 years.

Stock awards are grants of shares of common stock that may be restricted (subject to a holding period or other conditions) or unrestricted. The Committee determines the amounts, vesting, if any, terms and conditions of the awards, including the price to be paid, if any, for restricted awards and any contingencies related to the attainment of specified performance goals or continued employment or service.

The Committee may also grant performance awards to participants. Performance awards are the right to receive cash, common stock or both, at the end of a specified performance period, subject to satisfaction of the performance criteria and any vesting conditions established for the award.

 

20


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

Stock Options Awarded under the 2003 Incentive Plan

As of March 6, 2012, options to purchase 333,250 shares had been cumulatively granted under the Plan. No stock options were awarded during the 40 week period ended March 6, 2012. Of the 333,250 shares cumulatively granted, 26,000 belong to the President and Chief Executive Officer (CEO). The outstanding options belonging to the CEO that were granted before October 2009 (20,000) vested six months from the date of the grant. Options granted to the CEO pursuant to the terms of his employment contract (3,000 respectively in October 2009 and October 2010) vested one year from the date of the grant. Outstanding options granted to executive officers and other key employees vest in three equal annual installments. Outstanding options granted to non-employee members of the Board of Directors vested one year from the date of grant. The Committee may, in its sole discretion, accelerate the vesting of all or any part of any awards held by a terminated participant, excluding, however, any participant who is terminated for cause.

There were 245,003 options outstanding as of March 6, 2012.

Unrestricted Stock Awarded under the 2003 Incentive Plan

On June 15, 2011, the Committee granted an unrestricted stock award to the CEO. Pursuant to the award, 17,364 shares of the Company’s common stock were re-issued to the CEO from the Company’s treasury. The total value of the award amounted to $371,000, for which the Company recorded a pretax charge against administrative and advertising expense in the consolidated statement of earnings during the 16 week period ended September 20, 2011 (first quarter fiscal year 2012). In connection with the award, the CEO surrendered 7,998 shares back to the Company’s treasury to cover the withholding tax obligation on the compensation. Also on June 15, 2011, an option to purchase 40,000 shares of the Company’s common stock that belonged to the CEO was terminated. The option was originally granted to the CEO on July 11, 2001 at a strike price of $13.70 per share (see 1993 Stock Option Plan described elsewhere in Note D – Capital Stock).

Restricted Stock Awarded under the 2003 Incentive Plan

In October 2010, the Committee began granting restricted stock awards in lieu of the previous practice of granting stock options each year.

Each non-employee member of the Board of Directors was granted a restricted stock award on October 6, 2010 equivalent to $40,000 in shares of the Company’s common stock. The aggregate award amounted to 12,036 shares granted, which resulted in 2,006 shares being issued to each non-employee director, based upon the October 6, 2010 market value of the Company’s common stock. On October 5, 2011, each non-employee director was again granted a restricted stock award equivalent to $40,000 in shares of the Company’s common stock. Based upon the October 5, 2011 market value of the Company’s common stock, the total award amounted to 14,560 shares, or 2,080 shares to each non-employee member. Pursuant to the terms of his employment contract, the CEO was granted a restricted stock award on October 5, 2011 in the same amount (2,080 shares) and subject to the same conditions as the restricted stock granted to non-employee directors on that day.

On June 15, 2011, the Committee granted restricted stock awards to the executive officers and other key employees. Pursuant to the award, 7,141 shares were re-issued from the Company’s treasury. The aggregate award amounted to $150,000, based on the June 15, 2011 market value of the Company’s stock.

All restricted stock awarded was re-issued from the Company’s treasury and vests in full on the first anniversary of the grant date. Full voting and dividend rights are provided prior to vesting. Vested shares must be held until board service or employment ends, except that enough shares may be sold to satisfy tax obligations attributable to the grant.

 

21


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

Shares Available for Awards under the 2003 Incentive Plan

The table below reconciles shares available for awards under the 2003 Incentive Plan as of March 6, 2012:

 

Original authorization

     800,000   

Stock options cumulatively granted

     (333,250

Options cumulatively forfeited (re-available)

     69,669   
  

 

 

 
     536,419   

Unrestricted stock awarded

     (17,364

Restricted stock cumulatively awarded

     (35,817

Restricted stock (cumulatively forfeited (re-available)

     438   
  

 

 

 

Available for awards

     483,676   
  

 

 

 

No other awards — stock appreciation rights or performance awards — had been granted under the 2003 Incentive Plan as of March 6, 2012.

1993 Stock Option Plan

The 1993 Stock Option Plan was not affected by the adoption of the 2003 Stock Option and Incentive Plan. Approved by the shareholders in October 1993, the 1993 Stock Option Plan authorized the grant of stock options for up to 562,432 shares (as adjusted for subsequent changes in capitalization from the original authorization of 500,000 shares) of the common stock of the Company for a 10 year period beginning in May 1994. Shareholders approved the Amended and Restated 1993 Stock Option Plan in October 1998, which extended the availability of options to be granted to October 4, 2008. The Amended and Restated 1993 Stock Option Plan is in compliance with the American Jobs Creation Act of 2004 and Section 409A of the Internal Revenue Code.

Options to purchase 556,228 shares were cumulatively granted under the Amended and Restated 1993 Stock Option Plan before granting authority expired on October 4, 2008. As of March 6, 2012, 157,335 shares granted remained outstanding, including 110,000 that belong to the CEO. An outstanding option for 40,000 shares that was granted to the CEO in 2001 was terminated on June 15, 2011 (see Unrestricted Stock Awarded under the 2003 Incentive Plan described elsewhere in Note D – Capital Stock).

All outstanding options under the Amended and Restated 1993 Stock Option Plan were granted at fair market value and expire 10 years from the date of grant. Final expirations will occur in June 2014. Outstanding options to the CEO vested after six months, while options granted to non-employee members of the Board of Directors vested after one year. Outstanding options granted to other key employees vested in three equal annual installments.

Outstanding and Exercisable Options

The changes in outstanding and exercisable options involving both the 1993 Stock Option Plan and the 2003 Stock Option and Incentive Plan are shown below as of March 6, 2012:

 

     No. of
shares
    Weighted avg.
price per share
     Weighted avg.
Remaining
Contractual Term
    Aggregate
Intrinsic Value
(in thousands)
 

Outstanding at beginning of year

     461,840      $ 23.01        

Granted

     —        $ —          

Exercised

     (6,166   $ 17.97        

Forfeited or expired

     (53,336   $ 16.23        
  

 

 

        

Outstanding at end of quarter

     402,338      $ 23.98         4.07  years    $ 519   
  

 

 

      

 

 

   

 

 

 

Exercisable at end of quarter

     368,838      $ 24.08         3.72  years    $ 470   
  

 

 

      

 

 

   

 

 

 

 

22


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

The intrinsic value of stock options exercised during the 40 weeks ended March 6, 2012 and March 8, 2011 was $18,000 and $612,000, respectively. Options exercised during the 40 weeks ended March 8, 2011 included 61,478 by the CEO, the intrinsic value of which amounted to $595,000. Options exercised during the 12 week periods ended March 6, 2012 and March 8, 2011 were $2,000 and zero respectively.

Stock options outstanding and exercisable as of March 6, 2012 for the 1993 Stock Option Plan and the 2003 Stock Option and Incentive Plan are shown below:

 

Range of Exercise Prices per Share

   No. of
shares
     Weighted average
price per share
     Weighted average
remaining life in years
 

Outstanding:

        

$13.43 to $18.00

     2,000       $ 16.39         0.50 years   

$18.01 to $24.20

     201,918       $ 20.60         3.48 years   

$24.21 to $31.40

     198,420       $ 27.50         4.70 years   
  

 

 

    

 

 

    

 

 

 

$13.43 to $31.40

     402,338       $ 23.98         4.07 years   

Exercisable:

        

$13.43 to $18.00

     2,000       $ 16.39         0.50 years   

$18.01 to $24.20

     180,918       $ 20.61         2.92 years   

$24.21 to $31.40

     185,920       $ 27.54         4.53 years   
  

 

 

    

 

 

    

 

 

 

$13.43 to $31.40

     368,838       $ 24.08         3.72 years   

Restricted Stock Awards

The changes in restricted stock issued under the 2003 Stock Option and Incentive Plan are shown below as of March 6, 2012:

 

     No. of
shares
    Weighted average
price per share
 

Non-vested at beginning of year

     12,036      $ 19.94   

Awarded

     23,781      $ 19.78   

Vested

     (12,724   $ 20.00   

Forfeited

     (438   $ 21.05   
  

 

 

   

 

 

 

Non-vested at end of quarter

     22,655      $ 19.71   
  

 

 

   

 

 

 

Employee Stock Purchase Plan

Shareholders approved the Employee Stock Option Plan (elsewhere referred to as Employee Stock Purchase Plan) in October 1998. The Plan provides employees who have completed 90 days of continuous service with 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 measured at 85 percent of the fair market value of shares at the beginning of the offering period or at the end of the offering period, whichever is lower. The Plan authorizes a maximum of 1,000,000 shares that may be purchased on the open market or from the Company’s treasury. As of October 31, 2011 (latest available data), 164,977 shares had been cumulatively purchased through the Plan. Shares purchased through the Plan are held by the Plan’s custodian until withdrawn or distributed. As of October 31, 2011, the custodian held 44,548 shares on behalf of employees.

 

23


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

Frisch’s Executive Savings Plan

Common shares totaling 58,492 (as adjusted for subsequent changes in capitalization from the original authorization of 50,000 shares) were reserved for issuance under the non-qualified Frisch’s Executive Savings Plan (FESP) (see Benefit Plans in Note A – Accounting Policies) when it was established in 1993. As of March 6, 2012, 38,767 shares remained in the FESP reserve, including 12,990 shares allocated but not issued to participants.

There are no other outstanding options, warrants or rights.

Treasury Stock

As of March 6, 2012, the Company’s treasury held 2,648,899 shares of the Company’s common stock. Most of the shares were acquired through a modified “Dutch Auction” self-tender offer in 1997, and in a series of intermittent repurchase programs that began in 1998.

The repurchase program that was authorized by the Board of Directors in January 2010 expired on January 6, 2012. The authorization had allowed the Company to repurchase up to 500,000 shares of its common stock in the open market or through block trades. During the two year life of the program, the Company acquired 289,528 shares at a cost of $6,107,000, which includes 19,596 shares acquired at a cost of $417,000 during the 40 weeks ended March 6, 2012; no repurchases were made after September 2011.

Separate from the repurchase program, the Company’s treasury acquired 10,701 shares of its common stock during the 40 weeks ended March 6, 2012 at a cost of $223,000 to cover the withholding tax obligations in connection with restricted and unrestricted stock awards. Most of these shares were acquired in June 2011 when 7,998 shares valued at $171,000 were surrendered by the CEO (see Unrestricted Stock Award under the 2003 Incentive Plan described elsewhere in Note D – Capital Stock).

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.

 

     Basic earnings per share      Stock
equivalents
     Diluted earnings per share  

40 weeks ended:

   Weighted average
shares outstanding
     EPS         Weighted average
shares outstanding
     EPS  

March 6, 2012

     4,932,817       $ 0.67         8,683         4,941,500       $ 0.67   

March 8, 2011

     5,065,863       $ 1.40         38,281         5,104,144       $ 1.39   

Stock options to purchase 246,000 shares during the 40 weeks ended March 6, 2012 and 254,000 shares during the 40 weeks ended March 8, 2011 were excluded from the calculation of diluted EPS because the effect was anti-dilutive.

 

     Basic earnings per share      Stock
equivalents
     Diluted earnings per share  
     Weighted average                Weighted average         

12 weeks ended:

   shares outstanding      EPS         shares outstanding      EPS  

March 6, 2012

     4,936,699       $ 0.57         11,476         4,948,175       $ 0.57   

March 8, 2011

     5,025,074       $ 0.37         31,378         5,056,452       $ 0.37   

 

24


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

Stock options to purchase 246,000 shares during the 12 weeks ended March 6, 2012 and 254,000 shares during the 12 weeks ended March 8, 2011 were excluded from the calculation of diluted EPS because the effect was anti-dilutive.

Share-Based Payment (Compensation Cost)

The fair value of stock options granted and restricted stock issued is recognized as compensation cost on a straight-line basis over the vesting periods of the awards. The fair value of unrestricted stock issued to the CEO in June 2011 (see Unrestricted Stock Awarded under the 2003 Incentive Plan described elsewhere in Note D — Capital Stock) was recognized entirely during the 16 week period ended September 20, 2011 (first quarter fiscal year 2012). Compensation costs arising from all share-based payments are charged to administrative and advertising expense in the consolidated statement of earnings.

 

     40 weeks ended     12 weeks ended  
     Mar. 6,
2012
    Mar. 8,
2011
    Mar. 6,
2012
    Mar. 8,
2011
 
           (in thousands)        

Stock options granted

   $ 120      $ 214      $ 30      $ 60   

Restricted stock issued

     327        92        103        55   

Unrestricted stock issued

     371        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Share-based compensation cost, pretax

     818        306        133        115   

Tax benefit

     (278     (104     (45     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Share-based compensation cost, net of tax

   $ 540      $ 202      $ 88      $ 76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect on basic earnings per share

   $ .11      $ .04      $ .02      $ .02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect on diluted earnings per share

   $ .11      $ .04      $ .02      $ .02   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of March 6, 2012, there was $91,000 of total unrecognized pretax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 0.7 years. Unrecognized pretax compensation cost related to restricted stock amounted to $228,000 as of March 6, 2012, which is expected to be recognized over a weighted average period of 0.51 years.

No stock options were awarded during the 40 week period ended March 6, 2012. The fair value of each stock option award that was granted in the previous year (the 40 weeks ended March 8, 2011) was estimated on the date of the grant using the modified Black-Scholes option pricing model, developed using the assumptions shown in the following table. No options were granted during the 12 weeks ended March 8, 2011.

 

     40 weeks
Mar. 8,
2011
 

Options granted

     43,000   

Weighted average fair value of options

     $5.40   
  

 

 

 

Dividend yield

     2.5% - 3.0%   

Expected volatility

     30% - 32%   

Risk free interest rate

     1.8% - 2.7%   

Expected lives

     6 years   

 

25


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE D — CAPITAL STOCK (CONTINUED)

 

Dividend yield was based on the Company’s current dividend yield, which is considered the best estimate of projected dividend yields within the contractual life of the options. Expected volatility was based on the historical volatility of the Company’s stock using the month end closing price of the previous six years. Risk free interest rate represented the U. S. Treasury yield curve in effect at the time of grant for periods within the expected life of the option. Expected life represents the period of time the options are expected to be outstanding based on historical exercise patterns.

Compensation cost is also recognized in connection with the Company’s Employee Stock Purchase Plan (described elsewhere in Note D – Capital Stock). Compensation costs related to the Employee Stock Purchase Plan, determined at the end of each semi-annual offering period – October 31 and April 30, amounted to $24,000 and $23,000 respectively, during the 40 weeks ended March 6, 2012 and March 8, 2011.

NOTE E — PENSION PLANS

As discussed more fully under Benefit Plans in Note A – Accounting Policies, the Company sponsors two qualified defined benefit pension plans (DB Plans) plus an unfunded non-qualified Supplemental Executive Retirement Plan (SERP) for “highly compensated employees” (HCE’s). Net periodic pension cost for all three retirement plans is shown in the table that follows:

 

     40 weeks ended     12 weeks ended  

Net periodic pension cost components

   Mar. 6,
2012
    Mar. 8
2011
    Mar. 6,
2012
    Mar. 8,
2011
 
     (in thousands)  

Service cost

   $ 1,478      $ 1,482      $ 444      $ 445   

Interest cost

     1,441        1,455        432        436   

Expected return on plan assets

     (1,589     (1,300     (477     (390

Amortization of prior service cost

     1        6        —          2   

Recognized net actuarial loss

     673        684        202        205   

Settlement loss

     115        239        35        72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 2,119      $ 2,566      $ 636      $ 770   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average discount rate

     5.25     5.50     5.25     5.50

Weighted average rate of compensation increase

     4.00     4.00     4.00     4.00

Weighted average expected long-term rate of return on plan assets

     7.50     7.50     7.50     7.50

Net periodic pension cost for fiscal year 2012 is currently expected in the range of $2,700,000 to $2,800,000. This includes a benefit in excess of $550,000 from the effect of certain changes in assumptions relating to retirement, termination and marriage, offset by approximately $125,000 due to a reduction of 25 basis points in the discount rate. Net periodic pension cost for fiscal year 2011 was $3,025,000.

DB Plan funding for the plan year ending May 31, 2012 is currently anticipated at a level of $2,100,000 (well above minimum required contributions), of which $1,250,000 had been contributed as of March 6, 2012. Although the funding requirements allow the Company to make quarterly contributions through February 2013, the Company expects to contribute the remaining planned contributions of $850,000 before the fiscal year ends on May 29, 2012. Obligations to participants in the SERP are satisfied in the form of a lump sum distribution upon retirement of the participants.

 

26


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

NOTE E — PENSION PLANS (CONTINUED)

 

Future funding of the DB Plans largely depends upon the performance of investments that are held in trusts that have been established for the plans. Equity securities comprise 70 percent of the target allocation of the plans’ assets. Although the market for equity securities made significant rebounds in fiscal years 2011 and 2010, which have continued into fiscal year 2012, the market declines experienced in fiscal year 2009 continue to adversely affect funding, and will likely require the continued recognition of significantly higher net periodic pension costs than had been incurred prior to the market declines in fiscal year 2009.

The “Underfunded pension obligation” included in “Long-Term Obligations” in the consolidated balance sheet represents projected benefit obligations in excess of the fair value of plan assets. The change in underfunded status is re-measured at the end of each fiscal year, effected through an increase or decrease in “Accumulated other comprehensive loss” in the equity section of the consolidated balance sheet. The projected benefit obligation, which includes a projection of future salary increases, was measured at May 31, 2011 using a weighted average discount rate of 5.25 percent, a reduction of 25 basis points from the previous year. The projected benefit obligation increases approximately $975,000 for each decrease of 25 basis points in the discount rate.

Compensation expense (not included in the net periodic pension cost described above) relating to the Non Deferred Cash Balance Plan (NDCBP) (see Benefit Plans in Note A — Accounting Policies) was $543,000 and $390,000 respectively, during the 40 weeks ended March 6, 2012 and March 8, 2011, and was $267,000 and $115,000 respectively, for the 12 weeks ended March 6, 2012 and March 8, 2011. Total NDCBP expense for fiscal year 2012 is currently expected to be in the range of $640,000 to $650,000. This consists of amounts contributed or expected to be contributed into HCE’s individual trust accounts, and accruals for additional required contributions that are due when the present value of lost benefits under the DB plans and the SERP exceeds the value of the assets in the HCE’s trust accounts when a participating HCE retires or is otherwise separated from service with the Company. NDCBP expense for fiscal year 2011 was $477,000.

In addition, the President and Chief Executive Officer (CEO) has an employment agreement that calls for additional annual contributions to be made to the trust established for the benefit of the CEO under the NDCBP when certain levels of annual pretax earnings are achieved.

The Company also sponsors two 401(k) defined contribution plans, and a non-qualified Executive Savings Plan (FESP) is in place for certain HCE’s who have been disqualified from participation in the 401(k) plans (see Benefit Plans in Note A — Accounting Policies). In the 40 week periods ended March 6, 2012 and March 8, 2011, matching contributions to the 401(k) plans amounted to $221,000 and $181,000 respectively, and were $69,000 and $58,000 respectively, during the 12 week periods ended March 6, 2012 and March 8, 2011. Matching contributions to FESP were $26,000 and $22,000 respectively, during the 40 weeks ended March 6, 2012 and March 8, 2011, and were $7,000 and $6,000 respectively, during the 12 week periods ended March 6, 2012 and March 8, 2011.

The Company does not sponsor post retirement health care plans.

NOTE F — COMPREHENSIVE INCOME

 

     40 weeks ended     12 weeks ended  
     Mar. 6,
2012
    Mar. 8,
2011
    Mar. 6,
2012
    Mar. 8,
2011
 
     (in thousands)  

Net earnings

   $ 3,326      $ 7,081      $ 2,813      $ 1,855   

Amortization of amounts included in net periodic pension cost

     789        928        237        278   

Tax effect

     (268     (316     (81     (95
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,847      $ 7,693      $ 2,969      $ 2,038   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE G — SEGMENT INFORMATION

The Company has two reportable segments within the restaurant industry: Big Boy restaurants and Golden Corral restaurants. Financial information by operating segment is as follows:

 

     40 weeks ended     12 weeks ended  
     Mar. 6,
2012
    Mar. 8,
2011
    Mar. 6,
2012
    Mar. 8,
2011
 
           (in thousands)        

Sales

        

Big Boy

   $ 157,583      $ 153,882      $ 46,284        45,148   

Golden Corral

     73,293        77,186        22,122        22,342   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 230,876      $ 231,068      $ 68,406      $ 67,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

        

Big Boy

   $ 13,902      $ 16,123      $ 4,281      $ 4,344   

Impairment of long-lived assets

     (328 )      —          (328 )      —     

Opening expense

     (398 )      (982     —          (66
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Big Boy

     13,176        15,141        3,953        4,278   

Golden Corral

     2,284        1,838        1,285        411   

Impairment of long-lived assets

     (4,094 )      —          (94 )      —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Golden Corral

     (1,810 )      1,838        1,191        411   

Total restaurant level profit

     11,366        16,979        5,144        4,689   

Administrative expense

     (7,621 )      (6,784     (2,125 )      (2,007

Franchise fees and other revenue

     994        1,005        300        309   

Gain on sale of assets

     178        —          178        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     4,917        11,200        3,497        2,991   

Interest expense

     (1,136 )      (1,227     (328     (378
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   $ 3,781      $ 9,973      $ 3,169      $ 2,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

        

Big Boy

   $ 7,849      $ 7,561      $ 2,375      $ 2,348   

Golden Corral

     3,744        4,364        1,105        1,290   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 11,593      $ 11,925      $ 3,480      $ 3,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

        

Big Boy

   $ 8,714      $ 13,100      $ 1,231      $ 2,446   

Golden Corral

     2,626        1,405        1,110        826   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 11,340      $ 14,505      $ 2,341      $ 3,272   
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of        
     Mar. 6,
2012
    May 31,
2011
   

Identifiable assets

      

Big Boy

   $ 130,937      $ 125,784     

Golden Corral

     61,701        69,490     
  

 

 

   

 

 

   
   $ 192,638      $ 195,274     
  

 

 

   

 

 

   

 

28


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE H — COMMITMENTS AND CONTINGENCIES

Commitments

In the ordinary course of business, purchase commitments are entered into with certain of the Company’s suppliers. Most of these agreements are typically for periods of one year or less in duration; however, longer term agreements are also in place. Future minimum payments under these arrangements are $14,611,000, $3,294,000, $205,000 and $52,000 respectively, for the periods ending March 6, 2013, 2014, 2015 and 2016. These agreements are intended to secure favorable pricing while ensuring availability of desirable products. Management does not believe such agreements expose the Company to any significant risk.

Litigation

The Company is subject to various claims and suits that arise from time to time in the ordinary course of business. Management does not presently believe that the resolution of any claims currently outstanding will materially affect the Company’s earnings, cash flows or financial position. Exposure to loss contingencies from pending or threatened litigation is continually evaluated by management, which believes that adequate provisions for losses not covered by insurance are already included in the consolidated financial statements.

Other Contingencies

The Company self-insures a significant portion of expected losses under its workers’ compensation program in the state of Ohio. Insurance coverage is purchased from an insurance company for individual claims that may exceed $300,000. (See Self Insurance in Note A – Accounting Policies.) Insurance coverage is maintained for various levels of casualty and general and product liability.

Outstanding letters of credit maintained by the Company totaled $100,000 as of March 6, 2012.

As of March 6, 2012, the Company operated 22 restaurants on non-owned properties. (See Note C — Leased Properties.) One of the leases provides for contingent rental payments based on a percentage of the leased restaurant’s sales in excess of a fixed amount.

The Company is secondarily liable for the performance of a ground lease that has been assigned to a third party. The annual obligation of the lease approximates $48,000 through 2020. Since there is no reason to believe that the third party will default, no provision has been made in the consolidated financial statements for amounts that would be payable by the Company. In addition, the Company has the right to re-assign the lease in the event of the third party’s default.

NOTE I — RELATED PARTY TRANSACTIONS

The Chief Executive Officer of the Company (Craig F. Maier), who also serves as a director of the Company, owns a Big Boy restaurant licensed to him by the Company. Another officer and director of the Company (Karen F. Maier) is a part owner of a Big Boy restaurant that is licensed to her and her siblings (excluding Craig F. Maier). Until her death in September 2009, Blanche F. Maier (the mother of Craig F. Maier and Karen F. Maier) served as a director of the Company. Certain other family members of Mrs. Maier’s also own a licensed Big Boy restaurant.

These three restaurants are operated by the Company (not consolidated herein) and they pay to the Company franchise and advertising fees, employee leasing and other fees, and make purchases from the Company’s commissary. The total paid to the Company by these three restaurants amounted to $3,985,000 and $3,825,000 respectively, during the 40 weeks ended March 6, 2012 and March 8, 2011, and was $1,178,000 and $1,114,000 respectively, during the 12 weeks ended March 6, 2012 and March 8, 2011. Amounts due are generally settled within 28 days of billing. As of March 6, 2012, these three restaurants had overpaid the Company $35,000. The amount owed to the Company was $57,000 as of May 31, 2011.

 

29


Frisch’s Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Third Quarter Fiscal 2012, Ended March 6, 2012

 

NOTE I – RELATED PARTY TRANSACTIONS (CONTINUED)

 

All related party transactions described above were effected on substantially similar terms as transactions with persons or entities having no relationship with the Company.

The Chairman of the Board of Directors from 1970 to 2005 (Jack C. Maier, deceased February 2005) had an employment agreement that contained a provision for deferred compensation. The agreement provided that upon its expiration or upon the Chairman’s retirement, disability, death or other termination of employment, the Company would become obligated to pay the Chairman or his survivors for each of the next 10 years the amount of $214,050, adjusted annually to reflect 50 percent of the annual percentage change in the Consumer Price Index (CPI). Monthly payments of $17,838 to the Chairman’s widow (Blanche F. Maier), a director of the Company until her death in September 2009, commenced in March 2005. On March 1, 2012, the monthly payment was increased to $19,436 from $19,149 in accordance with the CPI provision of the agreement. The present value of the long-term portion of the obligation to Mrs. Maier’s Estate (Craig F. Maier, Executor), approximating $432,000 is included in the consolidated balance sheet under the caption “Deferred compensation and other.” The present value of the current portion of the obligation approximating $212,000 is included in current liabilities in the consolidated balance sheet.

NOTE J – SUBSEQUENT EVENTS

On March 12, 2012, the Company announced that it had entered into an agreement with NRD Holdings. LLC to sell substantially all of the Company’s Golden Corral operations and real estate consisting of restaurants in Ohio, Indiana, Kentucky, West Virginia and Pennsylvania. On March 22, 2012, the Company announced that Golden Corral Franchising Systems, Inc. (the franchisor) had exercised its right of first refusal, supplanting NRD Holdings, LLC as the buyer of the Company’s Golden Corral operations and real estate. Terms of the transaction with Golden Corral Franchising Systems, Inc. will be upon the same terms and conditions of the previous contract with NRD Holdings, LLC. The transaction is expected to close before the end of the Company’s fiscal year 2012, at which time the terms of the transaction will be disclosed.

On March 15, 2012, the Company paid $1,681,000 to retire one of its outstanding term loans (see “Construction Loan” under Note B – Long-Term Debt) that has been in place with its lender. The early retirement of the loan required no prepayment penalty.

 

30


ITEM 2. MANAGEMENT’S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS

SAFE HARBOR STATEMENT under the PRIVATE SECURITIES LITIGATION REFORM ACT of 1995

Forward-looking statements are included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Such statements may generally express management’s expectations with respect to its plans, or its assumptions and beliefs concerning future developments and their potential effect on the Company. There can be no assurances that such expectations will be met or that future developments will not conflict with management’s current beliefs and assumptions, which are inherently subject to risks and other uncertainties. Factors that could cause actual results and performance to differ materially from anticipated results that may be expressed or implied in forward-looking statements are included in, but not limited to, the discussion in this Form 10-Q under Part II, Item 1A. “Risk Factors.”

Sentences that contain words such as “should,” “would,” “could,” “may,” “plan(s),” “anticipate(s),” “project(s),” “believe(s),” “will,” “expect(s),” “estimate(s),” “intend(s),” “continue(s),” “assumption(s),” “goal(s),” “target” and similar words (or derivatives thereof) are generally used to distinguish “forward-looking statements” from historical or present facts.

All forward-looking information in this MD&A is provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of all risk factors. Except as may be required by law, the Company disclaims any obligation to update any forward-looking statements that may be contained in this MD&A.

This MD&A should be read in conjunction with the consolidated financial statements. The Company has no off-balance sheet arrangements other than operating leases that are entered from time to time in the ordinary course of business. The company does not use special purpose entities.

CORPORATE OVERVIEW

The operations of Frisch’s Restaurants, Inc. and Subsidiaries (Company) consist of two reportable segments within the restaurant industry: full service family-style “Big Boy” restaurants and grill buffet style “Golden Corral” restaurants. As of March 6, 2012, 95 Big Boy restaurants and 29 Golden Corral restaurants were owned and operated by the Company. All restaurant operations are primarily located in various regions of Ohio, Kentucky and Indiana. In addition, Golden Corral restaurants are operated in smaller regions of Pennsylvania and West Virginia.

In October 2011, the Company announced that it had engaged an investment banking firm specializing in the restaurant industry to assist the Company in its evaluation of strategic alternatives relating to its Golden Corral business segment. The purpose of the engagement has been to optimize the value of the Company’s investments in its Golden Corral restaurants. On March 12, 2012, the Company announced that it had entered into an agreement to sell substantially all of its Golden Corral restaurant operations, including real estate. On March 22, 2012, the franchisor (Golden Corral Franchising Systems, Inc.) exercised its right of first refusal to become the new buyer. Terms of the deal will be disclosed upon close of the transaction, which is expected to occur before the end of Fiscal 2012 (defined below).

Six underperforming Golden Corral restaurants were permanently closed on August 23, 2011 (during the 16 week first quarter of fiscal 2012, which ended September 20, 2011), at which time a non-cash pretax asset impairment charge (with related closing costs) of $4,000,000 was recorded. The impairment charge lowered the carrying values of the six properties (owned in fee simple estate) to their fair values, which in the aggregate amounted to approximately $6,909,000. One of the six former Golden Corrals was sold during the Third Quarter of Fiscal 2012 (defined below). The sale proceeds approximated its fair value. Two other former Golden Corrals are currently under contract, one of which required a $94,000 reduction in its fair value, which was recognized as an impairment charge during the Third Quarter of Fiscal 2012.

The Company’s Third Quarter of Fiscal 2012 consists of the 12 weeks ended March 6, 2012, and compares with the 12 weeks ended March 8, 2011, which constituted the Third Quarter of Fiscal 2011. The First Three Quarters of Fiscal 2012 consists of the 40 weeks ended March 6, 2012, and compares with the 40 weeks ended March 8, 2011, which constituted the First Three Quarters of Fiscal 2011. The 12 week third quarter is usually a disproportionately smaller share of annual revenue and earnings because it spans most of the winter season from mid December through

 

31


early March. References to Fiscal 2012 refer to the 52 week year that will end on May 29, 2012. References to Fiscal 2011 refer to the 52 week year that ended May 31, 2011.

Net earnings for the Third Quarter of Fiscal 2012 were $2,813,000, or diluted net earnings per share (EPS) of $0.57, which compares with $1,855,000, or diluted EPS of $0.37 in the Third Quarter of Fiscal 2011. The estimated annual effective tax rate was 11.2 percent in the Third Quarter of Fiscal 2012 and was 29 percent in the Third Quarter of Fiscal 2011. The EPS calculations used the following diluted weighted average shares outstanding: 4,948,175 in the Third Quarter of Fiscal 2012 and 5,056,452 in the Third Quarter of Fiscal 2011.

Factors having a notable effect on pretax earnings when comparing the Third Quarter of Fiscal 2012 ($3,169,000) with the Third Quarter of Fiscal 2011 ($2,613,000):

 

   

This year’s $422,000 charge to lower the fair values of one of the six closed Golden Corral restaurants ($94,000) and two former Big Boy restaurants ($328,000) that have been held for sale for several years

 

   

Consolidated restaurant sales increased $916,000

 

  -  

Total Big Boy sales increased $1,136,000 (2.5 percent), primarily the result of more restaurants in operation

 

  -  

Big Boy same store sales increased 1.7 percent

 

  -  

Golden Corral sales decreased $220,000 (1.0 percent), which includes the effect of lost sales from six closed restaurants ($2,660,000 during the Third Quarter of Fiscal 2011)

 

  -  

Golden Corral same store sales increased 12.4 percent

 

   

Big Boy gross profit increased $32,000, or 0.6 percent

As a percentage of sales:

  -  

Food and Paper Costs were 33.7 percent in the Third Quarter of Fiscal 2012, up from 33.1 percent in the Third Quarter of Fiscal 2011

 

  -  

Payroll and Related Costs were 35.7 percent in the Third Quarter of Fiscal 2012, down from 36.0 percent in the Third Quarter of Fiscal 2011

 

  -  

Other Operating Costs were 18.9 percent in the Third Quarter of Fiscal 2012, down from 19.1 percent in the Third Quarter of Fiscal 2011. Included in these percentages is the effect of new store opening costs - zero in Third Quarter of Fiscal 2012 versus $66,000 in the Third Quarter of Fiscal 2011

 

   

Golden Corral gross profit increased $861,000, or 87.2 percent

As a percentage of sales:

 

  -  

Food and Paper Costs were 38.4 percent in the Third Quarter of Fiscal 2012, down from 38.5 percent in the Third Quarter of Fiscal 2011

 

  -  

Payroll and Related costs were 28.2 percent in the Third Quarter of Fiscal 2012, down from 29.5 percent in the Third Quarter of Fiscal 2011

 

  -  

Other Operating Costs were 25.1 percent in the Third Quarter of Fiscal 2012, down from 27.5 percent in the Third Quarter of Fiscal 2011

Net earnings for the First Three Quarters of Fiscal 2012 were $3,327,000, or diluted EPS of $0.67, which compares with $7,081,000, or diluted EPS of $1.39 in the First Three Quarters of Fiscal 2011. The estimated annual effective tax rate was 12 percent in the First Three Quarters of Fiscal 2012 and was 29 percent in the First Three Quarters of Fiscal 2011. The EPS calculations used the following diluted weighted average shares outstanding: 4,941,500 in the First Three Quarters of Fiscal 2012 and 5,104,144 in the First Three Quarters of Fiscal 2011.

Factors having a notable effect on pretax earnings when comparing the First Three Quarters of Fiscal 2012 ($3,781,000) with the First Three Quarters of Fiscal 2011 ($9,973,000):

 

   

This year’s $4,094,000 charge (with related closing costs) for impairment of the six closed Golden Corral restaurants

 

32


   

This year’s $328,000 charge for the impairment of two former Big Boy restaurants that have been held for sale for several years

 

   

Consolidated restaurant sales decreased $192,000

 

  -  

Total Big Boy sales increased $3,701,000 (2.4 percent), primarily the result of more restaurants in operation

 

  -  

Big Boy same store sales increased 0.9 percent

 

  -  

Golden Corral sales decreased $3,893,000 (5.0 percent), which includes the effect of lost sales from six closed restaurants ($2,744,000 in the First Three Quarters of Fiscal 2012 and $9,171,000 in the First Three Quarters of Fiscal 2011)

 

  -  

Golden Corral same store sales increased 3.7 percent

 

   

Big Boy gross profit decreased $1,551,000, or 8.2 percent

As a percentage of sales:

 

  -  

Food and Paper Costs were 33.8 percent in the First Three Quarters of Fiscal 2012, up from 32.6 percent in the First Three Quarters of Fiscal 2011

 

  -  

Payroll and Related Costs were 35.4 percent in the First Three Quarters of Fiscal 2012, down from 35.6 percent in the First Three Quarters of Fiscal 2011

 

  -  

Other Operating Costs were 19.9 percent in the First Three Quarters of Fiscal 2012, up from 19.6 percent in the First Three Quarters of Fiscal 2011. These percentages include the effect of new store opening costs - $398,000 in First Three Quarters of Fiscal 2012 versus $982,000 in the First Three Quarters of Fiscal 2011

 

   

Golden Corral gross profit increased $336,000, or 8.8 percent

As a percentage of sales:

 

  -  

Food and Paper Costs were 38.3 percent in the First Three Quarters of Fiscal 2012, up from 38.1 percent in the First Three Quarters of Fiscal 2011

 

  -  

Payroll and Related costs were 28.9 percent in the First Three Quarters of Fiscal 2012, down from 29.1 percent in the First Three Quarters of Fiscal 2011

 

  -  

Other Operating Costs were 27.1 percent in the First Three Quarters of Fiscal 2012, down from 27.8 percent in the First Three Quarters of Fiscal 2011

 

   

Administrative and advertising expense increased 6.5 percent, primarily due to stock based compensation costs, which included $371,000 for an unrestricted stock award to the Chief Executive Officer, and higher professional fees associated with the strategic assessment of Golden Corral operations.

RESULTS of OPERATIONS

Sales

The Company’s sales are primarily generated through the operation of Big Boy restaurants and Golden Corral restaurants. Big Boy sales also include wholesale sales from the Company’s commissary to restaurants licensed to other Big Boy operators and the sale of Big Boy’s signature brand tartar sauce to grocery stores. Same store sales comparisons are a key metric that management uses in the operation of the business. Same store sales are affected by changes in customer counts and menu price increases. Changes in sales also occur as new restaurants are opened and older restaurants are closed. Below is the detail of consolidated restaurant sales:

 

     Third Quarter      First Three Quarters  
     Mar. 6,
2012
     Mar. 8,
2011
     Mar. 6,
2012
     Mar. 8,
2011
 
     (in thousands)  

Big Boy restaurant sales

   $ 43,714       $ 42,740       $ 149,322       $ 146,122   

Wholesale sales to licensees

     2,089         1,955         7,232         6,808   

Other wholesale sales

     481         453         1,029         952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Big Boy Sales

     46,284         45,148         157,583         153,882   

Golden Corral sales

     22,122         22,342         73,293         77,186   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated restaurant sales

   $ 68,406       $ 67,490       $ 230,876       $ 231,068   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

33


The Company operated 95 Big Boy restaurants as of March 6, 2012. The count of 95 includes the following changes since the beginning of Fiscal 2011 (June 2010), when 91 Big Boy restaurants were in operation:

 

   

July 2010 — new restaurant opened in Louisville, Kentucky

 

   

August 2010 — new restaurant opened in Beavercreek, Ohio (Dayton market)

 

   

October 2010 — new restaurant opened in Elizabethtown, Kentucky (Louisville market)

 

   

December 2010 — new restaurant opened in Heath, Ohio (Columbus market)

 

   

July 2011 — new restaurant opened near Cincinnati, Ohio

 

   

October 2011 — new restaurant opened in Highland Heights, Kentucky (Cincinnati market)

 

   

October 2011 — older restaurant closed in Ft. Thomas, Kentucky (Cincinnati market)

 

   

December 2011 — older restaurant closed in Columbus, Ohio

Two new Big Boy restaurants are expected to be added in calendar year 2012, with openings currently scheduled in August 2012 (Cincinnati market) and October (Lexington market). An older Big Boy restaurant (Cincinnati market) that currently operates at a leased location will likely be closed and vacated when its lease expires in May 2012.

Big Boy sales shown in the above table include a same store sales increase of 1.7 percent in the Third Quarter of Fiscal 2012 (on a customer count decrease of 0.8 percent) and a 0.9 percent increase for the First Three Quarters of Fiscal 2012 (on a 1.8 percent decrease in customer counts). The Big Boy same store sales comparisons include four menu price increases, implemented respectively in September 2010 (1.0 percent), March 2011 (1.0 percent), September 2011 (1.5 percent) and February 2012 (1.2 percent).

A plan is currently under development to expand significantly the Company’s grocery line business by adding “Frisch’s” brand of salad dressings in grocery stores in 2012, joining “Frisch’s” brand tartar sauce, which has been a long-standing staple on grocery store shelves in Ohio, Kentucky and Indiana for many years. The deletion of the reference to “Big Boy” will allow the “Frisch’s” brand to enter previously restricted markets.

The Company operated 29 Golden Corral restaurants as of March 6, 2012 (see pending sale information in the Corporate Overview section of this MD&A). The count of 29 includes the following changes since the beginning of Fiscal 2011 (June 2010), when 35 Golden Corral restaurants were in operation:

 

   

August 2011 — closed four restaurants in or near Cincinnati, Ohio

 

   

August 2011 — closed restaurant in Medina, Ohio (Cleveland market)

 

   

August 2011 — closed restaurant in West Akron, Ohio (Cleveland market)

Golden Corral sales shown in the above table include a same store sales increase of 12.4 percent in the Third Quarter of Fiscal 2012 (on a customer count increase of 9.7 percent) and a 3.7 percent increase in the First Three Quarters of Fiscal 2012 (on a 0.2 decrease in customer counts). The Golden Corral same store sales comparisons include six menu price increases implemented respectively in September 2010 (1.3 percent), February 2011 (0.9 percent), March 2011 (1.0 percent), June 2011 (0.9 percent), January 2012 (0.5 percent) and February 2012 (1.3 percent). A number of factors supported the 12.4 percent sales increase in the Third Quarter of Fiscal 2012: the highly effective “Two for $20” marketing campaign, the introduction into all restaurants of new products such as the “Chocolate Wonderfall” and cotton candy, mild winter weather and the continued effect of customers migrating from the six closed restaurants to nearby locations (same stores).

Proposed regulations of the menu labeling provisions of the federal Patient Protection and Affordable Care Act (enacted March 2010) were issued by the U.S. Food and Drug Administration in April 2011. Final regulations that had been expected by the end of calendar year 2011 have been postponed to an unspecified date in 2012. It is expected that implementation will be required no earlier than six months and no later than 12 months following release of the final regulations.

The Payment Card Industry Security Standards Council has a data security standard with which all organizations that process card payments must comply. The standard is intended to prevent credit card fraud by focusing on the internal controls of processing and storage of such data. An independent audit must certify the Company’s compliance with Payment Card Industry Security standards each year. The Company received its first annual Attestation of Compliance in June 2011. Management expects to encounter no significant difficulties in being re-certified in 2012. A finding of non-compliance could restrict the Company’s authorization to accept credit cards as a form of payment.

 

34


Gross Profit

Gross profit for the Big Boy segment includes wholesale sales and cost of wholesale sales. Gross profit differs from restaurant level profit discussed in Note G (Segment Information) to the consolidated financial statements because advertising expense and impairment of asset losses are charged against restaurant level profit. Gross profit for both operating segments is shown below:

 

     Third Quarter      First Three Quarters  
     Mar. 6,
2012
     Mar. 8,
2011
     Mar. 6,
2012
     Mar. 8,
2011
 
            (in thousands)         

Big Boy gross profit

   $ 5,410       $ 5,378       $ 17,310       $ 18,861   

Golden Corral gross profit

     1,848         987         4,158         3,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross profit

   $ 7,258       $ 6,365       $ 21,468       $ 22,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

The operating percentages shown in the following table are percentages of total sales, including Big Boy wholesale sales. The table supplements the discussion that follows which addresses cost of sales for both the Big Boy and Golden Corral reporting segments, including food cost, payroll and other operating costs.

 

     Third Quarter      First Three Quarters  
     12 weeks 3/6/12      12 weeks 3/8/11      40 weeks 3/6/12      40 weeks 3/8/11  
     Total      Big
Boy
     GC      Total      Big
Boy
     GC      Total      Big
Boy
     GC      Total      Big
Boy
     GC  

Sales

     100.0         100.0         100.0         100.0         100.0         100.0         100.0         100.0         100.0         100.0         100.0         100.0   

Food and Paper

     35.2         33.7         38.4         34.9         33.1         38.5         35.2         33.8         38.3         34.5         32.6         38.1   

Payroll and Related

     33.3         35.7         28.2         33.8         36.0         29.5         33.3         35.4         28.9         33.4         35.6         29.1   

Other Operating Costs (including opening costs)

     20.9         18.9         25.1         21.9         19.1         27.5         22.2         19.9         27.1         22.3         19.6         27.8   

Gross Profit

     10.6         11.7         8.3         9.4         11.8         4.5         9.3         10.9         5.7         9.8         12.2         5.0   

The cost of food continued its sharp rise throughout the First Three Quarters of Fiscal 2012. Higher prices were paid for most commodities, especially beef and pork. The price of hamburger continues at record highs, driven by a) the high cost of corn, which is the primary feed ingredient for cattle, as well as hogs and poultry, and b) record low beef supplies and strong demand for exports. Costs for beef are expected continue rising well into the 2012 calendar year.

Although the Company does not use financial instruments as a hedge against changes in commodity prices, purchase contracts for some commodities may contain provisions that limit the price the Company will pay. In addition, the effect of commodity price increases in actively managed with changes to the Big Boy menu mix and effective selection and rotation of items served on the Golden Corral buffet, together with periodic increase in menu prices. However, rapid escalations in the cost of food can be problematic to effective menu management, as evidenced by the sharply rising percentages in the above table despite higher prices being charged to customers.

Food and paper cost percentages for the Golden Corral segment are much higher than the Big boy segment because of the all-you-can-eat nature of the Golden Corral segment, and because steak is featured daily on the buffet line. Golden Corral food cost percentages did not rise as sharply as Big Boy as favorable long term pricing for steak had been locked-in through February 2012.

 

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Food safety poses a major risk to the Company. Management rigorously emphasizes and enforces established food safety policies in all of the Company’s restaurants and in its commissary and food manufacturing plant. These policies are designed to work cooperatively with programs established by health agencies at all levels of governmental authority, including the federal Hazard Analysis of Critical Control Points (HACCP) program. In addition, the Company makes use of ServSafe Training, a nationally recognized program developed by the National Restaurant Association. The ServSafe program provides accurate, up-to-date science-based information to all levels of restaurant employees covering all aspects of food handling, from receiving and storing to preparing and serving. All restaurant managers are required to be certified in ServSafe Training and are required to be re-certified every five years.

The across the board decreases in payroll and related expenses (as a percentage of sales) shown in the above table were driven primarily by same store sales increases, as actual payroll costs did not rise as rapidly as sales increased, especially in the Golden Corral segment’s Third Quarter of Fiscal 2012. In addition, Golden Corral continues to receive the expected benefit from the closing of six underperforming restaurants in August 2011, as the system has now right-sized itself. Payroll and related costs for the Golden Corral segment are much lower than the Big Boy segment because fewer servers are needed to operate.

In last year’s results, payroll and related costs received the benefit from the federal Hiring Incentives to Restore Employment Act of 2010 (HIRE Act enacted March 2010) under which the Company did not have to pay the employer’s share of social security (FICA) taxes on certain new hires. FICA credits under the HIRE Act amounted to $472,000 during the First Three Quarters of Fiscal 2011, of which $202,000 occurred in the Third Quarter of Fiscal 2011.

Payroll and related costs continue to be adversely affected by mandated increases in the minimum wage.

 

   

In Ohio, where roughly two-thirds of the Company’s payroll costs are incurred, the minimum wage for non-tipped employees was increased 33 percent from $5.15 per hour to $6.85 per hour beginning January 1, 2007. It was subsequently increased to $7.00 per hour on January 1, 2008, to $7.30 per hour on January 1, 2009 (there was no increase on January 1, 2010) and to $7.40 per hour on January 1, 2011. On January 1, 2012, the rate increased to $7.70 per hour, which represents a 50 percent increase over the five year period.

 

   

The Ohio minimum wage for tipped employees increased 61 percent from $2.13 per hour to $3.43 per hour beginning January 1, 2007. It was subsequently increased to $3.50 per hour on January 1, 2008, to $3.65 per hour on January 1, 2009 (there was no increase on January 1, 2010) and to $3.70 per hour on January 1, 2011. On January 1, 2012, the rate increased to $3.85 per hour, which represents an 81 percent increase over the five year period.

 

   

Federal minimum wage statutes currently apply to substantially all other (non-Ohio) employees. The federal minimum wage for non-tipped employees increased from $5.15 per hour to $5.85 per hour in July 2007. It was subsequently increased to $6.55 per hour in July 2008 and to $7.25 per hour in July 2009. The rate for tipped employees (non-Ohio) was not affected by the federal legislation, remaining at $2.13 per hour.

Although there is no seasonal fluctuation in employment levels, the number of hours worked by hourly paid employees has always been managed closely according to sales patterns in individual restaurants. However, the effects of paying the mandated higher hourly rates of pay have been and are continuing to be countered through the combination of reductions in the number of scheduled labor hours and higher menu prices charged to customers. Without the benefit of reductions in labor hours, the Ohio minimum wage increase on January 1, 2011 would have added an estimated $140,000 to annual payroll costs in Ohio restaurant operations. It is estimated that the increase on January 1, 2012 will add $570,000 to annual Ohio payrolls, which will be offset largely with further scheduled reductions in labor hours.

Despite the savings that come from reductions in hours worked and higher menu prices charged to customers, other factors add to payroll and related costs. These factors include higher costs associated with benefit programs offered by the Company, including medical insurance premiums and pension related costs.

Medical insurance premiums totaled approximately $10,225,000 for the plan year that ended December 31, 2011, an increase of 3.4 percent over the plan year ended December 31, 2010, and 8.8 percent higher than the plan year ended

 

36


December 31, 2009. The Company has typically absorbed 78 to 80 percent of the cost, with employees contributing the remainder. Premium cost is currently projected to be $10,400,000 for the 2012 calendar year. Management continues to analyze and evaluate health care reform legislation (the federal Patient Protection and Affordable Care Act, enacted March 2010) to determine the future short and long term effects upon the Company while developing various strategies to mitigate the expected financial burden of compliance.

Net periodic pension cost was $636,000 and $770,000 respectively, in the Third Quarter of Fiscal 2012 and the Third Quarter of Fiscal 2011. Net periodic pension cost was $2,119,000 and $2,566,000 respectively, in the First Three Quarters of Fiscal 2012 and the First Three Quarters of Fiscal 2011. Net periodic pension cost for Fiscal 2012 is currently expected to be in the range of $2,700,000 to $2,800,000, which is net of a benefit in excess of $550,000 from certain changes in assumptions relating to retirement, termination and marriage, but which is offset by an increase of approximately $125,000 from the discount rate being 25 basis points lower than the rate used in Fiscal 2011. The final total periodic pension cost in Fiscal 2011 was $3,025,000.

Net periodic pension costs for all periods presented in this MD&A are much higher than historical levels. Equity securities comprise 70 percent of the target allocation of pension plan assets. Although the market for equity securities made significant rebounds during the last two fiscal years, which have continued into Fiscal 2012, the steep market declines experienced in Fiscal 2009 continue to drive costs well above historical levels. The market losses from Fiscal 2009 are being amortized through pension cost, which in turn creates a lower credit for the expected return on plan assets that flows through pension cost.

Payroll and related costs are also affected by adjustments that result each quarter when management performs a comprehensive review of claims experience in the Company’s self-insured Ohio workers’ compensation program. Increases to the self-insured reserves result in charges to payroll and related costs, while decreases to the reserves result in credits to payroll and related costs. The reserves were increased by $191,000 (charged against payroll and related costs) in the Third Quarter of Fiscal 2012. The reserves were decreased (credited to payroll and related costs) by $25,000 during the Third Quarter of Fiscal 2011. For the First Three Quarters of Fiscal 2012, $224,000 was charged to payroll and related expense, while $162,000 was charged to payroll and related costs during the Third Quarter of Fiscal 2011.

Other operating costs include occupancy costs such as maintenance, rent, depreciation, property tax, insurance and utilities, plus costs relating to field supervision, accounting and payroll preparation costs, franchise fees for Golden Corral restaurants, new restaurant opening costs and many other restaurant operating costs. Opening costs can have a significant effect on other operating costs. Opening costs (all for Big Boy) were zero and $66,000 respectively during the Third Quarter of Fiscal 2012 and the Third Quarter of Fiscal 2011. For the First Three Quarters of Fiscal 2012, opening costs (all for Big Boy) were $398,000. Opening costs were $982,000 (all for Big Boy) in the First Three Quarters of Fiscal 2011. As most of the other typical expenses charged to other operating costs tend to be more fixed in nature, the percentages shown in the above table can be greatly affected by changes in same store sales levels. In other words, percentages will generally rise when sales decrease and percentages will generally decrease when sales increase. Other operating costs for the Golden Corral segment are a much higher percentage of sales than Big Boy because the physical facility of a Golden Corral restaurant is almost twice as large as a Big Boy restaurant and Golden Corral sales volumes have generally remained well below management’s original long-term expectations.

Operating Profit

To arrive at the measure of operating profit, administrative and advertising expense is subtracted from gross profit, while the line item for franchise fees and other revenue is added to it. Gains and losses from the sale of real property (if any) are then respectively added or subtracted. Charges for impairment of assets (if any) are also subtracted from gross profit to arrive at the measure of operating profit.

Administrative and advertising expense increased $133,000 and $813,000 respectively, in the Third Quarter of Fiscal 2012 and the First Three Quarters of Fiscal 2012 when compared with comparable periods a year ago. Most of the increase during the First Three Quarters is attributable to the combination of higher stock based compensation costs (see a detailed discussion in the Financing Activities section of Liquidity and Capital Resources that appears elsewhere in this MD&A) and professional services relating the strategic assessment of the Golden Corral business segment. Administrative and advertising expense benefitted from a lower accrual for the Chief Executive Officer’s incentive compensation, but was adversely affected by accruals for additional required contributions due under the Non-Deferred Cash Balance Plan (a plan that provides comparable retirement type benefits to Highly Compensated Employees in lieu of future accruals under the defined benefit pension plans).

 

37


Revenue from franchise fees is based on sales volumes generated by Big Boy restaurants that are licensed to other operators. The fees are based principally on percentages of sales and are recorded on the accrual method as earned. As of March 6, 2012, 25 Big Boy restaurants were licensed to other operators and paying franchise fees to the Company. No licensed Big Boy restaurants opened or closed during any of the periods presented in this MD&A. Other revenue includes certain other fees earned from restaurants licensed to others along with minor amounts of rent and investment income.

Six underperforming Golden Corral restaurants were closed on August 23, 2011, which resulted in a non-cash pretax impairment charge (with related closing costs) of $4,000,000. The impairment charge, which was recorded in the first quarter of fiscal 2012 that ended September 20, 2011, lowered the carrying costs of the six restaurant properties (owned in fee simple estate) to their estimated fair values. In addition to related closing costs, the total charge included impairment losses of intangible assets associated with unamortized initial franchise fees.

During the Third Quarter of Fiscal 2012, an impairment charge of $422,000 was recorded to lower the fair values of one of the six Golden Corrals (a sales contract was accepted for $94,000 less than estimated fair value) and two former Big Boy restaurants ($328,000 due to continued soft market conditions) that have been held for sale for several years. No impairment losses were recognized in the Third Quarter of Fiscal 2011 or the First Three Quarters of Fiscal 2011.

Net gains from the sale of assets amounted to $178,000 during the Third Quarter of Fiscal 2012, consisting of the February 2012 sale of a former Big Boy restaurant for a gain of $192,000 and the December 2011 sale of one of the six former Golden Corrals at a $14,000 loss, which includes the effect of all closing costs. Gains and losses reported on this line do not include abandonment losses that routinely arise when certain equipment is replaced before it reaches the end of its expected life; abandonment losses are instead reported in other operating costs.

Interest Expense

Interest expense decreased $50,000 and $91,000 respectively, in the Third Quarter of Fiscal 2012 and the First Three Quarters of Fiscal 2012 when compared with comparable year ago periods. The decreases are primarily the result of lower debt levels than a year ago, along with a lower weighted average interest rate on fixed rate financing.

Income Tax Expense

Income tax expense as a percentage of pretax earnings was estimated at 12 percent at the end of the First Three Quarters of Fiscal 2012, down from 16 percent that was estimated at the end of the first half of fiscal 2012. The change resulted in an effective tax rate of 11.2 percent for the Third Quarter of Fiscal 2012. The estimated tax rate was 29 percent at the end of the First Three Quarters of Fiscal 2011 and for the Third Quarter of Fiscal 2011.

The effective tax rates have historically been kept under statutory rates through the use of tax credits, especially the federal credit allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips and the Work Opportunity Tax Credit (WOTC). The WOTC expired December 31, 2011. While these credits are generally more favorable to the effective tax rate when pretax earnings decrease, they are much more favorable to the effective tax rate when estimated annual pretax earnings decrease in a significant fashion, as is the situation in Fiscal 2012 due primarily to charges for impairment of assets.

LIQUIDITY and CAPITAL RESOURCES

Sources of Funds

Food sales to restaurant customers provide the Company’s principal source of cash. The funds from sales are immediately available for the Company’s use, as substantially all sales to restaurant customers are received in currency or are settled by debit or credit cards. The primary source of cash provided by operating activities is net earnings plus depreciation and impairment of assets, if any. Other sources of cash may include borrowing against credit lines, proceeds received when stock options are exercised and occasional sales of real estate. In addition to servicing debt, these cash flows are utilized for discretionary objectives, including capital projects (principally restaurant expansion), capital stock repurchases and dividends.

Working Capital Practices

The Company has historically maintained a strategic negative working capital position, which is a common practice in the restaurant industry. As significant cash flows are consistently provided by operations, and credit lines remain readily available, the use of this practice should not hinder the Company’s ability to satisfactorily retire any of its

 

38


obligations when due, including the aggregated contractual obligations and commercial commitments shown in the following table.

Aggregated Information about Contractual Obligations and Commercial Commitments March 6, 2012

 

         Payments due by period (in thousands)  
         Total      year 1      year 2      year 3      year 4      year 5      more
than 5
years
 
 

Long-Term Debt

   $ 24,907       $ 7,280       $ 5,542       $ 4,274       $ 3,395       $ 2,167       $ 2,249   
 

Interest on Long-Term Debt (estimated)

     2,558         1,019         685         430         243         125         56   
 

Rent due under Capital Lease Obligations

     2,502         284         245         245         245         245         1,238   
1  

Rent due under Operating Leases

     21,329         1,628         1,601         1,547         1,414         1,450         13,689   
2  

Purchase Obligations

     18,302         14,751         3,294         205         52         —           —     
3  

Other Long-Term Obligations

     689         234         236         219         —           —           —     
 

Total Contractual Cash Obligations

   $ 70,287       $ 25,196       $ 11,603       $ 6,920       $ 5,349       $ 3,987       $ 17,232   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Operating leases may include option periods yet to be exercised, when exercise is determined to be reasonably assured.

 

2 Primarily consists of commitments for certain food and beverage items, plus capital projects including commitments to purchase real property, if any. Does not include agreements that are cancellable without penalty.

 

3 Deferred compensation liability (undiscounted).

The working capital deficit was $11,234,000 as of March 6, 2012. The deficit was $14,240,000 as of May 31, 2011. The improvement is mostly the result of a higher level of cash on hand as March 6, 2012.

A financing package of unsecured credit facilities has been in place for many years with the same lending institution, currently styled (since October 2010) as the 2010 Loan Agreement. It expires April 15, 2012. The renewal of the 2010 Loan Agreement is expected to be completed before April 15, 2012, providing uninterrupted access to credit facilities for construction and working capital:

 

   

Construction Loan - $8,500,000 currently available is anticipated to be expanded to $15,000,000

 

   

Revolving Loan - $5,000,000 currently available to fund temporary working capital is anticipated to continue in place

 

   

Stock Repurchase Loan - $9,000,000 currently available to finance repurchases of the Company’s common stock is anticipated to not be replaced

The Company is in full compliance with the covenants contained in the 2010 Loan Agreement.

Operating Activities

Operating cash flows were $21,011,000 during the First Three Quarters of Fiscal 2012, which compares with $23,413,000 in the First Three Quarters of Fiscal 2011. Normal changes in assets and liabilities such as prepaid expenses, inventories, accounts payable and accrued, prepaid and deferred income taxes, all of which can and often do fluctuate widely from quarter to quarter, account for most of the change.

Management measures cash flows from the operation of the business by simply adding to net earnings certain non-cash expenses such as depreciation, losses (net of any gains) on disposition of assets, charges for impairment of assets (if any), stock based compensation cost and pension costs in excess of plan contributions. The result of this approach is shown as a sub-total in the consolidated statement of cash flows: $21,026,000 in the First Three Quarters of Fiscal 2012 and $21,152,000 in the First Three Quarters of Fiscal 2011.

Contributions to the two defined benefit pensions plans sponsored by the Company are currently anticipated at a level of $2,100,000 (well above minimum required contributions) in Fiscal 2012, $1,250,000 of which was contributed during the First Three Quarters of Fiscal 2012.

 

39


An automatic Change in Accounting Method was filed with the Internal Revenue Service (IRS) in Fiscal 2011 to allow immediate deduction of certain repairs and maintenance costs, replacing previous treatment that had capitalized these costs. In late December 2011, the IRS issued new temporary and proposed regulations on tangible property capitalization that significantly departs from the prior proposed regulations on which the Company’s Change in Accounting Method was based. Management is currently reviewing the new temporary and proposed regulations to determine the effect, if any, upon the Company’s Change in Accounting Method.

Investing Activities

Capital spending is the principal component of investing activities. Capital spending was $11,340,000 during the First Three Quarters of Fiscal 2012, a decrease of $3,165,000 from the First Three Quarters of Fiscal 2011. This year’s capital spending includes $8,714,000 for Big Boy and $2,626,000 for Golden Corral. These capital expenditures consisted of site acquisitions for Big Boy expansion, new Big Boy construction, plus on-going reinvestments in existing restaurants (Big Boy and Golden Corral) including remodelings, routine equipment replacements and other maintenance capital outlays.

Proceeds from the disposition of property amounted to $1,592,000 during the First Three Quarters of Fiscal 2012, consisting of $1,536,000 in real property and $56,000 from transactions to sell used equipment and /or other operating assets. The proceeds from dispositions of real property consisted of the December 2011 sale of one of the six closed Golden Corral properties that had closed in August 2011 and the February 2012 sale of a Big Boy restaurant that had ceased operating in October 2011.

Two former Big Boy restaurants, five former Golden Corral restaurants and seven other pieces of surplus land were held for sale as of March 6, 2012 at an aggregate asking price of approximately $9,600,000.

Financing Activities

Borrowing against credit lines amounted to $2,000,000 during the First Three Quarters of Fiscal 2012, none of which was borrowed during the Third Quarter of Fiscal 2012. Scheduled and other payments of long-term debt and capital lease obligations amounted to $7,616,000 during the First Three Quarters of Fiscal 2012. On March 15, 2012, the Company paid $1,681,000 to retire an outstanding term loan. The early retirement of the loan required no prepayment penalty.

Three quarterly cash dividends were paid to shareholders during the First Three Quarters of Fiscal 2012, which amounted to $2,318,000 or $0.47 per share. In addition, a $0.16 per share dividend was declared on March 13, 2012. Its payment of $790,000 on April 10, 2012 was the 205th consecutive quarterly dividend (a period of 51 years) paid by the Company. The Company expects to continue its practice of paying regular quarterly cash dividends.

During the First Three Quarters of Fiscal 2012, 6,166 shares of the Company’s common stock were re-issued from the Company’s treasury pursuant to the exercise (1,166 shares in the Third Quarter of Fiscal 2012) of stock options, which yielded proceeds to the Company of approximately $111,000. As of March 6, 2012, 402,338 shares granted under the Company’s two stock option plans remain outstanding, including 368,838 fully vested shares at a weighted average exercise price of $24.08 per share. Although the closing price of the Company’s stock on March 6, 2012 was $22.86, the intrinsic value of 135,334 fully vested “In The Money” options was $470,000, which, if exercised, would yield $2,624,000 in proceeds to the Company. No stock options were granted during the First Three Quarters of Fiscal 2012.

In June 2011, the Chief Executive Officer (CEO) was granted an unrestricted stock award of 17,364 common shares and a group of executive officers and other key employees were granted an aggregate award of 7,141 restricted shares of common stock. The total value of the unrestricted award to the CEO amounted to $371,000. The total value of the restricted awards to executive officers and other key employees amounted to $150,000. On October 5, 2011, 14,560 shares of restricted stock were awarded to non-employee members of the Board of Directors and an award of 2,080 restricted shares was granted to the CEO pursuant to the terms of his employment agreement. The total value of all restricted shares issued on October 5, 2011 amounted to $320,000. All restricted shares vest in full on the first anniversary date of the award, unless accelerated by the Compensation Committee of the Board of Directors. Full voting and dividend rights are provided prior to vesting. Vested shares must be held until board service or employment ends, except that enough shares may be sold to satisfy tax obligations attributable to the grants.

 

40


All unrestricted and restricted shares were awarded under the 2003 stock Option and Incentive Plan (2003 Plan). As of March 6, 2012, 483,676 shares remained available for awards under the 2003 Plan.

The fair value of stock options granted and restricted stock issued is recognized as compensation cost on a straight-line basis over the vesting periods of the awards. Although no stock options were granted during the First Three Quarters of Fiscal 2012, compensation cost continues from the run–out of options granted in previous years. Compensation cost from restricted shares issued as shown in the table below includes costs from the run-out of awards granted in October 2010 to non-employee members of the Board of Directors. The fair value of unrestricted stock issued to the CEO in June 2011 was recognized entirely during the first quarter of fiscal 2012, which ended September 20, 2011. Compensation costs arising from all share-based payments are charged to administrative and advertising expense in the consolidated statement of earnings:

 

      Third Quarter      First Three Quarters  
      Mar. 6,
2012
     Mar. 8,
2011
     Mar. 6,
2012
     Mar. 8,
2011
 
     (in thousands)  

Stock options granted

   $ 30       $ 60       $ 120       $ 214   

Restricted stock issued

     103         55         327         92   

Unrestricted stock issued

     —           —           371         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation cost, pretax

   $ 133       $ 115       $ 818       $ 306   

The stock repurchase program that was authorized by the Board of Directors in January 2010 expired on January 6, 2012. Up to 500,000 shares of the Company’s common stock had been authorized to be repurchased in the open market or through block trades. During the two year life of the program, the Company acquired 289,528 shares at a cost of $6,107,000, of which 19,596 shares were acquired at a cost of $417,000 during the First Three Quarters of Fiscal 2012. No repurchases were made after September 2011, and the Board of Directors has not authorized a new program.

Separate from the repurchase program, the Company’s treasury acquired 10,701 shares of its common stock in the First Three Quarters of Fiscal 2012 (none in the Third Quarter of Fiscal 2012) at a cost of $223,000 to cover withholding tax obligations in connection with restricted and unrestricted stock awards. Most of these shares were acquired in June 2011, when 7,998 shares valued at $171,000 were surrendered by the CEO to cover the tax obligation on his unrestricted stock award.

Other Information

Two new Big Boy restaurants opened for business during the First Three Quarters of Fiscal 2012 (none in the Third Quarter of Fiscal 2012). The first opened in July 2011 on land that was acquired in fee simple estate during Fiscal 2011. The second one opened in October 2011 on ground that is leased to the Company. It replaced an older nearby restaurant. There was no new restaurant construction as of March 6, 2012. Two new Big Boys are currently being planned to open in calendar year 2012 – August and October - with construction scheduled to begin respectively in April and June. Several other sites owned by the Company – including two that were acquired in Fiscal 2012 - have been “land banked” for possible development in calendar year 2013. Any contracts that were in place as of March 6, 2012 to acquire sites for future development were cancellable at the Company’s sole discretion while due diligence is pursued under the inspection period provisions of the contracts.

Including land and land improvements, the cost required to build and equip each new Big Boy restaurant currently ranges from $2,500,000 to $3,400,000. The actual cost depends greatly on the price paid for the land and the cost of land improvements, both of which can vary widely from location to location, and whether the land is purchased or leased. Costs also depend on whether the new restaurant is constructed using plans for the original 2001 building prototype (5,700 square feet with seating for 172 guests) or its smaller adaptation,, the 2010 building prototype (5,000 square feet with seating for 148 guests), which is used in smaller trade areas. The larger 2001 building prototype plan was used to construct both of the new Big Boy restaurants that opened during the First Three Quarters of Fiscal 2012. The smaller 2010 building prototype plan will be used to construct the two restaurants scheduled to open during the 2012 calendar year.

Approximately one-fifth of the Big Boy restaurants are routinely renovated or decoratively updated each year. The renovations not only refresh and upgrade interior finishes, but are also designed to synchronize the interiors and exteriors of older restaurants with newly constructed restaurants. The current average cost to renovate a Big Boy

 

41


restaurant ranges from $100,000 to $200,000. The Fiscal 2012 remodeling budget for Big Boy restaurants is $2,820,000. All but six Big Boy remodels had been completed as of March 6, 2012.

Golden Corral restaurants are remodeled every seven years, but replacement of carpeting occurs every 42 months. The Golden Corral remodeling budget for Fiscal 2012 is $2,240,000, which includes the carryover cost to complete six restaurants for which work was not completely finished in Fiscal 2011. Substantially all of the Golden Corral remodel work scheduled for Fiscal 2012 had been completed by March 6, 2012.

Development rights to open additional Golden Corrals expired on December 31, 2011.

Part of the Company’s strategic plan entails owning the land on which it builds new restaurants. However, it is sometimes necessary to enter ground leases to obtain desirable land on which to build. Seven of the 29 Golden Corral restaurants now in operation and five Big Boy restaurants that have opened since 2003 are on leased land. As of March 6, 2012, 22 restaurants were in operation on non-owned premises – one capital lease and 21 operating leases. One Big Boy restaurant that operated on leased land was closed in December 2011 when its operating lease expired. Another Big Boy leased location will likely be closed in May 2012 when its lease expires.

APPLICATION of CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use estimates and assumptions to measure certain items that affect the amounts reported in the financial statements and accompanying footnotes. These judgments are based on knowledge and experience about past and current events, and assumptions about future events. Accounting estimates can and do change as new events occur and additional information becomes available. Actual results may differ markedly from current judgment.

Two factors are required for an accounting policy to be deemed critical. The policy must be significant to the fair presentation of a company’s financial condition and its results of operations, and the policy must require management’s most difficult, subjective or complex judgments. Management believes the following to be the Company’s critical accounting policies.

Self Insurance

The Company self-insures a significant portion of expected losses from its workers’ compensation program in the state of Ohio. The Company purchases coverage from an insurance company for individual claims in excess of $300,000. Reserves for claims expense include a provision for incurred but not reported claims. Each quarter, management reviews claims valued by the third party administrator (TPA) of the program and then applies experience and judgment to determine the most probable future value of incurred claims. As the TPA submits additional new information, management reviews it in light of historical claims for similar injuries, probability of settlement, and any other facts that might provide guidance in determining ultimate value of individual claims. Unexpected changes in any of these or other factors could result in actual costs differing materially from initial projections or values presently carried in the self-insurance reserves.

Pension Plans

Pension plan accounting requires rate assumptions for future compensation increases and the long-term investment return on plan assets. A discount rate is also applied to the calculations of net periodic pension cost and projected benefit obligations. An informal committee consisting of executives from the Finance Department and the Human Resources Department, with guidance provided by the Company’s actuarial consulting firm, develops these assumptions each year. The consulting firm also provides services in calculating estimated future obligations and net periodic pension cost.

To determine the long-term rate of return on plan assets, the committee reviews the target asset allocation of plan assets and determines the expected return on each asset class. The expected returns for each asset class are combined and rounded to the nearest 25 basis points to determine the overall expected return on assets. The committee determines the discount rate by looking at the projected future benefit payments by year and matching them to spot rates based on yields of high-grade corporate bonds over the term of the projected benefit payments. A single discount rate is selected, and then rounded to the nearest 25 basis points, which produces the same present value as the various spot rates.

 

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Assets of the pension plans are targeted to be invested 70 percent in equity securities, as these investments have historically provided the greatest long-term returns. Poor performance in equity securities markets can significantly lower the market values of the plans’ investment portfolios, which, in turn, can result in a) material increases in future funding requirements, b) much higher net periodic pension costs to be recognized in future years, and c) increases in the underfunded status of the plans, requiring the Company’s equity to be reduced.

Long-Lived Assets

Long-lived assets include property and equipment, goodwill and other intangible assets. Property and equipment typically approximates 85 to 90 percent of the Company’s total assets. Judgments and estimates are used to determine the carrying value of long-lived assets. This includes the assignment of appropriate useful lives, which affect depreciation and amortization expense. Capitalization policies are continually monitored to assure they remain appropriate.

Management considers a history of cash flow losses on a restaurant-by-restaurant basis to be the primary indicator of potential impairment. Carrying values of property and equipment are tested for impairment at least annually, and whenever events or circumstances indicate that the carrying value may be impaired. When undiscounted expected future cash flows are less than carrying values, an impairment loss is recognized for the amount by which carrying values exceed the greater of the net present value of the future cash flow stream or fair value. Future cash flows can be difficult to predict. Changing neighborhood demographics and economic conditions, and many other factors may influence operating performance, which affect cash flows. Fair values are generally determined by opinions of value provided by real estate brokers and/or management’s judgment as developed through its experience in disposing of property.

Sometimes it becomes necessary to cease operating a certain restaurant due to poor operating performance. The ultimate loss can be significantly different from the original impairment charge, particularly if the eventual market price received from the disposition of the property differs materially from initial estimates of fair values.

Acquired goodwill and other intangible assets are tested for impairment annually or whenever an impairment indicator arises.

ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET RISKS

The Company has no significant market risk exposure to interest rate changes as substantially all of its debt is currently financed with fixed interest rates, or will be converted to fixed rate term loans in the next six months. The Company does not currently use derivative financial instruments to manage its exposure to changes in interest rates. Any cash equivalents maintained by the Company have original maturities of three months or less. The Company does not use foreign currency.

Operations in the Big Boy segment are vertically integrated, using centralized purchasing and food preparation, provided through the Company’s commissary and food manufacturing plant. Management believes the commissary operation ensures uniform product quality and safety, timeliness of distribution to restaurants and creates efficiencies that ultimately result in lower food and supply costs. The commissary operation does not supply Golden Corral restaurants.

Commodity pricing affects the cost of many of the Company’s food products. Commodity pricing can be extremely volatile, affected by many factors outside of management’s control, including import and export restrictions, the influence of currency markets relative to the U.S dollar, supply versus demand, production levels and the impact that adverse weather conditions may have on crop yields. Certain commodities purchased by the commissary, 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. These contracts are normally for periods of one year or less but may have longer terms if favorable long-term pricing becomes available. Food supplies are generally plentiful and may be obtained from any number of suppliers, which mitigates the Company’s overall commodity cost risk. Quality, timeliness of deliveries and price are the principal determinants of source. Management does not use financial instruments as a hedge against changes in commodity pricing.

Except for items such as bread, fresh produce and dairy products that are purchased from any number of reliable local suppliers, the Golden Corral segment of the business currently purchases substantially all food, beverage and other menu items from the same approved vendor that Golden Corral Franchising Systems, Inc. (the Franchisor) uses

 

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in its operations. Deliveries are received twice per week. Other vendors are available to provide products that meet the Franchisor’s specifications at comparable prices should the Company wish or need to make a change.

ITEM 4. CONTROLS and PROCEDURES

a) Effectiveness of Disclosure Controls and Procedures. The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 6, 2012, the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information that would be required to be disclosed in the Company’s Exchange Act reports is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) would be accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

b) Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) during the fiscal quarter ended March 6, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Employees, customers and other parties bring various claims and suits against the Company from time to time in the ordinary course of business. Management continually evaluates exposure to loss contingencies from pending or threatened litigation, and presently believes that the resolution of claims currently outstanding, whether or not covered by insurance, will not result in a material effect on the Company’s earnings, cash flows or financial position.

ITEM 1A. RISK FACTORS

The materialization of any of the operational and other risks and uncertainties identified herein, together with those risks not specifically listed or those that are presently unforeseen, could result in significant adverse effects on the Company’s financial position, results of operations and cash flows, which could include the permanent closure of any affected restaurant(s) with an impairment of assets charge taken against earnings, and could adversely affect the price at which shares of the Company’s common stock trade.

In addition to operating results, other factors can influence the volatility and price at which the Company’s common stock trades. The Company’s stock is thinly traded on the NYSE Amex market. Thinly traded stocks can be susceptible to sudden, rapid declines in price, especially when holders of large blocks of shares seek exit positions. Rebalancing of stock indices in which the Company’s shares may be placed can also influence the price of the Company’s stock.

Food Safety

Food safety is the most significant risk to any company that operates in the restaurant industry. It is the focus of increased government regulatory initiatives at the local, state and federal levels. Failure to protect the Company’s food supplies could result in food borne illnesses and/or injuries to customers. If any of the Company’s customers become ill or injured from consuming the Company’s products, the affected restaurants may be forced to close. An instance of food contamination originating at the commissary operation could have far-reaching effects, as the contamination would affect substantially all Big Boy restaurants.

Economic Factors

Economic recessions can negatively influence discretionary consumer spending in restaurants and result in lower customer counts, as consumers become more price conscious, tending to conserve their cash amid unemployment and economic uncertainty. The effects of higher gasoline prices can also negatively affect discretionary consumer spending in restaurants. Increasing costs for energy can affect profit margins in many other ways. Petroleum based material is often used to package certain products for distribution. In addition, suppliers may add surcharges for fuel to their invoices. The cost to transport products from the commissary to restaurant operations will rise with each

 

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increase in fuel prices. Higher costs for electricity and natural gas result in much higher costs to a) heat and cool restaurant facilities, b) refrigerate and cook food and c) manufacture and store food at the commissary and food manufacturing plant.

Inflationary pressure, particularly on food costs, labor costs (especially associated with increases in the minimum wage) and health care benefits, can negatively affect the operation of the business. Shortages of qualified labor are sometimes experienced in certain local economies. In addition, the loss of a key executive could pose a significant adverse effect on the Company.

Future funding requirements of the two qualified defined benefit pension plans that are sponsored by the Company largely depend upon the performance of investments that are held in trusts that have been established for the plans. Equity securities comprise 70 percent of the target allocation of the plans’ assets. Poor performance in equity securities markets can significantly lower the market values of the plans’ investment portfolios, which, in turn, can result in a) material increases in future funding requirements, b) much higher net periodic pension costs to be recognized in future years, and c) increases in the underfunded status of the plans, requiring reduction in the Company’s equity to be recognized.

Competition

The restaurant industry is highly competitive and many of the Company’s competitors are substantially larger and possess greater financial resources than does the Company. Both the Big Boy and Golden Corral operating segments have numerous competitors, including national chains, regional and local chains, as well as independent operators. None of these competitors, in the opinion of the Company’s management, presently dominates the family-style sector of the restaurant industry in any of the Company’s operating markets. That could change at any time due to:

 

 

changes in economic conditions

 

 

changes in demographics in neighborhoods where the Company operates restaurants

 

 

changes in consumer perceptions of value, food and service quality

 

 

changes in consumer preferences, particularly based on concerns with nutritional content of food on the Company’s menus

 

 

new competitors that enter the Company’s markets from time to time

 

 

increased competition from supermarkets and other non-traditional competitors

 

 

increased competition for quality sites on which to build restaurants

Development Plans and Financing Arrangements

The Company’s business strategy and development plans also face risks and uncertainties. These include the inherent risk of poor quality decisions in the selection of sites on which to build restaurants, the ever rising cost and availability of desirable sites and increasingly rigorous requirements on the part of local governments to obtain various permits and licenses. Other factors that could impede plans to increase the number of restaurants operated by the Company include saturation in existing markets and limitations on borrowing capacity and the effects of higher interest rates.

In addition, the Company’s loan agreements include financial and other covenants with which compliance must be met or exceeded each quarter. Failure to meet these or other restrictions could result in an event of default under which the lender may accelerate the outstanding loan balances and declare them immediately due and payable.

The Supply and Cost of Food

Food purchases can be subject to significant price fluctuations that can considerably affect results of operations from quarter to quarter and year to year. Price fluctuations can be due to seasonality or any number of factors. The market for beef, in particular, continues to be highly volatile due in part to import and export restrictions. Beef costs can also be affected by bio-fuel initiatives and other factors that influence the cost to feed cattle. The Company depends on timely deliveries of perishable food and supplies. Any interruption in the continuing supply would harm the Company’s operations.

Litigation and Negative Publicity

Employees, customers and other parties bring various claims against the Company from time to time. Defending such claims can distract the attention of senior level management away from the operation of the business. Legal proceedings can result in significant adverse effects to the Company’s financial condition, especially if other potentially responsible parties lack the financial wherewithal to satisfy a judgment against them or the Company’s insurance coverage proves to be inadequate. Also, see “Legal proceedings” in Part II, Item 1 of this Form 10-Q.

 

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Negative publicity associated with legal claims against the Company, especially those related to food safety issues, could harm the Company’s reputation (whether or not such complaints are valid), which, in turn, could adversely affect operating results. Publicity surrounding food safety issues has caused irreparable damages to the reputations of certain operators in the restaurant industry in the past. The Company’s reputation and brand can also be harmed by operational problems experienced by other operators of Big Boy and Golden Corral restaurants, especially from issues relating to food safety. Other negative publicity such as that arising from rumor and innuendo spread through social internet media and other sources can create adverse effects on the Company’s results of operations.

Governmental and Other Rules and Regulations

Governmental and other rules and regulations can pose significant risks to the Company. Examples include:

 

 

general exposure to penalties or other costs associated with the potential for violations of numerous governmental regulations, including:

 

  ¡    

immigration (I-9) and labor regulations regarding the employment of minors

 

  ¡    

minimum wage and overtime requirements

 

  ¡    

employment discrimination and sexual harassment

 

  ¡    

health, sanitation and safety regulations

 

  ¡    

facility issues, such as meeting the requirements of the Americans with Disabilities Act of 1990 or liabilities to remediate unknown environmental conditions

 

 

changes in existing environmental regulations that would significantly add to the Company’s costs

 

 

any future imposition by OSHA of costly ergonomics regulations on workplace safety

 

 

climate legislation that adversely affects the cost of energy

 

 

legislative changes affecting labor law, especially increases in the federal or state minimum wage requirements

 

 

compliance with legislation enacted to reform the U.S. health care system could have a material adverse effect upon the Company’s health care costs

 

 

nutritional labeling on menus – compliance with legislation enacted to reform the U.S health care system that requires nutritional labeling to be placed on menus and the Company’s reliance on the accuracy of information obtained from third party suppliers

 

 

nutritional labeling on menus – potential adverse effect on sales and profitability if customers’ menu ordering habits change

 

 

legislation or court rulings that result in changes to tax codes that are adverse to the Company

 

 

changes in accounting standards imposed by governmental regulators or private governing bodies could adversely affect the Company’s financial position

 

 

estimates used in preparing financial statements and the inherent risk that future events affecting them may cause actual results to differ markedly

Catastrophic Events

Unforeseen catastrophic events could disrupt the Company’s operations, the operations of the Company’s suppliers and the lives of the Company’s customers. The Big Boy segment’s dependency on the commissary operation in particular could present an extensive disruption of products to restaurants should a catastrophe impair its ability to operate. Examples of catastrophic events include but are not limited to:

 

 

adverse winter weather conditions

 

 

natural disasters such as earthquakes or tornadoes

 

 

fires or explosions

 

 

widespread power outages

 

 

criminal acts, including bomb threats, robberies, hostage taking, kidnapping and other violent crimes

 

 

acts of terrorists or acts of war

 

 

civil disturbances and boycotts

 

 

disease transmitted across borders that may enter the food supply chain

Technology and Information Systems

Technology and information systems are of vital importance to the strategic operation of the Company. Security violations such as unauthorized access to information systems, including breaches on third party servers, could result

 

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in the loss of proprietary data. Should consumer privacy be compromised, consumer confidence may be lost, which would adversely affect sales and profitability. To prevent credit card fraud, the Payment Card Security Standards Council requires an annual independent audit to certify the Company’s compliance with the required internal controls of processing and storing of credit card data. A finding of non-compliance could restrict the Company’s authorization to accept credit cards as a form of payment, which would adversely affect sales and profitability.

Other events that could pose threats to the operation of the business include:

 

 

catastrophic failure of certain information systems

 

 

difficulties that may arise in maintaining existing systems

 

 

difficulties that may occur in the implementation of and transition to new systems

 

 

financial stability of vendors to support software over the long term

ITEM 2. UNREGISTERED SALES of EQUITY SECURITIES and USE of PROCEEDS

(c) Issuer Purchases of Equity Securities

The repurchase program that was authorized by the Board of Directors in January 2010 expired on January 6, 2012. The authorization had allowed the Company to repurchase up to 500,000 shares of its common stock in the open market or through block trades. The following table shows information pertaining to the Company’s repurchases of its common stock during the third quarter of fiscal year 2012, which ended March 6, 2012:

 

Period

   Total
Number
Of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares that May
Yet Be Purchased
Under the

Plans or Programs
 

Dec. 14, 2011 to Jan. 10, 2012

     —         $ —           —           —     

Jan. 11, 2012 to Feb. 7, 2012

     —         $ —           —           —     

Feb. 8, 2012 to Mar. 6, 2012

     —         $ —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —           —           —           —     

ITEM 3. DEFAULTS upon SENIOR SECURITIES

Not applicable

ITEM 4. (Removed and Reserved)

ITEM 5. OTHER INFORMATION

Not applicable

 

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ITEM 6. EXHIBITS

Articles of Incorporation and Bylaws

3.1 Third Amended Articles of Incorporation, which was filed as Exhibit (3) (a) to the Registrant’s Form 10-K Annual Report for 1993, is incorporated herein by reference.

3.2 Amended and Restated Code of Regulations effective October 2, 2006, which was filed as Exhibit A to the Registrant’s Definitive Proxy Statement dated September 1, 2006, is incorporated herein by reference.

Material Contracts

10.1 Amended and Restated Loan Agreement between the Registrant and US Bank NA dated October 21, 2010, which was filed as Exhibit 10.1 to the Registrant’s Form 10-Q Quarterly Report for September 21, 2010, is incorporated herein by reference.

10.2 Agreement to Purchase Stock between the Registrant and Frisch West Chester, Inc. dated June 1, 1988, which was filed as Exhibit 10 (f) to the Registrant’s Form 10-Q Quarterly Report for September 19, 2006, is incorporated herein by reference.

10.3 Agreement to Purchase Stock between the Registrant and Frisch Hamilton West, Inc. dated February 19, 1988, which was filed as Exhibit 10 (g) to the Registrant’s Form 10-Q Quarterly Report for September 19, 2006, is incorporated herein by reference.

Material Contracts — Compensatory Plans or Agreements

10.50 Employment Agreement between the Registrant and Craig F. Maier effective June 3, 2009, dated April 10, 2009, which was filed as Exhibit 10.16 to the Registrant’s Form 10-Q Quarterly Report for March 10, 2009, is incorporated herein by reference.

10.51 Amendment to Employment Agreement between the Registrant and Craig F. Maier effective April 6, 2011, which was filed as Exhibit 99.1 to the Registrant’s Form 8-K Current Report dated April 6, 2011, is incorporated herein by reference.

10.52 Employment Agreement between the Registrant and Craig F. Maier effective May 30, 2012, dated April 4, 2012, is filed herewith.

10.53 Performance Award under the 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63, 10.64, 10.65 below) between the Registrant and Craig F. Maier dated May 30, 2012 is filed herewith.

10.60 Frisch’s Executive Retirement Plan (SERP) effective June 1, 1994, which was filed as Exhibit (10) (b) to the Registrant’s Form 10-Q Quarterly Report for September 17, 1995, is incorporated herein by reference.

10.61 Amendment No. 1 to Frisch’s Executive Retirement Plan (SERP) (see Exhibit 10.60 above) effective January 1, 2000, which was filed as Exhibit 10 (k) to the Registrant’s Form 10-K Annual Report for 2003, is incorporated herein by reference.

10.62 2003 Stock Option and Incentive Plan, which was filed as Appendix A to the Registrant’s Proxy Statement dated August 28, 2003, is incorporated herein by reference.

10.63 Amendment # 1 to the 2003 Stock Option and Incentive Plan (see Exhibit 10.62 above) effective September 26, 2006, which was filed as Exhibit 10 (q) to the Registrant’s Form 10-Q Quarterly Report for September 19, 2006, is incorporated herein by reference.

 

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10.64 Amendments to the 2003 Stock Option and Incentive Plan (see Exhibits 10.62 and 10.63 above) effective December 19, 2006, which was filed as Exhibit 99.2 to the Registrant’s Form 8-K Current Report dated December 19, 2006, is incorporated herein by reference.

10.65 Amendments to the 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63 and 10.64 above) adopted October 7, 2008, which was filed as Exhibit 10.21 to the Registrant’s Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.

10.66 Forms of Agreement to be used for stock options granted to employees and to non-employee directors under the Registrant’s 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63, 10.64 and 10.65 above), which was filed as Exhibits 99.1 and 99.2 to the Registrant’s Form 8-K dated October 1, 2004, are incorporated herein by reference.

10.67 Restricted Stock Agreement to be used for restricted stock granted to non-employee members of the Board of Directors under the Registrant’s 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63, 10.64 and 10.65 above), which was filed as Exhibit 10.58 to the Registrant’s Form 10-Q Quarterly Report for September 21, 2010, is incorporated herein by reference.

10.68 Restricted Stock Agreement to be used for restricted stock granted to key employees under the Registrant’s 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63, 10.64 and 10.65 above), which was filed as Exhibit 10.60 to the Registrant’s Form 10-K Annual Report for 2011, is incorporated herein by reference.

10.69 Unrestricted Stock Agreement to be used for unrestricted stock granted to employees (between the Registrant and Craig F. Maier dated June 15, 2011) under the Registrant’s 2003 Stock Option and Incentive Plan (see Exhibits 10.62, 10.63, 10.64 and 10.65 above), which was filed as Exhibit 10.61 to the Registrant’s Form 10-K Annual Report for 2011, is incorporated herein by reference.

10.70 Amended and Restated 1993 Stock Option Plan, which was filed as Exhibit A to the Registrant’s Proxy Statement dated September 9, 1998, is incorporated herein by reference.

10.71 Amendments to the Amended and Restated 1993 Stock Option Plan (see Exhibit 10.70 above) effective December 19, 2006, which was filed as Exhibit 99.1 to the registrant’s Form 8-K Current Report dated December 19, 2006, is incorporated herein by reference.

10.72 Employee Stock Option Plan, which was filed as Exhibit B to the Registrant’s Proxy Statement dated September 9, 1998, is incorporated herein by reference.

10.73 Change of Control Agreement between the Registrant and Craig F. Maier dated November 21, 1989, which was filed as Exhibit (10) (g) to the Registrant’s Form 10-K Annual Report for 1990, is incorporated herein by reference. It was also filed as Exhibit 99.2 to the Registrant’s Form 8-K Current Report dated March 17, 2006, which is also incorporated herein by reference.

10.74 First Amendment to Change of Control Agreement (see Exhibit 10.73 above) between the Registrant and Craig F. Maier dated March 17, 2006, which was filed as Exhibit 99.1 to the Registrant’s Form 8-K Current Report dated March 17, 2006, is incorporated herein by reference.

10.75 Second Amendment to Change of Control Agreement (see Exhibits 10.73 and 10.74 above) between the Registrant and Craig F. Maier dated October 7, 2008, which was filed as Exhibit 99.1 to the Registrant’s Form 8-K Current Report dated October 7, 2008, is incorporated herein by reference.

10.76 Frisch’s Nondeferred Cash Balance Plan effective January 1, 2000, which was filed as Exhibit (10) (r) to the Registrant’s Form 10-Q Quarterly Report for December 10, 2000, is incorporated herein by reference, together with the Trust Agreement established by the Registrant between the Plan’s Trustee and the Grantor (employee). There are identical Trust Agreements between the Plan’s Trustee and Craig F. Maier, Rinzy J. Nocero, Karen F. Maier, Michael E. Conner, Lindon C. Kelley, Michael R. Everett, James I. Horwitz, William L. Harvey and certain other “highly compensated employees” (Grantors).

 

49


10.77 First Amendment (to be effective June 6, 2006) to the Frisch’s Nondeferred Cash Balance Plan that went into effect January 1, 2000 (see Exhibit 10.76 above), which was filed as Exhibit 99.2 to the Registrant’s Form 8-K Current Report dated June 7, 2006, is incorporated herein by reference.

10.78 Senior Executive Bonus Plan effective June 2, 2003, which was filed as Exhibit (10) (s) to the Registrant’s Form 10-K Annual Report for 2003, is incorporated herein by reference.

10.79 Non-Qualified Deferred Compensation Plan, Basic Plan Document to Restate Frisch’s Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.80, 10.81 and 10.82), which was filed as Exhibit 10.32 to the Registrant’s Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.

10.80 Non-Qualified Deferred Compensation Plan, Adoption Agreement (Stock) to Restate Frisch’s Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.79, 10.81 and 10.82), which was filed as Exhibit 10.33 to the Registrant’s Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.

10.81 Non-Qualified Deferred Compensation Plan, Adoption Agreement (Mutual Funds) to Restate Frisch’s Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.79, 10.80 and 10.82), which was filed as Exhibit 10.34 to the Registrant’s Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.

10.82 Non-Qualified Deferred Compensation Plan, Adoption Agreement to Restate Frisch’s Executive Savings Plan (FESP) effective July 1, 2009 (also see Exhibits 10.79, 10.80 and 10.81), which was filed as Exhibit 10.36 to the Registrant’s Form 10-K Annual Report for 2009, and to correct a typographical error in Section 4.02(c) was re-filed as Exhibit 10.74 to the Registrant’s Form 10-Q Quarterly Report for September 20, 2011, is incorporated herein by reference.

Other Exhibits

14 Code of Ethics, which was filed as Exhibit 14 to the Registrant’s Form 10-K Annual Report for 2011, is incorporated herein by reference.

31.1 Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a), is filed herewith.

31.2 Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a), is filed herewith.

32.1 Section 1350 Certification of Chief Executive Officer is filed herewith.

32.2 Section 1350 Certification of Chief Financial Officer is filed herewith.

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statement of Earnings, (ii) Consolidated Balance Sheet, (iii) Consolidated Statement of Shareholders’ Equity, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements tagged as blocks of text.

 

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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 April 6, 2012  
  BY      /s/ Mark R. Lanning    
  Mark R. Lanning
  Vice President and Chief Financial Officer,
  Principal Financial Officer
  Principal Accounting Officer

 

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