Attached files
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EXCEL - IDEA: XBRL DOCUMENT - FRISCHS RESTAURANTS INC | Financial_Report.xls |
EX-32.2 - EX-32.2 - FRISCHS RESTAURANTS INC | d328599dex322.htm |
EX-31.2 - EX-31.2 - FRISCHS RESTAURANTS INC | d328599dex312.htm |
EX-32.1 - EX-32.1 - FRISCHS RESTAURANTS INC | d328599dex321.htm |
EX-31.1 - EX-31.1 - FRISCHS RESTAURANTS INC | d328599dex311.htm |
EX-10.52 - EX-10.52 - FRISCHS RESTAURANTS INC | d328599dex1052.htm |
EX-10.53 - EX-10.53 - FRISCHS RESTAURANTS INC | d328599dex1053.htm |
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
FRISCHS 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) | |
Registrants 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 issuers 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. |
Managements 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 | ||
51 |
Frischs 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 | ||||||||||||
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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 | | ||||||||||||
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|||||||||
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 | ||||||||||||
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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 | ||||||||||||
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Net Earnings |
$ | 3,326,543 | $ | 7,081,475 | $ | 2,812,720 | $ | 1,855,319 | ||||||||
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Earnings per share (EPS) of common stock: |
||||||||||||||||
Basic net earnings per share |
$ | 0.67 | $ | 1.40 | $ | 0.57 | $ | 0.37 | ||||||||
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Diluted net earnings per share |
$ | 0.67 | $ | 1.39 | $ | 0.57 | $ | 0.37 | ||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
3
Frischs 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 | ||||||
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|
|||||
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 | ||||||
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|
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307,588,526 | 321,574,047 | |||||||
Less accumulated depreciation and amortization |
148,405,092 | 148,651,557 | ||||||
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|
|||||
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 | ||||||
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Total other assets |
15,248,457 | 7,491,234 | ||||||
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Total assets |
$ | 192,637,850 | $ | 195,273,735 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
4
LIABILITIES AND SHAREHOLDERS EQUITY
March 6, 2012 |
May 31, 2011 |
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(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 | ||||||
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|
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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 | ||||||
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Total long-term obligations |
35,810,244 | 40,646,184 | ||||||
Commitments |
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Shareholders Equity |
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Capital stock |
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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 | ||||||
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73,400,124 | 73,122,398 | |||||||
Accumulated other comprehensive loss |
(5,205,749 | ) | (5,726,555 | ) | ||||
Retained earnings |
97,258,038 | 96,249,483 | ||||||
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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 | ||||||
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Total shareholders equity |
127,387,647 | 125,527,892 | ||||||
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Total liabilities and shareholders equity |
$ | 192,637,850 | $ | 195,273,735 | ||||
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5
Frischs 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 | ) | ||||||||||||||||
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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 | ||||||||||||||||||
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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 | ) | ||||||||||||||||
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Balance at March 6, 2012 |
$ | 7,586,764 | $ | 65,813,360 | ($ | 5,205,749 | ) | $ | 97,258,038 | ($ | 38,064,766 | ) | $ | 127,387,647 | ||||||||||
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40 weeks ended March 6, 2012 |
12 weeks ended May 31, 2011 |
40 weeks ended March 8, 2011 |
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Comprenhensive income: |
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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 | |||||||||
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Comprehensive income |
$ | 3,847,349 | $ | 3,908,275 | $ | 7,694,186 | ||||||
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The accompanying notes are an integral part of the consolidated financial statements.
6
Frischs 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 |
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Cash flows provided by (used in) operating activities: |
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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 | ) | ||||
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21,025,922 | 21,151,709 | |||||||
Changes in assets and liabilities: |
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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 | ||||||
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(15,133 | ) | 2,261,032 | ||||||
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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 | ) | ||||
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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 | ||||||
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Net cash (used in) financing activities |
(8,421,690 | ) | (5,055,028 | ) | ||||
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Net increase in cash and equivalents |
2,733,396 | 3,614,639 | ||||||
Cash and equivalents at beginning of year |
2,449,448 | 647,342 | ||||||
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Cash and equivalents at end of quarter |
$ | 5,182,844 | $ | 4,261,981 | ||||
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Supplemental disclosures: |
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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
Frischs 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 Companys significant accounting policies consistently applied in the preparation of the accompanying interim consolidated financial statements follows:
Description of the Business
Frischs Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name Frischs 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 Frischs 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 Frischs 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 Companys investments in its Golden Corral segment. (See Note J Subsequent Event.)
Consolidation Practices
The accompanying interim consolidated financial statements (unaudited) include all of the Companys 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 Companys 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
Frischs 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 managements 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
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2012, Ended March 6, 2012
NOTE AACCOUNTING 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 managements 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 managements 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
Frischs 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 managements 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 restaurants 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
Frischs 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 Companys 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
Frischs 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 Companys 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 Frischs 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 Companys 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 Frischs 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 (HCEs) are disqualified from participation in the Salaried Savings Plan. A non-qualified savings plan Frischs Executive Savings Plan (FESP) provides a means by which the HCEs may continue to defer a portion of their compensation. FESP allows deferrals of up to 25 percent of a participants 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 Companys common stock. HCEs 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
Frischs 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 HCEs 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 HCEs 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 HCEs 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 managements 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
Frischs 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 years 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 Companys 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 Companys 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 entitys 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 Companys business or that no material effect is expected on the financial statements as a result of future adoption.
15
Frischs 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
Frischs 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 Companys 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 Companys 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
Frischs 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 Companys 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
Frischs 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
Frischs 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 Companys 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 (SARs) 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 stocks fair market value on the date the SAR is granted. SARs 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
Frischs 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 Companys common stock were re-issued to the CEO from the Companys 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 Companys treasury to cover the withholding tax obligation on the compensation. Also on June 15, 2011, an option to purchase 40,000 shares of the Companys 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 Companys 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 Companys 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 Companys common stock. Based upon the October 5, 2011 market value of the Companys 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 Companys treasury. The aggregate award amounted to $150,000, based on the June 15, 2011 market value of the Companys stock.
All restricted stock awarded was re-issued from the Companys 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
Frischs 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
Frischs 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 Companys 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 Companys 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 Plans custodian until withdrawn or distributed. As of October 31, 2011, the custodian held 44,548 shares on behalf of employees.
23
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2012, Ended March 6, 2012
NOTE D CAPITAL STOCK (CONTINUED)
Frischs 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 Frischs 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 Companys treasury held 2,648,899 shares of the Companys 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 Companys 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
Frischs 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
Frischs 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 Companys 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 Companys 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 Companys 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 (HCEs). 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
Frischs 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 HCEs 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 HCEs 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 HCEs 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 | ) | ||||||||
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Comprehensive income |
$ | 3,847 | $ | 7,693 | $ | 2,969 | $ | 2,038 | ||||||||
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27
Frischs 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 | ||||||||||||
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$ | 230,876 | $ | 231,068 | $ | 68,406 | $ | 67,490 | |||||||||
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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 | ) | |||||||||
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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 | ) | | ||||||||||
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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 | | ||||||||||||
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Operating profit |
4,917 | 11,200 | 3,497 | 2,991 | ||||||||||||
Interest expense |
(1,136 | ) | (1,227 | ) | (328 | ) | (378 | ) | ||||||||
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Earnings before income taxes |
$ | 3,781 | $ | 9,973 | $ | 3,169 | $ | 2,613 | ||||||||
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Depreciation and amortization |
||||||||||||||||
Big Boy |
$ | 7,849 | $ | 7,561 | $ | 2,375 | $ | 2,348 | ||||||||
Golden Corral |
3,744 | 4,364 | 1,105 | 1,290 | ||||||||||||
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$ | 11,593 | $ | 11,925 | $ | 3,480 | $ | 3,638 | |||||||||
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Capital expenditures |
||||||||||||||||
Big Boy |
$ | 8,714 | $ | 13,100 | $ | 1,231 | $ | 2,446 | ||||||||
Golden Corral |
2,626 | 1,405 | 1,110 | 826 | ||||||||||||
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|||||||||
$ | 11,340 | $ | 14,505 | $ | 2,341 | $ | 3,272 | |||||||||
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As of | ||||||||||||||||
Mar. 6, 2012 |
May 31, 2011 |
|||||||||||||||
Identifiable assets |
||||||||||||||||
Big Boy |
$ | 130,937 | $ | 125,784 | ||||||||||||
Golden Corral |
61,701 | 69,490 | ||||||||||||||
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|||||||||||||
$ | 192,638 | $ | 195,274 | |||||||||||||
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28
Frischs 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 Companys 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 Companys 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 restaurants 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 partys 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. Maiers 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 Companys 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
Frischs 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 Chairmans 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 Chairmans 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. Maiers 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 Companys 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 Companys 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 Companys 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. MANAGEMENTS 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 Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Such statements may generally express managements 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 managements 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 Frischs 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 Companys 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 Companys 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 years $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 years $4,094,000 charge (with related closing costs) for impairment of the six closed Golden Corral restaurants |
32
| This years $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 Companys sales are primarily generated through the operation of Big Boy restaurants and Golden Corral restaurants. Big Boy sales also include wholesale sales from the Companys commissary to restaurants licensed to other Big Boy operators and the sale of Big Boys 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 | ||||||||
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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 Companys grocery line business by adding Frischs brand of salad dressings in grocery stores in 2012, joining Frischs 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 Frischs 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 Companys 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 Companys 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 | ||||||||||||
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Total gross profit |
$ | 7,258 | $ | 6,365 | $ | 21,468 | $ | 22,683 | ||||||||
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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 Companys 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 segments 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 years 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 employers 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 Companys 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
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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 Companys 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 managements 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 Officers 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).
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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 Companys principal source of cash. The funds from sales are immediately available for the Companys 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 Companys ability to satisfactorily retire any of its
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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 |
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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 | ||||||||||||||||
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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 Companys 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.
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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 Companys Change in Accounting Method was based. Management is currently reviewing the new temporary and proposed regulations to determine the effect, if any, upon the Companys 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 years 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 Companys common stock were re-issued from the Companys 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 Companys 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 Companys 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.
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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 runout 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 |
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(in thousands) | ||||||||||||||||
Stock options granted |
$ | 30 | $ | 60 | $ | 120 | $ | 214 | ||||||||
Restricted stock issued |
103 | 55 | 327 | 92 | ||||||||||||
Unrestricted stock issued |
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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 Companys 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 Companys 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 Companys 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
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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 Companys 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 companys financial condition and its results of operations, and the policy must require managements most difficult, subjective or complex judgments. Management believes the following to be the Companys 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 Companys 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 Companys 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 Companys 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 managements 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 Companys 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 Companys food products. Commodity pricing can be extremely volatile, affected by many factors outside of managements 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 Companys 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
43
in its operations. Deliveries are received twice per week. Other vendors are available to provide products that meet the Franchisors 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 Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) reviewed and evaluated the effectiveness of the Companys 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 Companys disclosure controls and procedures were effective as of such date to ensure that information that would be required to be disclosed in the Companys 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 Companys 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 Companys 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 Companys internal control over financial reporting.
PART II OTHER INFORMATION
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 Companys earnings, cash flows or financial position.
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 Companys 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 Companys common stock trade.
In addition to operating results, other factors can influence the volatility and price at which the Companys common stock trades. The Companys 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 Companys shares may be placed can also influence the price of the Companys 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 Companys food supplies could result in food borne illnesses and/or injuries to customers. If any of the Companys customers become ill or injured from consuming the Companys 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
44
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 Companys equity to be recognized.
Competition
The restaurant industry is highly competitive and many of the Companys 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 Companys management, presently dominates the family-style sector of the restaurant industry in any of the Companys 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 Companys menus |
| new competitors that enter the Companys 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 Companys 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 Companys 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 Companys 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 Companys financial condition, especially if other potentially responsible parties lack the financial wherewithal to satisfy a judgment against them or the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys operations, the operations of the Companys suppliers and the lives of the Companys customers. The Big Boy segments 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
46
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 Companys compliance with the required internal controls of processing and storing of credit card data. A finding of non-compliance could restrict the Companys 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 Companys 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)
Not applicable
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Articles of Incorporation and Bylaws
3.1 Third Amended Articles of Incorporation, which was filed as Exhibit (3) (a) to the Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Frischs Executive Retirement Plan (SERP) effective June 1, 1994, which was filed as Exhibit (10) (b) to the Registrants Form 10-Q Quarterly Report for September 17, 1995, is incorporated herein by reference.
10.61 Amendment No. 1 to Frischs Executive Retirement Plan (SERP) (see Exhibit 10.60 above) effective January 1, 2000, which was filed as Exhibit 10 (k) to the Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 registrants 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 Registrants 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 Registrants Form 10-K Annual Report for 1990, is incorporated herein by reference. It was also filed as Exhibit 99.2 to the Registrants 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 Registrants 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 Registrants Form 8-K Current Report dated October 7, 2008, is incorporated herein by reference.
10.76 Frischs Nondeferred Cash Balance Plan effective January 1, 2000, which was filed as Exhibit (10) (r) to the Registrants 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 Plans Trustee and the Grantor (employee). There are identical Trust Agreements between the Plans 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).
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10.77 First Amendment (to be effective June 6, 2006) to the Frischs 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 Registrants 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 Registrants Form 10-K Annual Report for 2003, is incorporated herein by reference.
10.79 Non-Qualified Deferred Compensation Plan, Basic Plan Document to Restate Frischs 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 Registrants 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 Frischs 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 Registrants 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 Frischs 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 Registrants 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 Frischs 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 Registrants 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 Registrants 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 Registrants 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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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.
FRISCHS 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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