Interim Financial Statements and Principles of Consolidation

The accompanying interim Condensed Consolidated Financial Statements (unaudited) include the accounts of the Company, prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures included normally in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP) have been condensed or omitted as permitted under such rules and regulations. However, management believes that the disclosures made are adequate to make the information not misleading when read in conjunction with the Consolidated Financial Statements and the notes thereto that were included in the Company's Annual Report on Form 10-K for the year ended May 28, 2013.

Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (all of which were normal and recurring) necessary for a fair presentation of the accompanying unaudited Interim Condensed Consolidated Financial Statements have been made for all periods presented. Additionally, all of the dollar amounts referenced in the text of the footnotes are reported in thousands.

Reclassifications

Certain amounts reported in the prior year have been reclassified to conform to the current year presentation.

Fiscal Year

The current fiscal year will end on Tuesday, June 3, 2014 (Fiscal Year 2014), a period of 53 weeks (which will include a 13 week fourth quarter). The year that ended May 28, 2013 (Fiscal Year 2013) was a 52 week year. The Third Quarter of Fiscal 2014 consists of the 12 weeks ended March 4, 2014. It compares with the 12 weeks ended March 5, 2013, which constituted the Third Quarter of Fiscal 2013. The Three Quarters Ended March 4, 2014 was a period of 40 weeks. It compares with the Three Quarters Ended March 5, 2013, which was also a period of 40 weeks. The 12 week third quarter of each fiscal year should not be considered indicative of results for a full year, because it spans most of the winter season from mid-December through early March.

Rebates

Cash rebates received from vendors are recorded as a reduction of cost of sales in the periods in which they are earned. Cash received in advance of the period of recognition is recorded as a liability on the balance sheet.

Impairment of Long-Lived Assets

There were no non-cash impairment losses recorded during the Three Quarters Ended March 4, 2014.

Non-cash impairment losses from continuing operations totaling $71 were recorded during the 40 week period ended March 5, 2013 (during the First Quarter). The $71 aggregate impairment charge lowered previous estimates of the fair values of two former Frisch's Big Boy restaurants, both of which had been sold as of March 4, 2014 (in May and July 2013).

Goodwill and Other Intangible Assets

An analysis of Goodwill and Other Intangible Assets follows:



	March 4, 2014		May 28, 2013
	(in thousands)
Goodwill	$	741	$	741
Other intangible assets not subject to amortization	22		22
Other intangible assets subject to amortization - net	10		12
Total goodwill and other intangible assets	$	773	$	775

Provision for Income Taxes

The provision for income taxes in all periods presented is based on management’s estimate of the effective tax rate for the entire year, to which the effect of certain discrete items as described below has been applied.



	40 weeks ended						12 weeks ended
Income Tax Expense (Benefit)	March 4, 2014			March 5, 2013			March 4, 2014			March 5, 2013

Effective tax rate (benefit)	22.5		%	30		%	(14.1		)%	26.2		%

	(in thousands)
Effective tax rate - tax expense (benefit)	$	1,537		$	2,052		$	(126	)	$	621
Discrete - valuation allowances (released) placed	(222		)	81			(222		)	—
Discrete - domestic production activities deduction	(343		)	—			(343		)	—
Total income tax expense (benefit)	$	972		$	2,133		$	(691	)	$	621

Income Taxes - Discrete Items

Management periodically assesses the realization of net deferred tax assets based on historical, current and future (expected) operating results. A valuation allowance is recorded if management believes the Company's net deferred tax assets will not be realized ultimately. In addition, all valuation allowances are monitored closely by management, which may consider releasing such allowances in the future based on any positive evidence that may become available that would indicate that the deferred tax asset may be realized ultimately.

During the 12 week period ended March 4, 2014, management developed a plan to restructure the Company's consolidated subsidiaries from corporations to single member limited liability companies. By implementing this plan, management believes future taxable income will be generated in amounts sufficient to realize certain state deferred tax assets, including certain Net Operating Loss (NOL) carryforwards. As a result, the valuation allowances that had been previously placed on these deferred tax assets were released during the 12 week period ended March 4, 2014, the effect of which was to record an income tax benefit of $222. The release of $222 includes $81 that had been placed on certain deferred state income tax assets and included in the tax provision during the Second Quarter of Fiscal 2013.

During the present fiscal year, management has undertaken a project to identify, quantify and document tax benefits associated with the Domestic Production Activities Deduction (DPAD) that are available under the Internal Revenue Code (IRC). Prior to this project, management had not elected to claim DPAD benefits. In February 2014, the Company filed an amended federal income tax return for its 2010 fiscal year to take advantage of DPAD. The expected refund totaling $343, was recorded as an income tax benefit during the 12 week period ended March 4, 2014. Amended federal income tax returns for fiscal years 2011, 2012 and 2013 will be filed in the Fourth Quarter of Fiscal 2014, which will result in the recording of additional tax benefits for DPAD, currently estimated to total between $600 and $700.

The tax benefit to be derived from DPAD in fiscal 2014 has been incorporated into the annual effective tax rate as of the 12 week period ended March 4, 2014.

Income Taxes - Repair Regulations

An automatic Change in Accounting Method (Form 3115) was filed with the Internal Revenue Service (IRS) in fiscal 2011, to allow for immediate deduction of certain repairs and maintenance costs, replacing the previous treatment that had capitalized these costs. Final Repair Regulations were issued by the IRS in September 2013 to replace temporary and proposed repair regulations that had been issued in December 2011. The temporary and proposed repair regulations had departed in some ways from the earlier regulations on which the Company's Change in Accounting Method had been based. The Final Repair Regulations are less of a departure from the earlier regulations than were the temporary and proposed regulations that had been issued in December 2011. The Final Repair Regulations, which specify when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted as incurred, must be applied to taxable years beginning on or after January 1, 2014 (the Company's fiscal year 2015). Although still unfavorable, the effect of the Final Repair Regulations on the Company's Change in Accounting Method (filed in fiscal 2011) is expected to be an immaterial timing difference. Once the exact amount is known, (likely in the 4th quarter of fiscal 2014), the appropriate Forms 3115 will be filed with the IRS to conform the previous Change in Accounting Method to the Final Repair Regulations.

New Accounting Pronouncements

ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive income," was issued in February 2013 to amend Accounting Standards Codification Topic 220, "Comprehensive Income." The amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements, but requires disclosure about amounts reclassified out of accumulated other comprehensive income (AOCI), by component. The amendment requires disclosure of the effect of significant reclassifications out of AOCI on the respective line items in net income in which the item was reclassified if the amount being reclassified is required to be reclassified to net income in its entirety in the same reporting period. It requires a cross reference to other disclosures that provide additional detail for amounts that are not required to be reclassified in their entirety in the same reporting period.

ASU 2013-02 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. This new disclosure became effective for the Company on May 29, 2013 (the first day of Fiscal Year 2014), and has been adopted in accordance with the standard. See NOTE H - OTHER COMPREHENSIVE INCOME to the Condensed Consolidated Financial Statements for the new disclosures related to the adoption of this standard.

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