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 8, 2011
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 ¨ 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
The total number of shares outstanding of the issuers no par common stock, as of March 21, 2011 was: 4,937,629
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 - 28 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 29 - 38 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 39 | ||||
Item 4. |
Controls and Procedures | 39 | ||||
PART II - OTHER INFORMATION | ||||||
Item 1. |
Legal Proceedings | 40 | ||||
Item 1A. |
Risk Factors | 40 - 43 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 43 | ||||
Item 3. |
Defaults Upon Senior Securities | 43 | ||||
Item 4. |
(Removed and Reserved) | 43 | ||||
Item 5. |
Other Information | 43 | ||||
Item 6. |
Exhibits | 43 - 46 | ||||
SIGNATURE | 46 |
Frischs Restaurants, Inc. and Subsidiaries
Consolidated Statement of Earnings
(Unaudited)
Forty weeks ended | Twelve weeks ended | |||||||||||||||
March 8, 2011 |
March 9, 2010 |
March 8, 2011 |
March 9, 2010 |
|||||||||||||
Sales |
$ | 231,067,733 | $ | 221,753,296 | $ | 67,490,452 | $ | 64,872,608 | ||||||||
Cost of sales |
||||||||||||||||
Food and paper |
79,607,930 | 75,170,285 | 23,527,960 | 22,094,555 | ||||||||||||
Payroll and related |
77,224,245 | 74,322,609 | 22,841,840 | 21,837,537 | ||||||||||||
Other operating costs |
51,552,685 | 49,588,410 | 14,755,945 | 14,385,174 | ||||||||||||
208,384,860 | 199,081,304 | 61,125,745 | 58,317,266 | |||||||||||||
Gross profit |
22,682,873 | 22,671,992 | 6,364,707 | 6,555,342 | ||||||||||||
Administrative and advertising |
12,487,369 | 11,433,789 | 3,682,818 | 3,471,981 | ||||||||||||
Franchise fees and other revenue |
(1,004,996 | ) | (970,749 | ) | (309,361 | ) | (282,375 | ) | ||||||||
Operating profit |
11,200,500 | 12,208,952 | 2,991,250 | 3,365,736 | ||||||||||||
Interest expense |
1,227,025 | 1,355,360 | 377,931 | 390,026 | ||||||||||||
Earnings before income taxes |
9,973,475 | 10,853,592 | 2,613,319 | 2,975,710 | ||||||||||||
Income taxes |
2,892,000 | 3,473,000 | 758,000 | 952,000 | ||||||||||||
Net Earnings |
$ | 7,081,475 | $ | 7,380,592 | $ | 1,855,319 | $ | 2,023,710 | ||||||||
Earnings per share (EPS) of common stock: |
||||||||||||||||
Basic net earnings per share |
$ | 1.40 | $ | 1.45 | $ | .37 | $ | .40 | ||||||||
Diluted net earnings per share |
$ | 1.39 | $ | 1.42 | $ | .37 | $ | .39 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Frischs Restaurants, Inc. and Subsidiaries
ASSETS
March 8, 2011 |
June 1, 2010 |
|||||||
(unaudited) | ||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 4,261,981 | $ | 647,342 | ||||
Trade and other accounts receivable |
1,671,307 | 1,533,799 | ||||||
Inventories |
6,240,867 | 5,958,540 | ||||||
Prepaid expenses, sundry deposits and other |
1,875,073 | 760,032 | ||||||
Prepaid and deferred income taxes |
1,603,257 | 1,489,119 | ||||||
Total current assets |
15,652,485 | 10,388,832 | ||||||
Property and Equipment |
||||||||
Land and improvements |
81,407,954 | 77,458,187 | ||||||
Buildings |
104,631,610 | 101,478,173 | ||||||
Equipment and fixtures |
101,015,437 | 96,531,395 | ||||||
Leasehold improvements and buildings on leased land |
24,704,494 | 23,267,910 | ||||||
Capitalized leases |
2,330,279 | 2,158,899 | ||||||
Construction in progress |
3,973,821 | 5,855,478 | ||||||
318,063,595 | 306,750,042 | |||||||
Less accumulated depreciation and amortization |
147,371,134 | 138,051,284 | ||||||
Net property and equipment |
170,692,461 | 168,698,758 | ||||||
Other Assets |
||||||||
Goodwill |
740,644 | 740,644 | ||||||
Other intangible assets |
515,948 | 718,357 | ||||||
Investments in land |
923,435 | 923,435 | ||||||
Property held for sale |
2,921,818 | 2,758,998 | ||||||
Deferred income taxes |
1,333,147 | 3,162,703 | ||||||
Other long term assets |
2,258,177 | 1,860,919 | ||||||
Total other assets |
8,693,169 | 10,165,056 | ||||||
Total assets |
$ | 195,038,115 | $ | 189,252,646 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
4
LIABILITIES AND SHAREHOLDERS EQUITY
March 8, 2011 |
June 1, 2010 |
|||||||
(unaudited) | ||||||||
Current Liabilities |
||||||||
Long-term obligations due within one year |
||||||||
Long-term debt |
$ | 7,413,028 | $ | 7,517,765 | ||||
Obligations under capitalized leases |
197,885 | 240,893 | ||||||
Self insurance |
761,725 | 528,220 | ||||||
Accounts payable |
11,902,754 | 10,557,636 | ||||||
Accrued expenses |
10,306,879 | 9,641,305 | ||||||
Income taxes |
175,150 | 54,972 | ||||||
Total current liabilities |
30,757,421 | 28,540,791 | ||||||
Long-Term Obligations |
||||||||
Long-term debt |
22,823,099 | 23,795,046 | ||||||
Obligations under capitalized leases |
1,026,991 | 994,151 | ||||||
Self insurance |
1,124,242 | 1,040,778 | ||||||
Underfunded pension obligation |
11,502,451 | 10,747,629 | ||||||
Deferred compensation and other |
4,258,533 | 4,040,235 | ||||||
Total long-term obligations |
40,735,316 | 40,617,839 | ||||||
Commitments |
||||||||
Shareholders Equity |
||||||||
Capital stock |
||||||||
Preferred stock - authorized, 3,000,000 shares without par value; none issued |
| | ||||||
Common stock - authorized, 12,000,000 shares without par value; issued, 7,586,764 and 7,585,764 shares - stated value - $1 |
7,586,764 | 7,585,764 | ||||||
Additional contributed capital |
65,407,675 | 65,222,878 | ||||||
72,994,439 | 72,808,642 | |||||||
Accumulated other comprehensive loss |
(7,243,716 | ) | (7,856,427 | ) | ||||
Retained earnings |
93,858,198 | 89,701,652 | ||||||
86,614,482 | 81,845,225 | |||||||
Less cost of treasury stock (2,572,991 and 2,525,174 shares) |
(36,063,543 | ) | (34,559,851 | ) | ||||
Total shareholders equity |
123,545,378 | 120,094,016 | ||||||
Total liabilities and shareholders equity |
$ | 195,038,115 | $ | 189,252,646 | ||||
5
Frischs Restaurants, Inc. and Subsidiaries
Consolidated Statement of Shareholders Equity
Forty weeks ended March 8, 2011 and March 9, 2010
(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 2, 2009 |
$ | 7,582,347 | $ | 64,721,328 | $ | (6,634,422 | ) | $ | 82,306,488 | $ | (33,598,597 | ) | $ | 114,377,144 | ||||||||||
Net earnings for 40 weeks |
| | | 7,380,592 | | 7,380,592 | ||||||||||||||||||
Other comprehensive income, net of tax |
| | 393,386 | | | 393,386 | ||||||||||||||||||
Stock options exercised - new shares issued |
3,417 | 80,449 | | | | 83,866 | ||||||||||||||||||
Stock options exercised - treasury shares re-issued |
| (3,480 | ) | | | 13,540 | 10,060 | |||||||||||||||||
Excess tax benefit from stock - based compensation |
| 6,144 | | | | 6,144 | ||||||||||||||||||
Compensation cost - stock options |
| 266,803 | | | | 266,803 | ||||||||||||||||||
Other treasury shares re-issued |
| 40,557 | | | 34,216 | 74,773 | ||||||||||||||||||
Employee stock purchase plan |
| 9,836 | | | | 9,836 | ||||||||||||||||||
Cash dividends - $0.51 per share |
| | | (2,603,767 | ) | | (2,603,767 | ) | ||||||||||||||||
Balance at March 9, 2010 |
7,585,764 | 65,121,637 | (6,241,036 | ) | 87,083,313 | (33,550,841 | ) | 119,998,837 | ||||||||||||||||
Net earnings for 12 weeks |
| | | 2,618,339 | | 2,618,339 | ||||||||||||||||||
Other comprehensive loss, net of tax |
| | (1,615,391 | ) | | | (1,615,391 | ) | ||||||||||||||||
Compensation cost - stock options |
| 88,758 | | | | 88,758 | ||||||||||||||||||
Employee stock purchase plan |
| 12,483 | | | | 12,483 | ||||||||||||||||||
Treasury shares acquired |
| | | | (1,009,010 | ) | (1,009,010 | ) | ||||||||||||||||
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 - new shares issued |
1,000 | 9,375 | | | | 10,375 | ||||||||||||||||||
Stock options exercised - treasury shares re-issued |
| (191,865 | ) | | | 855,444 | 663,579 | |||||||||||||||||
Issuance of restricted stock - treasury shares re-issued |
| (166,338 | ) | | | 166,338 | | |||||||||||||||||
Excess tax benefit from stock - based compensation |
| 208,223 | | | | 208,223 | ||||||||||||||||||
Other treasury shares re-issued |
| 16,308 | | | 34,237 | 50,545 | ||||||||||||||||||
Treasury shares acquired |
| | | | (2,559,711 | ) | (2,559,711 | ) | ||||||||||||||||
Compensation cost - stock options |
| 213,730 | | | | 213,730 | ||||||||||||||||||
Compensation cost - restricted stock |
| 92,307 | | | | 92,307 | ||||||||||||||||||
Employee stock purchase plan |
| 3,057 | | | | 3,057 | ||||||||||||||||||
Cash dividends - $0.58 per share |
| | | (2,924,929 | ) | | (2,924,929 | ) | ||||||||||||||||
Balance at March 8, 2011 |
$ | 7,586,764 | $ | 65,407,675 | $ | (7,243,716 | ) | $ | 93,858,198 | $ | (36,063,543 | ) | $ | 123,545,378 | ||||||||||
Forty weeks ended March 8, 2011 |
Twelve weeks ended June 1, 2010 |
Forty weeks ended March 9, 2010 |
||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net earnings for the period |
$ | 7,081,475 | $ | 2,618,339 | $ | 7,380,592 | ||||||||||||||||||
Change in defined benefit pension plans, net of tax |
612,711 | (1,615,391 | ) | 393,386 | ||||||||||||||||||||
Comprehensive income (loss) |
$ | 7,694,186 | $ | 1,002,948 | $ | 7,773,978 | ||||||||||||||||||
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 8, 2011 and March 9, 2010
(unaudited)
March 8, 2011 |
March 9, 2010 |
|||||||
Cash flows provided by (used in) operating activities: |
||||||||
Net earnings |
$ | 7,081,475 | $ | 7,380,592 | ||||
Adjustments to reconcile net earnings to net cash from operating activities: |
||||||||
Depreciation and amortization |
11,925,141 | 10,712,045 | ||||||
Loss on disposition of assets |
123,546 | 154,640 | ||||||
Stock-based compensation expense |
306,037 | 266,803 | ||||||
Net periodic pension cost |
2,565,510 | 1,953,191 | ||||||
Contributions to pension plans |
(850,000 | ) | (775,000 | ) | ||||
21,151,709 | 19,692,271 | |||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(137,508 | ) | (175,911 | ) | ||||
Inventories |
(282,327 | ) | 10,662 | |||||
Prepaid expenses and sundry deposits |
(1,115,041 | ) | (397,381 | ) | ||||
Other assets |
514,395 | (43,396 | ) | |||||
Prepaid, accrued and deferred income taxes |
1,728,178 | (1,117,300 | ) | |||||
Excess tax benefit from stock-based compensation |
(208,223 | ) | (6,144 | ) | ||||
Accounts payable |
593,052 | 2,952,692 | ||||||
Accrued expenses |
665,575 | (2,372,273 | ) | |||||
Self insured obligations |
316,969 | 376,322 | ||||||
Deferred compensation and other liabilities |
185,962 | 325,888 | ||||||
2,261,032 | (446,841 | ) | ||||||
Net cash provided by operating activities |
23,412,741 | 19,245,430 | ||||||
Cash flows provided by (used in) investing activities: |
||||||||
Additions to property and equipment |
(14,504,871 | ) | (17,053,999 | ) | ||||
Proceeds from disposition of property |
47,297 | 20,701 | ||||||
Change in other assets |
(285,500 | ) | (403,172 | ) | ||||
Net cash (used in) investing activities |
(14,743,074 | ) | (17,436,470 | ) | ||||
Cash flows provided by (used in) financing activities: |
||||||||
Proceeds from borrowings |
5,000,000 | 8,000,000 | ||||||
Payment of long-term debt and capital lease obligations |
(6,258,232 | ) | (6,531,771 | ) | ||||
Cash dividends paid |
(2,172,864 | ) | (1,939,849 | ) | ||||
Proceeds from stock options exercisednew shares issued |
10,375 | 83,866 | ||||||
Proceeds from stock options exercisedtreasury shares re-issued |
663,579 | 10,060 | ||||||
Excess tax benefit from stock-based compensation |
208,223 | 6,144 | ||||||
Treasury shares acquired |
(2,559,711 | ) | | |||||
Treasury shares re-issued |
50,545 | 74,773 | ||||||
Employee stock purchase plan |
3,057 | 9,836 | ||||||
Net cash (used in) financing activities |
(5,055,028 | ) | (286,941 | ) | ||||
Net increase in cash and equivalents |
3,614,639 | 1,522,019 | ||||||
Cash and equivalents at beginning of year |
647,342 | 898,779 | ||||||
Cash and equivalents at end of quarter |
$ | 4,261,981 | $ | 2,420,798 | ||||
Supplemental disclosures: |
||||||||
Interest paid |
$ | 1,262,922 | $ | 1,392,355 | ||||
Income taxes paid |
1,166,357 | 4,647,500 | ||||||
Income taxes refunds received |
2,535 | 57,201 | ||||||
Dividends declared but not paid |
752,065 | 663,918 | ||||||
Lease transactions capitalized |
171,380 | 825,000 |
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 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying interim consolidated financial statements (unaudited) 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 operated by the Company as of March 8, 2011 are located in various regions of Ohio, Kentucky and Indiana. All 35 Golden Corral restaurants operated by the Company as of March 8, 2011 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.
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 prior 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 31, 2011 (fiscal year 2011), a period of 52 weeks. The year that ended June 1, 2010 (fiscal year 2010) 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. Significant estimates and assumptions are used to measure self-insurance liabilities, deferred executive compensation obligations, net periodic pension cost and future pension obligations, the carrying values of property held for sale and for 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.
8
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
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 8, 2011 and June 1, 2010. 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 if construction has begun or if construction is likely within the next 12 months. As of March 8, 2011, one new Big Boy restaurant building was under construction on land that is owned by the Company. Estimated remaining costs (not already included in construction in progress) to complete construction of this restaurant approximated $2,077,000 as of March 8, 2011. A second new Big Boy restaurant should be under construction in April 2011 on land leased by the Company. Two other sites owned by the Company are included in construction in progress as of March 8, 2011 as near term construction is more likely than not. Contracts to acquire additional sites for future development that had been entered before March 8, 2011 were cancellable at the Companys sole discretion while due diligence is pursued under the inspection period provisions of the contracts.
Interest on borrowings is capitalized during active construction periods of new restaurants. Capitalized interest was $67,000 and $70,000 respectively, for the 40 weeks ended March 8, 2011 and March 9, 2010, and was $7,000 and $38,000 respectively, for the 12 week periods ended March 8, 2011 and March 9, 2010.
9
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
The cost of land on which construction is not likely within the next 12 months is classified as Investments in land in the consolidated balance sheet. Surplus property that is no longer needed by the Company, including two former Big Boy restaurants, is classified as property held for sale in the consolidated balance sheet. All of the surplus property is stated at estimated net realizable value. Market values are generally determined by opinions of value provided by real estate brokers and/or managements judgment.
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 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 the greater of the net present value of the future cash flow stream or a floor value. Floor 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 unprofitable restaurant properties.
No impairment losses were recognized during either the 40 weeks ended March 8, 2011 or March 9, 2010, or during the 12 week periods ended March 8, 2011 and March 9, 2010.
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 estimated net realizable 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.
Goodwill and Other Intangible Assets, Including Licensing Agreements
As of March 8, 2011 and June 1, 2010, the carrying amount of goodwill that was acquired in prior years amounted to $741,000. Acquired goodwill is tested annually for impairment and whenever an impairment indicator arises. Impairment losses are recorded when impairment is determined to have occurred.
10
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
An analysis of other intangible assets follows:
March 8, 2011 |
June 1, 2010 |
|||||||
(in thousands) | ||||||||
Golden Corral initial franchise fees subject to amortization |
$ | 1,280 | $ | 1,280 | ||||
Less accumulated amortization |
(731 | ) | (665 | ) | ||||
Carrying amount of Golden Corral initial franchise fees subject to amortization |
549 | 615 | ||||||
Current portion of Golden Corral initial franchise fees subject to amortization |
(85 | ) | (85 | ) | ||||
Golden Corral initial franchise fees not yet subject to amortization |
| 135 | ||||||
Golden Corral total intangible fees |
464 | 665 | ||||||
Other intangible assets subject to amortization net |
18 | 19 | ||||||
Other intangible assets not yet subject to amortization |
34 | 34 | ||||||
Total other intangible assets |
$ | 516 | $ | 718 | ||||
An initial franchise fee of $40,000 was paid for each Golden Corral restaurant that the Company opened. As finite useful lives are subject to amortization, the initial fee began amortizing when each restaurant opened, computed using the straight-line method over the 15 year term of each individual restaurants franchise agreement, which equated to $2,667 per year per restaurant. Amortization was $66,000 in each of the 40 weeks ended March 8, 2011 and March 9, 2010, and was $20,000 in each of the 12 weeks ended March 8, 2011 and March 9, 2010. The fees will continue to amortize as scheduled below:
(in thousands) | ||||
Annual period ending: March 8, 2012 |
$ | 85 | ||
March 8, 2013 |
85 | |||
March 8, 2014 |
85 | |||
March 8, 2015 |
79 | |||
March 8, 2016 |
69 | |||
Subsequent to 2016 |
146 | |||
$ | 549 | |||
Over the years, the Company had paid an additional $135,000 in initial franchise fees for future development of Golden Corral restaurants. In exchange for payment of these fees, the Company was granted development rights to open up to 12 more Golden Corral restaurants through December 31, 2011. Because the Company has no further plans to develop new Golden Corral restaurants, $135,000 was written off during the second quarter of fiscal year 2011 (the 12 week period 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 to other operating costs as incurred.
Other intangible assets are tested annually for impairment and whenever an impairment indicator arises.
11
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
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 by 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 are charged to other operating costs as incurred:
40 weeks ended | 12 weeks ended | |||||||||||||||
March 8, 2011 |
March 9, 2010 |
March 8, 2011 |
March 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Big Boy |
$ | 982 | $ | 419 | $ | 66 | $ | 193 | ||||||||
Golden Corral |
| | | | ||||||||||||
$ | 982 | $ | 419 | $ | 66 | $ | 193 | |||||||||
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 have been amended to comply with the Pension Protection Act of 2006 (PPA) and the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), and have been further amended for 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.
Benefits under both plans are based on years-of-service and other factors. The Company's funding policy is to contribute at least the minimum annual amount sufficient to satisfy legal funding requirements plus additional discretionary tax deductible amounts that may be deemed advisable, even when no minimum funding is required. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future.
12
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
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 three 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 three 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 three 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.
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).
13
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE A ACCOUNTING POLICIES (CONTINUED)
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 8, |
March 9, 2010 |
March 8, 2011 |
March 9, 2010 |
|||||||||||
(in thousands) | ||||||||||||||
$(162) | $ | (536 | ) | $ | 25 | $ | 3 | |||||||
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 29 percent and 32 percent respectively, for the 40 weeks ended March 8, 2011 and March 9, 2010, and was 29 percent and 32 percent respectively, for the 12 week periods ended March 8, 2011 and March 9, 2010. The lower rate used in fiscal year 2011 is primarily due to the effect of lower graduated tax rates in certain jurisdictions.
The Internal Revenue Services examination of the Companys tax return for the year ended June 2, 2009 (fiscal year 2009) was completed in November 2010. The examination resulted in no changes.
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.
Subsequent Events
The Company evaluated all transactions that occurred after March 8, 2011 through the date the financial statements contained herein were issued. On March 21, 2011, 75,000 shares of the Companys common stock were repurchased through a block trade at a cost of approximately $1,599,000. (See Treasury Stock under Note D Capital Stock.)
New Accounting Pronouncements
The Company reviewed all 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.
14
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE B LONG TERM DEBT
March 8, 2011 | June 1, 2010 | |||||||||||||||
Payable within one year |
Payable after one year |
Payable within one year |
Payable after one year |
|||||||||||||
(in thousands) | ||||||||||||||||
Construction Loan |
||||||||||||||||
Construction Phase |
$ | | $ | 3,000 | $ | | $ | 6,000 | ||||||||
Term Loans |
6,419 | 17,088 | 6,550 | 15,312 | ||||||||||||
Revolving Loan |
| | | | ||||||||||||
Stock Repurchase Loan |
||||||||||||||||
Draw Phase |
| 1,000 | ||||||||||||||
Term Loans |
| | ||||||||||||||
2009 Term Loan |
994 | 1,735 | 968 | 2,483 | ||||||||||||
$ | 7,413 | $ | 22,823 | $ | 7,518 | $ | 23,795 | |||||||||
The portion payable after one year matures as follows:
March 8, 2011 |
June 1, 2010 |
|||||||
(in thousands) | ||||||||
Period ending in 2012 |
$ | | $ | 12,254 | ||||
2013 |
10,433 | 5,027 | ||||||
2014 |
4,664 | 3,400 | ||||||
2015 |
3,363 | 2,052 | ||||||
2016 |
2,451 | 1,034 | ||||||
2017 |
1,189 | 28 | ||||||
Subsequent to 2017 |
723 | | ||||||
$ | 22,823 | $ | 23,795 | |||||
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 2012. The 2009 Term Loan was previously governed under the revolving credit agreement.
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 increased the amount available to be borrowed from $1,000,000 to $15,000,000. As of March 8, 2011, the amount available to be borrowed had been reduced to $12,000,000, which reflects the sum of $3,000,000 borrowed since the 2010 Loan Agreement went into effect, including $1,500,000 borrowed during the 12 weeks ended March 8, 2011.
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.
15
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE B LONG TERM DEBT (CONTINUED)
Within six months, 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 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 extend the amortization period up to 12 years without incurring additional costs.
As of March 8, 2011, the aggregate outstanding balance under the Construction Loan was $26,507,000, which consisted of $23,507,000 in Term Loans plus $3,000,000 in the Construction Phase awaiting conversion. Since the inception of the Construction Loan (including prior agreements), 19 of the Term Loans ($43,000,000 out of $91,500,000 in original notes) had been retired as of March 8, 2011. All of the outstanding Term Loans are subject to fixed interest rates, the weighted average of which is 5.46 percent, all of which are being repaid in 84 equal monthly installments of principal and interest aggregating $704,000, expiring in various periods ranging from April 2011 through March 2018.
The $3,000,000 balance in the Construction Phase as of March 8, 2011 was borrowed under three separate draws ($1,500,000 in October 2010, $500,000 in December 2010 and $1,000,000 in February 2011), all of which are currently subject to a variable interest rate of 1.9 percent or lower. If the 2010 Loan Agreement is not renewed by April 2012, any outstanding amount in the Construction Phase that has not been converted into a Term Loan shall mature and be payable in full at that time.
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 8, 2011, will mature and be payable in full in April 2012, unless it is renewed sooner. It 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.
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 8, 2011, the amount available to be borrowed had been reduced to $9,000,000, which reflects the sum of $1,000,000 borrowed in December 2010. 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.
The $1,000,000 balance in the Draw Phase as of March 8, 2011 is subject to a variable interest rate of 1.85 percent. If the 2010 Loan Agreement is not renewed by April 2012, any outstanding amount in the Draw Phase that has not been converted into a Term Loan shall mature and be payable in full at that time.
16
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE B LONG TERM DEBT (CONTINUED)
The 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 requires 48 monthly installments of $89,000 including principal and interest at a fixed 3.47 percent rate. The final payment of the unsecured loan is due October 21, 2013.
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 8, 2011. Compensating balances are not required under the terms of the 2010 Loan Agreement.
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 8, 2011 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 |
$ | 23,507,000 | $ | 24,308,000 |
The final payment on a separate term loan (2007 Term Loana bullet loan prior to March 15, 2007) was made on March 15, 2010. It had required 36 equal monthly installments of $92,000 including principal and interest at a fixed 6.13 percent rate and was secured by mortgages that encumbered the real property of two Golden Corral restaurants. None of the Companys real property is currently encumbered by mortgages.
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 8, 2011, 22 restaurants were in operation on non-owned premises, of which 21 were classified as operating leases and one was a capital lease. Most of the operating leases are for 15 or 20 years and contain multiple five year renewal options. 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. In addition, an operating lease is in place for land on which construction of a Big Boy restaurant is scheduled to begin in April 2011.
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.
Rent expense under operating leases (including certain month-to-month arrangements for five Big Boy restaurant facilities until they were acquired from the landlord in September 2009):
40 weeks ended | 12 weeks ended | |||||||||||||||
Mar. 8, 2011 |
Mar. 9, 2010 |
Mar 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Minimum rentals |
$ | 1,308 | $ | 1,483 | $ | 392 | $ | 403 | ||||||||
Contingent payments |
| 11 | | 1 | ||||||||||||
$ | 1,308 | $ | 1,494 | $ | 392 | $ | 404 | |||||||||
17
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE C LEASED PROPERTY (CONTINUED)
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. 8, 2011 |
June 1, 2010 |
|||||||
(in thousands) | ||||||||
Restaurant property (land) |
$ | 825 | $ | 825 | ||||
Delivery and other equipment |
1,505 | 1,334 | ||||||
Less accumulated amortization |
(1,165 | ) | (995 | ) | ||||
$ | 1,165 | $ | 1,164 | |||||
Future minimum lease payments under capitalized leases and operating leases are summarized below:
Period ending March 8, |
Capitalized leases |
Operating leases |
||||||
(in thousands) | ||||||||
2012 |
$ | 282 | $ | 1,724 | ||||
2013 |
131 | 1,618 | ||||||
2014 |
93 | 1,622 | ||||||
2015 |
93 | 1,567 | ||||||
2016 |
93 | 1,426 | ||||||
2017 to 2027 |
1,317 | 12,514 | ||||||
Total |
2,009 | $ | 20,471 | |||||
Amount representing interest |
(784 | ) | ||||||
Present value of obligations |
1,225 | |||||||
Portion due within one-year |
(198 | ) | ||||||
Long-term obligations |
$ | 1,027 | ||||||
18
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
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.
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. 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. However, the Committee limited stock options granted in June 2010 (40,000) to 10 executive officers (not including the President and Chief Executive Officer).
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.
19
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE D CAPITAL STOCK (CONTINUED)
As of March 8, 2011, options to purchase 333,250 shares had been cumulatively granted under the Plan, including 26,000 that 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 agreement (3,000 respectively in October 2009 and October 2010) vest one year from the date of the grant. Outstanding options granted to other key employees vest in three equal annual installments, while outstanding options granted to non-employee members of the Board of Directors vest 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 262,004 options outstanding as of March 8, 2011.
Beginning in October 2010, the Committee determined that restricted stock awards be granted to the non-employee members of the Board of Directors in lieu of granting automatic annual stock options. On October 6, 2010, each non-employee director was granted a restricted stock award, equivalent to $40,000 in shares of the Companys common stock. Based upon the closing price of the Companys common stock on October 6, 2010, the total number of shares granted amounted to 12,036, an award of 2,006 shares issued to each non-employee director. The shares were issued from the Companys treasury and will vest in full on the first anniversary of the grant date. Full voting and dividend rights are provided prior to vesting. The stock certificates issued in the names of the non-employee directors are being held by the Company until the shares vest. Vested shares must be held until board service ends, except that enough shares may be sold to satisfy tax obligations attributable to the grant.
A summary of shares available for use under the 2003 Incentive Plan, as of March 8, 2011:
Original authorization |
800,000 | |||
Options granted to date |
(333,250 | ) | ||
Options forfeited to date (re-available) |
56,834 | |||
Restricted stock issued to date |
(12,036 | ) | ||
Available for use |
511,548 |
No other awards stock appreciation rights, restricted stock award, unrestricted stock award or performance award have been granted under the 2003 Stock Option and Incentive Plan as of March 8, 2011.
1993 Stock Option Plan
The 1993 Stock Option Plan was not affected by the adoption of the 2003 Stock Option and Incentive Plan. 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 (Amended Plan) in October 1998, which extended the availability of options to be granted to October 4, 2008. The Amended 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 1993 Stock Option Plan and the Amended Plan before granting authority expired on October 4, 2008. As of March 8, 2011, 204,836 shares granted remain outstanding, including 150,000 that belong to the CEO.
All outstanding options under the 1993 Stock Option Plan and the Amended 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.
20
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE D CAPITAL STOCK (CONTINUED)
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 8, 2011:
No. of shares |
Weighted avg. price per share |
Weighted avg. Remaining Contractual Term |
Aggregate Intrinsic Value (in thousands) |
|||||||||||||
Outstanding at beginning of year |
503,069 | $ | 21.64 | |||||||||||||
Granted |
43,000 | $ | 20.51 | |||||||||||||
Exercised |
(63,478 | ) | $ | 10.62 | ||||||||||||
Forfeited or expired |
(15,751 | ) | $ | 25.26 | ||||||||||||
Outstanding at end of quarter |
466,840 | $ | 22.91 | 4.70 | years | $ | 695 | |||||||||
Exercisable at end of quarter |
386,007 | $ | 22.84 | 3.86 | years | $ | 651 | |||||||||
The intrinsic value of stock options exercised during the 40 weeks ended March 8, 2011 and March 9, 2010 was $612,000 and $36,000, respectively. Options exercised during the 40 weeks ended March 8, 2011 included 61,478 by the CEO in July 2010, the intrinsic value of which amounted to $595,000. No options were exercised during either of the 12 week periods ended March 8, 2011 or March 9, 2010.
Stock options outstanding and exercisable as of March 8, 2011 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 |
49,167 | $ | 13.80 | 0.31 years | ||||||||
$18.01 to $24.20 |
212,085 | $ | 20.59 | 4.68 years | ||||||||
$24.21 to $31.40 |
205,588 | $ | 27.49 | 5.77 years | ||||||||
$13.43 to $31.40 |
466,840 | $ | 22.91 | 4.70 years | ||||||||
Exercisable: |
||||||||||||
$13.43 to $18.00 |
49,167 | $ | 13.80 | 0.31 years | ||||||||
$18.01 to $24.20 |
162,585 | $ | 20.49 | 3.36 years | ||||||||
$24.21 to $31.40 |
174,255 | $ | 27.58 | 5.32 years | ||||||||
$13.43 to $31.40 |
386,007 | $ | 22.84 | 3.86 years |
Restricted Stock
The changes in restricted stock issued under the 2003 Stock Option and Incentive Plan are shown below as of March 8, 2011:
No. of shares |
Weighted average price per share |
|||||||
Non-vested at beginning of year |
| $ | | |||||
Granted |
12,036 | 19.94 | ||||||
Released |
| | ||||||
Forfeited |
| | ||||||
Non-vested at end of quarter |
12,036 | $ | 19.94 | |||||
21
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE D CAPITAL STOCK (CONTINUED)
Employee Stock Purchase Plan
Shareholders approved the Employee Stock Option Plan (elsewhere referred to as Employee Stock Purchase Plan) in 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, 2010 (latest available data), 154,676 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, 2010, the custodian held 42,431 shares on behalf of employees.
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 8, 2011, 39,249 shares remained in the FESP reserve, including 11,373 shares allocated but not issued to participants.
There are no other outstanding options, warrants or rights.
Treasury Stock
As of March 8, 2011, the Companys treasury held 2,572,991 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 current repurchase program was authorized by the Board of Directors on January 6, 2010. The authorization allows the Company to repurchase up to 500,000 shares of its common stock in the open market or through block trades over a two year period that will expire January 6, 2012. Since its inception, the Company has acquired 171,300 shares at a cost of $3,569,000, of which 124,832 have been acquired since the beginning of the current fiscal year at a cost of $2,560,000, including 18,143 shares acquired during the third quarter at a cost of $390,000. In addition, 75,000 shares were repurchased through a block trade that was completed on March 21, 2011 at a cost of $1,599,000.
Earnings Per Share
Basic earnings per share is based on the weighted average number of outstanding common shares during the period presented. Diluted earnings per share includes the effect of common stock equivalents, which assumes the exercise and conversion of dilutive stock options.
Stock equivalents |
||||||||||||||||||||
Basic earnings per share | Diluted earnings per share | |||||||||||||||||||
40 weeks ended: |
Weighted average shares outstanding |
EPS | Weighted average shares outstanding |
EPS | ||||||||||||||||
March 8, 2011 |
5,065,863 | $ | 1.40 | 38,281 | 5,104,144 | $ | 1.39 | |||||||||||||
March 9, 2010 |
5,105,228 | $ | 1.45 | 97,327 | 5,202,555 | $ | 1.42 |
Stock options to purchase 254,000 shares during the 40 weeks ended March 8, 2011 and 140,000 shares during the 40 weeks ended March 9, 2010 were excluded from the calculation of diluted EPS because the effect was anti-dilutive.
22
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE D CAPITAL STOCK (CONTINUED)
Basic earnings per share | Stock equivalents |
Diluted earnings per share | ||||||||||||||||||
12 weeks ended: |
Weighted average shares outstanding |
EPS | Weighted average shares outstanding |
EPS | ||||||||||||||||
March 8, 2011 |
5,025,074 | $ | .37 | 31,378 | 5,056,452 | $ | .37 | |||||||||||||
March 9, 2010 |
5,107,058 | $ | .40 | 77,528 | 5,184,586 | $ | .39 |
Stock options to purchase 254,000 shares during the 12 weeks ended March 8, 2011 and 270,000 shares during the 12 weeks ended March 9, 2010 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 in the consolidated statement of earnings (charged to administrative and advertising expense) on a straight-line basis over the vesting periods of the awards:
40 weeks ended | 12 weeks ended | |||||||||||||||
Mar. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Stock Options Granted |
||||||||||||||||
Charged to compensation cost |
$ | 214 | $ | 267 | $ | 60 | $ | 92 | ||||||||
Tax benefit |
(72 | ) | (91 | ) | (20 | ) | (31 | ) | ||||||||
Compensation cost, net of tax |
$ | 142 | $ | 176 | $ | 40 | $ | 61 | ||||||||
Restricted Stock Issued |
||||||||||||||||
Charged to compensation cost |
$ | 92 | $ | 55 | ||||||||||||
Tax benefit |
(32 | ) | (19 | ) | ||||||||||||
Compensation cost, net of tax |
$ | 60 | $ | 36 | ||||||||||||
Total share-based compensation cost, net of tax |
$ | 202 | $ | 176 | $ | 76 | $ | 61 | ||||||||
Effect on basic earnings per share |
$ | .04 | $ | .03 | $ | .02 | $ | .01 | ||||||||
Effect on diluted earnings per share |
$ | .04 | $ | .03 | $ | .02 | $ | .01 | ||||||||
As of March 8, 2011, there was $310,000 of total unrecognized pretax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.02 years. Unrecognized pretax compensation cost related to restricted stock amounted to $148,000 as of March 8, 2011, which is expected to be recognized over a weighted average period of 0.62 years.
The fair value of each stock option award is 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, nor the 12 weeks ended March 9, 2010.
23
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE D CAPITAL STOCK (CONTINUED)
40 weeks | ||||||||
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||
Weighted average fair value of options |
$ | 5.40 | $ | 7.88 | ||||
Dividend yield |
2.5% - 3.0% | 1.9% - 2.0% | ||||||
Expected volatility |
30% - 32% | 32% | ||||||
Risk free interest rate |
1.8% - 2.7% | 2.8% - 3.3% | ||||||
Expected lives |
6 years | 6 years |
Dividend yield is 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 is based on the historical volatility of the Companys stock using the month end closing price of the previous six years. Risk free interest rate is based on 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.
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 $23,000 and $28,000 respectively, during the 40 weeks ended March 8, 2011 and March 9, 2010.
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 below:
40 weeks ended | 12 weeks ended | |||||||||||||||
Net periodic pension cost components |
Mar. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
||||||||||||
(in thousands) | ||||||||||||||||
Service cost |
$ | 1,482 | $ | 1,165 | $ | 445 | $ | 349 | ||||||||
Interest cost |
1,455 | 1,403 | 436 | 422 | ||||||||||||
Expected return on plan assets |
(1,300 | ) | (1,210 | ) | (390 | ) | (363 | ) | ||||||||
Amortization of prior service cost |
6 | 6 | 2 | 1 | ||||||||||||
Recognized net actuarial loss |
684 | 412 | 205 | 124 | ||||||||||||
Settlement loss |
239 | 128 | 72 | 38 | ||||||||||||
Curtailment cost |
| 49 | | | ||||||||||||
Net periodic pension cost |
$ | 2,566 | $ | 1,953 | $ | 770 | $ | 571 | ||||||||
Weighted average discount rate |
5.50 | % | 6.50 | % | 5.50 | % | 6.50 | % | ||||||||
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 | % | 8.00 | % | 7.50 | % | 8.00 | % |
Net periodic pension cost for fiscal year 2011 is currently expected in the range of $3,300,000 to $3,400,000. Net periodic pension cost in fiscal year 2010 was $2,818,000. Most of the expected increase is attributable to lowering the discount rate from 6.5 percent to 5.5 percent, which has added approximately $500,000 to pension cost in fiscal year 2011. Approximately $100,000 is also included in the increased pension costs in fiscal year 2011 because of lowering the long-term rate of return on plan assets from 8.0 percent to 7.5 percent.
24
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
NOTE E PENSION PLANS (CONTINUED)
Contributions to the DB Plans for fiscal year 2011 are currently anticipated at a level of $1,600,000, which includes $850,000 that had been contributed through March 8, 2011. Obligations to participants in the SERP are satisfied in the form of a lump sum distribution upon retirement of the participants.
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 a significant rebound in fiscal year 2010, which has continued into fiscal year 2011, 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.
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 June 1, 2010 using a weighted average discount rate of 5.5 percent, a reduction of 100 basis points from the prior 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 (see Benefit Plans in Note A Accounting Policies) was $390,000 and $225,000 respectively, during the 40 weeks ended March 8, 2011 and March 9, 2010, and was $115,000 and $91,000 respectively, for the 12 weeks ended March 8, 2011 and March 9, 2010. Contributions of $384,000 and $317,000 were respectively made to the Plan in December 2010 and December 2009. 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 Non Deferred Cash Balance Plan 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) 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 weeks ended March 8, 2011 and March 9, 2010, matching contributions to the 401(k) plans amounted to $181,000 and $132,000 respectively, and were $58,000 and $42,000 respectively, during the 12 week periods ended March 8, 2011 and March 9, 2010. Matching contributions to FESP were $22,000 and $21,000 respectively, during the 40 weeks ended March 8, 2011 and March 9, 2010, and were $6,000 and $5,000 respectively, during the 12 week periods ended March 8, 2011 and March 9, 2010.
The Company does not sponsor post retirement health care plans.
NOTE F COMPREHENSIVE INCOME
40 weeks ended | 12 weeks ended | |||||||||||||||
Mar. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Net earnings |
$ | 7,081 | $ | 7,381 | $ | 1,855 | $ | 2,024 | ||||||||
Amortization of amounts included in net periodic pension cost |
928 | 596 | 278 | 164 | ||||||||||||
Tax effect |
(316 | ) | (203 | ) | (95 | ) | (56 | ) | ||||||||
Comprehensive income |
$ | 7,693 | $ | 7,774 | $ | 2,038 | $ | 2,132 | ||||||||
25
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
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. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Sales |
||||||||||||||||
Big Boy |
$ | 153,882 | $ | 146,055 | $ | 45,148 | 42,324 | |||||||||
Golden Corral |
77,186 | 75,698 | 22,342 | 22,549 | ||||||||||||
$ | 231,068 | $ | 221,753 | $ | 67,490 | $ | 64,873 | |||||||||
Earnings before income taxes |
||||||||||||||||
Big Boy |
$ | 16,123 | $ | 15,410 | $ | 4,344 | $ | 4,305 | ||||||||
Opening expense |
(982 | ) | (419 | ) | (66 | ) | (193 | ) | ||||||||
Total Big Boy |
15,141 | 14,991 | 4,278 | 4,112 | ||||||||||||
Golden Corral |
1,838 | 2,425 | 411 | 842 | ||||||||||||
Opening expense |
| | | | ||||||||||||
Total Golden Corral |
1,838 | 2,425 | 411 | 842 | ||||||||||||
Total restaurant level profit |
16,979 | 17,416 | 4,689 | 4,954 | ||||||||||||
Administrative expense |
(6,784 | ) | (6,178 | ) | (2,007 | ) | (1,871 | ) | ||||||||
Franchise fees and other revenue |
1,005 | 971 | 309 | 283 | ||||||||||||
Operating profit |
11,200 | 12,209 | 2,991 | 3,366 | ||||||||||||
Interest expense |
(1,227 | ) | (1,355 | ) | (378 | ) | (390 | ) | ||||||||
Earnings before income taxes |
$ | 9,973 | $ | 10,854 | $ | 2,613 | $ | 2,976 | ||||||||
Depreciation and amortization |
||||||||||||||||
Big Boy |
$ | 7,561 | $ | 6,443 | $ | 2,348 | $ | 1,987 | ||||||||
Golden Corral |
4,364 | 4,269 | 1,290 | 1,289 | ||||||||||||
$ | 11,925 | $ | 10,712 | $ | 3,638 | $ | 3,276 | |||||||||
Capital expenditures |
||||||||||||||||
Big Boy |
$ | 13,100 | $ | 13,952 | $ | 2,446 | $ | 4,019 | ||||||||
Golden Corral |
1,405 | 3,102 | 826 | 1,487 | ||||||||||||
$ | 14,505 | $ | 17,054 | $ | 3,272 | $ | 5,506 | |||||||||
As of | ||||||||||||||||
Mar. 8, 2011 |
June 1, 2010 |
|||||||||||||||
Identifiable assets |
||||||||||||||||
Big Boy |
$ | 125,452 | $ | 116,486 | ||||||||||||
Golden Corral |
69,586 | 72,767 | ||||||||||||||
$ | 195,038 | $ | 189,253 | |||||||||||||
26
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
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 $13,043,000, $4,746,000 and $1,298,000 respectively, for the periods ending March 8, 2012, 2013 and 2014. 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 have been 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 8, 2011.
As of March 8, 2011, the Company operated 22 restaurants on non-owned properties (see Note C Leased Properties). Two of the leases provide 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 $3,825,000 and $3,758,000 respectively, during the 40 weeks ended March 8, 2011 and March 9, 2010, and was $1,114,000 and $1,075,000 respectively, during the 12 weeks ended March 8, 2011 and March 9, 2010. The amount owed to the Company from these restaurants was $61,000 and $85,000 respectively, as of March 8, 2011 and June 1, 2010. Amounts due are generally settled within 28 days of billing.
27
Frischs Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Third Quarter Fiscal 2011, Ended March 8, 2011
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, 2011, the monthly payment was increased to $19,149 from $19,006 in accordance with the CPI provision of the agreement. The present value of the long-term portion of the obligation to Mrs. Maiers Estate, approximating $625,000 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 $190,000 is included in current liabilities in the consolidated balance sheet.
28
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 8, 2011, 95 Big Boy restaurants and 35 Golden Corral restaurants were owned and operated by the Company, located in various regions of Ohio, Kentucky and Indiana, plus smaller areas in Pennsylvania and West Virginia.
The Companys Third Quarter of Fiscal 2011 consists of the 12 weeks ended March 8, 2011, and compares with the 12 weeks ended March 9, 2010, which constituted the Third Quarter of Fiscal 2010. The First Three Quarters of Fiscal 2011 consists of the 40 weeks ended March 8, 2011, and compares with the 40 weeks ended March 9, 2010, which constituted the First Three Quarters of Fiscal 2010. 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 early March. References to Fiscal 2011 refer to the 52 week year that will end on May 31, 2011. References to Fiscal 2010 refer to the 52 week year that ended June 1, 2010.
Net earnings for the Third Quarter of Fiscal 2011 were $1,855,000, or diluted net earnings per share (EPS) of $0.37, which compares with $2,024,000, or diluted EPS of $0.39 in the Third Quarter of Fiscal 2010. The estimated annual effective tax rate was 29 percent in the Third Quarter of Fiscal 2011 and was 32 percent in the Third Quarter of Fiscal 2010. Diluted EPS for the Third Quarter of Fiscal 2011 was aided by 128,000 fewer shares included in the calculation of diluted weighted average shares outstanding as compared with the Third Quarter of Fiscal 2010.
Factors having a noteworthy effect on pretax earnings when comparing the Third Quarter of Fiscal 2011 ($2,613,000) with the Third Quarter of Fiscal 2010 ($2,976,000):
| Consolidated restaurant sales increased $2,617,000 |
- | Total Big Boy sales increased $2,824,000, primarily the result of more restaurants in operation |
- | Big Boy same store sales increased 0.2 percent |
- | Golden Corral same store sales decreased 0.9 percent |
| As a percentage of sales, food costs increased to 34.9 percent from 34.1 percent |
| As a percentage of sales, payroll and related costs increased to 33.8 percent from 33.7 percent |
29
| Golden Corrals pretax earnings decreased $431,000 |
| New store opening costs (all for Big Boy) were $127,000 lower |
Net earnings for the First Three Quarters of Fiscal 2011 were $7,081,000, or diluted EPS of $1.39, which compares with $7,381,000, or diluted EPS of $1.42 in the First Three Quarters of Fiscal 2010. The estimated annual effective tax rate was 29 percent in the First Three Quarters of Fiscal 2011 and was 32 percent in the First Three Quarters of Fiscal 2010. Diluted EPS for the First Three Quarters of Fiscal 2011 was aided by 98,000 fewer shares included in the calculation of diluted weighted average shares outstanding as compared with the First Three Quarters of Fiscal 2010.
Factors having a noteworthy effect on pretax earnings when comparing the First Three Quarters of Fiscal 2011 ($9,973,000) with the First Three Quarters of Fiscal 2010 ($10,854,000):
| Consolidated restaurant sales increased $9,315,000 |
- | Total Big Boy sales increased $7,827,000, primarily the result of more restaurants in operation |
- | Big Boy same store sales decreased 0.6 percent |
- | Golden Corral same store sales increased 2.0 percent |
| As a percentage of sales, food costs increased to 34.5 percent from 33.9 percent |
| As a percentage of sales, payroll and related costs decreased to 33.4 percent from 33.5 percent |
| Golden Corrals pretax earnings decreased $587,000 |
| New store opening costs (all for Big Boy) were $563,000 higher |
| Self insurance reserve adjustment $162,000 was charged against earnings in the First Three Quarters of Fiscal 2011 vs. $536,000 charged against earnings in the First Three Quarters of Fiscal 2010. |
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. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Big Boy restaurant sales |
$ | 42,740 | $ | 40,037 | $ | 146,122 | $ | 138,592 | ||||||||
Wholesale sales to licensees |
1,955 | 1,835 | 6,808 | 6,506 | ||||||||||||
Other wholesale sales |
453 | 452 | 952 | 957 | ||||||||||||
Total Big Boy Sales |
45,148 | 42,324 | 153,882 | 146,055 | ||||||||||||
Golden Corral sales |
22,342 | 22,549 | 77,186 | 75,698 | ||||||||||||
Consolidated restaurant sales |
$ | 67,490 | $ | 64,873 | $ | 231,068 | $ | 221,753 | ||||||||
The Company operated 95 Big Boy restaurants as of March 8, 2011. The count of 95 includes the following openings and closings since the beginning of Fiscal 2010 (June 2009), when 88 Big Boy restaurants were in operation:
| September 2009 closed original unit in Lawrenceburg, Indiana (Cincinnati market) |
| September 2009 replacement unit opened in Lawrenceburg, Indiana (Cincinnati market) no sales interruption |
| November 2009 new unit opened near Hamilton, Ohio (Cincinnati market) |
| April 2010 new unit opened in Independence, Kentucky (Cincinnati market) |
| May 2010 new unit opened in Shepherdsville, Kentucky (Louisville market) |
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| July 2010 new unit opened in Louisville, Kentucky |
| August 2010 new unit opened in Beavercreek, Ohio (Dayton market) |
| October 2010 new unit opened in Elizabethtown, Kentucky (Louisville market) |
| December 2010 new unit opened in Heath, Ohio (Columbus market) |
One new Big Boy restaurant was under construction as of March 8, 2011. Construction is set to begin in April 2011 on a second new Big Boy. Both restaurants are in the Cincinnati market, scheduled to open respectively in June and August 2011 (the first quarter of fiscal 2012). No further openings are planned until calendar year 2012.
Big Boy sales shown in the above table include a same store sales increase of 0.2 percent in the Third Quarter of Fiscal 2011 (on a customer count decrease of 0.7 percent) and a 0.6 percent decrease for the First Three Quarters of Fiscal 2011 (on a 2.0 percent decrease in customer counts). The Big Boy same store sales comparisons include three menu price increases, each averaging 1.0 percent, implemented respectively in September 2009, February 2010 and September 2010. Another increase (1.0 percent) went into effect in March 2011.
Golden Corral sales shown in the above table include a same store sales decrease of 0.9 percent in the Third Quarter of Fiscal 2011 (on a customer count decrease of 4.4 percent) and a 2.0 percent increase in the First Three Quarters of Fiscal 2011 (on a 0.4 decrease in customer counts). The Golden Corral same store sales comparisons include average menu price increases of 0.5 percent (February 2010), 1.3 percent (September 2010) and 0.9 percent (February 2011). Another increase (1.0 percent) went into effect in March 2011. The Company currently operates 35 Golden Corral restaurants, all of which are included in the same store sales comparison. The Company has no plans for further development of Golden Corral restaurants.
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. While the Company has adhered to this standard for some time, a new requirement recently introduced by MasterCard requires an independent audit of these controls. This independent audit must certify compliance with Payment Card Industry Security Standards no later than July 2011. A finding of non-compliance could restrict the Companys ability to accept credit cards as a form of payment. The Company has established an action plan to ensure that any issues that may arise as a result of the independent audit are foreseen and corrected in a timely fashion.
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, as advertising expense is charged against restaurant level profit. Gross profit for both operating segments is shown below:
Third Quarter | First Three Quarters | |||||||||||||||
Mar. 8, 2011 |
Mar. 9, 2010 |
Mar. 8, 2011 |
Mar. 9, 2010 |
|||||||||||||
(in thousands) | ||||||||||||||||
Big Boy gross profit |
$ | 5,378 | $ | 5,146 | $ | 18,861 | $ | 18,525 | ||||||||
Golden Corral gross profit |
987 | 1,409 | 3,822 | 4,147 | ||||||||||||
Total gross profit |
$ | 6,365 | $ | 6,555 | $ | 22,683 | $ | 22,672 | ||||||||
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.
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Third Quarter | First Three Quarters | |||||||||||||||||||||||||||||||||||||||||||||||
12 weeks 3/8/11 | 12 weeks 3/9/10 | 40 weeks 3/8/11 | 40 weeks 3/9/10 | |||||||||||||||||||||||||||||||||||||||||||||
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 |
34.9 | 33.1 | 38.5 | 34.1 | 32.2 | 37.5 | 34.5 | 32.6 | 38.1 | 33.9 | 32.1 | 37.3 | ||||||||||||||||||||||||||||||||||||
Payroll and Related |
33.8 | 36.0 | 29.5 | 33.7 | 36.2 | 29.0 | 33.4 | 35.6 | 29.1 | 33.5 | 35.8 | 29.2 | ||||||||||||||||||||||||||||||||||||
Other Operating Costs (including opening costs) |
21.9 | 19.1 | 27.5 | 22.2 | 19.5 | 27.3 | 22.3 | 19.6 | 27.8 | 22.4 | 19.4 | 28.0 | ||||||||||||||||||||||||||||||||||||
Gross Profit |
9.4 | 11.8 | 4.5 | 10.0 | 12.1 | 6.2 | 9.8 | 12.2 | 5.0 | 10.2 | 12.7 | 5.5 |
Food prices continued to escalate in the Third Quarter of Fiscal 2011, up sharply from the Third Quarter of Fiscal 2010. Food costs began rising during the last half of Fiscal 2010, after a period of food cost deflation that first emerged during the last half of Fiscal 2009. Elevated prices for pork, poultry, dairy and grain are forecast to continue throughout the 2011 calendar year, combined with expected record high beef prices. Purchase contracts for some commodities may contain contractual provisions that limit the price the Company will pay. The Company does not use financial instruments as a hedge against changes in commodity prices. Food and paper cost percentages in the Golden Corral segment are much higher than Big Boy because of the all-you-can-eat nature of the Golden Corral concept, as well as its use of steak as a featured item on the buffet line.
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. To ensure continued safety, management initiated an assessment of its food handling, processing and storage practices that are used at the commissary and food manufacturing plant. Completed near the end of October 2010, the assessment concluded that key safety practices that are in place are very well established and functioning properly. The assessment also noted certain opportunities for improvement, most of which have already been completed thus providing a solid foundation for ultimate compliance with the federal Food Safety Modernization Act that was signed into law in January 2011. 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 on April 1, 2011. Final regulations are expected by the end of calendar year 2011 with implementation required by mid 2012.
Payroll and related costs have benefitted from the federal Hiring Incentives to Restore Employment Act of 2010 (HIRE Act enacted March 2010) under which the Company has not had to pay the employers share of social security (FICA) taxes on certain recently hired employees. 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.
Notwithstanding the improvements shown in some of the payroll and related cost percentages in the above table, operating margins continue to be adversely affected by mandated increases in the minimum wage.
| In Ohio, where more than 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 increased to $7.00 per hour on January 1, 2008 and to $7.30 per hour on January 1, 2009. While there was no increase on January 1, 2010, non-tipped employees began receiving a minimum of $7.40 per hour on January 1, 2011. |
| 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 increased to $3.50 per hour on January 1, 2008 and to $3.65 per hour on |
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January 1, 2009. While there was no increase on January 1, 2010, tipped employees began receiving a minimum of $3.70 per hour on January 1, 2011. |
| 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 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. |
The effects of paying the required higher hourly rates of pay continue to be countered through the combination of higher menu prices charged to customers and reductions in the number of scheduled labor hours. Without the benefit of further reductions in scheduled labor hours, the January 2011 increase in the Ohio minimum wage will add an estimated $140,000 to annual payroll costs in Ohio restaurant operations.
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 significant increases in medical insurance premiums and pension related costs.
Medical insurance premiums totaled $9,900,000 for the plan year that ended December 31, 2010, an increase of 5.4 percent over the plan year ended December 31, 2009, and 21.2 percent higher than the plan year ended December 31, 2008. The Company typically absorbs 78 to 80 percent of the cost, with employees contributing the remainder. Premium cost is currently projected to be at least five percent higher in the 2011 calendar year, approaching a level of $10,400,000. Management is closely monitoring health care reform legislation (the federal Patient Protection and Affordable Care Act, enacted March 2010) and its potential effects upon the Company, as the Health and Human Services Department and other federal agencies release their regulations.
Net periodic pension cost was $770,000 and $571,000 respectively, in the Third Quarter of Fiscal 2011 and the Third Quarter of Fiscal 2010. Net periodic pension cost was $2,566,000 and $1,953,000 respectively, in the First Three Quarters of Fiscal 2011 and the First Three Quarters of Fiscal 2010. Net periodic pension cost for Fiscal 2011 is currently expected to be in the range of $3,300,000 to $3,400,000. The final total for Fiscal 2010 was $2,818,000. The increase over Fiscal 2010 is primarily due to lowering actuarial assumptions used in Fiscal 2011. The discount rate was lowered from 6.5 percent to 5.5 percent (an annual increase of approximately $500,000) and the expected return on plan assets was lowered from 8.0 percent to 7.5 percent (an annual increase of approximately $100,000). Net periodic pension costs for all periods presented in this MD&A are much higher than historical levels. The higher costs continue to be driven by significant market losses in equity securities in Fiscal 2009, which greatly lowered the fair value of plan assets in the pension trusts. The loss is amortized through pension cost and it created a lower credit for the expected return on plan assets that flows through pension cost.
Pension accounting standards require the overfunded or underfunded status of defined benefit pension plans to be recognized as an asset or liability in the Companys consolidated balance sheet. The underfunded status as of March 8, 2011 was $11,502,000, measured as the excess of the projected benefit obligations over plan assets at fair value. Significant reductions in the Companys equity, net of tax, were required over the last two fiscal year ends to establish the underfunded pension obligation. The reductions in equity were effected through charges to Accumulated other comprehensive loss.
Payroll and related costs are also affected when management performs a comprehensive review of the Companys self-insured Ohio workers compensation program each quarter and adjusts its reserves as deemed necessary based on claims experience. The reserves were increased by $162,000 (charged against earnings) in the First Three Quarters of Fiscal 2011. The reserves were also increased (charged against earnings) by $536,000 during the First Three Quarters of Fiscal 2010. Minimal adjustments to the reserves were recorded in both the Third Quarter of Fiscal 2011 and the Third Quarter of Fiscal 2010.
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 (all for Big Boy) were $66,000 during the Third Quarter of Fiscal 2011 and were $193,000 in the Third Quarter of Fiscal 2010. Opening costs (all for Big Boy) were $982,000 during the First Three Quarters of Fiscal 2011 and were $419,000 in the First Three Quarters of Fiscal 2010. 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 rise when sales decrease and percentages will
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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 franchise fees and other revenue are 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 $211,000 and $1,054,000 respectively, in the Third Quarter of Fiscal 2011 and the First Three Quarters of Fiscal 2011 when compared with comparable periods a year ago. Most of the increases are attributable to higher advertising expense associated with higher sales levels. In addition, the First Three Quarters of Fiscal 2011 includes a charge for $135,000 to write-off multiple deposits for Golden Corral development rights, as no further Golden Corral restaurants will be developed. Stock based compensation costs included in administrative and advertising costs was $115,000 during the Third Quarter of Fiscal 2011 and was $92,000 during the Third Quarter of Fiscal 2010. For the First Three Quarters of Fiscal 2011, stock based compensation cost was $307,000 versus $267,000 in the First Three Quarters of Fiscal 2010.
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 8, 2011, 25 Big Boy restaurants were licensed to other operators and paying franchise fees to the Company, no change from a year ago. Other revenue includes certain other fees earned from restaurants licensed to others along with minor amounts of rent and investment income.
There were no sales of real property during the First Three Quarters of Fiscal 2011 or the First Three Quarters of Fiscal 2010. No charges for impairment of assets were recorded during the First Three Quarters of Fiscal 2011 or the First Three Quarters of Fiscal 2010.
Interest Expense
Interest expense decreased $12,000 and $128,000 respectively, in the Third Quarter of Fiscal 2011 and the First Three Quarters of Fiscal 2011 when compared with comparable year ago periods. The decreases are primarily the result of lower debt levels throughout most of the First Three Quarters of Fiscal 2011 compared with the First Three Quarters of Fiscal 2010, 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 29 percent in the Third Quarter of Fiscal 2011 as well as in the First Three Quarters of Fiscal 2011. The estimated annual effective tax rate was 32 percent in the Third Quarter of Fiscal 2010 and in the First Three Quarters of Fiscal 2010. These rates have been kept consistently low through the use of tax credits, especially the federal credit allowed for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. These credits are generally more favorable to the effective tax rate when pretax earnings decrease. In addition, an Internal Revenue Service (IRS) Change in Accounting Method is expected to result in much lower taxable income in Fiscal 2011, which in turn has lowered the graduated federal tax rate.
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.
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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 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 8, 2011
Payments due by period (in thousands) | ||||||||||||||||||||||||||||||
Total | year 1 | year 2 | year 3 | year 4 | year 5 | more than 5 years |
||||||||||||||||||||||||
Long-Term Debt |
$ | 30,236 | $ | 7,413 | $ | 10,433 | $ | 4,664 | $ | 3,363 | $ | 2,451 | $ | 1,912 | ||||||||||||||||
Interest on Long-Term Debt (estimated) |
3,841 | 1,381 | 994 | 665 | 413 | 230 | 158 | |||||||||||||||||||||||
Rent due under Capital Lease Obligations |
2,009 | 282 | 131 | 93 | 93 | 93 | 1,317 | |||||||||||||||||||||||
1 | Rent due under Operating Leases |
20,471 | 1,724 | 1,618 | 1,622 | 1,567 | 1,426 | 12,514 | ||||||||||||||||||||||
2 | Purchase Obligations |
21,631 | 15,587 | 4,746 | 1,298 | | | | ||||||||||||||||||||||
3 | Other Long-Term Obligations |
917 | 230 | 233 | 236 | 218 | | | ||||||||||||||||||||||
Total Contractual Cash Obligations |
$ | 79,105 | $ | 26,617 | $ | 18,155 | $ | 8,578 | $ | 5,654 | $ | 4,200 | $ | 15,901 | ||||||||||||||||
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 $15,105,000 as of March 8, 2011. It was $18,152,000 as of June 1, 2010 and $18,855,000 as of the end of the previous quarter that ended December 14, 2010. The improvement is mostly the result of a higher level of cash on hand as March 8, 2011.
A financing package of unsecured credit facilities has been in place for many years with the same lending institution. The financing package was amended and restated in October 2010 (2010 Loan Agreement). The 2010 Loan Agreement increased the amount available to be borrowed on the Construction Loan to $15,000,000, up $14,000,000 from the $1,000,000 that had remained available from the previous renewal cycle. As of March 8, 2011, $12,000,000 was available to be borrowed.
The 2010 Loan Agreement also renewed the $5,000,000 Revolving Loan, which provides financing to fund temporary working capital if needed (unused as of March 8, 2011). In addition, the 2010 Loan Agreement provides a new $10,000,000 Stock Repurchase Loan, under which $9,000,000 was available to be borrowed as of March 8, 2011. All funds provided by the 2010 Loan Agreement are readily available to be borrowed through April 2012. The Company is in full compliance with the covenants contained in the 2010 Loan Agreement.
Operating Activities
Operating cash flows were $23,413,000 during the First Three Quarters of Fiscal 2011, which compares with $19,245,000 in the First Three Quarters of Fiscal 2010. The change is usually attributable to 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.
The Small Business Jobs Act of 2010, federal legislation that was signed into law in September 2010, extended bonus depreciation through December 31, 2010, which had previously expired December 31, 2009. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation act of 2010, federal legislation that was signed into law in December 2010, extended bonus depreciation through December 31, 2011. The combined effect of the two pieces of legislation allows the Company to immediately write-off 50 percent of the cost of certain capital expenditures made between January 1, 2010 and September 7, 2010, with 100 percent of capital spending costs from September 8,
35
2010 through December 31, 2011 to be immediately written-off. The legislation, together with an IRS Change in Accounting Method, has allowed the Company to reduce its first three tax deposits for Fiscal 2011 by over $3,000,000 compared with the same periods last year.
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: $21,152,000 in the First Three Quarters of Fiscal 2011 and $19,692,000 in the First Three Quarters of Fiscal 2010.
Investing Activities
Capital spending is the principal component of the Companys investing activities. Capital spending was $14,505,000 during the First Three Quarters of Fiscal 2011, a decrease of $2,549,000 from the First Three Quarters of Fiscal 2010. This years capital spending includes $13,100,000 for Big Boy restaurants and $1,405,000 for Golden Corral restaurants. These capital expenditures consisted of land for future development, new restaurant construction, on-going reinvestments in existing restaurants including remodelings, kitchen and dining room expansions, routine equipment replacements and other maintenance capital outlays.
There were no proceeds from the disposition of real property during the First Three Quarters of Fiscal 2011 or the First Three Quarters of Fiscal 2010. Shortly after the Third Quarter of Fiscal 2011 ended, the sale of an excess piece of property was completed. Proceeds amounted to $361,000.
Financing Activities
Borrowing against credit lines amounted to $5,000,000 during the First Three Quarters of Fiscal 2011, which includes $2,500,000 that was borrowed during the Third Quarter of Fiscal 2011 $1,500,000 on the Construction Loan and $1,000,000 from the Stock Repurchase Loan. Scheduled and other payments of long-term debt and capital lease obligations amounted to $6,258,000 during the First Three Quarters of Fiscal 2011.
Three quarterly cash dividends were paid to shareholders during the First Three Quarters of Fiscal 2011, which amounted to $2,173,000 or $0.43 per share. In addition, a $0.15 per share dividend had been declared but not paid as of March 8, 2011. Its payment of $752,000 on April 8, 2011 was the 201st consecutive quarterly dividend paid by the Company. The Company expects to continue its 50 year practice of paying regular quarterly cash dividends.
During the First Three Quarters of Fiscal 2011, options to purchase 63,478 shares of the Companys common stock were exercised (none in the Third Quarter of Fiscal 2011), 61,478 of which were exercised by the President and Chief Executive Officer (CEO). The issuance (or re-issuance from the Companys treasury) of 63,478 shares of the Companys stock yielded proceeds to the Company of approximately $674,000.
During the First Three Quarters of Fiscal 2011, options to purchase 40,000 shares of the Companys common stock were granted (June 2010) to executive officers (excluding the CEO) and 3,000 options shares were granted to the CEO (October 2010) pursuant to the terms of his employment agreement. As of March 8, 2011, 466,840 shares granted under the Companys stock option plans remain outstanding, including 386,007 fully vested shares at a weighted average exercise price of $22.84. The closing price of the Companys stock was $21.54 on March 8, 2011.
In lieu of granting an automatic annual option to purchase stock, 12,036 shares of restricted stock were awarded in October 2010 to non-employee members (2,006 shares each) of the Board of Directors. The shares were re-issued from the Companys treasury and will vest in full on the first anniversary date of the grant. Full voting and dividend rights are provided prior to vesting. Vested shares must be held until board service ends, except that enough shares may be sold to satisfy tax obligations attributable to the grant.
The current stock repurchase program was authorized by the board of Directors on January 6, 2010, which authorizes the Company to repurchase up to 500,000 shares of its common stock in the open market or through block trades over a two year period that will expire January 6, 2012. Since its inception, the Company has acquired 171,300 shares at a cost of $3,569,000 through March 8, 2011, of which 124,832 have been acquired since the beginning of Fiscal 2011 at a cost of $2,560,000, including 18,143 shares acquired during the Third Quarter of Fiscal 2011 at a cost of $390,000. In addition, 75,000 shares were repurchased through a block trade that was completed on March 21, 2011 at a cost of $1,599,000.
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Other Information
Four new Big Boy restaurants opened for business during the First Three Quarters of Fiscal 2011 (none in the Third Quarter of Fiscal 2011). Three of the four restaurants were constructed on land that was acquired in fee simple estate during Fiscal 2010. The fourth one was built on land that is occupied pursuant to the terms of a capital lease. As of March 8, 2011, one new Big Boy restaurant was under construction on land owned in fee simple estate. Construction is scheduled to begin on a second new Big Boy in April 2011 on leased land. Openings are currently scheduled for June and August 2011. Two other sites owned by the Company are in the pipeline for future construction, including one that was acquired during the Third Quarter of Fiscal 2011. Any other contracts to acquire promising sites for future development are cancellable at the Companys sole discretion while due diligence is pursued under the inspection period provisions of the respective 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, 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 recently adapted smaller version, the 2010 building prototype (5,000 square feet with seating for 146 guests), which is used in smaller trade areas. The 2010 building prototype plan was used to construct all four Big Boy restaurants that opened during the First Three Quarters of Fiscal 2011. The 2001 building prototype plan will be used to construct the two restaurants scheduled to open during the summer of 2011.
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 typical older restaurant ranges from $140,000 to $160,000. Restaurants opened since 2001 also receive updates when they reach five years of age, the cost of which currently approximates $120,000. The Fiscal 2011 remodeling budget for Big Boy restaurants is $2,100,000. In addition, certain high-volume Big Boy restaurants are regularly evaluated to determine whether their kitchens should be redesigned for increased efficiencies and whether an expansion of the dining room is warranted. A typical kitchen redesign costs approximately $125,000 while a dining room expansion can cost up to $750,000.
Nine Golden Corrals are being renovated during the period January 2011 through the end of Fiscal 2011. The Fiscal 2011 Golden Corral remodeling budget is approximately $3,020,000.
The Company possesses development rights to open up to 12 more Golden Corrals by December 31, 2011. These rights were acquired several years ago when the Company paid $135,000 in initial franchise fees. Because management has determined that no further Golden Corral restaurants will be developed, $135,000 was written-off during the previous quarter, which ended December 14, 2010. Three Golden Corral restaurant locations that were determined to have an impairment of long-lived assets at the end of Fiscal 2008 remained in operation as of March 8, 2011.
Although part of the Companys strategic plan entails owning the land on which it builds new restaurants, it is sometimes necessary to enter ground leases to obtain desirable land on which to build. Seven of the 35 Golden Corral restaurants and four Big Boy restaurants that have opened since 2003 were built on leased land. As of March 8, 2011, 22 restaurants were operating on non-owned premises, 21 of which are being accounted for as operating leases with one treated as a capital lease. In addition, an operating lease is in place for land on which construction of a Big Boy restaurant is scheduled to begin in April 2011.
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
37
managements most difficult, subjective or complex judgments. The Company believes the following to be its 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 and matches them to spot rates based on yields of high-grade corporate bonds. 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.
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) the plans reaching underfunded status, 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 a floor 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. Floor 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 floor values.
Acquired goodwill and other intangible assets are tested for impairment annually or whenever an impairment indicator arises.
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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 the Companys 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. The Company 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 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) or 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of March 8, 2011, 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 required to be disclosed in the reports that the Company files under the Exchange Act 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 significant 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 8, 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
39
PART II OTHER INFORMATION
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 result in a material effect on the Companys earnings, cash flows or financial position. Exposure to loss contingencies from pending or threatened litigation is continually evaluated by management, which believes adequate provisions for losses have been included in the consolidated financial statements.
The Company continually takes reasonable preventive measures to reduce its risks and uncertainties. However, the nature of some risks and uncertainties provides little, if any, control to the Company. The realization 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. To limit the Companys exposure to the risk of food contamination, management rigorously emphasizes and enforces the Companys food safety policies in all of the Companys restaurants, and at the commissary and food manufacturing plant that the Company operates for Big Boy restaurants. These policies are designed to work cooperatively with programs established by health agencies at all levels of government 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 workers on 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.
Failure to protect the Companys food supplies could result in food borne illnesses and/or injuries to customers. Publicity of such events in the past has caused irreparable damages to the reputations of certain operators in the restaurant industry. If any of the Companys customers become ill 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 as unemployment and economic uncertainty mount. The effects of higher gasoline prices can also negatively affect discretionary consumer spending in restaurants. Increasing costs for energy can affect profit margins in 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 increase in fuel prices. Higher costs for electricity and natural gas result in much higher costs to heat and cool restaurant facilities and to refrigerate and cook food.
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
40
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) the plans reaching underfunded status requiring reductions 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.
In addition, negative publicity associated with legal claims against the Company, whether or not such complaints are valid, could harm the Companys reputation, which, in turn, could adversely affect operating results. 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
41
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 recently enacted legislation to reform the U.S. health care system could adversely affect the Companys health care costs |
| nutritional labeling on menus compliance with recently enacted legislation requiring nutritional labeling 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
The strategic nature of technology and information systems is of vital importance to the operation of the Company. 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 |
| failure to comply with the Payment Card Industry Security Standards Councils data security standard by July 2011 could restrict the Companys ability to accept credit cards as a form of payment |
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In addition, security violations or any unauthorized access to information systems, including breaches on third party servers, could result in the loss of proprietary data. Should consumer privacy be compromised, consumer confidence may be lost, which could adversely affect sales and profitability.
ITEM 2. UNREGISTERED SALES of EQUITY SECURITIES and USE of PROCEEDS
(c) Issuer Purchases of Equity Securities
In January 2010, the Board of Directors authorized a program to repurchase up to 500,000 shares of the Companys common stock in the open market or through block trades over a two-year period that expires January 6, 2012. The following table shows information pertaining to the Companys repurchases of its common stock during the third quarter of fiscal year 2011, which ended March 8, 2011:
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. 15, 2010 to Jan. 11, 2011 |
7,889 | $ | 21.57 | 7,889 | 338,954 | |||||||||||
Jan. 12, 2011 to Feb. 8, 2011 |
4,748 | $ | 21.09 | 4,748 | 334,206 | |||||||||||
Feb. 9, 2011 to Mar. 8, 2011 |
5,506 | $ | 21.73 | 5,506 | 328,700 | |||||||||||
Total |
18,143 | $ | 21.49 | 18,143 | 328,700 |
In addition, 75,000 shares were repurchased through a block trade that was completed on March 21, 2011 at a cost of $1,599,000 or $21.32 per share.
ITEM 3. DEFAULTS upon SENIOR SECURITIES
Not applicable
ITEM 4. (Removed and Reserved)
Not applicable
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.
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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 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.
10.52 Amendment No. 1 to Frischs Executive Retirement Plan (SERP) (see Exhibit 10.51 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.
10.53 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.
10.54 Amendment # 1 to the 2003 Stock Option and Incentive Plan (see Exhibit 10.53 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.
10.55 Amendments to the 2003 Stock Option and Incentive Plan (see Exhibits 10.53 and 10.54 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.
10.56 Amendments to the 2003 Stock Option and Incentive Plan (see Exhibits 10.53, 10.54 and 10.55 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.
10.57 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 10.53, 10.54, 10.55 and 10.56 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.
10.58 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 10.53, 10.54, 10.55 and 10.56 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.
10.59 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.
10.60 Amendments to the Amended and Restated 1993 Stock Option Plan (see Exhibit 10.59 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.
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10.61 Employee Stock Option Plan, which was filed as Exhibit B to the Registrants Proxy Statement dated September 9, 1998, is incorporated herein by reference.
10.62 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.
10.63 First Amendment to Change of Control Agreement (see Exhibit 10.62 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.
10.64 Second Amendment to Change of Control Agreement (see Exhibits 10.62 and 10.63 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.
10.65 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 Donald H. Walker (Grantor). There are identical Trust Agreements between the Plans Trustee and Craig F. Maier, Rinzy J. Nocero, Karen F. Maier, Michael E. Conner, Louie Sharalaya, Lindon C. Kelley, Michael R. Everett, James I. Horwitz, William L. Harvey and certain other highly compensated employees (Grantors).
10.66 First Amendment (to be effective June 6, 2006) to the Frischs Nondeferred Cash Balance Plan that went into effect January 1, 2000 (see Exhibit 10.65 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.
10.67 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.
10.68 Non-Qualified Deferred Compensation Plan, Basic Plan Document to Restate Frischs Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.69, 10.70 and 10.71), which was filed as Exhibit 10.32 to the Registrants Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.
10.69 Non-Qualified Deferred Compensation Plan, Adoption Agreement (Stock) to Restate Frischs Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.68, 10.70 and 10.71), which was filed as Exhibit 10.33 to the Registrants Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.
10.70 Non-Qualified Deferred Compensation Plan, Adoption Agreement (Mutual Funds) to Restate Frischs Executive Savings Plan (FESP) effective December 31, 2008, (also see Exhibits 10.68, 10.69 and 10.71), which was filed as Exhibit 10.34 to the Registrants Form 10-Q Quarterly Report for September 23, 2008, is incorporated herein by reference.
10.71 Non-Qualified Deferred Compensation Plan, Adoption Agreement to Restate Frischs Executive Savings Plan (FESP) effective July 1, 2009 (also see Exhibits 10.68, 10.69 and 10.70), which was filed as Exhibit 10.36 to the Registrants Form 10-K Annual Report for 2009, is incorporated herein by reference.
Other Exhibits
14 Code of Ethics for Chief Executive Officer and Financial Professionals, which was filed as Exhibit 14 to the Registrants Form 10-K Annual Report for 2003, is incorporated herein by reference.
15 Letter re: unaudited interim financial statements, is filed herewith.
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31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934
Rule 13a-14(a) or 15d-14(a), is filed herewith.
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934
Rule 13a-14(a) or 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.
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 1, 2011 |
||
BY /s/ Donald H. Walker | ||
Donald H. Walker | ||
Vice President and Chief Financial Officer, | ||
Principal Financial Officer | ||
Principal Accounting Officer |
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EXHIBIT 15
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Frischs Restaurants, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Frischs Restaurants, Inc. (an Ohio Corporation) and subsidiaries as of March 8, 2011, and the related consolidated statement of earnings for each of the forty week and twelve week periods ended March 8, 2011 and March 9, 2010 and the related consolidated statements of shareholders equity and cash flows for the forty week periods ended March 8, 2011 and March 9, 2010. These interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of June 1, 2010, and the related consolidated statements of earnings, shareholders equity and cash flows for the year then ended (not presented herein); and in our report dated July 30, 2010, we expressed an unqualified opinion on those consolidated financial statements.
/s/ Grant Thornton LLP
Cincinnati, Ohio
April 6, 2011
EXHIBIT 31.1
CERTIFICATION RULE 13a14(a) or 15d14(a)
I, Craig F. Maier, President and Chief Executive Officer of Frischs Restaurants, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Frischs Restaurants, Inc. (the Registrant); |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
d) | Disclosed in this Quarterly Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
DATE April 4, 2011
/s/ Craig F. Maier |
||||
Craig F. Maier, President and Chief |
||||
Executive Officer |
EXHIBIT 31.2
CERTIFICATION RULE 13a14(a) or 15d14 (a)
I, Donald H. Walker, Vice President-Finance and Chief Financial Officer of Frischs Restaurants, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Frischs Restaurants, Inc. (the Registrant); |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
d) | Disclosed in this Quarterly Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
DATE April 1, 2011
/s/ Donald H. Walker | ||||
Donald H. Walker, Vice President-Finance and | ||||
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION of CHIEF EXECUTIVE OFFICER
PURSUANT to SECTION 1350 of CHAPTER 63 of TITLE 18 of the UNITED STATES CODE,
as ADOPTED PURSUANT to
SECTION 906 of THE SARBANES-OXLEY ACT OF 2002
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Frischs Restaurants, Inc. (the Registrant) on Form 10-Q for the quarter ended March 8, 2011 (the Report), the undersigned officer of the Registrant certifies, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
April 4, 2011 | By: | /s/ Craig F. Maier | ||
Craig F. Maier | ||||
Chief Executive Officer |
This certification is being furnished as required by Rule 13a 14(b) under the Securities Exchange Act of 1934 (Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as other otherwise stated in such filing.
EXHIBIT 32.2
CERTIFICATION of CHIEF FINANCIAL OFFICER
PURSUANT to SECTION 1350 of CHAPTER 63 of TITLE 18 of the UNITED STATES CODE,
as ADOPTED PURSUANT to
SECTION 906 of THE SARBANES-OXLEY ACT OF 2002
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Frischs Restaurants, Inc. (the Registrant) on Form 10-Q for the quarter ended March 8, 2011 (the Report), the undersigned officer of the Registrant certifies, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
April 1, 2011 | By: | /s/ Donald H. Walker | ||
Donald H. Walker | ||||
Vice President-Finance and | ||||
Chief Financial Officer |
This certification is being furnished as required by Rule 13a 14(b) under the Securities Exchange Act of 1934 (Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as other otherwise stated in such filing.