Item 1. - Business
Frisch's Restaurants, Inc. ("Company") was incorporated in 1947. The Company and its subsidiaries are engaged in the food service business, including the operation of and licensing of others to operate restaurants, and in the lodging business.
The food service industry is the Company's dominant industry segment. Operations in this industry are vertically integrated, and include the manufacture and distribution of food products and supplies to its restaurants and to licensees for resale to the general public. Fees are charged to licensees for use of trademarks and trade names and for advertising services based principally on percentages of sales.
The Company also operates two high-rise hotels located in greater Cincinnati, under the name "Quality Hotel"; one containing 147 guest rooms, banquet facilities for 400, a restaurant and cocktail lounge; the other having 236 guest rooms, banquet facilities for 700, and two restaurants with cocktail lounges.
The Company operates or licenses others to operate family restaurants, most of which have "drive-thru" service, located in Ohio, Kentucky and Indiana which use the tradename "Big Boy". The Company also has the right to operate or license others to operate Big Boy family restaurants in Florida, Texas, Oklahoma, portions of Kansas, the unfranchised areas of Tennessee and Georgia and, under certain circumstances, in prescribed areas of states adjacent to Tennessee and Georgia. During the year ended June 2, 1996, the Company closed the six restaurants it had operated pursuant to licenses from Hardee's Food Systems, Inc. As of June 2, 1996, there were 103 Big Boy restaurants operated by the Company and 42 operated by licensees. The following tabulation sets forth restaurant openings and closings for both operated and licensed restaurants for the five years ended June 2, 1996:
The following tabulation sets forth the range and average floor space and the range and average seating capacity for Big Boy restaurants operated by the Company (similar information for licensed restaurants is not available):
Big Boy restaurants are family restaurants which the Company operates under the name of "Frisch's". Some of the licensed Big Boy restaurants do not use the name "Frisch's". Menus are generally standardized with a wide variety of items at moderate prices, featuring the "Big Boy" double-deck hamburger sandwich and other sandwiches, steak, pasta, chicken and seafood dinners, desserts and other items. In addition, a full breakfast menu is offered, and most of the restaurants also contain breakfast bars, soup and salad bars and drive-thru service. Older restaurants are located in suburban or urban neighborhoods which cater to local trade rather than highway travel. Restaurants opened in recent years have generally been located near expressways.
The agreements with licensees are not uniform, but substantially all of the licenses for individual restaurants are covered by agreements containing the following provisions:
1. The Licensor grants to the Licensee the right to use the name "Frisch" and/or "Frisch's" and related trademarks and names in connection with the operation of a food and restaurant business, in return for which the Licensee pays a license fee equal to three and three-quarters percent (3- 3/4%) of its gross sales.
2. The Licensor provides local and regional advertising through publications, radio, television, etc., in return for which the Licensee pays an amount equal to two and one-half percent (2-1/2%) of its gross sales.
3. The Licensee agrees to conduct its business on a high scale, in an efficient manner, with cleanliness and good service, all to the complete satisfaction of the Licensor, and to comply with all food, sanitary and other regulations, and to serve only quality foods.
4. The term of the license is for a period of five (5) years. The license can be renewed for two further periods of five (5) years each provided the terms are similar to those contained in license agreements given by the Licensor at such time.
To service its owned and certain licensed restaurants, the Company operates a commissary at Cincinnati, Ohio, where it prepares foods, and stocks foods, forms, paper products and other supplies. Certain companies in the foodservice industry operate commissaries, while others purchase from outside sources. Sixteen of the licensed restaurants (38%) currently purchase items from the commissary. Big Boy restaurants licensed in northern Indiana and northwestern Ohio do not buy food and supplies from the Company.
The Company also provides bookkeeping and payroll services to its owned and some of its licensed restaurants. Nine of the licensed restaurants (21%) currently purchase these services from the Company.
Pursuant to an agreement with Elias Brothers Restaurants, Inc., the Company has the right to use and sub-license others to use the registered trademark and tradename "Big Boy" for a perpetually renewable term at no license fee in Ohio, Kentucky, Indiana, Florida, Texas, Oklahoma, parts of Kansas, the unfranchised areas of Tennessee and Georgia and, under certain circumstances, prescribed areas of states adjacent to Tennessee and Georgia.
Seasonal weather conditions can have a marked effect upon revenues and earnings. Due to this seasonality, the first and fourth quarters of the Company's fiscal year normally account for a disproportionate share of annual revenues and earnings.
The business in which the Company is engaged is highly competitive and many of its competitors are substantially larger and possess greater financial resources than does the Company. The Company has numerous competitors, none of which is dominant in the family restaurant sector of the foodservice industry. The principal methods of competition in the foodservice industry are service, food quality, cleanliness, customer perception of value and advertising.
Raw materials used in the Company's business (which consist principally of food items) are generally plentiful and may be obtained from any number of suppliers. Quality and price are the principal determinants of source.
The Company's working capital practices are incorporated herein by reference to Management's Discussion and Analysis in Part II, item 7, page 10 of this Form 10-K, under the caption "Liquidity and Capital Resources."
The Company does not believe that various federal, state and local environmental regulations will have any material impact upon its capital expenditures, earnings or competitive position.
As of June 2, 1996, the Company and its subsidiaries employed approximately 6,100 persons, approximately 4,200 of whom were full-time and 1,900 were part-time.
Item 2.
Item 2. - Properties
The Company owns the building which houses its commissary in Cincinnati, Ohio. The area of this building is approximately 79,000 square feet. The facility operates one shift daily so that additional productive capacity is available when needed. It is suitable and adequate to supply Company restaurants and franchise needs in all of the Company's market areas for the forseeable future. The Company also maintains administrative office space in Cincinnati, approximating 49,000 square feet, under a lease expiring December 31, 2002.
It is the Company's policy to own its restaurant locations whenever possible. Of the 103 Big Boy restaurants operated by the Company in Ohio, Kentucky and Indiana as of June 2, 1996, seventy (70) locations are owned and thirty-three (33) locations are leased. The leases generally provide for prime terms of fifteen (15) or twenty (20) years with options aggregating ten (10) or fifteen (15) years.
During the next five years, leases for restaurant facilities will expire as follows:
All but one of the above nineteen leases have options to renew for from 5 to 20 years, and/or favorable purchase options.
The Company has assigned or sub-let certain leases of closed restaurants with average annual obligations approximating $290,000 over the next five years. In the event of default by assignees or sub-lessees, the Company generally retains the right to re-assign or sub-let the properties.
The Company owns and operates two hotels in greater Cincinnati, one of which is located on land that is leased through April 30, 2020, with renewal options aggregating 50 years. The Company has the option to purchase this land at any time during the current term or any renewal thereof.
The furniture, fixtures and equipment used in the operation of the business are owned by the Company.
Mortgages totaling approximately $760,000 encumber the commissary in Cincinnati, Ohio, one restaurant location, office equipment and commissary production equipment.
The Company owns a one-fifteenth limited partner's interest in the Cincinnati Reds professional baseball team.
The Company owns farm property in Warren County, Ohio, approximating 167 acres, which is operated profitably as a thoroughbred horse boarding, breeding and training facility. Related parties do not use this facility.
The farm property, certain surplus land and two former restaurant locations are currently held for sale.
Item 3.
Item 3. - Legal Proceedings
From time to time, the Company is subject to various claims and suits in the ordinary course of its business. The Company does not believe that any ultimate liability for these claims will have a material impact on its earnings or financial condition.
Item 4
Item 4 . Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The executive officers are chosen at the annual meeting of the Board of Directors for a term of one year and until their successors are chosen and qualified. Each of the executive officers listed below has been continuously employed by the Company for at least the past five years:
PART II (Items 5 through 9)
Item 5.
Item 5. - Market for the Registrant's Common Equity and Related Stockholder Matters
In addition to cash dividends above, a 4% stock dividend was paid in 1996 and 1995. There are approximately 3,000 shareholders of record. The Company's common stock is traded on the American Stock Exchange under the symbol FRS.
Through July 10, 1996, the Company has paid 142 consecutive quarterly dividends during its thirty-five year history as a public company. The Company has also paid twenty-five stock dividends since 1970, which has resulted in increased dividend payouts in every year since 1975.
Item 6.
Item 6. - Selected Financial Data
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES SUMMARY OF OPERATIONS
Note: Per share data, except for dividends, are based on the weighted average number of common shares outstanding.
Item 7.
Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
TOTAL REVENUE climbed a modest 2.4%, or $3,886,000 to reach $166,945,000, a record level for the fourth consecutive year. Fiscal 1996 and the fourth quarter contained one additional week compared to the prior two years. Without the benefit of $3,206,000 of revenue contributed during the extra week this year, the increase, while still a record, would have been .4%. Revenue increases were 1.9% in 1995 and 7.4% in 1994. Total revenue consists of retail sales by Company-operated restaurants and hotels, and wholesale sales to and fees from licensed Big Boy restaurants.
Record SALES of $165,426,000 were also posted, increasing 2.5% or $3,997,000, of which $3,191,000 was added during the extra week. Sales increases were 2.2% in 1995 and 7.7% in 1994. Changes in sales occur when new restaurants are opened, older restaurants are closed, sales patterns shift in existing restaurants, and menu prices are changed.
Twenty new Big Boy restaurants have been opened at new locations during the last three years, including three in 1996. In addition, two replacement restaurant buildings were opened at existing locations, one each in 1996 and 1995. Many of the new restaurants were built in markets outside the Company's headquarters market of Greater Cincinnati and have experienced disappointing sales levels. Six older, lower volume Big Boy restaurants were closed during the last three years, including three in 1996. Eight Hardee's ceased operating during the last three years, six of which were sold in 1996, bringing the Hardee's era of the Company to an end. The Company operated 103 Big Boy restaurants and two Quality Hotels at the end of the year.
On a comparable 52 week basis, average sales of a Big Boy restaurant in operation the entire year decreased 1.3% from $1,393,000 to $1,375,000. Although four menu price increases were implemented during the last three years, same store sales declined slightly in 1996, after a moderate decline in 1995 and a modest increase in 1994. Estimated price increases were 1.4% and 2.0% in the third and first quarters, respectively, of fiscal 1996, 2.4% in the fourth quarter of fiscal 1995, and 2.3% late in fiscal 1994. Factors such as the introduction of new menu items, product sales mix changes after price increases, marketing strategies emphasizing specific menu items, and competition make the effect of these price increases difficult to quantify.
OTHER REVENUE has continued to decline due principally to lower franchise fees and the lack of distributions during the last two years from the Company's investment in the Cincinnati Reds limited partnership. At the end of 1996, there were 42 licensed Big Boy restaurants, compared with 71 such restaurants at the beginning of the three year period. The Company does not expect a significant reversal of this trend.
The pressure on profit margins continued in 1996. Cost of sales increased $3,930,000 while revenue rose only $3,886,000. PAYROLL AND RELATED EXPENSES were the principal cause, rising from 33% of revenue in 1994 to 34.5% in 1995 and 35.1% this year. Competition for employees due to labor shortages in most of the Company's market areas resulted in higher average hourly rates for restaurant workers and higher salaries for restaurant managers. Although higher pay rates lowered employee turnover by 11% in 1996, tight labor markets are likely to continue in the near term. Favorable claims experience in the Company's self insurance programs allowed estimates for future obligations to be lowered in the first quarter of all three years, the largest of which occurred in 1994. The fourth quarter of 1996 also benefited from a further lowering of these estimates. The Company has put in place new insurance programs for 1997 that will result in significantly lower rates for workers' compensation, which will lower payroll related expenses in 1997.
The Company does not expect the Federal minimum wage legislation that was recently passed by Congress to have an immediate material effect on earnings due to current labor market conditions,
and because of provisions in the bill that freeze the minimum wage paid to tipped workers at current levels. However, the long-term effects of this bill will create additional pressure on profit margins.
Lower beef prices helped FOOD AND PAPER COST to decline to 31.8% of revenue this year from 32.1% in 1995 and from 31.9% in 1994. Although general price levels have been stable for several years, future beef and other commodity price fluctuations can not be accurately predicted.
OTHER OPERATING EXPENSES include depreciation, occupancy expenses, training and opening expenses, various other costs, and gains and losses from dispositions of operating real estate. These costs have remained stable at 24.9% of revenue in 1996 and 25% in 1995, having risen from 23.6% in 1994. Real estate gains were included in other operating expenses in all three years. These real estate gains were more than offset in all three years by higher depreciation and other charges relating to recent expansion and modernization.
During the last three years, expansion efforts have largely been directed toward gaining greater market penetration in Indianapolis and Columbus. While these areas are presently incurring higher operating costs against lower than expected sales volumes, the Company believes better management now in place, along with increased customer awareness through effective advertising, will produce improved economic performance.
Menu prices in all the Company's markets will continue to be increased modestly in an effort to return margins to normal levels. The Company believes there is room in its markets to increase current menu prices which are below most of its competition. A new menu featuring meals built around side dishes such as macaroni and cheese, mashed potatoes, green beans, carrots and corn has already been introduced in some of the Company's markets and will be rolled out in all markets by this fall. This new menu will not add additional low-fat foods since the Company's customers have not shown any significant preference for these items, although they are currently available.
The Company is testing a new point of sale system in three of its restaurants. When this pilot phase is successfully completed, the fully functional system will be installed in all restaurants. The system is expected to improve service and sales by correctly entering all orders and by eliminating guest check pricing errors. Additionally, cost reduction and control should be enhanced through efficient scheduling of employees, replacement of employee time cards with precision employee time-keeping functions, in-store inventory control, and credit card processing.
GENERAL AND ADMINISTRATIVE EXPENSE was $836,000 or 18.3% lower than last year. Lower executive compensation and gains from the sale of real estate not used in the business were the principal reasons for the improvement. General and administrative expense was much higher in 1994 due to the write-off of the remaining goodwill of the Big Boy licensing rights in the state of Texas.
INTEREST EXPENSE rose 22.9% or $450,000 above last year due to much higher debt levels that were incurred in 1995 and early in 1996 to complete the fiscal 1995 construction cycle. Average interest rates have remained relatively steady to slightly higher in 1996. The Company intends to operate within cash flow and to reduce long-term debt as cash flow permits. Interest expense should level-off or decline in 1997.
The effective INCOME TAX rate was 32.4% in 1996, compared with 23.8% in 1995 and 35.9% in 1994. This year's tax rate was adversely affected by higher provisions for state income taxes and lower tax credits, principally the loss of the Targeted Jobs Tax Credit (TJTC) that expired at the end of calendar year 1994. Legislation has recently been enacted by Congress that replaces TJTC with a scaled down version known as the Work Opportunity Tax Credit. While potentially
helpful to the Company in the long-run, the near term impact will be minimal. The effective tax rate in 1994 was adversely affected by a non-deductible write-off of goodwill.
Looking ahead to 1997, if earnings do not return to earlier levels, the effective tax rate could increase substantially. Continued lower earnings would impair the Company's ability to utilize its general business tax credits. General business tax credits can only be used to the extent that the regular tax liability exceeds the alternative minimum tax liability.
Liquidity and Capital Resources
During the year, CASH PROVIDED BY OPERATING ACTIVITIES was $12,000,000, generated principally from net income and depreciation.
INVESTING ACTIVITIES included $15,400,000 in property additions, a reduction of $7,900,000 from last year. Capital spending consisted of approximately $11,700,000 for Big Boy operations and $3,700,000 for hotel properties. Proceeds from the sale of property amounting to $3,900,000 are also included in investing activities. These proceeds were generated by the sale of six Hardee's restaurants, five older Big Boy restaurant locations that had been held for sale since ceasing operations several years ago, the Company's former commissary in Dallas, Texas, and the sale of investment property pursuant to a purchase option exercised by a lessee.
FINANCING ACTIVITIES included $8,000,000 in new debt, $4,500,000 of which had been repaid by the end of the year. Scheduled long-term debt payments of approximately $2,450,000 were also made, which reduced the net increase in long-term debt for fiscal 1996 to $1,050,000. The Company also paid dividends in excess of $1,600,000.
The 1996 construction cycle is underway. It calls for the opening of two new Big Boy restaurants, introducing a new, smaller building design. The cost to build and equip each of these units ranges from $1,300,000 to $1,500,000 including land, a reduction of approximately $200,000 from last year's average new unit cost. The first of these units opened in April. The cost to build and equip this restaurant was approximately $250,000 lower than the last unit opened under the 1995 construction cycle. This smaller prototype will allow the Company to reduce break-even sales for new restaurants and to expand into locations not previously feasible. Construction of two replacement restaurants should be completed by September, 1996. At the end of the year, the estimated remaining capital outlay needed to complete the construction of the other new restaurant and the two replacement restaurants was $1,800,000. The Company intends to fund these expenditures out of cash flow. A revolving credit loan is available to meet additional borrowing requirements.
AUDITORS' REPORT
Shareholders Frisch's Restaurants, Inc.
We have audited the accompanying consolidated balance sheet of Frisch's Restaurants, Inc. (an Ohio corporation) and Subsidiaries as of June 2, 1996 and May 28, 1995 and the related consolidated statements of earnings, cash flows, and shareholders' equity for each of the three years in the period ended June 2, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Frisch's Restaurants, Inc. and Subsidiaries as of June 2, 1996 and May 28, 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 2, 1996, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP Cincinnati, Ohio July 10, 1996
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 2, 1996 and May 28, 1995 ASSETS
The accompanying notes are an integral part of these statements.
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 2, 1996 and May 28, 1995 LIABILITIES
The accompanying notes are an integral part of these statements.
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS
Three years ended June 2, 1996
The accompanying notes are an integral part of these statements.
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Three years ended June 2, 1996
The accompanying notes are an integral part of these statements.
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three years ended June 2, 1996
The accompanying notes are an integral part of these statements.
FRISCH'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended June 2, 1996
NOTE A - ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Consolidation Practices
The consolidated financial statements include the accounts of Frisch's Restaurants, Inc. and all of its subsidiaries.
Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Outstanding checks in the amount of $690,462 were included in accounts payable at May 28, 1995.
Receivables
The Company values its trade notes and accounts receivable on the reserve method. The reserve balance was immaterial for the years ended June 2, 1996 and May 28, 1995.
Inventories
Inventories, comprised principally of food items, are valued at the lower of cost, determined by the first-in, first-out method, or market.
Income Taxes
Taxes are provided on all items included in the statement of earnings regardless of when such items are reported for tax purposes.
Property and Equipment
Depreciation is provided principally on the straight-line method over the estimated service lives of the assets.
Intangible and Other Assets
The excess of cost over equity in net assets of subsidiaries acquired prior to November 1, 1970, is not currently being amortized because, in the opinion of management, the value has not decreased.
Due to changed business conditions, plans for the development of Company operated or franchised Big Boy restaurants in the state of Texas ceased during the year ended May 29, 1994. Accordingly, the remaining goodwill of $886,447 ascribed to the acquisition of Big Boy licensing rights for Texas was charged against earnings during the year ended May 29, 1994.
Net cash surrender value of life insurance policies includes the cash values of two policies written by a life insurance company that is under regulatory supervision pursuant to an Order of Rehabilitation on August 12, 1994. There are restraints which restrict policy surrenders, loans and reductions in face amount. This company's mortgage portfolio has been sold, significantly improving the liquidity of its estate, thus facilitating the anticipated transfer of policy liabilities to creditworthy carriers. Although adjustments may
become necessary to values in existence prior to August 12, 1994, the rehabilitator has concluded that policyholders' account values should be fully preserved.
Advertising Costs
Advertising costs are charged to expense as incurred. There are no significant advertising costs on the balance sheet for the years ended June 2, 1996 and May 28, 1995.
New Store Opening Costs
New store opening costs are capitalized and amortized over a one year period from the date each new store opened. Items capitalized include new employee training costs, the cost of an employee team to coordinate the opening and the cost of certain replacement items such as uniforms and china.
Benefit Plans
The Company has two defined benefit pension plans covering substantially all of its employees. The benefits are based on years-of-service and other factors. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. The Company also has a non-qualified supplemental retirement plan for certain key employees.
Self Insurance
The Company self-insures its casualty and a portion of its employee medical coverages. Self insurance costs are accrued based on management's estimate for future claims. There is insurance in place which provides for catastrophic losses.
Revenue Recognition
Franchise fees, based on sales of franchisees, are recorded on the accrual method as earned. There was no significant income from initial fees during the last three years.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates fair value.
Investment in Sports Franchise
The Company's limited partnership investment in the Cincinnati Reds is carried at cost. An income distribution of $254,500 was recorded in earnings in 1994. No distributions were received in 1996 or 1995.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest to the last day of May. Fiscal year 1996 was comprised of 53 weeks compared with 52 weeks for fiscal years 1995 and 1994.
Business Segments
The Company operates principally in the food service industry and additionally operates two hotels. During the last three years, restaurant operations have constituted a dominant segment in accordance with SFAS statement No. 14, "Financial Reporting for Segments of a Business Enterprise."
Use of Estimates
The preparation of financial statements requires management to use estimates and assumptions in certain areas that affect the amounts reported. These judgments are based on knowledge and experience about past and current events, and assumptions about future events. Although management believes its estimates are reasonable and adequate, future events affecting them may differ markedly from current judgment.
Some of the more significant areas requiring the use of estimates include self insurance liabilities, deferred store closing costs, value of goodwill, real estate held for sale, and deferred executive compensation.
New Accounting Standards
The Company is required to adopt Financial Accounting Standard Number 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of" and SFAS 123 "Accounting for Stock Based Compensation" in fiscal year 1997.
SFAS 121 requires impairment losses to be recognized on long-lived assets, whether used in the operation of the business or held for disposal, when events or changes in circumstances indicate that the assets' carrying amount may not be fully recoverable. The Company considers a history of cash flow losses in established areas to be its primary indicator of potential impairment. Based on current information, the Company does not believe the effect upon adoption will be material.
SFAS 123 establishes new accounting and reporting standards for stock based compensation plans. Companies may elect to adopt this standard using a fair-value based method or continue using the intrinsic value method of measuring compensation expense prescribed under the current guidance of Accounting Principles Board Opinion Number 25 (APB 25).
Since the Company will elect to continue using the intrinsic value method, SFAS 123 will not affect the Company's statement of earnings or financial position. SFAS 123 requires companies electing to continue using the rules of APB 25 to make pro forma disclosures of net income and earnings per share as though the fair value method had been elected. Pro forma disclosures of future options granted and stock issued will be reflected in the footnotes of the Company's consolidated financial statements when required.
NOTE B - LONG-TERM DEBT
The portion payable after one year matures as follows:
The revolving credit loan is a $20,000,000 line of credit, $11,500,000 of which is outstanding at June 2, 1996. This credit loan matures on September 1, 1999, unless extended. Interest is payable quarterly determined by various indices, currently 6.26%. The term loan, converted from a revolving credit loan during the year ended May 28, 1995, is payable in monthly installments of $125,000 through December 31, 2002. Interest is also payable monthly at a rate equal to the prime rate up to a maximum of 7.5% through December 31, 1997. The rate for the final five years shall also be equal to the prime rate, not to exceed 8.5%.
These agreements contain covenants relating to net worth, interest expense, debt and capitalization changes, investments, leases, and restrictions on pledging certain restaurant operating assets.
The Company also has a $2,494,000 outstanding letter of credit in support of its self insurance.
Other debt includes industrial revenue bonds that were issued in 1978, payable in annual installments of $200,000 through 1998 and bear interest at 7.4%. Property and equipment having a book value at June 2, 1996 of $3,150,000 is pledged as collateral for the bonds.
NOTE C - LEASED PROPERTY
The Company has capitalized the leased property of 50% of its non-owned restaurant locations. The majority of the leases are for fifteen or twenty years and contain renewal options for ten to fifteen years. Delivery equipment is held under capitalized leases expiring during periods to 2001. The Company also occupies office space under an operating lease which expires during 2003.
An analysis of the leased property follows:
Total rental expense of operating leases was approximately $1,575,000 in 1996, $1,675,000 in 1995 and $1,828,000 in 1994.
Future minimum lease payments under capitalized leases and operating leases having an initial or remaining term of one year or more follow:
NOTE D - INCOME TAXES
The variations between the statutory Federal rate and the effective rates are summarized as follows:
The components of the deferred tax asset (liability) were as follows (in thousands):
NOTE E - CAPITAL STOCK
Shareholders approved the 1993 Stock Option Plan on October 4, 1993. The plan authorizes the grant of stock options for up to 540,800 shares of the Common Stock of the Company for a ten year period beginning May 9, 1994. Shares may be optioned at not less than seventy-five percent of the fair market value on the date granted and may include stock appreciation rights. No options have been granted under the 1993 plan.
The 1984 Stock Option Plan expired on May 8, 1994. Outstanding options are exercisable within ten years from the date of grant. The exercise price is the fair market value as of the date granted.
The outstanding stock options for the 1984 plan follow:
The Company also has reserved 56,243 shares for issuance under the Frisch's Executive Savings Plan. Shares reserved under these plans have been adjusted for stock dividends. There are no other outstanding options, warrants or rights.
NOTE F - PENSION PLANS
Net pension expense included the following components (in thousands):
The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheet at June 2, 1996 and May 28, 1995 (in thousands):
Assumptions used to develop net periodic pension cost and the actuarial present value of projected benefit obligations:
NOTE G - EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common shares outstanding during the year (6,882,609 in 1996, 6,882,391 in 1995 and 6,885,993 in 1994). Stock options outstanding during the three years did not have a material dilutive effect on earnings per share.
QUARTERLY RESULTS (UNAUDITED)
The first quarter of each year contained sixteen weeks. The second and third quarters of each year contained twelve weeks. The fourth quarter of fiscal 1996 contained thirteen weeks compared to twelve weeks in fiscal 1995.
Net earnings for the first quarters of 1996 and 1995 and the fourth quarter of 1996 included favorable adjustments of $220,000, $440,000, and $330,000 respectively, resulting from lower than anticipated claims in the Company's self insured casualty insurance program.
The fourth quarter of 1995 included a $160,000 favorable adjustment of income tax expense to reflect the actual effective rate for the year.
Item 9. - Disagreements on Accounting and Financial Disclosure
Not applicable
PART III (Items 10 through 13)
Item 10. - Directors and Executive Officers of the Registrant
Information regarding directors is incorporated by reference to the Registrant's proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 2, 1996.
Information regarding executive officers appears at the end of Part I.
Item 11. - Executive Compensation
Incorporated by reference to the Registrant's proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 2, 1996.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Registrant's proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 2, 1996.
Item 13. - Certain Relationships and Related Transactions
Incorporated by reference to the Registrant's proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 2, 1996.
PART IV
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a). List of documents filed as part of this report
1. Financial Statements
All financial statements of the Registrant as set forth under Part II, Item 8