Summary of FRISCHS RESTAURANTS INC

ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS
SAFE HARBOR STATEMENT under the PRIVATE SECURITIES LITIGATION REFORM ACT of 1995 Forward-looking statements are contained in this Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Such statements may generally express management's expectations with respect to its plans, or its assumptions and beliefs concerning future developments and their potential effect on the Company. There can be no assurances that such expectations will be met or that future developments will not conflict with management's current beliefs and assumptions, which are inherently subject to risks and other uncertainties. Factors that could cause actual results and performance to differ materially from anticipated results that may be expressed or implied in forward-looking statements are included in, but not limited to, the discussion in "Risk Factors" found in this Form 10-Q under Part II, Item 1A. and as set forth in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the fiscal year ended May 29, 2012.
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(s)" 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 of the forward-looking statements that may be contained in this MD&A. This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended May 29, 2012. 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
Frisch's Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name "Frisch's Big Boy." As of December 11, 2012, 94 Frisch's Big Boy restaurants were owned and operated by the Company, located in various regions of Ohio, Kentucky and Indiana. The Company also licenses 25 Frisch's Big Boy restaurants to other operators who pay franchise and other fees to the Company.
The Company's Second Quarter of Fiscal 2013 consists of the 12 weeks ended December 11, 2012. It compares with the 12 weeks ended December 13, 2011, which constituted the Second Quarter of Fiscal 2012. The First Half of Fiscal 2013 consists of the 28 week period that ended December 11, 2012, and compares with the 28 week period that ended December 13, 2011, which constituted the First Half of Fiscal 2012.
The first half of the Company's fiscal year normally accounts for a disproportionate share of annual revenue and net earnings because it contains 28 weeks, whereas the second half of the year normally contains only 24 weeks. The upcoming 12 week third quarter can particularly be a disproportionately smaller share of annual revenue and net earnings because it spans most of the winter season from mid December through early March. Winter storms can adversely affect results of operations, which are particularly vulnerable if severe winter weather should develop over a prolonged period.
References to Fiscal Year 2013 refer to the 52 week year that will end on May 28, 2013. References to Fiscal Year 2012 refer to the 52 week year that ended May 29, 2012.
At the beginning of Fiscal Year 2012, the Company operated a second business segment, which consisted of 35 grill buffet style "Golden Corral" restaurants that were licensed to the Company by Golden Corral Corporation (GCC). The Company closed six of the Golden Corral restaurants in August 2011 due to issues with under performance, which resulted in a pretax charge of $4,000,000 for impairment of long-lived assets that was recorded in the First Quarter of Fiscal 2012. In May 2012, the remaining 29 Golden Corrals were sold to GCC. Results for the Golden Corral segment for the Second Quarter and First Half of Fiscal 2012 are presented as discontinued operations.

The following table recaps the earnings or loss components of the Company's consolidated statements of earnings.

                                              Second Quarter                         First Half
                                            2013             2012              2013              2012
                                      (in thousands, except per share     (in thousands, except per share
                                                   data)                               data)
Earnings from continuing operations
before income taxes                   $        3,062      $   2,688       $    4,470         $     3,286
Earnings from continuing operations   $        2,000      $   2,059       $    2,958         $     2,519
Diluted EPS from continuing
operations                            $         0.39      $    0.42       $     0.59         $      0.51
Earnings (loss) from discontinued
operations, net of tax                $            -      $     729       $     (158 )       $    (2,005 )
Diluted EPS (loss) from discontinued
operations                            $            -      $    0.14       $    (0.03 )       $     (0.41 )
Net earnings                          $        2,000      $   2,788       $    2,801         $       514
Diluted net EPS                       $         0.39      $    0.56       $     0.56         $      0.10

Weighted average diluted shares
outstanding                                    5,070          4,937            5,028               4,939

Factors having a notable effect on earnings from continuing operations before income taxes when comparing the Second Quarter of Fiscal 2013 with the Second Quarter of Fiscal 2012:
• Consolidated restaurant sales were $48,523,000 in the Second Quarter of Fiscal 2013 versus $49,938,000 in the Second Quarter of Fiscal 2012. The decrease is due to the effect of the permanent closure of certain restaurants and a same store sales decrease of 1.7 percent.

• Gross profit increased $156,000, or 2.7 percent, to $5,992,000 in the Second Quarter of Fiscal 2013 from $5,836,000 in the Second Quarter of Fiscal 2012.

As a percentage of sales:
- Food and Paper Costs were 33.3 percent in the Second Quarter of Fiscal 2013, down from 33.6 percent in the Second Quarter of Fiscal 2012.

- Payroll and Related Costs were 34.3 percent in the Second Quarter of Fiscal 2013, down from 34.7 percent in the Second Quarter of Fiscal 2012.

- Other Operating Costs were 20.1 percent in the Second Quarter Fiscal 2013, up from 20.0 percent in the Second Quarter of Fiscal 2012.

• Interest expense was $229,000 in the Second Quarter of Fiscal 2013 versus $351,000 in the Second Quarter of Fiscal 2012.

Factors having a notable effect on earnings from continuing operations before income taxes when comparing the First Half of Fiscal 2013 with the First Half of Fiscal 2012:
• Consolidated restaurant sales were $109,148,000 in the First Half of Fiscal 2013 versus $111,299,000 in the First Half of Fiscal 2012. The decrease is due to the effect of the permanent closure of certain restaurants and a same store sales decrease of 0.8 percent.

• Gross profit increased $785,000, or 7.1 percent, to $11,767,000 in the First Half of Fiscal 2013 from $10,982,000 in the First Half of Fiscal 2012.

As a percentage of sales:
- Food and Paper Costs were 33.4 percent in the First Half of Fiscal 2013, down from 33.8 percent in the First Half of Fiscal 2012.

- Payroll and Related Costs were 34.9 percent in the First Half of Fiscal 2013, down from 35.3 percent in the First Half of Fiscal 2012.

- Other Operating Costs were 20.9 percent in the First Half of Fiscal 2013, down from 21.1 percent in the First Half of Fiscal 2012.

• Share based compensation costs were $327,000 in the First Half of Fiscal 2013 versus $684,000 in the First Half of Fiscal 2012.

• Interest expense was $550,000 in the First Half of Fiscal 2013 versus $808,000 in the First Half of Fiscal 2012.

RESULTS of OPERATIONS
Except as where noted, the discussion of Results of Operations presented in this MD&A excludes the results from discontinued operations. Sales
The Company's sales are primarily generated through the operation of Frisch's Big Boy restaurants. Sales also include wholesale sales from the Company's commissary to Frisch's Big Boy restaurants that are licensed to other operators and the sale of Frisch's signature brand tartar sauce to grocery stores. Same store sales comparisons are a key metric that management uses in the operation of the business. Same store sales are affected by changes in customer counts and menu price increases. Changes in sales also occur as new restaurants are opened and older restaurants are closed. Below is the detail of consolidated restaurant sales:

                                           Second Quarter                   First Half
                                        2013           2012            2013           2012
                                           (in thousands)                 (in thousands)
Frisch's Big Boy restaurants
operated by the Company              $  46,076      $  47,443       $ 103,504      $ 105,608
Wholesale sales to licensees             2,216          2,235           5,110          5,143
Wholesale sales to groceries               231            260             534            548
Total sales                          $  48,523      $  49,938       $ 109,148      $ 111,299

Frisch's Big Boy restaurant sales shown in the above table include a same store sales decrease of 1.7 percent in the Second Quarter of Fiscal 2013 (on a customer count decrease of 4.0 percent) and a decrease of 0.8 percent in the First Half of Fiscal 2013 (on a 3.2 percent decrease in customer counts). The same store sales comparison includes the effect of three menu price increases, implemented respectively in September 2011 (1.5 percent), February 2012 (1.2 percent) and September 2012 (0.9 percent). Another menu price increase will likely be implemented in February 2013.
The Company operated 94 Frisch's Big Boy restaurants as of December 11, 2012. The count of 94 includes the following changes since the beginning of Fiscal 2012 (June 2011), when 95 Frisch's Big Boy restaurants were in operation:
• July 2011 - opened restaurant near Cincinnati, Ohio

• October 2011 - opened restaurant in Highland Heights, Kentucky (Cincinnati market)

• October 2011 - closed restaurant in Ft. Thomas, Kentucky (Cincinnati market)

• December 2011 - closed restaurant in Columbus, Ohio

• May 2012 - closed restaurant in Cincinnati, Ohio

• May 2012 - closed restaurant in Elizabethtown, Kentucky (Louisville market)

• August 2012 - opened restaurant near Cincinnati, Ohio

One more new Frisch's Big Boy restaurant is expected to be added in Fiscal Year 2013, which is currently under construction and scheduled to open in March 2013 (Dayton market).

Gross Profit
The determination of gross profit is shown with operating percentages in the
following table. The table is intended to supplement the cost of sales
discussion that follows. Cost of sales is comprised of food and paper costs,
payroll and related costs, and other operating costs.
                       Second Quarter      First Half
                       2013      2012     2013     2012

Sales                  100.0%   100.0%   100.0%   100.0%
Food and Paper          33.3%    33.6%    33.4%    33.8%
Payroll and Related     34.3%    34.7%    34.9%    35.3%
Other Operating Costs   20.1%    20.0%    20.9%    21.1%
Gross Profit            12.3%    11.7%    10.8%     9.8%

The cost of food continued its slight moderation into the Second Quarter of Fiscal 2013. Beef prices moderated somewhat after hitting record high price levels in the early part of the summer of 2012. The decline in food and paper costs as a percentage of sales, as reflected in the above table, was also aided by menu price increases. Looking ahead, rising commodity costs for food can be expected, especially for beef and other proteins, driven primarily by the drought conditions that were experienced in the nation's corn belt during 2012. Although the outlook for corn prices is beginning to improve, beef prices in the spring of 2013 are currently expected to exceed the record price levels that were experienced during the summer of 2012.
Although the Company does not use financial instruments as a hedge against changes in commodity prices, purchase contracts for some commodities may contain provisions that limit the price the Company will pay. In addition, the effect of commodity price increases is actively managed with changes to the menu mix, together with periodic increases in menu prices.

Food safety poses a major risk to the Company. Management rigorously emphasizes and enforces established food safety policies in all of the Company's restaurants and in its commissary and food manufacturing plant. These policies are designed to work cooperatively with programs established by health agencies at all levels of governmental authority, including the federal Hazard Analysis of Critical Control Points (HACCP) program. In addition, the Company makes use of ServSafe Training, a nationally recognized program developed by the National Restaurant Association. The ServSafe program provides accurate, up-to-date science-based information to all levels of restaurant 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.
The decrease in payroll and related costs (as a percentage of sales) shown in the above table was driven primarily by the combination of higher menu prices charged to customers and the continuation of reductions in scheduled labor hours. The labor hour reductions are commensurate with lower customer counts and are also initiated to offset mandated increases in the minimum wage:
• In Ohio, where roughly two-thirds of the Company's payroll costs are incurred, the minimum wage for non-tipped employees was increased 33 percent from $5.15 per hour to $6.85 per hour beginning January 1, 2007. It was subsequently increased to $7.00 per hour on January 1, 2008, to $7.30 per hour on January 1, 2009 (there was no increase on January 1, 2010), to $7.40 per hour on January 1, 2011 and to $7.70 per hour on January 1, 2012. On January 1, 2013, the rate increased to $7.85 per hour, which represents a 52 percent increase since 2007.

• The Ohio minimum wage for tipped employees increased 61 percent from $2.13 per hour to $3.43 per hour beginning January 1, 2007. It was subsequently increased to $3.50 per hour on January 1, 2008, to $3.65 per hour on January 1, 2009 (there was no increase on January 1, 2010), to $3.70 per hour on January 1, 2011 and to $3.85 per hour on January 1, 2012. On January 1, 2013, the rate increased to $3.93 per hour, which represents an 85 percent increase since 2007.

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

Without the benefit of reductions in labor hours, the Ohio minimum wage increase on January 1, 2012 would have added an estimated $420,000 to annual payroll costs in Ohio restaurant operations. It is currently estimated that the increase on January 1, 2013 would add $320,000 to annual Ohio payrolls if there were to be no further scheduled reductions in labor hours.

Other factors also continue to have an adverse effect on payroll and related costs. These factors include higher costs associated with benefit programs sponsored by the Company, including medical insurance premiums and pension related costs.
Management continues to analyze and evaluate health care reform legislation (the federal Patient Protection and Affordable Care Act, enacted March 2010) to determine the future short and long term effects upon the Company while developing various strategies to mitigate the expected financial burden of compliance with the mandate when it becomes fully effective on January 1, 2014. The Company has typically absorbed 80 percent of the cost for medical premiums, with employees contributing the remaining 20 percent. Among other responses to mitigate medical insurance costs, it is likely that employees will be contributing more than 20 percent of premium cost, benefit design changes will likely be implemented and the level of full time hourly employment may potentially be decreased in favor of increased part time employment. Net periodic pension cost was $749,000 and $635,000 respectively, in the Second Quarter of Fiscal 2013 and the Second Quarter of Fiscal 2012 (pension cost in the Second Quarter of Fiscal 2012 included $108,000 charged to discontinued operations). Net periodic pension cost was $1,748,000 and $1,483,000 respectively, in the First Half of Fiscal 2013 and the First Half of Fiscal 2012 (pension cost in the First Half of Fiscal 2012 included $250,000 charged to discontinued operations). Net periodic pension cost for Fiscal Year 2013 is currently expected to be in the range of $3,200,000 to $3,300,000. Net periodic pension cost for Fiscal Year 2012 was $2,746,000 ($487,000 charged to discontinued operations). Most of the anticipated increase in net periodic pension costs for Fiscal Year 2013 is due to the reduction of 100 basis points in the discount rate. Approximately $135,000 is added to annualized net periodic pension cost for each decrement of 25 basis points in the discount rate. Other operating costs include occupancy costs such as maintenance, rent, depreciation, abandonment losses, property tax, insurance and utilities, plus costs relating to field supervision, accounting and payroll preparation costs, new restaurant opening costs and many other restaurant operating costs. As expenses charged to other operating costs tend to be more fixed in nature, the percentages shown in the above table can be greatly affected by changes in same store sales levels. In other words, percentages will generally rise when sales decrease and percentages will generally decrease when sales increase. Operating Profit
To arrive at the measure of operating profit, administrative and advertising expense is subtracted from gross profit, while the line item for franchise fees and other revenue is added to it. Gains and losses from the sale of real property (if any) are then respectively added or subtracted. Charges for impairment of assets (if any) are also subtracted from gross profit to arrive at the measure of operating profit.
Administrative and advertising expense decreased $81,000 in the Second Quarter of Fiscal 2013 and $168,000 in the First Half of Fiscal 2013 when compared with the comparable periods a year ago. Stock based compensation expense included in administrative and advertising expense was $88,000 during the Second Quarter of Fiscal 2013 versus $135,000 during the Second Quarter of Fiscal 2012. Stock based compensation was $327,000 in the First Half of Fiscal 2013 versus $684,000 in the First Half of Fiscal 2012. An unrestricted stock award in June 2011 to the Chief Executive Officer that amounted to $371,000 was included in stock based compensation expense in the First Half of Fiscal 2012 (see further discussion of stock based compensation expenses in the Financing Activities section of Liquidity and Capital Resources that appears elsewhere in this MD&A). Administrative and advertising expense in the First Half of Fiscal 2013 (recorded in the First Quarter of Fiscal 2013) also includes higher charges for the cost of employee separations.

Revenue from franchise fees is based upon sales volumes generated by Frisch's 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 December 11, 2012, 25 Frisch's Big Boy restaurants were licensed to other operators and were paying franchise fees to the Company. No licensed Frisch's Big Boy restaurants opened or closed during any of the periods presented in this MD&A. Other revenue also includes certain other fees earned from Frisch's Big Boy restaurants licensed to others along with minor amounts of rent and investment income.
Gains and losses from the sale of assets consist of transactions involving real property and sometimes may include restaurant equipment that is sold together with real property as a package when closed restaurants are sold. Gains and losses reported on this line do not include abandonment losses that routinely arise when certain equipment is replaced before it reaches the end of its expected life; abandonment losses are instead reported in other operating costs. Non-cash pretax impairment charges totaling $70,000 were recorded during the First Half of Fiscal 2013 (all in the First Quarter of Fiscal 2013) to lower previous estimates of the fair values of two former Frisch's Big Boy restaurants. The impairment charges were based on sales contracts that had been accepted by the Company. No impairment charges were recorded during the First Half of Fiscal 2012.

Interest Expense
Interest expense decreased $122,000 and $258,000 respectively, in the Second Quarter of Fiscal 2013 and the First Half of Fiscal 2013 when compared with comparable periods a year ago. The decreases are mostly the result of lower debt levels than a year ago.
Income Tax Expense
Income tax expense as a percentage of pretax earnings was estimated at 34.7 percent for the Second Quarter Fiscal 2013 and 33.8 percent for the First Half of Fiscal 2013. The rate was approximately 23 percent in the Second Quarter of Fiscal 2012 and for the First Half of Fiscal 2012. The higher rates in Fiscal Year 2013 are primarily due to changes in tax credits and a valuation allowance (VA) placed on certain deferred state taxes amounting to $81,000. Management periodically assesses the realization of net deferred tax assets based on historical, current and future (expected) operating results. A VA is recorded if management believes the Company's net deferred tax assets will not be realized. In addition, management monitors the realization of the VA and may consider its release in the future based on any positive evidence that may become available. The Internal Revenue Service is currently examining the Company's tax return for Fiscal Year 2011, which was filed in February 2012.
DISCONTINUED OPERATIONS
At the beginning of Fiscal Year 2012, the Company operated a second business segment, which consisted of 35 Golden Corral restaurants (Golden Corral) that were licensed to the Company by Golden Corral Corporation (GCC). Six of the Golden Corrals were closed in August 2011 (First Quarter of Fiscal 2012) due to issues with under performance, which resulted in a non-cash pretax asset impairment charge of $4,000,000. In May 2012, the remaining 29 Golden Corrals were sold to GCC. Results for Golden Corral for the Second Quarter and First Half of Fiscal 2012 are shown in the following table. Income tax expense as shown in the table in the First Half of Fiscal 2013 represents adjustments to tax related balance sheet accounts that were recorded during the First Quarter of Fiscal 2013.

                                            Second Quarter                     First Half
                                          2013            2012            2013           2012
                                            (in thousands)                   (in thousands)
Sales                                $        -        $  20,804       $       -      $  51,171

Food and paper                                -            7,994               -         19,613
Payroll and related                           -            6,031               -         14,923
Other operating costs                         -            5,490               -         13,724
                                              -           19,515               -         48,260

Gross profit                                  -            1,289               -          2,911

Administrative and advertising                -              658               -          1,585
Impairment of long-lived assets               -                -               -          4,000

Earnings (loss) from discontinued
operations before income tax                  -              631               -         (2,674 )

Income tax expense (benefit)                  -              (98 )           158           (669 )

Earnings (loss) from discontinued
operations, net of taxes             $        -        $     729       $    (158 )    $  (2,005 )

LIQUIDITY and CAPITAL RESOURCES
Sources of Funds
Food sales to restaurant customers provide the Company's principal source of cash. The funds from sales are immediately available for the Company's use, as substantially all sales to restaurant customers are received in currency or are settled by debit or credit cards. The primary source of cash provided by operating activities is net earnings plus depreciation and impairment of assets, if any. Other sources of cash may include borrowing against credit lines, proceeds received when stock options are exercised and occasional sales of real estate. In addition to servicing debt, these cash flows are utilized for discretionary objectives, including capital projects (principally restaurant expansion and renovation), capital stock repurchases and dividends. As of May 29, 2012, $42,000,000 of the proceeds from the May 2012 sale of 29 Golden Corral restaurants was invested in commercial paper. These funds were converted to cash on September 14, 2012 to fund a special dividend of $9.50 per share (see Financing Activities below). Also as of May 29, 2012, the sum of $3,493,000 (restricted cash - principally from the Golden Corral sale proceeds) was being held by a third party intermediary in anticipation of completing qualifying like kind exchanges in order to defer taxable gains pursuant to
Section 1031 of the Internal Revenue Code. In July and August 2012, all of the restricted cash was returned to the Company's treasury from the third party intermediary because suitable like kind exchanges could not be identified. 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, this practice should not hinder the Company's ability to . . .