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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________________________________
Commission file number 0-12343
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VICORP Restaurants, Inc.
_____________________________________________________
(Exact name of registrant as specified in its charter)
Colorado 84-0511072
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 West 48th Avenue, Denver, Colorado 80216
----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-2121
________________
Securities registered pursuant to Section 12(b) of the Act: None
________________
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
$.05 par value per share
__________
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 if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of 6,446,523 shares of the registrant's common
stock held by non-affiliates on January 20, 2000 was approximately
$102,338,552.
At January 20, 2000 there were 6,777,443 shares of the Company's
Common Stock $.05 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Notice of Annual Meeting of Shareholders and Proxy Statement pertaining
to the 1999 Annual Meeting of Shareholders ("the Proxy Statement") are
incorporated herein by reference into Parts I and III.
PART I
Item 1. Business.
VICORP Restaurants, Inc., the registrant, is referred to herein as "VICORP"
or the "Company." The Company was incorporated in 1959 and is headquartered
in Denver, Colorado.
VICORP operates family style restaurants under the names "Bakers Square" and
"Village Inn," and franchises restaurants under the Village Inn brandname.
At October 31, 1999, VICORP operated two hundred fifty-two Company-owned
restaurants in thirteen states. Of the two hundred fifty-two Company-owned
restaurants, one hundred fifty were Bakers Squares and one hundred two were
Village Inns, with an additional one hundred sixteen franchised Village Inn
restaurants in twenty-one states. The Company-owned and franchised
restaurants are concentrated in Arizona, California, Florida, the Rocky
Mountain region and the upper Midwest. The Company operates a pie
manufacturing division to support the restaurants, which operates under the
name VICOM. VICOM has three production facilities located in Santa Fe
Springs, California, Oak Forest, Illinois and Mounds View, Minnesota.
Company Operations
The Village Inn concept is focused on breakfast food, offering homestyle
entrees for breakfast, lunch and dinner. Bakers Square emphasizes lunch and
dinner with signature fresh baked pies in twenty-two, plus flavors. Each
concept offers a relatively standard core menu supplemented with daily and
monthly entree and pie specials with an average guest check of six to eight
dollars.
Store management typically consists of a general manager and two assistant
managers. The store managers are supported by regional managers, regional
vice-presidents and the corporate office. Incentives are provided to
encourage store and regional managers to maximize store sales and monitor
controllable costs.
The Company believes the principal measure of success for the restaurants is
the ability to provide the customer with a satisfying experience.
Attracting and retaining the best people, continuous employee development,
regular communication of expectations, and constant performance feedback are
central factors to ensure customer satisfaction. Training programs are
designed to meet these objectives and focus on outcome-based training,
emphasizing the acquisition of basic skills and behavior that result in
desired performance for specific positions.
Cost effective procurement of quality products is also critical to providing
a satisfying customer experience. The Company makes centralized purchasing
decisions for basic menu ingredients to gain favorable prices and ensure
uniform quality specifications. Management does not anticipate any
difficulty in obtaining food products of adequate quantity or quality at
acceptable prices.
The Company utilizes advertising to promote the restaurant concepts and gain
market share. Expenditures for marketing were 2.66% of Company-operated
restaurant sales in the current fiscal year.
The Company-operated restaurants utilize point-of-sale and back-of-house
computer systems. These systems capture sales information, payroll data,
and provide restaurant managers with analytical and reporting tools.
During fiscal 1999, the Company opened seven new restaurants and closed four
restaurants, of which three were converted to franchise operations and one
closed due to the expiration of the lease. The Company intends to open
eight to ten Company-operated restaurants during fiscal year 2000, with
emphasis on the Village Inn concept.
Franchise Operations
The initial term of a Village Inn Franchise Agreement is twenty-five years.
An initial franchise fee of $35,000 is due upon the grant of a franchise and
ongoing royalty fees are 4% of gross sales. The Company supports its
franchisees with regular visits to the restaurants by Quality Assurance
Consultants to help ensure the Company's high quality service and
cleanliness standards are upheld. A franchise advisory board, consisting of
seven franchisees elected by their peers every two years, meets with Company
management four times per year. The meetings provide a forum for the
exchange of ideas, which will enable the Company and the franchisees to
maximize growth, sales and profits.
During fiscal year 1999, the Company established eight new franchised
Village Inn locations in Florida, Arkansas, Nevada, Oklahoma and Colorado;
and two restaurants were closed. The Company plans to pursue franchise
development as a source of providing a continued profitable revenue stream,
as well as to gain market share, thus promoting the advancement of the
Village Inn brandname. The Company expects to develop from five to ten
franchised units during fiscal 2000.
Trademarks and Service Marks
The Company owns the right to use the trademarks and service marks, which
have been registered with various state and federal patent and trademark
offices. The Company considers the trademarks and service marks important
to the business and actively defends and enforces them.
Competition
The restaurant industry is highly competitive with regards to quality,
value, location, service and price, and is often affected by changes in
consumer tastes, local and national economic and real estate conditions,
traffic patterns and demographic trends. The Company competes directly and
indirectly with all types of restaurants from national and regional chains
to local establishments. Competitors include corporations much larger than
the Company, which have greater capital resources and ability to withstand
adverse business trends.
Research and Development
No material amounts were spent on Company sponsored research activities
relating to the development or enhancement of products, services or
techniques.
Regulation
The Company is subject to various federal, state and local laws governing the
sale and preparation of food, zoning, sanitation, health and safety, minimum
wage requirements, overtime, construction, environmental and sale of
alcoholic beverages.
The Federal Trade Commission, as well as state laws regulate franchise
operations, including laws imposing registration and disclosure requirements
for franchisors during the offer and sale of franchises and, in certain
cases, applying substantive standards to the relationship between the
Company and the franchisee.
Employees
As of October 31, 1999 the Company had approximately 11,880 employees. None
of the Company's employees are represented by a labor union or are the
subject of a collective bargaining agreement.
Executive Officers of the Company
The following table sets forth the names, ages, position and business
experience of the executive officers of the Company. Executive officers are
appointed by the Board of Directors on an annual basis. There are no family
relationships between the executive officers.
Name Age Position
- ---- --- -------
Charles R. Frederickson 62 Chairman of the Board and Chief
Executive Officer
Joseph F. Trungale 58 President VICORP Restaurants, Inc./
Bakers Square
Robert E. Kaltenbach 54 President Village Inn
Richard E. Sabourin 49 Executive Vice President/Chief
Financial Officer
Charles R. Frederickson has been a director of the Company since 1968, and
Chairman of the Board since November 1986.
Joseph F. Trungale was appointed President of the Company on November 1,
1999, after serving as the President of the Bakers Square concept since
August 1998. Previously, Mr. Trungale served in various positions with
operational responsibility over the Company's Bakers Square restaurants.
Prior to joining the Company, Mr. Trungale operated a family-owned real
estate business from September 1995 through July 1997. For eight years
preceding that, he was Vice President of Operations for Whataburger, Inc.
Robert E. Kaltenbach was appointed President of Village Inn in December 1994
after serving as Vice President of Franchise Operations since July 1988.
Richard E. Sabourin was appointed Executive Vice President and Chief
Financial Officer in August 1996. From 1989 to August 1996, Mr. Sabourin
was employed by Bestop, Inc. in various positions including President, Chief
Operating Officer, and Chief Executive Officer.
Item 2. Properties.
The Company owns the corporate office complex located in Denver, Colorado
and the bakery facility in Oak Forest, Illinois. The land and buildings at
the Santa Fe Springs, California and Mounds View, Minnesota bakeries are
leased.
Company operated Village Inn restaurants are concentrated in the Rocky
Mountain region, Arizona and Florida, while Bakers Square restaurants are
located primarily in California and the upper Midwest. The Company considers
existing restaurant properties and equipment to be in good working
condition. The Company intends to lease, sublease or sell seven idle
restaurant properties. On October 28, 1999, the Company completed the sale
and leaseback of the real estate related to twenty-one restaurant
properties. The idle bakery facility in Denver, Colorado was sold on
November 12, 1999. The following table sets forth properties owned in fee,
buildings owned on leased land, and leased locations as of October 31, 1999:
Village Bakers
Inn Square Other Total
------- ------ ----- -----
Company-operated restaurants:
Properties owned in fee 15 35 -- 50
Buildings owned on leased land 5 10 -- 15
Leased locations 82 105 -- 187
--- --- --- ---
102 150 -- 252
=== === === ===
Properties leased to others:
Properties owned in fee 3 -- 1 4
Buildings owned on leased land -- -- 1 1
Leased locations 22 -- 23 45
--- --- --- ---
25 -- 25 50
=== === === ===
Properties held for disposal:
Properties owned in fee -- -- 4 4
Buildings owned on leased land -- -- -- --
Leased locations -- -- 3 3
--- --- --- ---
-- -- 7 7
=== === === ===
Item 3. Legal Proceedings.
On September 28, 1998, two class actions were commenced in the Superior
Court of Los Angeles County, California.
The first, Kirk v. VICORP Restaurants, Inc., Case No. BC-198202, was brought
by a former manager of a California Bakers Square restaurant. Allegations
in the amended complaint assert violations by VICORP of California wage and
hour laws and regulations concerning overtime wages. The Plaintiff is
seeking class certification, injunctive relief, damages in an unspecified
amount, statutory penalties, interest, costs, and attorneys' fees.
The second, Schroeder v. VICORP Restaurants, Inc., Case No. BC-198203, was
brought by a former server at a California Bakers Square restaurant. The
Plaintiff alleges VICORP has violated California statutes and regulations
concerning the payment of wages, tip pooling, reimbursement for uniform
expenses, failure to remit tips, and the improper charging of walkouts to
servers. Class certification is requested, as well as injunctive relief,
damages in an unspecified amount, statutory penalties, interest, costs, and
attorneys' fees.
On December 28, 1998, a third action was commenced in the Superior Court of
Los Angeles County, California, Ontiveros v. VICORP Restaurants, Inc., Case
No. BC-202962. This action was brought by a former manager of a California
Bakers Square restaurant. The Plaintiff is seeking damages, statutory
penalties, declaratory relief, interest, attorneys' fees, and costs for
alleged violations of California statutes and regulations concerning the
payment of wages.
The Company believes the legal actions described above are similar to
plaintiff actions recently brought against other multi-location restaurant
operators in the state of California. Resolution of these matters may
require a significant period of time and is subject to substantial
uncertainties common to the judicial process for class actions in general.
The Company believes it has not violated California statutes and regulations
and has meritorious defenses to each of the claims in these actions. While
the Company intends to vigorously defend against the allegations, it is
possible that the Company will not prevail, or that decisions made in other
similar cases may result in interpretations of the California statutes that
are adverse to the Company's position. The cost of defense for these
actions is being recognized as incurred. No provision has been made for any
judgements or settlements that might ultimately result. While a contingency
exists that any such judgement or settlement could be material to the
results of operations of the Company for some future period or periods, the
Company currently believes that resolution of these amounts will not have a
material adverse effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the Company's security holders during the
fourth quarter ended October 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock is traded on the over-the-counter market and is
quoted on the National Association of Securities Dealers (NASDAQ) National
Market System under the symbol "VRES". As of January 20, 2000, the Company
had 391 shareholders of record. The following table sets forth for the high
and low closing sales quotations per share of common stock as reported by
NASDAQ during each of the Company's fiscal quarters:
[CAPTION]
Fiscal Quarter
First Second Third Fourth
- -----------------------------------------------------------------------------
1999
High $16 $16 3/4 $18 5/16 $18 3/8
Low 13 3/8 14 3/8 15 3/16 15 11/16
1998
High $17 1/2 $19 1/4 $16 3/4 $15 5/8
Low 15 3/8 15 1/2 14 1/2 13
The range of high and low closing sales quotations contained in the
foregoing table reflects inter-dealer prices, without retail mark-up,
markdown or commissions, and may not represent actual transactions.
The Company has not paid cash dividends on common stock since 1986. Future
common stock dividend payments are dependent upon operating results, loan
agreement restrictions and other financial and business considerations.
Item 6. Selected Financial Data.
(dollars in thousands,
except per share data) 1999 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Results of operations
System-wide sales including
franchise sales $500,566 $482,506 $450,534 $456,352 $496,300 $529,982 $542,986
Restaurant sales 355,781 342,654 322,188 339,937 370,116 409,297 425,139
Total revenues 359,046 346,173 325,527 343,280 373,838 412,644 428,505
Net income(loss) 17,327* 9,120 6,899 (929)* (4,532) (6,638)* 16,524*
- -----------------------------------------------------------------------------------------------------
Operating analysis
Restaurant operating profit
analysis as a percentage of
restaurant sales
Costs and expenses:
Food 30.1% 30.8% 31.4% 32.9% 33.5% 30.1% 29.8%
Labor 32.8% 32.7% 32.4% 32.0% 33.7% 30.2% 28.5%
Other operating 24.6% 25.4% 25.9% 26.7% 28.3% 28.2% 27.5%
Restaurant operating profit 12.5% 11.1% 10.3% 8.3% 4.4% 11.4% 14.2%
General and administrative
expense as a percentage
of revenues 8.1% 7.5% 7.4% 7.3% 7.0% 8.7% 7.8%
Interest expense as a
percentage of revenues .3% .5% .8% 1.2% 1.0% .9% .9%
Income before income taxes
as a percentage of revenues 5.2%* 4.2% 3.3% .9%* (2.4%) 2.5%* 6.3%*
Effective income tax rate 6.5% 36.5% 36.0% 64.0% 50.0% 37.5% 36.2%
- ------------------------------------------------------------------------------------------------------
Balance sheet data
Total assets $228,271 $199,670 $194,990 $203,946 $228,161 $249,023 $254,031
Long-term debt and
capitalized lease
obligations 4,588 5,783 19,465 33,585 42,179 42,554 40,008
Common shareholders' equity 151,848 138,007 129,919 122,269 123,098 134,866 148,318
Debt to total capitalization 2.9% 4.0% 13.0% 21.5% 25.5% 24.0% 21.2%
- ------------------------------------------------------------------------------------------------------
Cash flow data
Cash provided by operations $ 29,405 $ 42,222 $ 28,568 $ 17,847 $ 7,309 $ 34,094 $ 50,870
As a percentage of revenues 8.2% 12.2% 8.8% 5.2% 2.0% 8.3% 11.9%
Investment in property
and equipment $ 32,996 $ 21,054 $ 16,410 $ 7,922 $ 13,234 $ 28,733 $ 42,426
- ------------------------------------------------------------------------------------------------------
Per common share
Earnings (loss) $ 1.93 $ .98 $ .75 $ (.10) $ (.49) $ (.69) $ 1.62
Book value 17.06 15.18 14.18 13.50 13.61 14.18 14.96
Market price at year-end 16 7/8 14 1/8 15 1/2 14 1/2 11 16 3/4 20 3/4
Weighted average common and
dilutive common stock
equivalents (000's omitted) 8,958 9,262 9,145 9,050 9,246 9,656 10,189
- ------------------------------------------------------------------------------------------------------
Number of restaurants at year-end
Bakers Square 150 150 150 154 160 189 187
Company-operated Village Inn 102 99 97 98 99 112 126
Franchised Village Inn 116 110 108 108 106 107 104
Other Company-operated -- -- -- 1 5 6 --
- ------------------------------------------------------------------------------------------------------
Total 368 359 355 361 370 414 417
- ------------------------------------------------------------------------------------------------------
* An asset impairment of $746,000 was included in results of operations for
1999.
* A one-time tax benefit of approximately $5,400,000 from adjusting the
valuation allowance relating to certain deferred tax assets was included
in net income for 1999.
* An asset disposal charge of $5,800,000 was included in results of
operations for 1996.
* An asset disposal, impairment and restructuring charge of $23,000,000
and income of $1,918,000 from settlement of litigation were
included in results of operations for 1994.
* A restructuring charge of $1,300,000 was included in results of
operations for 1993.
* Fiscal 1999 consisted of 364 days, while fiscal years 1998, 1997,
1996, 1995, 1994, 1993, consisted of 366 days, 365 days, 366 days, 366 days,
364 days, and 371 days, respectively.
* The Company has not paid dividends on common stock during the last
seven years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following analysis should be read in conjunction with the Selected
Financial Data (Item 6 of Part II) and the Financial Statements and
Supplementary Data (Item 8 of Part II).
Results of Operations
The following table sets forth selected operating statistics for the last
three fiscal years (in thousands except restaurants at year end).
1999 1998 1997
------ ------ ------
Bakers Square
Restaurant sales $ 215,431 $ 207,251 $ 192,538
Average sales per restaurant 1,441 1,387 1,276
Restaurant operating profit 21,034 14,712 11,740
Restaurant operating profit % 9.8% 7.1% 6.1%
Divisional administrative costs 5,653 5,320 4,987
Divisional operating profit 15,381 9,392 6,753
Restaurants at year-end 150 150 150
Village Inn
Restaurant sales $ 140,350 $ 135,403 $ 128,586
Average sales per restaurant 1,401 1,394 1,326
Restaurant operating profit 23,570 23,314 21,566
Restaurant operating profit % 16.8% 17.2% 16.8%
Franchise income 3,265 3,519 3,339
Divisional administrative costs 4,623 4,942 3,788
Divisional operating profit 22,212 21,891 21,117
Restaurants at year-end 102 99 97
Angel's
Restaurant sales $ -- $ -- $ 1,064
Average sales per restaurant -- -- --
Restaurant operating profit/(loss) -- -- (19)
Restaurant operating profit/(loss) % -- -- (1.8%)
Divisional administrative costs -- -- 12
Divisional operating profit/(loss) -- -- (31)
Restaurants at year-end -- -- --
Consolidated
Restaurant sales $ 355,781 $ 342,654 $ 322,188
Food cost % 30.1% 30.8% 31.4%
Labor cost % 32.8% 32.7% 32.4%
Other operating cost % 24.6% 25.4% 25.9%
Restaurant operating profit % 12.5% 11.1% 10.3%
Restaurant operating profit 44,604 38,026 33,287
Franchise income 3,265 3,519 3,339
Divisional general and
administrative costs 10,276 10,262 8,787
-------------------------------------------
Divisional operating profit 37,593 31,283 27,839
-------------------------------------------
Unallocated general and
administrative costs 18,716 15,756 15,110
-------------------------------------------
Operating profit $ 18,877 $ 15,527 $ 12,729
============================================
Before asset impairment charge of $746,000 in 1999.
The year ended October 31, 1999 compared to the year ended November 1, 1998
- ---------------------------------------------------------------------------
Consolidated restaurant sales increased 3.8% in 1999 versus 1998. This was
a result of operating an additional three Village Inn restaurants in the
current year (seven new restaurants were opened while three existing
restaurants were converted to franchise operations and one was closed due to
expiration of the lease), as well as experiencing a comparable same store
sales increase of 3.2%. The Bakers Square concept registered a 4.6%
increase in same store sales and a 1.3% increase in customer counts compared
to 1998. Restaurant remodel programs to enhance the dining experience,
broadened advertising coverage, special incentive programs at the local
level, strengthened management ranks in the Midwest and Westcoast, and
continued improved execution of the Bakers Square concept contributed to the
improvement in sales. Village Inn same store sales increased .9% and
customer counts decreased 1.5% over the prior year. The decrease in
customer counts is partially attributable to the opening of new stores in
established market areas, as well as highly successful promotional programs
in 1998 which drove large increases in customer traffic.
Consolidated restaurant operating profit increased 17.3% in 1999 versus
1998. Bakers Square's restaurant operating profit increased 43.0% over the
prior year, while restaurant operating profit as a percent of sales
increased to 9.8% in 1999 from 7.1% in 1998. Improved Bakers Square
operating profit is due to higher same store sales, and programs developed
to improve efficiencies, control food costs and minimize controllable
operating costs. Village Inn's restaurant operating profit increased 1.1%,
while profit as a percent of sales decreased from 17.2% in 1998 to 16.8% in
1999 due to start-up costs associated with the seven new stores opened in
1999.
Net franchise income decreased 7.2% between 1999 and 1998 primarily as a
result of increased general and administrative expenses associated with
franchise operations.
General and administrative expenses as a percent of restaurant sales,
increased .6% in 1999 to 8.1%. The increase was attributed to increased
divisional management expenses, higher incentive compensation payouts due to
improved profitability, an increased investment in store manager training,
and increased depreciation and other costs associated with the Enterprise
Resource Planning (ERP) system implementation.
Other income for 1999 increased 272% from 1998 due to a $859,000 gain on the
sale of a restaurant property.
Interest expense declined 34.6%, or $535,000 between 1999 and 1998 due to a
substantial reduction in long-term debt in 1998.
The year ended November 1, 1998 compared to the year ended October 31, 1997
- ---------------------------------------------------------------------------
Consolidated restaurant sales increased 6.4% in 1998 compared to 1997.
Comparable consolidated same store sales increased 6.7%, reflecting a 4.3%
increase for Village Inn and an 8.3% increase for Bakers Square. Village
Inn and Bakers Square comparable sales increases were due to a combination
of higher customer counts and increased average customer expenditures. Same
store customer counts increased 2.6% at Village Inn and 4.5% at Bakers
Square.
Consolidated restaurant operating profit increased 14.2% in 1998 versus
1997. Bakers Square accounted for the majority of the improvement as a
result of increased sales coupled with programs to control waste and gain
efficiencies. Village Inn's restaurant operating profit improved due
largely to reduced food costs.
Franchise income increased 5.4% in 1998 versus 1997 due to four new
franchise units offset partially by the closing of two franchise units.
General and administrative expense was 7.5% of revenues in 1998 and 7.4% in
1997. The increase of $2,121,000 or 8.9%, was largely due to higher bonus
payouts to operating management as the result of improved operating results.
Other income for 1998 decreased 38.3% from 1997 due to disposal of subleased
units and lower interest earned on notes receivable.
Interest expense decreased 39.8% for 1998 versus 1997 due to significantly
reduced levels of borrowing and reduced capital lease interest.
Asset Disposal, Impairment and Related Costs
- --------------------------------------------
The Company recorded a pre-tax charge of $746,000 in fiscal 1999 for the
write down of certain restaurant properties. Management assessed various
factors relevant to the assets, including projected negative cash flows and
concluded the historical performance trends were unlikely to improve
materially, therefore an impairment of the assets was recognized.
In 1996, the Company determined the strategy of using the Angel's Diner
restaurants concept to invigorate underperforming restaurant properties was
not economically viable and recorded a $5,800,000 asset disposal charge. The
charge reduced the carrying values of related assets to net realizable value
and provided for closure and carrying costs.
In 1994, the Company recorded a $23,000,000 charge related primarily to a
plan to close and dispose of underperforming restaurants and discontinue a
portion of the Company's manufacturing and distribution activities. Also,
included was the recognition of the impairment of the carrying values on
four properties and an accrual for other costs directly related to the
restructuring.
During 1999, the Company disposed of eight properties; five through sublease
and three through lease termination. Closure and carrying costs of $336,000
were charged against the established reserve. Additional units closed that
were not included in the disposal plan included one in 1999, one in 1998 and
six in 1997.
Operating results for the closed restaurants for the past three fiscal years
were as follows:
1999 1998 1997
---- ---- ----
Bakers Square
Sales $ -- $ -- $ 1,276,000
Restaurant operating profit/(loss) -- -- (215,000)
Village Inn
Sales $ 2,133,000 $ 3,912,000 $ 5,607,000
Restaurant operating profit/(loss) (13,000) 225,000 462,000
Angel's
Sales $ -- $ -- $ 1,064,000
Restaurant operating profit/(loss) -- -- (19,000)
Total
Sales $ 2,133,000 $ 3,912,000 $ 7,947,000
Restaurant operating profit/(loss) (13,000) 225,000 228,000
As of October 31, 1999, the Company had $2,996,000 remaining to provide for
the disposal of seven properties. The reserves consisted of $2,238,000 to
reduce the disposal properties to realizable value and $758,000 to provide
for carrying costs and sublease losses. The Company believes these reserves
are adequate to cover the remaining costs and losses associated with the
remaining disposal properties.
The Company closed the bakery facilities in Denver, Colorado and Orlando,
Florida in 1996 and subsequently sold the Denver, Colorado bakery facility on
November 12, 1999 for $690,000, with a resulting loss of $614,000 applied
against the disposal reserve.
Effective Tax Rates
- -------------------
The effective income tax rates used for financial reporting were 6.5% in
1999, 36.5% in 1998, and 36.0% in 1997. The decrease in the effective tax
rate in 1999 is due to a one-time benefit of approximately $5,400,000 from
adjusting the valuation allowance relating to certain deferred tax assets.
Liquidity and Capital Resources
- -------------------------------
The Company's principal source of funds is internally generated cash from
operations. In 1999, $29,405,000 of cash was provided by operations
compared to $42,222,000 in 1998. The decrease in cash flow from operations
was a result of changes in working capital accounts. Cash provided from
operations in 1998 totaled $42,222,000, an increase of $13,654,000
over 1997. The increase was primarily due to increased profitability and
changes in working capital accounts.
In 1999, the Company utilized $1,954,000 in investing activities compared to
$18,588,000 in 1998. Although the net result is a $16,634,000 decrease,
capital expenditures actually increased to $32,996,000 in 1999. This was
offset by $30,608,000 in proceeds from the disposition of assets. Included
in this amount was $28,700,000 relating to a sale leaseback transaction on
twenty-one properties entered into by the Company. Cash used in investing
activities in 1998 totaled $18,588,000 compared to $15,309,000 in 1997. The
increase in cash used in investing activities in 1998 was due to higher
capital expenditures.
Cash used for financing activities in 1999, excluding the purchase of common
stock, decreased $11,035,000 to $889,000 compared to $11,924,000 in 1998.
The decrease is due to a substantial reduction of debt during 1998 and
limited advances under the Company's bank credit facility during 1999. In
1998, total cash used in financing activities, excluding the purchase of
common stock, was $11,924,000 compared to $12,981,000 in 1997, for a
decrease of $1,057,000. The decrease was a result of proceeds received from
the exercise of stock options.
In December 1997, the Company executed an amended and restated credit
agreement, which provides for an available credit limit of $40,000,000 in
the aggregate with a sublimit of $10,000,000 on letters of credit. The
credit agreement expires on February 28, 2001.
In 1999, 1998,and 1997, 232,925, 213,700 and 20,000 shares of the Company's
common stock were repurchased for $3,637,000, $2,912,000 and $220,000, under
authorizations approved by the Board of Directors. At October 31, 1999,
authorization to repurchase an additional 453,375 common shares was available.
Future purchases may be made in the open market or through privately negotiated
transactions and are dependent upon various business and financial
considerations.
At October 31, 1999, the Company was actively attempting to dispose of seven
properties. Four of these properties were owned in fee and the remainder
were leased. The Company intends to sell the fee properties over the next
year and approximately $2,100,000 of proceeds are expected to be realized
from the sale. The Company does not anticipate significant proceeds from
the disposition of the leased properties. The majority of the leased
properties will be disposed of through sublease over the next six to
eighteen months. Cash carrying costs of approximately $758,000 are expected
to be incurred during that period. The Company expects to sublease two of
the properties at rentals lower than the Company's obligations under the
prime leases. Those sublease losses will be funded over the remaining years
of the leases with an immaterial affect on the Company's liquidity.
Capital expenditures in 1999 totaled $32,996,000, which consisted of
$15,902,000 for new restaurants, $9,352,000 for improvements to existing
restaurants, $6,250,000 for information systems, and $1,492,000 for other
support related projects. The Company accounts for the cost of its
information systems in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires capitalization of external and internal costs
incurred during the application development stage. Costs incurred during
the preliminary project stage, post-implementation stage, training and
application maintenance are expensed as incurred. In 1998 and 1997 capital
expenditures totaled $21,054,000 and $16,410,000, respectively. Anticipated
capital expenditures of $29,600,000 are planned for fiscal year
2000, including the opening of eight to ten additional restaurants.
As of October 31, 1999, the Company had federal net operating loss ("NOL")
carryforwards totaling $27,491,000 which expire $6,146,000 in 2001,
$17,588,000 in 2010 and $3,757,000 in 2011. The Company also has investment
tax credit ("ITC") carryforwards totaling $1,601,000, which expire in 2000.
The Company has established a valuation allowance for the deferred tax
assets related to the ITC carryforward as it is not expected to be realized.
On October 28, 1999, the Company completed the sale and leaseback of the
real estate related to twenty-one restaurant properties. The Company
received $28,700,000 in net proceeds with a resulting deferred gain of
$16,500,000, which will be amortized to reduce future rent expenses over the
terms of the operating leases. The transaction allowed the Company to
realize net operating loss carryforwards that were due to expire, as well
as partially fund the tender offer discussed below.
On November 23, 1999 the Company commenced a tender offer to purchase up to
2,000,000 shares of the Company's outstanding common stock for $19.00 per
share. The tender offer concluded on December 22, 1999, whereby 2,000,000
shares were purchased. The tender offer was funded through cash proceeds
realized from the sale leaseback and a $4,000,000 draw on the $40,000,000
available line of credit.
VICORP guaranteed certain leases for twenty-five restaurant properties sold
in 1986 and sixteen restaurant leases of certain franchisees. Minimum
future rental payments remaining under these leases were approximately
$5,300,000 and $7,300,000 as of October 31, 1999 and November 1, 1998,
respectively. These guarantees are included in the definition of financial
instruments with off-balance-sheet risk of accounting loss. The Company
took possession of one of these properties, which has since been subleased,
and settled on a defaulted lease in the amount of $57,000 as a result of a
sublessee bankruptcy filing. The Company has no reason to believe that any
material liability exists and believes it is impracticable to estimate the
fair value of these financial guarantees (e.g., amounts the Company could
pay to remove the guarantees).
The Company believes anticipated cash flow from operations, as well as the
availability of funds under the $40,000,000 line of credit, and other
financing sources will provide sufficient capital to meet current
foreseeable cash needs, including working capital and capital expenditures.
Y2K
- ---
In 1997 the Company completed a review of the existing computer systems
which resulted in a decision to replace a large portion of the existing
systems. The principal purpose of implementing the new systems installed
was to upgrade and integrate the Company's information systems. The Company
believes the new systems are Year 2000 compliant.
As of January 4, 1999, the Company implemented a Year 2000 compliant system
at corporate headquarters. These new ERP (Enterprise Resource Planning)
systems have been designed to provide the infrastructure to support
corporate and field-based operations.
The Company completed a successful system-wide rollout of the new back-of-
house point-of-sale system, as well as Year 2000 compliant
modifications to the front-of-house systems in October 1999. End-to-end
testing was completed, including vendor interfaces, which required minor
modifications. The modifications were completed as of December 15, 1999.
The Company conducted a review of its physical facilities in order to
identify potential areas of embedded technology (heating, lighting,
fixtures, equipment, communications systems, waste treatment, emergency
backup systems, etc.) that may not be Year 2000 compliant. The Company
believes exposure is limited in this area and has formulated plans to
address any issues that may surface.
With respect to third parties, the Company contacted and prepared written
communications to all third parties considered critical to the Company's
ongoing operations. Communications requested written confirmation from
mission critical third parties of reasonable assurance that plans are being
developed to ensure Year 2000 readiness. Reasonable assurance included
verification that critical third-party vendors have a plan in place for
review of Year 2000 readiness for their supplier base. To the extent that
critical third-party vendors did not provide the Company with satisfactory
evidence of readiness, contingency plans were developed and will be
implemented by the Company if necessary.
The Company sent written notice to franchisees regarding the need for Year
2000 readiness. Approximately one-half of the Company's franchise
restaurant based systems were replaced in conjunction with the Company's
system wide rollout of the new back-of-house point-of-sale system and front-
of-house modifications.
The Company does not believe the costs related to the Year 2000 readiness
project are material to its financial position or results of operations.
As of January 21, 2000, the Company has not experienced any material
Year 2000 computer system related issues.
Management Outlook
- ------------------
The mid-scale segment of the restaurant industry remains extremely
competitive. Improvements in future operating performance will be primarily
dependent upon the Company's ability to increase comparable sales,
especially given the significant profit impact associated with incremental
sales at existing restaurants. Cost controls will also play a significant
factor in future profit growth. In addition, numerous external factors
could have a significant impact on future performance, including, but not
limited to, food costs, labor availability, site availability, the economy,
weather and government initiatives such as minimum wage rates, mandated
benefits and taxes.
Historically, the Company has mitigated the effects of inflation through
cost controls and periodic price increases. Management believes it will be
able to minimize the effects of future inflation through similar measures,
although such price increases will be subject to competitive constraints and
other business considerations.
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks
and uncertainties which are described in close proximity to such statements
and which could cause actual results to differ materially from those
currently anticipated. Shareholders, potential investors and other readers
are urged to consider these factors carefully in evaluating the forward-
looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein are
only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
New Accounting Pronouncements
- -----------------------------
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 which delayed the effective date of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), until fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
all derivatives to be recognized as assets or liabilities on the balance
sheet and measured at fair value. Changes in the fair value of derivatives
should be recognized in either net income or other comprehensive income,
depending on the designated purpose of the derivative. At present the
Company is investigating the effect the adoption of this statement will have
on the Company's results of operations, financial position and cash flows,
if any.
Item 8. Financial Statements and Supplementary Data.
Management's Report on Financial Statements
TO OUR SHAREHOLDERS:
The preparation and integrity of the financial statements of VICORP
Restaurants, Inc. are the responsibility of its management. This
responsibility includes the selection of accounting procedures and practices
which conform with generally accepted accounting principles considered
appropriate in the circumstances. Informed judgments and estimates which
the Company believes to be reasonable are required in the determination of
certain data used in the accounting and reporting process.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are executed in accordance
with management's authorization and properly recorded in all material
respects. Adequate communication of Company policies to its employees,
segregation of responsibilities for the authorization and execution of
transactions, and proper accountability for the Company's assets are
essential elements of the system.
Each year the Board of Directors appoints an Audit Committee comprised of
directors who are not employees of the Company. The principal
responsibilities of this Committee are to recommend an independent auditor
for the Company and to periodically meet with representatives of the
independent auditors and with management to obtain reasonable assurances
that the auditors are properly discharging their responsibilities and that
the Company's financial reporting to stockholders and others is adequate and
appropriate.
Arthur Andersen LLP has conducted an independent examination in order to
render their opinion on the Company's financial statements.
Charles R. Frederickson Richard E. Sabourin
Chief Executive Officer Executive Vice President and
and Chairman of the Board Chief Financial Officer
Report of Independent Public Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VICORP RESTAURANTS, INC.:
We have audited the accompanying balance sheets of VICORP Restaurants, Inc.
(a Colorado corporation) as of October 31, 1999 and November 1, 1998, and
the related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1999. 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 financial position of VICORP Restaurants, Inc.
as of October 31, 1999 and November 1, 1998, and the results of its
operations and its cash flows for each of the three years in the period
ended October 31, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
December 22, 1999.
VICORP Restaurants, Inc.
BALANCE SHEETS
October 31, November 1,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------
ASSETS
Cash $ 33,187 $ 10,262
Receivables(Note 3) 5,801 3,655
Inventories 9,989 7,501
Deferred income taxes(Note 10) 7,059 3,617
Prepaid expenses and other 1,253 2,192
- ---------------------------------------------------------------------------------------
Total current assets 57,289 27,227
- ---------------------------------------------------------------------------------------
Property and equipment, net(Note 4) 128,753 128,648
Deferred income taxes(Note 10) 33,303 35,547
Long-term receivables(Note 3) 1,204 869
Other assets 7,722 7,379
- ---------------------------------------------------------------------------------------
Total assets $ 228,271 $ 199,670
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt
and capitalized lease
obligations(Notes 5 and 6) $ 1,582 $ 1,711
Accounts payable, trade 18,054 21,847
Accrued compensation 7,616 6,013
Accrued taxes 11,008 8,629
Accrued insurance(Note 12) 2,246 3,354
Other accrued expenses 6,528 5,208
- ---------------------------------------------------------------------------------------
Total current liabilities 47,034 46,762
- ---------------------------------------------------------------------------------------
Long-term debt(Note 6) 40 87
Capitalized lease obligations(Note 5) 4,548 5,696
Non-current accrued insurance(Note 12) 2,757 3,199
Other non-current liabilities and credits 22,044 5,919
Commitments and contingencies
Shareholders' equity(Note 7)
Series A Junior Participating Preferred Stock,
$.10 par value, 200,000 shares authorized,
no shares issued -- --
Common Stock, $.05 par value, 20,000,000
shares authorized, 8,845,581 and 9,067,699
shares issued and outstanding 444 455
Paid-in capital 80,673 84,148
Retained earnings 70,731 53,404
- ----------------------------------------------------------------------------------------
Total shareholders' equity 151,848 138,007
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 228,271 $ 199,670
========================================================================================
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
STATEMENTS OF OPERATIONS
Year ended
-----------------------------------------------------
October 31, November 1, October 31,
(in thousands, except per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Revenues(Note 2)
Restaurant operations $355,781 $342,654 $322,188
Franchise operations 3,265 3,519 3,339
- ------------------------------------------------------------------------------------------------
359,046 346,173 325,527
- ------------------------------------------------------------------------------------------------
Costs and expenses
Restaurant operations
Food 106,991 105,416 101,152
Labor 116,571 112,047 104,371
Other operating 87,615 87,165 83,378
General and administrative 28,992 26,018 23,897
Asset disposal, impairment, restructuring
and related costs(Notes 2 and 9) 746 -- --
- ------------------------------------------------------------------------------------------------
Operating profit 18,131 15,527 12,729
Interest expense (1,012) (1,547) (2,569)
Other income, net 1,422 382 619
- ------------------------------------------------------------------------------------------------
Income before income taxes 18,541 14,362 10,779
Provision for income taxes(Note 10) 1,214 5,242 3,880
- ------------------------------------------------------------------------------------------------
Net income $ 17,327 $ 9,120 $ 6,899
================================================================================================
Earnings per share(Note 2)
Basic $ 1.94 $ .99 $ .76
Diluted $ 1.93 $ .98 $ .75
================================================================================================
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
STATEMENTS OF CASH FLOWS
Year ended
--------------------------------------------
October 31, November 1, October 31,
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
Operations
Net income $ 17,327 $ 9,120 $ 6,899
Reconciliation to cash provided by operations:
Depreciation and amortization 19,647 19,486 19,746
Deferred income tax provision(benefit) (1,198) 4,457 2,705
Asset disposal, restructuring and related costs 746 269 490
Gain on disposition of assets (850) -- --
Other, net (701) (491) (286)
Changes in assets and liabilities:
Receivables (2,983) 170 (171)
Inventories (2,488) (750) (234)
Accounts payable, trade (4,068) 7,764 2,952
Other current assets and liabilities 4,415 1,325 (511)
Non-current accrued insurance (442) 872 (3,022)
- --------------------------------------------------------------------------------------------
Cash provided by operations 29,405 42,222 28,568
- --------------------------------------------------------------------------------------------
Investing activities
Purchase of property and equipment (32,996) (21,054) (16,410)
Sale (purchase) of other assets (938) 125 (329)
Disposition of property 30,608 1,005 881
Collection of non-trade receivables 1,080 1,336 549
Other, net 292 -- --
- --------------------------------------------------------------------------------------------
Cash used for investing activities (1,954) (18,588) (15,309)
- --------------------------------------------------------------------------------------------
Financing activities
Proceeds from issuance of debt -- 1,300 2,100
Payments of debt and capital lease obligations (1,004) (15,186) (16,240)
Purchase of common stock (3,637) (2,912) (220)
Issuance of common stock 115 1,846 439
Other, net -- 116 720
- --------------------------------------------------------------------------------------------
Cash used for financing activities (4,526) (14,836) (13,201)
- --------------------------------------------------------------------------------------------
Increase in cash 22,925 8,798 58
Cash at beginning of year 10,262 1,464 1,406
- --------------------------------------------------------------------------------------------
Cash at end of year $ 33,187 $ 10,262 $ 1,464
============================================================================================
Supplemental information
Cash paid during the year:
Interest (net of amount capitalized) $ 1,020 $ 1,589 $ 2,535
Income taxes 2,998 382 369
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
NOTES TO FINANCIAL STATEMENTS
Note 1. Description of Business
VICORP ("the Company") operates family style restaurants under the names
"Bakers Square" and "Village Inn," and franchises restaurants under the
Village Inn brandname. At October 31, 1999, VICORP operated two hundred
fifty-two Company-owned restaurants in thirteen states. Of the two hundred
fifty-two Company-owned restaurants, one hundred fifty were Bakers Squares
and one hundred two were Village Inns, with an additional one hundred
sixteen franchised Village Inn restaurants in twenty-one states. The
Company-owned and franchised restaurants are concentrated in Arizona,
California, Florida, the Rocky Mountain region and the upper Midwest. The
Company operates a pie manufacturing division to support the restaurants,
which operates under the name VICOM. VICOM has three production facilities
located in Santa Fe Springs, California, Oak Forest, Illinois and Mounds
View, Minnesota.
Note 2. Summary of Significant Accounting Policies
Fiscal Year
- -----------
Effective fiscal 1999, the Company adopted reporting on a 52/53 week
fiscal year ending on the last Sunday in October. In conjunction with that
change, the Company's last fiscal quarter of 1999 consisted of sixteen weeks
and all other quarters consisted of twelve weeks. Prior to 1999, the Company
utilized a fiscal year which, ended on the last day in October. Fiscal
quarters in 1998 and 1997 consisted of three months.
Estimates
- ---------
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual
results could differ from these estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash on hand and highly liquid
instruments with original maturities of three months or less.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper, products and supplies. Inventories consisted of
the following (in thousands):
October 31, November 1,
1999 1998
---------- ----------
Inventories at production facilities
and third party storage locations:
Raw materials $ 2,401 $ 2,476
Finished goods 5,192 2,837
------- -------
7,593 5,313
Restaurant inventories 2,396 2,188
------- -------
$ 9,989 $ 7,501
======= =======
Prepaid Expenses
- ----------------
Prepaid expenses consist primarily of prepaid rent, supplies, prepaid
contracts and prior to fiscal year 1999 restaurant pre-opening costs. Pre-
opening costs consisted of salaries and other direct expenses incurred in
connection with the set-up and stocking of stores, employee training and
general store management costs incurred prior to the opening of new stores.
Effective November 2,1998, the Company early adopted the provisions of
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). All pre-opening expenses were expensed as
incurred in accordance with SOP 98-5. Prepaid pre-opening costs capitalized
at October 31, 1999 and November 1, 1998 are $0 and $67,000, respectively,
so the cumulative effect of the change in accounting principle was not
significant to the Company's financial position or results of operations.
Property and Equipment
- ----------------------
Property and equipment is stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization has been
calculated using the straight-line method. The useful lives of assets range
from twenty to forty years for buildings and three to ten years for
equipment and improvements. Leasehold improvements and leasehold rights
are amortized over the lesser of the useful life or the lease term.
Property and equipment additions include acquisitions of building and
equipment and costs incurred in the development and construction of new stores.
Expenditures for maintenance and repairs are charged to expense as incurred.
The Company accounts for the cost of its information systems in accordance
with Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which requires
capitalization of external and internal costs incurred during the
application development stage. Costs incurred during the preliminary
project stage, post-implementation stage, training and application
maintenance are expensed as incurred.
Goodwill
- --------
The excess purchase price over net assets acquired is included in other
assets and amortized over twenty-five years.
Revenue Recognition
- -------------------
Revenue from Company stores is recognized in the period during which related
food and beverage products are sold.
Initial franchise fees are recognized as income upon commencement of the
franchise operation and completion of all material services and conditions
by the Company. Continuing service fees are calculated as a percentage of
the franchisee gross sales and recognized in the period the sales are
generated. Property rental income is recognized on a straight-line basis
over the life of the lease. Interest income on franchisee notes receivable
and equipment sales is recognized when earned. If collectibility is in
doubt, revenue recognition is deferred until cash receipt.
Net franchise operations consisted of the following (in thousands):
1999 1998 1997
---- ---- ----
Continuing service fees $ 4,060 $ 3,979 $ 3,828
Initial and renewal fees 145 63 111
Property rental income 116 184 316
Interest income on franchisee notes 147 167 202
Equipment sales income 93 18 14
Administrative expense (1,296) (892) (1,132)
------- ------- ------
Net franchise operations $ 3,265 $ 3,519 $ 3,339
======= ======= =======
Advertising Costs
- -----------------
Advertising costs for television, radio, newspapers, direct mail and point-
of-purchase materials are expensed in the period incurred. Production costs
are expensed upon initial usage of the advertising. Advertising expense for
1999, 1998 and 1997 was $9,454,000, $7,982,000 and $5,788,000, respectively.
At October 31, 1999 and November 1, 1998, $146,000 and $0 were reported as
prepaid expenses.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of cash and cash equivalents approximates fair value due
to the length of maturity. Notes receivable is valued at estimated fair
market value based on the respective facts and circumstances of each non-
publicly traded instrument. The fair value of long-term debt approximates
carrying value due to the variable, market-based interest rate feature.
Income Taxes
- ------------
Deferred income tax assets and liabilities are recognized for the expected
future income tax consequences of carryforwards and temporary differences
between the GAAP and tax basis of assets and liabilities. Valuation
allowances are established for deferred tax assets that are deemed
unrealizable.
Earnings Per Share
- ------------------
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the effect of
potentially dilutive common stock using the treasury stock method. The
number of potentially issuable shares as of October 31, 1997 has been
restated to conform with Statement of Financial Accounting Standards No.128
"Earnings Per Share."
Weighted average common shares outstanding 1999 1998 1997
--------- --------- ---------
Basic 8,930,045 9,209,628 9,096,628
Effect of dilutive common stock equivalents 28,097 52,521 48,075
--------- --------- ---------
Diluted 8,958,142 9,262,149 9,144,703
========= ========= =========
Recoverability of Long-Lived Assets
- -----------------------------------
The Company evaluates long-lived assets to be held and used in the business
for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. An impairment is
determined by comparing estimated undiscounted future operating cash flows
to the carrying amounts of assets. Assets are assessed on a restaurant by
restaurant basis. If an impairment exists, the asset will be recorded at
the lesser of its fair value or the estimated discounted future cash flows
related to that asset.
New Accounting Pronouncements
- -----------------------------
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 which delayed the effective date of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), until fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
all derivatives to be recognized as assets or liabilities on the balance
sheet and measured at fair value. Changes in the fair value of derivatives
should be recognized in either net income or other comprehensive income,
depending on the designated purpose of the derivative. At present the
Company is investigating the effect the adoption of this statement will have
on the Company's results of operations, financial position and cash flows,
if any.
Note 3. Receivables
Receivables represent billings to outside bakery sales customers and
franchisee billings for continuing royalty service fees, initial and renewal
fees, equipment sales, and property rental for franchisees and other
sublessees. The trade receivables are generally unsecured while notes
receivable are typically secured by the property that gave rise to the
transaction.
Year-end receivables consisted of the following:
October 31, November 1,
(in thousands) 1999 1998
- ----------------------------------------------------------
Trade receivables $5,910 $3,094
Notes receivable 1,581 2,141
Discounts on notes receivable (14) (68)
Allowance for doubtful accounts (472) (643)
- ---------------------------------------------------------
Receivables, net 7,005 4,524
Current portion 5,801 3,655
- ---------------------------------------------------------
Long-term portion $1,204 $ 869
- ---------------------------------------------------------
Note 4. Property and Equipment
Property and equipment consisted of the following:
October 31, November 1,
(in thousands) 1999 1998
- ------------------------------------------------------------------------
Property and equipment used in operations:
Land $ 24,555 $ 22,540
Buildings and improvements 115,499 126,935
Equipment 120,885 111,376
Construction in progress 7,525 10,051
Restaurant property leased to others 7,329 7,947
Less: accumulated depreciation (151,266) (154,629)
- -----------------------------------------------------------------------
Net property and equipment used in operations 124,527 124,220
- -----------------------------------------------------------------------
Capitalized lease buildings 8,514 8,514
Less: accumulated amortization (5,469) (4,849)
- -----------------------------------------------------------------------
Net capitalized lease buildings 3,045 3,665
- -----------------------------------------------------------------------
Properties held for disposal, net 3,419 3,119
Less: allowance for loss on disposal (2,238) (2,356)
- -----------------------------------------------------------------------
Net properties held for disposal 1,181 763
- -----------------------------------------------------------------------
Property and equipment, net $128,753 $128,648
=======================================================================
Depreciation and amortization expense was $18,635,000 in 1999, $18,790,000
in 1998, and $19,222,000 in 1997.
At October 31, 1999, all fee owned properties were free of mortgages,
pledges or other liens.
Note 5. Leases
The Company is the prime lessee under various land, building and equipment
leases for Company-owned and franchised restaurants, bakery facilities and
other non-Company operated locations. The leases have initial terms
ranging from fifteen to thirty-five years and, in certain instances, provide
for renewal options ranging from five to twenty years. Many leases provide
for purchase options at the end of the lease term and escalation clauses,
either predetermined or based upon inflation. Leases may also include
additional rental payments contingent upon restaurant sales volume. Under
most leases, the Company is responsible for occupancy costs including taxes,
insurance and maintenance. Subleases to franchisees or other non-Company
operators generally provide for similar terms as the prime lease, as well as
an obligation for occupancy costs. Implicit interest rates range from 7.2%
to 13.8% on capital leases.
The following summarizes future minimum lease payments under capital and
operating leases having an initial or remaining non-cancelable term of one
year or more as of October 31, 1999:
Lease and
Capital Operating sublease
(in thousands) leases leases rentals
- -------------------------------------------------------------------------
2000 $ 2,281 $ 16,882 $ (2,273)
2001 2,038 16,190 (2,016)
2002 1,617 12,220 (1,580)
2003 758 10,443 (1,015)
2004 479 9,472 (769)
Later years 665 58,408 (2,668)
- ------------------------------------------------------------------------
Total minimum lease payments $ 7,838 $123,615 $(10,321)
================================
Less amount representing interest 1,764
- -----------------------------------------------
Present value of minimum lease payments 6,074
Current maturities of capitalized
lease obligations 1,526
- -----------------------------------------------
Capitalized lease obligations $ 4,548
===============================================
Net rental expense consisted of the following:
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------
Restaurant land and buildings:
Minimum rentals $13,591 $13,956 $13,892
Contingent rentals 2,537 2,556 2,357
Equipment 222 85 66
- ------------------------------------------------------------------------
Gross rental expense 16,350 16,597 16,315
Less: lease and sublease rental income 3,212 3,368 3,271
- ------------------------------------------------------------------------
Net rental expense $13,138 $13,229 $13,044
========================================================================
On October 28, 1999, the Company completed the sale and leaseback of the
real estate related to twenty-one restaurant properties. The Company
received $28,700,000 in net proceeds with a resulting deferred gain of
$16,500,000, which will be amortized to reduce future rent expenses over the
terms of the operating leases in accordance with SFAS 98, "Accounting for
Leases."
Note 6. Debt
Long-term debt consisted of the following:
October 31, November 1,
(in thousands) 1999 1998
- -----------------------------------------------------------------
Other long-term debt $ 96 $ 234
Current maturities 56 147
- -----------------------------------------------------------------
Long-term debt $ 40 $ 87
=================================================================
On December 19, 1997, the Company executed an amended and restated credit
agreement, which provides for an available credit limit of $40,000,000 in
the aggregate with a sublimit of $10,000,000 on letters of credit. The
credit agreement expires on February 28, 2001.
Advances under the amended and restated agreement bear interest at the
higher of the Federal Funds rate plus 1/2 of 1% or the lender's Prime Rate,
or the Company may elect to borrow at the lender's Eurodollar rate plus 1%
to 1 5/8%. In addition, the Company is required to pay fees equal to 1/4 to
3/8 of 1% per annum on unused portions of the commitment, and 1% to 1 5/8%
per annum on issued letters of credit.
The unused commitment and letter of credit fees and the margin on Eurodollar
borrowings are adjusted based on the Company's debt-to-capitalization ratio
and fixed charge coverage ratio. At the time of the closing of the amended
and restated agreement, the Company qualified for minimum rates and fees
provided in the agreement.
On October 28, 1999, the Company completed the sale and leaseback of the
real estate related to twenty-one restaurant properties. In conjunction with
the transaction the Company received a waiver letter dated October 22, 1999,
under which the lender waived any default caused by the sale leaseback
transaction, and agreed not to enforce their rights or remedies under the
loan document. In consideration of the waiver, the Company agreed not to
purchase any of its shares of common stock or exchange shares of one class
of capital stock for another in excess of the lesser of $30,000,000 or the
net proceeds of the sale leaseback transaction without the prior written
consent of the lender through the maturity date of the loan agreement. The
waiver does not constitute a waiver of any present or future violation of or
noncompliance with any provision of the loan document. Subsequent to year-
end, the Company commenced a tender offer to purchase 2,000,000 shares of
the outstanding common stock for $19.00 per share as described in Note 13.
The Company received a waiver letter dated November 22, 1999 from the lender
consenting to the transaction and amending certain covenants.
During 1999, the largest aggregate outstanding balance under the Company's
bank facilities was $650,000. The average balance outstanding was $3,022
with an average interest rate of 7.59%. At October 31, 1999, the Company
had placed letters of credit totaling $1,850,000 in connection with its
insurance programs and carried no outstanding debt under its credit
agreement.
The credit agreement contains various restrictive covenants which include,
among others, maintenance of certain financial ratios, maintenance of a
minimum balance of tangible net worth and limitations on annual capital
expenditures, indebtedness, dividends, dispositions and acquisitions and
franchise guarantees.
Principal amounts of other long-term debt outstanding as of October 31, 1999
due during each of the five succeeding fiscal years were, $56,000 in the
year 2000, $40,000 in 2001, and none in the years 2002, 2003 and 2004.
The Company incurred $1,012,000, $1,553,000, and $2,573,000, of interest
charges in 1999, 1998, and 1997, respectively. Of these amounts, $0, $6,000 and
$4,000 were capitalized in 1999, 1998, and 1997, respectively.
Deferred loan fees were $23,000 and $141,000 net of amortization at October
31, 1999 and November 1, 1998, respectively. These amounts are included in
other assets and are amortized over the three-year loan commitment period
using the straight-line method.
Note 7. Shareholders' Equity
The Company's authorized preferred stock consists of 5,000,000 $.10 par
value shares issuable in series. The rights of each series are to be
determined by the Company's Board of Directors.
Since August 1992, the Company's Board of Directors has authorized the
repurchase of shares of the Company's common stock. During 1999, the
Company repurchased 232,925 shares at an aggregate cost of $3,637,000. An
additional 453,375 common shares remained available for repurchase under the
existing authorizations. Future purchases may be made in the open market or
through privately negotiated transactions and will be dependent upon various
business and financial considerations.
Under Colorado law, repurchased shares of capital stock are considered
authorized and unissued shares and have the same status as shares which have
never been issued.
Under the most restrictive covenants of the Company's bank credit agreement,
approximately $30,000,000 and $33,796,000 was unrestricted at October 31,
1999, as to the repurchase of the Company's common stock and to declaration
of cash dividends, respectively.
The following table summarizes shareholders' equity activity:
Total
Common stock Paid-in Retained shareholders'
(in thousands, except share data) Shares Amount capital earnings equity
- ----------------------------------------------------------------------------------------------
Balances at October 31, 1996 9,055,026 $453 $84,431 $37,385 $122,269
Net income -- -- -- 6,899 6,899
Common stock options exercised
including income tax benefit 82,900 5 797 -- 802
Employee Stock Purchase Plan 14,860 1 168 -- 169
Purchase of common shares (20,000) (1) (219) -- (220)
- -------------------------------------------------------------------------------------------
Balances at October 31, 1997 9,132,786 458 85,177 44,284 129,919
Net income -- -- -- 9,120 9,120
Common stock options exercised
including income tax benefit 139,001 7 1,741 -- 1,748
Employee Stock Purchase Plan 9,612 1 131 -- 132
Purchase of common shares (213,700) (11) (2,901) -- (2,912)
- -------------------------------------------------------------------------------------------
Balances at November 1, 1998 9,067,699 455 84,148 53,404 138,007
Net income -- -- -- 17,327 17,327
Common stock options exercised
including income tax benefits 2,000 -- 27 -- 27
Common Stock issued under
The Directors Stock Plan 305 -- 6 -- 6
Employee Stock Purchase Plan 8,502 1 117 -- 118
Purchase of common shares (232,925) (12) (3,625) -- (3,637)
- -------------------------------------------------------------------------------------------
Balances at October 31, 1999 8,845,581 $444 $80,673 $70,731 $151,848
===========================================================================================
Note 8. Stock Option, Stock Purchase, Profit-sharing Plan, Deferred
Compensation Plan and Directors' Stock Plan
Under terms of the Company's stock option plans, officers and certain other
employees may be granted options to purchase the Company's common stock at
exercise prices not less than the market value of the common stock on the
date of the grant. Options generally vest over three years and expire ten
years after the date of grant or three months after employment termination,
whichever occurs first.
The Company has elected to account for its stock-based compensation plans
using the intrinsic value based method under APB No. 25. For pro forma
disclosure purposes, the Company has computed the value of all options
granted during 1999, 1998, and 1997 using the Black-Scholes option pricing
model and the following assumptions:
1999 1998 1997
---- ---- ----
Risk-free weighted average interest rate....... 5.4% 4.9% 6.7%
Expected dividend yield........................ 0% 0% 0%
Expected weighted average lives............... 6.50 yrs 6.28 yrs 6.25 yrs
Expected volatility.......................... 40.7% 44.3% 44.7%
The aggregate estimated fair value of stock options granted in 1999, 1998
and 1997 was $100,000, $1,208,000 and $73,000, respectively. For purposes
of pro forma disclosure, the estimated fair value of options is amortized
over the options' vesting period and previously recognized compensation
expense is reversed for current year forfeitures of unvested options. If
the Company had accounted for its employee stock compensation plans in
accordance with SFAS No. 123, the Company's net income and pro forma net
income per share would have been reported as follows:
Years Ended
October 31, November 1, October 31,
1999 1998 1997
---- ---- ----
Net Income:
As Reported $17,327 $ 9,120 $ 6,899
Pro Forma 16,616 8,966 6,472
Net Income per Common
and Common Equivalent Share:
As Reported $1.93 $ 0.98 $ 0.75
Pro Forma 1.85 0.97 0.71
Following is a summary of the Company's stock option plans at October 31,
1999, November 1, 1998 and October 31, 1997:
Years Ended
October 31, November 1, October 31,
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------
Outstanding at beginning of year 444,000 $15.68 641,518 $13.96 868,300 $12.72
Grants 16,000 $15.75 164,000 $15.81 14,000 $12.25
Exercised (52,000)* $16.86 (139,001) $12.37 (122,900)* $ 5.82
Canceled (10,000) $17.00 (222,517) $12.87 (117,882) $13.08
------- ------- -------
Outstanding at end of year 398,000 $15.50 444,000 $15.68 641,518 $13.96
======= ======= =======
* For 1999, includes 50,000 shares exercised by presenting 49,097 previously
owned shares. For 1997, includes 40,000 shares exercised by presenting
14,285 previously owned shares. The issuance of 903 and 25,715 incremental
shares to the employee was deferred in 1999 and 1997, respectively. These
shares are held in trust for the benefit of the employee under the terms of
the Company's Deferred Compensation Plan described below.
The following table summarizes information about the stock options
outstanding and exercisable as of October 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Number
Average Weighted Exercisable Weighted
Remaining Average At Average
Range of Options Contractual Exercise October 31, Exercise
Exercise Prices Outstanding Life Price 1999 Price
- --------------- ----------- ---- ----- ---- -----
$11.50 100,000 6.80 years $11.50 75,000 $11.50
$12.25 14,000 7.46 years $12.25 14,000 $12.25
$14.25 100,000 8.92 years $14.25 33,332 $14.25
$14.50-$18.25 142,000 6.95 years $16.67 117,000 $16.33
$20.00-$26.00 42,000 2.19 years $25.14 42,000 $25.14
------- -------
$11.50-$26.00 398,000 6.92 years $15.50 281,332 $15.91
======= =======
In October 1996, the Company adopted an Employee Stock Purchase Plan
(the "Plan") under which eligible employees completing twelve months of
employment may contribute up to $25,000 of their annual earnings toward the
quarterly purchase of the Company's common stock at 85% of the quarter-end
market value. There are no charges or credits to income in connection with the
Plan. The Company has reserved 500,000 common shares for issuance under the
Plan, which terminates on September 30, 2001. Under the Plan 8,502, 9,612
and 14,860 shares were issued in fiscal 1999, 1998 and 1997, respectively.
The Company has an Outstanding Common Stock Purchase Plan (the "Plan")
under which eligible participants may elect to utilize incentive compensation
that otherwise would be paid in cash to purchase the Company's common stock in
the open market at prevailing prices. If the participant owns these shares
and is employed by the Company after two years from the purchase of the
common shares, a cash bonus equal to 25% of the incentive compensation used
to purchase the shares will be paid to the participant. The Plan expired on
October 31, 1999. No material expense under this Plan was incurred during
the last three fiscal years.
The Company has an Employees' Profit-sharing Plan, established under Section
401(k) of the Internal Revenue Code of 1986, which provides for annual
contributions by the Company in the amount of 2% of the aggregate
compensation of participants. Full-time and part-time employees and part-time
employee meeting a one thousand hour service requirement are eligible to
participate. The Company contributed $651,000, $531,000 and $515,000 in 1999,
1998 and 1997, respectively.
The Company has a Deferred Compensation Plan (the "Plan") that allows
officers of the Company to voluntarily defer compensation. All benefits
under the Plan are unfunded obligations of the Company. Compensation
expense is recorded for cash compensation deferred and a related liability
is recognized. Participants may elect designated investment options for the
notional investment of their deferred compensation. The recorded
obligations and expense are adjusted for deemed income or loss related to
the investments selected. The Company accounts for deferred cash
compensation under EITF 97-14. On October 31, 1999 and November 1, 1998,
the accrued obligation for deferred cash compensation and deemed earnings
thereon was $1,553,000 and $874,000, respectively. The Plan provides that
participants who hold stock options may irrevocably elect to exercise the
stock options and have their Plan account credited with a number of shares
equal in value to the incremental difference between the exercise price and
the closing price of the Company's common stock on the surrender date.
Under EITF 97-5, if the option holder presents "mature" shares (held for at
least six months) that are deemed tendered for the exercise price, and the
ultimate payment to the employee is limited to the number of shares
deferred, no compensation expense is recognized at the time of exercise, or
subsequently. If the employee has the right to receive cash or other
considerations from the Plan, the intrinsic value of the options at the date
of exercise would be expensed as well as subsequent changes in the fair
value of the shares held by the Company for the benefit of the employee,
until finally distributed. To date, no compensation expense has been
recognized related to the deferred issuance of Company shares. Common
shares held in trust by the Company totaled 29,495 in 1999 and 28,592 in
1998. These shares are accounted for in a manner similar to treasury stock,
and consequently, under Colorado law, are treated as authorized but unissued
shares. Upon eligibility for retirement or termination of a participant's
employment, the participant shall have a 100% vested interest in their Plan
account. Distributions of the participant's account shall be made in single
lump sum payments or equal installments over a period of no less than two
and no more than fifteen years.
The Company has a common stock award plan for non-employee directors
("Directors Plan") under which the maximum number of shares of common stock
which may be granted during the term of the Directors Plan will be 150,000
shares. Under the terms of the Directors Plan, on the last day of each
calendar quarter effective July 1, 1999, the Company will automatically
grant a number of shares of common stock equal to $5,000 to each director.
The fair market value is equal to the average of the closing price on the
common stock for the five business days immediately preceding the grant
date. A director may elect to defer receipt of the common stock until the
expiration of five years from the date of such grant or the termination of
the director's status as a director. Compensation expense is recognized for
the fair value of the shares at the date of grant and adjusted for
subsequent changes in their fair value until issued. As of October 31,
1999, 2,440 shares were granted at an option price of $16.38, of which 305
were issued and 2,135 were deferred for a total compensation expense of
$41,068.
Note 9. Asset Disposal, Impairment and Related Costs
The Company recorded a pre-tax charge of $746,000 in fiscal 1999 for the
write down of certain restaurant properties. Management assessed various
factors relevant to the assets, including projected negative cash flow
losses and concluded the historical performance trends were unlikely to
improve materially, therefore an impairment of the assets was recognized.
In 1996, the Company determined the strategy of using the Angel's Diner
restaurants concept to invigorate underperforming restaurant properties was
not economically viable and recorded a $5,800,000 asset disposal charge. The
charge reduced the carrying values of related assets to net realizable value
and provided for closure and carrying costs.
In 1994, the Company recorded a $23,000,000 charge related primarily to a
plan to close and dispose of underperforming restaurants and discontinue a
portion of the Company's manufacturing and distribution activities. Also,
included was the recognition of the impairment of the carrying values on
four properties and an accrual for other costs directly related to the
restructuring.
During 1999, the Company disposed of eight properties; five through sublease
and three through lease termination. Closure and carrying costs of $336,000
were charged against the established reserve. Additional units closed that
were not included in the disposal plan included one in 1999, one in 1998 and
six in 1997.
Operating results for the closed restaurants for the past three fiscal years
were as follows (in thousands):
1999 1998 1997
---- ---- ----
Sales $2,133 $3,912 $7,947
Restaurant operating profit/(loss) (13) 225 228
As of October 31, 1999, the Company had $2,996,000 remaining to provide for
the disposal of seven properties. The reserves consisted of $2,238,000 to
reduce the disposal properties to realizable value and $758,000 to provide
for carrying costs and sublease losses. The Company believes these reserves
are adequate to cover the remaining costs and losses associated with the
remaining disposal properties.
The Company closed the bakery facilities in Denver, Colorado and Orlando,
Florida in 1996 and subsequently sold the Denver, Colorado bakery facility on
November 12, 1999 for $690,000, with a resulting loss of $614,000 applied
against the disposal reserve.
Note 10. Income Taxes
The total provisions for income taxes consisted of the following:
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Current
Federal $ 668 $ 254 $ 109
States 1,742 527 733
- -----------------------------------------------------------------------
2,410 781 842
- -----------------------------------------------------------------------
Deferred
Federal 224 4,008 2,082
States (1,422) 449 623
- -----------------------------------------------------------------------
(1,198) 4,457 2,705
- -----------------------------------------------------------------------
Total provision for income taxes $ 1,212 $ 5,238 $ 3,547
=======================================================================
The components of the provision for income taxes included in the Company's
statements of operations were as follows:
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
Current
Taxes on income before carryforwards $14,531 $ 6,064 $ 3,876
Less: benefit of loss carryforwards utilized (12,789) (5,537) (3,143)
AMT Payable 668 254 109
----------------------------------------------------------------------------------
2,410 781 842
- -----------------------------------------------------------------------------------
Deferred
Tax effect of net change in temporary differences (12,458) 126 125
Utilization of (addition to) tax net operating
loss carryforward 12,789 5,537 3,141
FICA tax credit (924) (698) (815)
AMT credit (666) (254) (109)
Expiration of net operating loss carryforwards 29,575 19,792 --
Expiration of tax credit carryforwards 781 1,009 363
Change in valuation allowance (30,295) (21,055) --
- -----------------------------------------------------------------------------------
(1,198) 4,457 2,705
- -----------------------------------------------------------------------------------
Tax effect of deduction for exercised stock
options credited to paid-in capital 2 4 333
- -----------------------------------------------------------------------------------
Income tax expense $ 1,214 $ 5,242 $ 3,880
===================================================================================
Income tax expense differs from the amounts computed by applying
the federal income tax rate to income before income taxes as follows:
(in thousands) 1999 % 1998 % 1997 %
- --------------------------------------------------------------------------------------------
Computed federal income taxes using
statutory rate $6,489 35.0% $5,027 35.0% $3,773 35.0%
FICA tax credit (924) (5.0) (698) (4.9) (815) (7.5)
State income taxes net of federal
income tax effect 1,565 8.4 1,003 6.9 881 8.1
Expiration of tax credit carryforwards 781 4.2 1,009 7.0 363 3.4
Expiration of tax NOL 29,575 159.5 19,792 137.9 -- --
Recognition of previously reserved assets (5,754) (31.0) -- -- -- --
Change in valuation allowance (30,295) (163.4) (21,055) (146.6) -- --
Other (223) (1.2) 164 1.2 (322) (3.0)
- ---------------------------------------------------------------------------------------------
$1,214 6.5% $5,242 36.5% $3,880 36.0%
=============================================================================================
The Company had federal taxable income for tax purposes and book
income before income taxes as follows:
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Federal taxable income $33,803 $14,051 $6,894
Book income before income taxes 18,541 14,362 10,779
The difference between federal taxable income and book income is due to
state income taxes and temporary differences.
The components of the net deferred tax assets were as follows:
(in thousands) 1999 1998
- -------------------------------------------------------------------------
Deferred tax assets
Tax effect of net operating loss carryforwards $10,273 $52,639
Tax credit carryforwards 2,053 2,835
FICA tax credit 4,965 4,041
Alternative minimum tax credits 3,269 2,603
Accrued insurance claims not yet deductible 1,862 2,432
Leasing transactions 7,128 2,552
Property and equipment 7,877 1,688
Other 4,649 3,915
------------------------------------------------------------------------
42,076 72,705
Valuation allowance (1,650) (31,945)
- -------------------------------------------------------------------------
Deferred tax assets, net of allowance 40,426 40,760
- -------------------------------------------------------------------------
Deferred tax liabilities (64) (1,596)
- -------------------------------------------------------------------------
Net deferred tax assets 40,362 39,164
Current portion 7,059 3,617
- -------------------------------------------------------------------------
Long-term portion $33,303 $35,547
=========================================================================
As of October 31, 1999, the Company had federal net operating loss ("NOL")
carryforwards totaling $27,491,000 which expire $6,146,000 in 2001,
$17,588,000 in 2010 and $3,757,000 in 2011. The Company also has investment
tax credit ("ITC") carryforwards totaling $1,601,000, which expire in 2000.
The Company has established a valuation allowance for the deferred tax
assets related to these carryforwards because the ITC carryforwards are not
expected to be realized.
Note 11. Operating Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating segments.
The Company has adopted SFAS 131 for the year ended October 31, 1999.
The Company has three reportable segments; Village Inn, Bakers Square, and
Franchising.
All amounts not attributed to segments relate to administrative functions
and other non-reportable segments.
Financial data related to the Company's reportable segments is as follows
(in thousands):
Bakers Square Village Inn Franchising Other Total
------------- ----------- ----------- ----- -----
Net sales: 1999 $215,431 $140,350 $ -- $ -- $355,781
1998 207,251 135,403 -- -- 342,654
1997 192,538 128,586 -- 1,064 322,188
Operating profit/(loss):
1999 $ 20,288 $ 23,570 $ 3,265 $(28,992) $ 18,131
1998 14,712 23,314 3,519 (26,018) 15,527
1997 11,740 21,566 3,339 (23,916) 12,729
Total assets: 1999 $ 72,449 $ 50,819 $ 5,602 $ 99,401 $228,271
1998 84,328 41,529 4,061 69,752 199,670
1997 89,681 38,262 5,380 61,667 194,990
Note 12. Commitments and Contingencies
Prior to fiscal 1998, the Company retained a significant portion of certain
insurable risks in the medical, dental, workers' compensation, general
liability and property areas. Stop-loss coverage was obtained in order to
limit exposure to any significant claims. Provisions for losses expected
under these programs were recorded based upon the Company's estimates of
liabilities for claims incurred, including those not yet reported, the
Company's historical performance and actuarial assumptions followed in the
insurance industry. Beginning in 1998, the Company obtained traditional
insurance coverage for insurable risks other than medical and dental while
maintaining stop-loss coverage for medical loss exposure. The Company has
provided letters of credit totaling $1,850,000 in connection with certain of
these insurance programs.
The Company is involved in various lawsuits and claims arising from the
conduct of its business and has guaranteed certain indebtedness and leases
of its franchisees and others. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
On September 28, 1998, two class actions were commenced in the Superior
Court of Los Angeles County, California.
The first, Kirk v. VICORP Restaurants, Inc., Case No. BC-198202, was brought
by a former manager of a California Bakers Square restaurant. Allegations
in the amended complaint assert violations by VICORP of California wage and
hour laws and regulations concerning overtime wages. The Plaintiff is
seeking class certification, injunctive relief, damages in an unspecified
amount, statutory penalties, interest, costs, and attorneys' fees.
The second, Schroeder v. VICORP Restaurants, Inc., Case No. BC-198203, was
brought by a former server at a California Bakers Square restaurant. The
Plaintiff alleges VICORP has violated California statutes and regulations
concerning the payment of wages, tip pooling, reimbursement for uniform
expenses, failure to remit tips, and the improper charging of walkouts to
servers. Class certification is requested, as well as injunctive relief,
damages in an unspecified amount, statutory penalties, interest, costs, and
attorneys' fees.
On December 28, 1998, a third action was commenced in the Superior Court of
Los Angeles County, California, Ontiveros v. VICORP Restaurants, Inc., Case
No. BC-202962. This action was brought by a former manager of a California
Bakers Square restaurant. The Plaintiff is seeking damages, statutory
penalties, declaratory relief, interest, attorneys' fees, and costs for
alleged violations of California statutes and regulations concerning the
payment of wages.
The Company believes the legal actions described above are similar to
plaintiff actions recently brought against other multi-location restaurant
operators in the state of California. Resolution of these matters may
require a significant period of time and is subject to substantial
uncertainties common to the judicial process for class actions in general.
The Company believes it has not violated California statutes and regulations
and has meritorious defenses to each of the claims in these actions. While
the Company intends to vigorously defend against the allegations, it is
possible that the Company will not prevail, or that decisions made in other
similar cases may result in interpretations of the California statutes that
are adverse to the Company's position. The cost of defense for these
actions is being recognized as incurred. No provision has been made for any
judgements or settlements that might ultimately result. While a contingency
exists that any such judgement or settlement could be material to the
results of operations of the Company for some future period or periods, the
Company currently believes that resolution of these amounts will not have a
material adverse effect on the Company's financial position.
VICORP guaranteed certain leases for twenty-five restaurant properties sold
in 1986 and sixteen restaurant leases of certain franchisees. Minimum
future rental payments remaining under these leases were $5,300,000 and
$7,300,000 as of October 31, 1999 and November 1, 1998, respectively. These
guarantees are included in the definition of financial instruments with off-
balance-sheet risk of accounting loss. The Company took possession of one
of these properties, which has since been subleased, and settled on a
defaulted lease in the amount of $57,000 as a result of a sublessee
bankruptcy filing. The Company has no reason to believe that any material
liability exists and believes it is impracticable to estimate the fair value
of these financial guarantees (e.g., amounts the Company could pay to remove
the guarantees).
Contractual obligations for restaurant construction amounted to
approximately $2,487,000 as of October 31, 1999.
On September 1, 1999, the Company entered into an operating agreement with
Pies, Inc. to operate a bakery facility for a term of five months and
purchase the facility at the completion of the operating term. At the
present time, management foresees purchasing the facility on February 1,
2000 at a cost of $2,600,000. This facility will replace an existing
facility whose lease is due to expire.
Note 13. Subsequent Events
On November 23, 1999 the Company commenced a tender offer to purchase up to
2,000,000 shares of the outstanding common stock for $19.00 per share. The
tender offer concluded on December 22, 1999, whereby 2,000,000 shares were
purchased.
Note 14. Quarterly Financial Data (unaudited)
In conjunction with the change in the fiscal year, the Company determined
that a significant amount of estimation would be required to restate
quarterly 1998 operating results to correspond with the twelve week quarterly
reporting. Therefore, restatements of results were not made and the quarterly
results for 1999 and 1998 are not comparable. The following table highlights
the differences in time periods:
Fiscal 1999 Fiscal 1998
----------------------------------- ----------------------------------
Time Period Days Time Period Days
--------------------------- ---------------------------
1st Quarter Nov 2, 1998 - Jan 24, 1999 84 Nov 1, 1997 - Jan 31, 1998 92
2nd Quarter Jan 25, 1999 - Apr 18, 1999 84 Feb 1, 1998 - Apr 30, 1998 89
3rd Quarter Apr 19, 1999 - Jul 11, 1999 84 May 1, 1998 - July 31, 1998 92
4th Quarter July 12, 1999 - Oct 31, 1999 112 Aug 1, 1998 - Nov 1, 1998 93
--- --
364 366
=== ===
The Company's quarterly results of operations are summarized as follows (in
thousands, except per share data):
Quarter ended
-----------------------------------------------------
January 24, April 18, July 11, October 31,
1999 1999 1999 1999
(84 days) (84 days) (84 days) (112 days)
- ----------------------------------------------------------------------------------------
Revenues $84,093 $81,854 $83,709 $109,390
Restaurant operating profit 10,435 9,774 10,903 13,492
Net income 3,032 2,329 3,147 8,819
Net income per share-diluted .33 .26 .35 .99
========================================================================================
Quarter ended
-----------------------------------------------------
January 31, April 30, July 31, November 1,
1998 1998 1998 1998
(92 days) (89 days) (92 days) (93 days)
- ----------------------------------------------------------------------------------------
Revenues $87,377 $82,946 $88,179 $87,671
Restaurant operating profit 9,316 8,659 10,406 9,645
Net income 2,291 1,899 2,787 2,143
Net income per share-diluted .25 .21 .30 .23
========================================================================================
An asset impairment of $746,000 was included in net income for the
fourth quarter ended October 31, 1999.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
The Company will file a definitive proxy statement pursuant to Regulation
14A for its 1999 Annual Meeting of Shareholders. Such statement will be
filed no later than 120 days after the close of the fiscal year covered by
this Form 10-K. Except for certain information concerning executive
officers of the Company which is included in Part I of this Form 10-K, the
information called for by the above items will be included in such
definitive proxy statement under "Election of Directors", "Certain
Transactions", "Compensation of Directors and Executive Officers" and
"Voting Securities and Principal Holders Thereof", which is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following Financial Statements of VICORP Restaurants, Inc. are
filed as part of this report:
Management's Report on Financial Statements.
Report of Independent Public Accountants.
Balance Sheets - October 31, 1999 and November 1, 1998.
Statements of Operations - Years ended October 31, 1999, November 1,
1998, and October 31, 1997.
Statements of Cash Flows - Years ended October 31, 1999, November 1,
1998, and October 31, 1997.
Statements of Shareholders' Equity - Years ended October 31, 1999,
November 1, 1998, and October 31, 1997 as presented in Note 7 of Notes
to Financial Statements.
(a)(2) The following financial statement schedule for VICORP Restaurants,
Inc., as listed in the Index below, is included herein beginning on page
36.
Report of Independent Public Accountants on Financial Statement
Schedule.
Schedule II - Valuation and Qualifying Accounts for the years ended
October 31, 1999, November 1, 1998, and October 31, 1997.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index on Page 36.
For the purpose of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act
of 1933, the undersigned registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into registrant's
currently effective Registration Statements on Form S-8:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to any statute, charter
provisions, bylaws, contract, or other arrangements, the registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceedings) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(b) Reports on Form 8-K filed in fourth quarter of 1999:
The Company filed a report on Form 8-K dated November 9, 1999,
reporting a disposition of assets under Item 2. On October 28, 1999,
the Company completed the sale and the leaseback of the real estate
related to twenty-one restaurant properties. The Company received
$28,700,000 in net proceeds from the sale.
(c) Exhibits filed with this report are attached hereto.
(d) Financial statement schedules filed with this report follow:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted auditing standards,
the financial statements of VICORP Restaurants, Inc. included in this Form
10-K and have issued our report thereon dated December 22, 1999. Our audit
was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index above is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Denver, Colorado,
December 22, 1999.
VICORP Restaurants, Inc.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended October 31, 1999
(in thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
------------------------
Balance at Charged Charged Balance
beginning to costs to other at end
Description of period and expenses accounts Deductions of period
- ----------- --------- ------------ -------- ---------- ---------
Year ended October 31, 1999:
Allowance for doubtful accounts $ 643 $ -- $ 189 $ 360 $ 472
Discounts and deferred gains 68 (17) -- 37 14
Allowance for loss on disposal 2,488 330 -- 579 2,239
------- ------- ------- ------- -------
$ 3,199 $ 313 $ 189 $ 976 $ 2,725
======= ======= ======= ======= =======
Year ended November 1, 1998:
Allowance for doubtful accounts $ 676 $ 22 $ 220 $ 275 $ 643
Discounts and deferred gains 660 46 -- 638 68
Allowance for loss on disposal 4,800 -- -- 2,312 2,488
------- ------- -------- ------- -------
$ 6,136 $ 68 $ 220 $ 3,225 $ 3,199
======= ======= ======== ======= =======
Year ended October 31, 1997:
Allowance for doubtful accounts $ 704 $ 42 $ 175 $ 245 $ 676
Discounts and deferred gains 687 (39) 12 -- 660
Allowance for loss on disposal 5,806 -- -- 1,006 4,800
------- ------- -------- ------- -------
$ 7,197 $ 3 $ 187 $ 1,251 $ 6,136
======= ======= ======== ======= =======
Charges to the accounts for purposes for which the reserves were
established.
Recognition of deferred gain.
Establishment of reserves by charges directly to income.
Year-end balances are reflected in the Balance Sheets as follows:
October 31, November 1,
1999 1998
----------- -----------
Deducted from current receivables $ 391 $ 562
Deducted from property and equipment 2,239 2,488
Deducted from long-term receivables 95 149
-------- --------
$ 2,725 $ 3,199
======== ========
EXHIBIT INDEX
The following documents are filed as a part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below
by an asterisk (*). For each such exhibit, there is shown below the filing
and exhibit number of the document in the previous filing. The registration
statements were filed by the Company unless otherwise indicated. Exhibits
which are not required for this report are omitted.
Exhibit Description of Document
- ------- -----------------------
3 - * (i) Articles of Incorporation, as Amended - Form 10-K for
the year ended October 29, 1989.
- *(ii) Bylaws - Form 10-K for the year ended October 29, 1989.
4 - * (i) Specimen Stock Certificate - Form 10-K for the year
ended October 30, 1988.
10 - Material Contracts
*(i) Franchise Operating Agreement - Registration Statement 2-
83326, Exhibit 10(b).
*(ii) U. S. $40,000,000 Amended and Restated Credit Agreement
dated December 19, 1997 between VICORP Restaurants, Inc. and
NationsBank of Texas, N.A. and U. S. Bank National
Association as amended on November 18, 1998; October 22, 1999;
and November 22, 1999 - Schedule 13E4 dated November 23, 1999,
Exhibit 99.B.
(iii) Form of Purchase Agreement relating to the Sale and
Leaseback of 21 restaurant properties on October 28, 1999.
(iv) Form of Lease relating to the Sale and Leaseback of 21
restaurant properties on October 28, 1999.
(v) Executive Compensation Plans and Arrangements
*(a) VICORP Restaurants, Inc. Outstanding Stock Purchase Plan
(1989) - Registration Statement 33-32608, Exhibit 4(h).
*(b) VICORP Restaurants, Inc. Stock Purchase Plan
- Registration Statement 333-11003, Form S-8 dated August
28, 1996.
*(c) Deferred Compensation Plan of VICORP Restaurants, Inc.
dated May 1, 1996 - Form 10-Q/A for the quarter ended
July 31, 1996, Exhibit 10(iii).
*(d) Deferred Stock Plan for Directors - Form 10-Q for the
quarter ended July 11, 1999, Exhibit 10.
*(e) Severance Agreement Charles R. Frederickson - Form 10-K
for the year ended October 31, 1993, Exhibit 10(vi).
*(f) Employment Agreement for Richard E. Sabourin dated
July 25, 1996 - Form 10-Q for the quarter ended
July 31, 1996, Exhibit 10(ii)(b).
*(g) Stock Option Agreement for Richard E. Sabourin dated
August 19, 1996 - Form 10-Q for the quarter
ended July 31, 1996, Exhibit 10(ii)(d).
*(h) Amended and Restated 1982 Stock Option Plan - Form 10-K
for the year ended October 31, 1997, Exhibit 10(iii)(j).
*(i) Amended and Restated 1983 Stock Option Plan - Form 10-K
for the year ended October 31, 1997, Exhibit 10(iii)(b).
*(j) Form Severance Agreement (Executive Officers excluding
Frederickson)-Form 10-Q for the
quarter ended July 31, 1998, Exhibit 10(iii)(i).
*(k) Stock Option Agreement for Robert E. Kaltenbach dated
April 9, 1998 - Form 10-K for the year ended
November 1, 1998, Exhibit 10(iii)(j).
*(l) Stock Option Agreement for Robert E. Kaltenbach
dated October 2, 1998 - Form 10-K for the year ended
November 1, 1998, Exhibit 10 (iii)(k).
*(m) Stock Option Agreement for Joseph F. Trungale dated
October 2, 1998 - Form 10-K for the
year ended November 1, 1998, Exhibit 10 (iii)(l).
*(n) Incentive Program Document Defined Positions of
Officers and Directors dated December 4, 1998, Form 10-K
for the year ended November 1, 1998, Exhibit 10(iii)(m).
*(o) Incentive Program Document for President/Bakers
Square dated December 14, 1998, Form 10-K for the year
ended November 1, 1998, Exhibit 10(iii)(n).
*(p) Incentive Program Document for President/Village Inn dated
December 14, 1998, Form 10-K for the year ended
November 1, 1998, Exhibit 10(iii)(o).
(q) Stock Option Agreement for Joseph F. Trungale date
November 1, 1999.
(r) Incentive Program Document Defined Positions of Officers
and Directors dated December 9, 1999.
(s) Stock Option Agreement for Charles R. Frederickson
dated December 9, 1999.
23 - Consents of Accountants
24 - Power of Attorney
27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the
21st day of January, 2000.
VICORP Restaurants, Inc. (Registrant)
By /s/ Charles R. Frederickson
---------------------------
Charles R. Frederickson, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on January 21, 2000 on
behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Charles R. Frederickson
- ---------------------------- Chairman of the Board and
(Charles R. Frederickson) Chief Executive Officer
/s/ Richard E. Sabourin
- ----------------------- Executive Vice President and
(Richard E. Sabourin) Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles R. Frederickson
- ---------------------------
(Charles R. Frederickson)*
* Charles R. Frederickson, as attorney-in-fact for Joseph F. Trungale, Carole
Lewis Anderson, Bruce B. Brundage, John C. Hoyt, Robert T. Marto, Dudley C.
Mecum, Dennis B. Robertson, Hunter Yager, and Arthur Zankel, constituting a
majority of the Board of Directors of the registrant.