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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 November 1, 1998
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.
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(Exact name of registrant as specified in its charter)
Colorado 84-0511072
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 West 48th Avenue, Denver, Colorado 80216
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-2121
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________________
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 8,722,603 shares of the registrant's
common stock held by non-affiliates on January 15, 1999 was approximately
$123,206,767.
At January 15, 1999 there were 9,064,706 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 1998 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 primarily under the names "Bakers
Square" and "Village Inn" and franchises restaurants under the Village Inn
name. At November 1, 1998, VICORP operated 249 restaurants in 13 states, of
which, 150 were Bakers Squares and 99 were Village Inns. On that date, there
were also 110 franchised Village Inn restaurants in 20 states. The Company
has a pie manufacturing division supporting its restaurants, which operates
under the name VICOM. VICOM has three production facilities.
Company Operations
During fiscal 1998, the Company closed one restaurant, resulting from a decision
not to renew the lease. The Company opened three new restaurants in fiscal
1998. The Company plans to resume growth of Company-operated restaurants, with
emphasis on the Village Inn concept.
Both of the Company's restaurant concepts serve breakfast, lunch and dinner with
a guest check average between $6 and $8. Village Inn is primarily known for
its breakfast foods, while Bakers Square emphasizes lunch and dinner and
features fresh baked pies as signature items. Each Company-operated restaurant
offers a relatively standard core menu. The standard menus are supplemented
with daily and monthly specials.
Store management typically consists of a general manager and two
associate/assistant managers. This management team has primary responsibility
for the efficient and profitable operation of their restaurant and are provided
incentives to do so. Additionally, the Company employs regional managers, who
work closely with the restaurant general managers in helping them meet the
Company's objectives. Regional managers report to Regional Vice Presidents.
The Company believes the principal measure of success for its restaurants is
the ability to provide each customer with a satisfying experience. Hiring and
retaining the right people, making certain that employees are adequately trained
to do their jobs, clearly communicating the specific results expected from each
employee, and providing relevant feedback of performance are central factors in
ensuring 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 where market penetration allows. Expenditures
for marketing were 2.2% of Company-operated restaurant sales in fiscal 1998.
All of the Company-operated restaurants utilize point-of-sale computer systems.
These systems capture and record sales and payroll data which are transmitted
daily to the Company's corporate office. These systems are supplemented with
personal computer back office systems that provide analytical and reporting
tools for restaurant managers.
Franchise Operations
The Village Inn restaurants franchised by the Company generally operate for
an initial term of 25 years and require payments to the Company of an initial
franchise fee of $25,000 and a continuing royalty fee of three percent of the
franchisee's revenues. In support of its franchising activities, the Company
employs field consultants who visit the franchise restaurants regularly to
ensure that the franchisees maintain compliance with certain standards of
operations and make recommendations for improvements. A Franchise Advisory
Board, consisting of seven franchisees who are elected by their peers every two
years, meets regularly with Company personnel to discuss facets of operations
that affect the Company's franchise community.
During fiscal 1998, four new franchise restaurants were opened and two franchise
restaurants were closed. The number of Village Inn franchise restaurants in
operation over the last five years has not changed significantly. However, as
franchising provides a profitable revenue stream and at the same time leverages
the strength of the Village Inn brand into new markets, the Company continues to
pursue franchising opportunities with qualified applicants. Six new franchise
units are expected to open in fiscal 1999.
Trademarks and Service Marks
The Company has acquired the right to use the marks which it considers
important to its business through various federal and state registrations.
VICORP has no reason to believe that there are any conflicting rights that
might materially impair the use of the Company's marks.
Working Capital Items
The Company is not required to maintain significant levels of working capital
because its revenues are primarily derived from cash sales while restaurant
inventories are purchased on credit and rapidly converted to cash.
Competition
The restaurant industry is highly competitive and is often affected by changes
in taste and eating habits of the public, by local and national economic
conditions affecting spending habits, and by population and traffic patterns.
The Company competes directly or indirectly with all types of restaurants, from
national and regional chains to local establishments. Some of its competitors
are corporations much larger than the Company, having at their disposal greater
capital resources and greater ability to withstand adverse business trends.
Research and Development
No material amount was spent on Company sponsored research and development
activities during the last fiscal year. Additionally, no material amounts were
spent by the Company on customer sponsored research activities relating to the
development of new products, services or techniques or the improvement of
existing products, services or techniques.
Regulation
The Company is subject to various federal, state and local laws affecting its
business. Restaurants generally are required to comply with a variety of
regulatory provisions relating to zoning of restaurant sites, sanitation, health
and safety. With respect to the restaurants operated by the Company which serve
alcoholic beverages, VICORP is governed by the laws regulating the sale of
liquor, wine and beer.
The Company is subject to a substantial number of state laws regulating
franchise operations and sales. Those laws impose registration and disclosure
requirements on franchisors in the offer and sale of franchises and, in certain
cases, also apply substantive standards to the relationship between franchisor
and franchisee. The Company also must adhere to the Federal Trade Commission
regulations governing disclosure requirements in the sale of franchises.
Various federal and state labor laws govern the Company's relationship with its
employees, including such matters as minimum wage requirements, overtime, and
other working conditions. Environmental requirements have not had a material
effect on the operations of the Company or those of its franchisees.
Employees
At November 1, 1998 the Company employed approximately 11,800 persons.
Executive Officers of the Company
The following sets forth certain data concerning the executive officers of the
Company, all of whom are appointed on an annual basis. There is no family
relationship between any of the executive officers.
Name Age Position
- ---- --- --------
Charles R. Frederickson 61 Chairman of the Board, President
and Chief Executive Officer
Robert E. Kaltenbach 53 President/Village Inn
Richard E. Sabourin 48 Executive Vice President/Chief
Financial Officer
Joseph F. Trungale 57 President/Bakers Square
Charles R. Frederickson has been a director of the Company since 1968, and
Chairman of the Board since November 1986.
Robert E. Kaltenbach was appointed President/Village Inn in December 1994 after
serving as Vice President/Franchise Operations since July 1988.
Richard E. Sabourin was appointed Executive Vice President/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.
Joseph F. Trungale was appointed President/Bakers Square Division in August
1998, after serving since July 1997 in various positions with operational
responsibility over the Company's Bakers Square Restaurants in the Midwest.
Prior to joining the Company in 1997, Mr. Trungale operated a family-owned real
estate business (September 1995-July 1997). For eight years preceding that, he
was Vice President of Operations for Whataburger, Inc.
Item 2. Properties.
The following table provides information as of November 1, 1998 concerning the
land and buildings at restaurant locations operated, leased to others or held
for disposal by the Company.
Village Bakers
Inn Square Other Total
------- ------ ----- -----
Company-operated restaurants:
Properties owned in fee 10 51 -- 61
Buildings owned on leased land 5 10 -- 15
Leased locations 84 89 -- 173
---- ---- ---- ----
99 150 -- 249
==== ==== ==== ====
Properties leased to others:
Properties owned in fee 2 -- 3 5
Buildings owned on leased land -- -- -- --
Leased locations 21 -- 20 41
---- ---- ---- ----
23 -- 23 46
==== ==== ==== ====
Properties held for disposal:
Properties owned in fee -- -- 2 2
Buildings owned on leased land -- -- 1 1
Leased locations -- -- 11 11
---- ---- ---- ----
-- -- 14 14
==== ==== ==== ====
The restaurants operated by the Company are located primarily in Arizona,
California, Florida, the Rocky Mountain region, and the upper Midwest. The
Company considers its existing operating restaurant properties and equipment to
be in good condition. For additional information concerning the Company's
leases see Note 4 of Notes to Consolidated Financial Statements which is
included in Item 8 of Part II.
The Company intends to lease, sublease or sell the 14 restaurant properties and
its bakery facility in Denver, Colorado which are currently idle.
The Company owns its corporate office complex in Denver, Colorado. It also
owns the land and buildings comprising its bakery facilities in Oak Forest,
Illinois. It leases the land and buildings which comprise its bakery facilities
in Santa Fe Springs, California and Mounds View, Minnesota.
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 Plantiff 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 or 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 Plantiff is seeking damages, statutory penalties,
injunctive and declaratory relief, the disgorgement of amounts by which VICORP
has been unjustly enriched, interest, attorneys' fees, and costs for alleged
violations of California statutes and regulations concerning the payment of
wages and of the California Business and Professional Code.
The Company believes it has meritorious defenses to each of the claims in the
actions and it intends to vigorously defend them. Management believes that the
Company will ultimately prevail and that the final resolution of the complaints
will not have a material effect on its results of operations or financial
position. The cost of defense for these class actions will be recognized as
incurred.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the Company's security holders during the
three month period ended November 1, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
The Company's common stock is traded in 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 15, 1999, the Company
had 465 shareholders of record. The following table sets forth for the
periods indicated the high and low closing sales quotations per share of common
stock as reported by NASDAQ:
Fiscal Quarter
First Second Third Fourth
- --------------------------------------------------------------------
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
1997
High $14 3/4 $12 7/8 $14 1/4 $16 1/4
Low 11 3/4 11 1/8 11 14
The range of high and low closing sales quotations contained in the foregoing
table reflects inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
The Company has not paid cash dividends on its common stock since 1986. Future
common stock dividend payments will be 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) 1998 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Results of operations
System-wide sales including
franchise sales $482,506 $450,534 $456,352 $496,300 $529,982 $542,986 $527,817
Restaurant sales 342,654 322,188 339,937 370,116 409,297 425,139 414,324
Total revenues 346,173 325,527 343,280 373,838 412,644 428,505 417,518
Income (loss) before
extraordinary item 9,120 6,899 (929) (4,532) (6,638) 16,524 15,522
Net income (loss) 9,120 6,899 (929) (4,532) (6,638) 16,524 15,522
- ---------------------------------------------------------------------------------------------------------------------
Operating analysis
Restaurant operating profit
analysis as a percentage of
restaurant sales
Costs and expenses
Food 30.8% 31.4% 32.9% 33.5% 30.1% 29.8% 30.9%
Labor 32.7% 32.4% 32.0% 33.7% 30.2% 28.5% 27.8%
Other operating 25.4% 25.9% 26.7% 28.3% 28.2% 27.5% 27.2%
Restaurant operating profit 11.1% 10.3% 8.3% 4.4% 11.4% 14.2% 14.1%
General and administrative
expense as a percentage
of revenues 7.5% 7.4% 7.3% 7.0% 8.7% 7.8% 7.5%
Interest expense as a percentage
of revenues .5% .8% 1.2% 1.0% .9% .9% 1.3%
Income before income taxes and
extraordinary and unusual items
as a percentage of revenues 4.2% 3.3% .9%* (2.4%) 2.5%* 6.3%* 6.1%*
Effective income tax rate 36.5% 36.0% 64.0% 50.0% 37.5% 36.2% 39.5%
- ----------------------------------------------------------------------------------------------------------------------
Balance sheet data
Total assets $199,773 $194,990 $203,946 $228,161 $249,023 $254,031 $241,958
Long-term debt and capitalized
lease obligation 5,783 19,465 33,585 42,179 42,554 40,008 43,736
Common Shareholders' equity 138,007 129,919 122,269 123,098 134,866 148,318 135,445
Debt to total capitalization 4.0% 13.0% 21.5% 25.5% 24.0% 21.2% 24.4%
- ----------------------------------------------------------------------------------------------------------------------
Cash flow data
Cash provided by operations 42,248 28,568 17,847 7,309 34,094 50,870 54,168
As a percentage of revenues 12.2% 8.8% 5.2% 2.0% 8.3% 11.9% 13.0%
Investment in property and
equipment 21,054 16,410 7,922 13,234 28,773 42,426 41,509
- ----------------------------------------------------------------------------------------------------------------------
Per common share
Earnings (loss) before
extraordinary item $ .98 $ .75 $ (.10) $ (.49) $ (.69) $ 1.62 $ 1.50
Earnings (loss) .98 .75 (.10) (.49) (.69) 1.62 1.45
Book value 15.18 14.18 13.50 13.61 14.18 14.96 13.58
Market price at year-end 14 1/8 15 1/2 14 1/2 11 16 3/4 20 3/4 22 1/4
Weighted average common and
dilutive common stock options
(000's omitted) 9,262 9,145 9,050 9,246 9,656 10,189 10,330
- ----------------------------------------------------------------------------------------------------------------------
Number of restaurants at year-end
Bakers Square 150 150 154 160 189 187 181
Company-operated Village Inn 99 97 98 99 112 126 122
Franchised Village Inn 110 108 108 106 107 104 105
Other company-operated -- -- 1 5 6 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total 359 355 361 370 414 417 408
______________________________________________________________________________________________________________________
* 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.
* Pretax extraordinary debt extinguishment costs of $963,000 were included in
results of operations for 1992.
- - Fiscal 1998 consisted of 366 days, while fiscal years 1997, 1996, 1995,
1994, 1993, 1992 consisted of 365 days, 366 days, 366 days, 364 days, 371
days and 364 days, respectively.
- - The Company has not paid dividends on its 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
(Item 8 of Part II).
Results of Operations
The following table sets forth selected operating statistics for the last three
fiscal years.
1998 1997 1996
---- ---- ----
Bakers Square
Restaurant sales $207,251,000 $192,538,000 $204,697,000
Average sales per restaurant 1,387,000 1,276,000 1,309,000
Restaurant operating profit 14,712,000 11,740,000 9,316,000
Restaurant operating profit % 7.1% 6.1% 4.6%
Divisional administrative costs 5,320,000 4,987,000 4,560,000
Divisional operating profit 9,392,000 6,753,000 4,756,000
Restaurants at year-end 150 150 154
Village Inn
Restaurant sales $135,403,000 $128,586,000 $129,442,000
Average sales per restaurant 1,394,000 1,326,000 1,317,000
Restaurant operating profit 23,314,000 21,566,000 19,523,000
Restaurant operating profit % 17.2% 16.8% 15.1%
Franchise income 3,519,000 3,339,000 3,343,000
Divisional administrative costs 4,942,000 3,788,000 3,059,000
Divisional operating profit 21,891,000 21,117,000 19,807,000
Restaurants at year-end 99 97 98
Angel's
Restaurant sales -- $1,064,000 $5,798,000
Average sales per restaurant -- N/A 1,352,000
Restaurant operating profit (loss) -- (19,000) (626,000)
Restaurant operating profit (loss) % -- (1.8%) (10.8%)
Divisional administrative costs -- 12,000 278,000
Divisional operating loss -- (31,000) (904,000)
Restaurants at year-end -- -- 1
Consolidated
Restaurant sales $342,654,000 $322,188,000 $339,937,000
Food cost % 30.8% 31.4% 32.9%
Labor cost % 32.7% 32.4% 32.0%
Other operating cost % 25.4% 25.9% 26.7%
Restaurant operating profit % 11.1% 10.3% 8.3%
Restaurant operating profit $ 38,026,000 $ 33,287,000 $ 28,213,000
Franchise income 3,519,000 3,339,000 3,343,000
Divisional general and
administrative costs 10,262,000 8,787,000 7,897,000
-----------------------------------------
Divisional operating profit 31,283,000 27,839,000 23,659,000
-----------------------------------------
Unallocated general and
administrative costs 15,756,000 15,110,000 17,232,000
-----------------------------------------
Operating profit $ 15,527,000 $ 12,729,000 $ 6,427,000
==========================================
Before asset disposal charge of $5.8 million in 1996.
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 sales decreased 5% in 1997 versus 1996. The Company
operated, on average, approximately eleven fewer restaurants in 1997 compared
to 1996 due to restaurant closures. A comparable same store sales decline of
2% also contributed to the overall decrease in sales. The Bakers Square
concept registered a 3% decrease in same store sales and a 1% decrease in
customer counts when compared to 1996. Same store sales and customer counts
in the Village Inn concept were respectively up 0.3% and 0.8% over the prior
year.
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.
Consolidated restaurant operating profit increased 18% in 1997 versus 1996.
Bakers Square's restaurant operating profit increased 26% over the prior year,
while profit as a percent of sales increased from 4.6% in 1996 to 6.1% in 1997.
Village Inn's profit improvement was 10% versus the prior year, with profit as
a percent of sales increasing from 15.1% to 16.8%. Programs developed to
improve efficiencies, control food costs and minimize controllable operating
costs added to the profit improvements realized by the closure of unprofitable
units.
Franchise income increased 5.4% in 1998 versus 1997 due to four new franchise
units offset partially by the closing of two franchise units. Net franchise
income was basically unchanged from 1996 to 1997, as reduced franchise fees
were offset by lower administrative costs.
General and administrative expense was 7.5% of revenues in 1998 and 7.4% in
1997. The increase of $2.1 million, or 8.9%, was largely due to higher bonus
payouts to operating management as the result of improved operating results.
General and administrative expenses, as a percent of restaurant sales,
remained virtually unchanged in 1997 from 1996 at 7.4%. However, actual
expenses decreased $1.2 million, or 4.9%, as a result of the continuing
programs of cost containment and improved efficiencies of support functions.
Interest expense decreased 39.8% for 1998 versus 1997 and 36.0% for 1997
versus 1996 due to significantly reduced levels of borrowing and reduced
capital lease interest.
Other income for 1998 decreased 38.3% from 1997 due to disposal of some
subleased units and lower interest earned on notes receivable. Other income
for 1997 decreased 23% from 1996 due to lower interest earned on notes
receivable and investments.
In 1996, the Company recorded a $5,800,000 asset disposal charge related to
its decision to close its Angel's Diner restaurants after determining that
its strategy of using that concept to invigorate underperforming restaurant
properties was not economically viable. 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 administrative restructuring costs.
As of October 31, 1996, all of the restaurants scheduled for disposition had
been closed. During fiscal 1998, 1997 and 1996, one, six and two additional
units were closed, respectively.
Operating results for the closed restaurants for the past three fiscal years
were as follows:
1998 1997 1996
---- ---- ----
Bakers Square
Sales $ -- $1,276,000 $ 5,624,000
Restaurant operating profit (loss) -- (215,000) (313,000)
Village Inn
Sales $ 146,000 $1,758,000 $ 3,112,000
Restaurant operating profit (loss) (26,000) 196,000 220
Angel's
Sales $ -- $1,064,000 $ 5,798,000
Restaurant operating profit (loss) -- (18,000) (626,000)
Total
Sales $ 146,000 $4,098,000 $14,534,000
Restaurant operating profit (loss) (26,000) (37,000) (719,000)
The Company closed its bakery facilities in Denver, Colorado, and Orlando,
Florida, in 1996.
The effective income tax rates used for financial reporting were 36.5% in
1998, 36.0% in 1997 and 64.0% in 1996. The higher rate (benefit) in 1996
was largely due to the greater impact of tax credits, primarily the FICA tax
credit relative to pre-tax income/loss.
Liquidity and Capital Resources
The Company's principal source of funds is cash provided by operations. Cash
flow from operations increased in 1998 due primarily to higher operating income.
The Company's working capital is generally in a deficit position because, like
most restaurant businesses, substantially all sales are for cash, while credit
is received from trade suppliers. Furthermore, the Company has not maintained
large excess cash balances, but rather has utilized available cash for capital
spending, repayment of borrowings or the repurchase of its common stock.
The Company supplements cash provided by operations with bank borrowings and
occasional lease financing. During fiscal 1998, the Company reduced its
outstanding debt borrowings by $12.1 million. At November 1, 1998 the Company
had no outstanding borrowings under its bank credit facility, with $38.2
million available for additional direct advances.
At November 1, 1998, the Company had 15 properties which it was trying to
dispose of. Three of these properties were owned in fee and the rest were
leased. The Company intends to sell the fee properties over the next year and
approximately $1 million of proceeds are expected to be realized from their
sale. The Company does not anticipate significant proceeds from the
disposition of the leased properties. It is expected that the majority of
the leased properties will be disposed of through sublease over the next six
to eighteen months. Cash carrying costs of approximately $1,094,000 are
expected to be incurred over that period. The Company expects to sublease
six 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 and the Company does not anticipate any material affect
on the Company's liquidity.
In 1998, 213,700 shares of the Company's common stock were repurchased for
$2,912,000, under authorizations approved by the Board of Directors. At
November 1, 1998, authorization to repurchase an additional 686,300, common
shares was available. Future purchases with respect to this authorization may
be made from time to time in the open market or through privately negotiated
transactions and will be dependent upon various business and financial
considerations.
Capital expenditures in 1998 totaled $21.0 million and consisted of $4.6
million for construction of new restaurants, $7.7 million for improvements
to existing restaurants, and $8.7 million for other support related projects.
Capital expenditures of $32.2 million are planned for 1999. Ten to twelve new
restaurant openings are planned during 1999. Cash flow from operations, funds
available under a bank credit facility, or other financing sources are expected
to be adequate for planned capital projects and any repurchases of common stock
authorized by the Board.
At November 1, 1998, the Company had $39,164,000 of net deferred tax assets,
the majority of which relates to federal net operating loss carryforwards
totaling $140,371,000. The Company also has investment tax credit ("ITC")
carryforwards totaling $2,289,000 which expire in 1999 and 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 and only a portion of the operating loss carryforwards are expected
to be applied against future taxable income before they expire. The
remaining valuation allowance at November 1, 1998, is based on an
assumption that the Company will report taxable income in 1999 of
approximately $34 million. To the extent actual taxable income for fiscal
1999 varies from the assumed amount, an adjustment to the valuation
allowance will be required. Actual taxable income for fiscal 1998 was
approximately $14 million. Management is currently pursuing certain tax
planning strategies it believes can be implemented to increase taxable
income currently projected for fiscal 1999 to at least $34 million.
However, there can be no assurance these tax planning strategies will
be successfully implemented and the adequacy of the allowance is
principally dependent on the actual amount of taxable income ultimately
reported for fiscal 1999.
VICORP has guaranteed certain leases for 21 restaurant properties sold to
others in 1986 and 18 restaurant leases of certain franchisees. Minimum
future rental payments remaining under these leases were approximately
$7.3 million and $9.5 million as of November 1, 1998 and October 31, 1997,
respectively. These guarantees are included in the definition of
financial instruments with off-balance-sheet risk of accounting loss;
however, the Company has not been required to make payments with respect
to these guarantees and presently has no reason to believe any payments
will be required in the future. The Company believes it is impracticable
to estimate the fair value of these financial guarantees (e.g., amounts
the Company could pay to remove the guarantees) because the Company has
no present intention or need to attempt settlement of any of the guarantees.
Y2K
The Company completed a review of its computer systems during fiscal 1997,
resulting in a decision to replace a large portion of the existing systems at a
cost of approximately $12.5 million. Approximately $7.5 million of this amount
was spent in fiscal 1998. The new systems are Year 2000 compliant.
As of January 4, 1999, the Company implemented Year 2000 compliant systems at
its corporate headquarters. These new ERP (Enterprise Resource Planning)
systems have been designed to provide the infrastructure to support corporate
and field-based systems.
A system-wide rollout to all restaurants of a new back-of-house point-of-sale
(POS) system, as well as a modification of front-of-house systems to be Year
2000 compliant, is planned to begin in March 1999 with a targeted completion
date of September 1, 1999. In-house testing of the new POS system is 85%
complete and a pilot store test will begin February 1, 1999. The Company is in
the process of developing a contingency plan for restaurant operations should
the initial store testing and the rollout fall behind schedule.
The Company is currently conducting a review of its physical facilities in
order to identify potential areas of embedded technology (heating, lighting,
fixtures, and equipment, communications systems, waste treatment, emergency
backup systems, etc.) that may not be Year 2000 compliant. The Company
believes its exposure is limited in this area and is formulating plans to
address any issues that may surface.
With respect to third parties, the Company has been in contact with and is
preparing written communications to send to all third parties considered
critical to the Company's ongoing operations. Written communication will
request written confirmation from mission critical third parties of reasonable
assurance that plans are being developed to ensure Year 2000 readiness.
Reasonable assurance will include 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 do not provide
the Company with satisfactory evidence of readiness, contingency plans will be
developed and implemented by the Company by December 31, 1999.
The Company has sent written notice to franchisees regarding the need for Year
2000 readiness. Approximately one-half of the Company's franchise restaurants
have plans in place to replace non-compliant restaurant-based systems with the
Company's new Year 2000 ready POS system. All installations are targeted to be
completed by October 1, 1999.
The Company does not believe the costs related to the Year 2000 readiness
project will be material to its financial position or results of operations.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were made utilizing numerous assumptions including the continued
availability of certain resources, third-party modification plans, and
other factors. Unanticipated failures by vendors and franchisees, as well
as the failure by the Company to execute its own remediation efforts, could
have a material adverse effect on the cost of the project and its completion
date. In addition, any such unforeseen occurrences, if combined with
failures of other third parties or public services beyond the Company's
control, could have a material adverse effect on the Company's financial
condition or results of operations. Consequently, there can be no
assurance that the forward-looking estimates contained herein will be
achieved and the actual cost could differ materially from the projections
contained herein.
In the event they are needed, the Company's contingency plans, in management's
estimate, will be in place by December 31, 1999.
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, the 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 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. SFAS No. 130 does not require a specific
format for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that financial
statement. This Statement is effective for fiscal years beginning after
December 15, 1997. Through November 1, 1998, the Company had no current or
cumulative items of other comprehensive income that had been excluded from net
income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131") which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. SFAS No. 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997.
In February 1998, the FASB issued statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132") which revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer useful. The Statement suggests combined formats
for presentation of pension and other postretirement benefit disclosures. This
Statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available in which case the
notes to the financial statements should include all available information and a
description of the information not available. The Company expects no impact on
its financial statements.
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
President, Chief Executive Officer, Executive Vice President/
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 November 1, 1998 and October 31,
1997, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended November 1, 1998. 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 November 1, 1998 and October 31, 1997, and the results of
its operations and its cash flows for each of the three years in the
period ended November 1, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
December 11, 1998.
VICORP Restaurants, Inc.
BALANCE SHEETS
November 1, October 31,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash (Note 1) $ 10,262 $ 1,464
Receivables (Notes 1 and 2) 3,655 4,105
Inventories (Note 1) 7,501 6,751
Deferred income taxes (Notes 1 and 9) 3,617 5,000
Prepaid expenses and other (Note 1) 2,192 1,190
- --------------------------------------------------------------------------------
Total current assets 27,227 18,510
- --------------------------------------------------------------------------------
Property and equipment, net (Notes 1 and 3) 128,648 128,915
Deferred income taxes (Notes 1 and 9) 35,547 38,619
Long-term receivables (Notes 1 and 2) 869 1,342
Other assets (Note 1) 7,379 7,604
- --------------------------------------------------------------------------------
Total assets $199,670 $194,990
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt and
capitalized lease obligations (Notes 1, 4 and 5) $ 1,711 $ 1,585
Accounts payable, trade 21,847 14,083
Accrued compensation 6,013 4,119
Accrued taxes 8,629 8,276
Accrued insurance (Note 10) 3,354 4,429
Other accrued expenses 5,208 4,580
- --------------------------------------------------------------------------------
Total current liabilities 46,762 37,072
- --------------------------------------------------------------------------------
Long-term debt (Notes 1 and 5) 87 12,172
Capitalized lease obligations (Note 4) 5,696 7,293
Non-current accrued insurance (Note 10) 3,199 2,327
Other non-current liabilities and credits 5,919 6,207
Commitments and contingencies (Notes 4, 5 and 10)
Shareholders' equity (Note 6)
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, 9,067,699 and 9,132,786
shares issued and outstanding 455 458
Paid-in capital 84,148 85,177
Retained earnings 53,404 44,284
- --------------------------------------------------------------------------------
Total shareholders' equity 138,007 129,919
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $199,670 $194,990
================================================================================
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
STATEMENTS OF OPERATIONS
Year ended
-------------------------------------
November 1, October 31, October 31,
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues
Restaurant operations $342,654 $322,188 $339,937
Franchise operations (Note 1) 3,519 3,339 3,343
- --------------------------------------------------------------------------------
346,173 325,527 343,280
- --------------------------------------------------------------------------------
Costs and expenses
Restaurant operations
Food 105,416 101,152 111,954
Labor 112,047 104,371 108,929
Other operating 87,165 83,378 90,841
General and administrative 26,018 23,897 25,129
Asset disposal, impairment, restructuring
and related costs (Note 8) -- -- 5,800
- --------------------------------------------------------------------------------
Operating profit 15,527 12,729 627
Interest expense (1,547) (2,569) (4,014)
Other income, net (Note 2) 382 619 804
- --------------------------------------------------------------------------------
Income (loss) before income taxes 14,362 10,779 (2,583)
Provision (benefit) for income taxes (Note 9) 5,242 3,880 (1,654)
- --------------------------------------------------------------------------------
Net income (loss) $ 9,120 $ 6,899 $ (929)
================================================================================
Earnings (loss) per share (Note 1)
Basic $ .99 $ .76 $ (.10)
Diluted $ .98 $ .75 $ (.10)
================================================================================
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
STATEMENTS OF CASH FLOWS
Year ended
-----------------------------------------
November 1, October 31, October 31,
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Operations
Net income (loss) $ 9,120 $ 6,899 $ (929)
Reconciliation to cash provided by operations
Depreciation and amortization 19,486 19,746 21,088
Deferred income tax provision(benefit) 4,457 2,705 (1,950)
Asset disposal, restructuring and related costs 269 490 6,173
Other, net (491) (286) (296)
-----------------------------------------
32,841 29,554 24,086
Change in assets and liabilities
Trade receivables 170 (171) (289)
Inventories (750) (234) 2,080
Accounts payable, trade 7,764 2,952 (5,395)
Other current assets and liabilities 1,325 (511) (1,891)
Non-current accrued insurance 872 (3,022) (744)
- ------------------------------------------------------------------------------------------------
Cash provided by operations 42,222 28,568 17,847
- ------------------------------------------------------------------------------------------------
Investing activities
Purchase of property and equipment (21,054) (16,410) (7,922)
Sale (purchase) of other assets 125 (329) (425)
Disposition of property 1,005 881 (651)
Collection of non-trade receivables 1,336 549 804
- ------------------------------------------------------------------------------------------------
Cash used for investing activities (18,588) (15,309) (8,194)
- ------------------------------------------------------------------------------------------------
Financing activities
Proceeds from issuance of debt 1,300 2,100 45,500
Payments of debt and capital lease obligations (15,186) (16,240) (57,889)
Purchase of common stock (2,912) -- --
Issuance of common stock 1,846 439 85
Other, net 116 500 69
- ------------------------------------------------------------------------------------------------
Cash used for financing activities (14,836) (13,201) (12,235)
- ------------------------------------------------------------------------------------------------
Increase (decrease) in cash 8,798 58 (2,582)
Cash at beginning of year 1,464 1,406 3,988
- ------------------------------------------------------------------------------------------------
Cash at end of year (Note 1) $ 10,262 $ 1,464 $ 1,406
================================================================================================
Supplemental information
Cash paid during the year for
Interest (net of amount capitalized) $ 1,589 $ 2,535 $ 4,102
Income taxes 382 369 313
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc.
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of significant accounting policies
Nature of operations
- --------------------
VICORP operates family style restaurants primarily under the names "Bakers
Square" and "Village Inn" and franchises restaurants under the Village Inn
name. At November 1, 1998, VICORP operated 249 restaurants in 13 states, of
which, 150 were Bakers Squares, and 99 were Village Inns. On that date, there
were also 110 franchised Village Inn restaurants in 20 states. The restaurants
operated by the Company are located primarily in Arizona, California, Florida,
the Rocky Mountain region, and the upper Midwest. The Company has a pie
manufacturing division supporting its restaurants, which operates under the name
VICOM. VICOM has three production facilities.
Basis of presentation
- ---------------------
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.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of VICORP
Restaurants, Inc. and the accounts of its wholly-owned subsidiary through March
1996, the date of the subsidiary's dissolution. Prior to its dissolution,
VICORP's subsidiary transferred all of its assets and liabilities to the
Company. All significant intercompany transactions and accounts have been
eliminated.
Fiscal year
- -----------
The Company's current fiscal year ended on November 1. Future fiscal years
will end on the last Sunday in October. The Company has determined to resume
reporting on a 52/53 week fiscal year. Its quarterly reports for fiscal 1999
will consist of three quarters including 12 weeks and one quarter including 16
weeks.
Inventories
- -----------
Inventories are valued at the lower of first-in, first-out cost or market value.
Inventories consisted of the following (in thousands):
November 1, October 31,
1998 1997
----------- -----------
Food at production facilities
and third party storage facilities
Raw materials $ 2,476 $ 1,976
Finished goods 2,837 2,511
----------- -----------
5,313 4,487
Food at restaurants 2,188 2,264
----------- -----------
$ 7,501 $ 6,751
=========== ===========
Prepaid expenses
- ----------------
Prepaid expenses consist primarily of supplies, prepaid contract costs and
restaurant preopening costs. Preopening costs are amortized over a one-year
period following restaurant opening. At November 1, 1998 and 1997, $67,000 and
no amounts, respectively, of preopening costs were reported as assets. The
American Institute of Certified Public Accountants has released a statement of
position that will prospectively require the costs of preopening activities to
be expensed as incurred, which is effective as of the beginning of the Company's
fiscal year 2000.
Depreciation and amortization
- -----------------------------
Depreciation and amortization of property and equipment are provided using
principally the straight-line method at rates based upon estimated useful lives
of the assets, ranging from 20 to 40 years for buildings and 3 to 15 years for
equipment and improvements. Amortization of leasehold rights and excess of cost
over net assets acquired in purchase transactions is provided using the
straight-line method, primarily over the remaining lives of location leases or
assets acquired, generally 5 to 25 years. Deferred loan fees ($141,000 and
$183,000 net of amortization at November 1, 1998, and October 31, 1997,
respectively) are included in other assets and are amortized over the 3 year
loan commitment period using the straight-line method (Note 5).
Franchise revenues
- ------------------
Initial franchise fees are deferred when received and recognized as income when
the franchisee has commenced operations and the Company has performed all
material services and conditions related to the sale of the franchise.
Continuing service fees, which are a percentage of the gross sales of franchised
operations, are accrued as income when earned except for situations in which
collectibility is in doubt. In those situations, continuing service fees and
rental income are recognized when received, and gains on property sales are
recorded using the cost recovery method.
Net franchise revenues consisted of the following (in thousands):
1998 1997 1996
-------- -------- --------
Continuing service fees $ 3,979 $ 3,828 $ 4,216
Initial and renewal fees 63 111 169
Property rental income 184 316 206
Interest income on franchisee notes 167 202 247
Equipment sales income 18 14 42
Administrative expense (892) (1,132) (1,537)
-------- -------- --------
Franchise revenues $ 3,519 $ 3,339 $ 3,343
======== ======== ========
Advertising costs
- -----------------
The Company expenses the production costs of advertising the first time the
advertising takes place. Costs of media advertising are expensed when incurred,
generally when airtime or print media is used. Direct response advertising is
seldom used by the Company and is expensed when incurred.
Advertising expense for 1998, 1997 and 1996 was $7,982,000, $ 5,788,000, and
$6,653,000, respectively. At November 1, 1998 and October 31, 1997, no material
amounts of advertising were reported as assets.
Fair value of financial instruments
- -----------------------------------
The Company has notes receivable carried on its balance sheets at values
approximating estimated fair market value. Because these instruments are not
publicly traded, the Company estimates the value based on the respective facts
and circumstances of each instrument. The fair value of the Company's long-term
debt approximates carrying value because of its variable, market-based interest
rate feature.
Income taxes
- ------------
Based on enacted tax laws, deferred income tax assets and liabilities are
recognized for the expected future income tax consequences of carryforwards and
temporary differences between the financial reporting and tax bases of assets
and liabilities. Deferred tax assets are reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, based on the
current circumstances, are not expected to be realized.
Earnings (loss) per share
- -------------------------
Basic earnings (loss) per share is determined by dividing net income (loss) by
the weighted average number of common shares outstanding during each period.
Diluted earnings per share includes the effects of potentially issuable common
stock, but only if dilutive. The treasury stock method, using the average price
of the Company's stock for the period, is applied to determine dilution from
stock options. Stock options were excluded for fiscal 1996 as anti-dilutive
because of the net loss reported for that year.
Weighted average common shares outstanding 1998 1997 1996
--------- --------- ---------
Basic 9,209,628 9,096,628 9,049,501
Effect of dilutive common stock options 52,521 48,075 --
--------- --------- ---------
Diluted 9,262,149 9,144,703 9,049,501
========= ========= =========
* The number of potentially issuable shares as of October 31, 1997 has been
restated to conform to the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share".
Statements of cash flows
- ------------------------
The Company considers all highly liquid investments and debt instruments with
original maturities of three months or less to be cash equivalents.
New Accounting Standards
- ------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This Statement is effective for fiscal years beginning after
December 15, 1997. Through November 1, 1998, the Company had no current or
cumulative items of other comprehensive income that had been excluded from net
income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131") which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. SFAS No. 131 requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132") which revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer useful. The Statement suggests combined formats
for presentation of pension and other postretirement benefit disclosures. This
Statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available in which case the
notes to the financial statements should include all available information and a
description of the information not available. The Company expects no impact on
its financial statements.
Note 2. Receivables
Receivables consisted of the following:
November 1, October 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
Trade receivables $ 3,094 $ 3,253
Notes receivable 2,141 3,530
Discounts (68) (660)
Allowance for doubtful accounts (643) (676)
- ------------------------------------------------------------------------------
Receivables, net 4,524 5,447
Current portion 3,655 4,105
- ------------------------------------------------------------------------------
Long-term portion $ 869 $ 1,342
- ------------------------------------------------------------------------------
The Company's receivables arose primarily from contracts and property
transactions with its franchisees and other sublessees. The ability of these
parties to honor their obligations is largely dependent on cash flows
generated from their restaurant operations. The trade receivables are generally
unsecured but related contracts are cancelable if the debtor fails to perform.
Under Company policy, the notes receivable are generally secured with security
agreements on the property that gave rise to the transactions.
Note 3. Property and equipment
Property and equipment consisted of the following:
November 1, October 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
Property and equipment used in operations
Land $ 22,540 $ 20,121
Buildings and improvements 126,935 124,428
Equipment 111,376 110,176
Construction in progress 10,051 1,455
Restaurant property leased to others 7,947 7,169
Accumulated depreciation (154,629) (141,576)
- ------------------------------------------------------------------------------
124,220 121,773
- ------------------------------------------------------------------------------
Capitalized lease buildings 8,514 8,524
Accumulated amortization (4,849) (4,507)
- ------------------------------------------------------------------------------
3,665 4,017
- ------------------------------------------------------------------------------
Properties held for disposal, net 3,119 7,794
Allowance for loss on disposal (2,356) (4,669)
- ------------------------------------------------------------------------------
Property and equipment, net $128,648 $128,915
==============================================================================
Depreciation and amortization expense charged to operations for property and
equipment was $18,790,000 in 1998, $19,222,000 in 1997, and $20,555,000 in 1996.
At November 1, 1998, all of the Company's fee owned properties were free of
mortgages, pledges or other liens.
Note 4. Leases
The Company is the prime lessee under various land and building leases for
restaurants operated by it and certain of its franchisees. Additionally, the
Company leases certain bakery production facilities as well as various
equipment. The leases have initial terms generally ranging from 15 to 35 years
and, in certain instances, provide for renewal options ranging from 5 to 20
years. Some of the leases contain purchase options at the end of the lease
terms. Many of the leases contain escalation clauses, either predetermined or
based upon inflation. Most of the leases require additional (contingent) rental
payments by the Company if sales volumes at the related restaurants exceed
specified levels. Most of the agreements require payment of taxes, insurance
and maintenance costs. The implicit interest rates range from 6.5% to 14.2% for
capital leases.
The Company as prime lessee has entered into sublease agreements with
franchisees and others on certain locations that are not operated by the
Company. These leases generally have terms similar to the prime lease with the
sublessee assuming the Company's obligations to pay taxes, insurance and
maintenance costs.
Following is a summary as of November 1, 1998, of future minimum lease payments
under capital and operating leases having an initial or remaining non-cancelable
term of one year or more:
Lease and
Capital Operating sublease
(in thousands) leases leases rentals
- --------------------------------------------------------------------------------
1999 $ 2,341 $ 14,394 $ (2,434)
2000 2,123 13,343 (2,205)
2001 1,911 12,503 (1,918)
2002 1,414 8,441 (1,492)
2003 740 6,668 (904)
Later years 1,109 28,075 (2,938)
- --------------------------------------------------------------------------------
Total minimum lease payments $ 9,638 $ 83,424 $(11,891)
====================================
Less amount representing interest 2,378
- ----------------------------------------------------
Present value of minimum lease payments 7,260
Current maturities of capitalized
lease obligations 1,564
- ----------------------------------------------------
Capitalized lease obligations $ 5,696
====================================================
Net rental expense consisted of the following:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Restaurant land and buildings
Minimum rentals $ 13,956 $ 13,892 $ 14,239
Contingent rentals 2,556 2,357 2,441
Equipment 85 66 742
- --------------------------------------------------------------------------------
Rental expense 16,597 16,315 17,422
Less lease and sublease rental income 3,368 3,271 3,198
- --------------------------------------------------------------------------------
Net rental expense $ 13,229 $ 13,044 $ 14,224
================================================================================
Note 5. Debt
Long-term debt consisted of the following:
November 1, October 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------
Advances under bank credit agreement $ -- $ 12,100
Other long-term debt 234 155
- ----------------------------------------------------------------------
234 12,255
Current maturities 147 83
- ----------------------------------------------------------------------
Long-term debt $ 87 $ 12,172
======================================================================
On December 19, 1997, the Company accepted 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 maturity
date of the amended agreement is 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.
During 1998, the largest aggregate outstanding balance under the Company's bank
facilities was $13,400,000. The average balance outstanding was $4,086,000 and
the average interest rate was 6.98%. At November 1, 1998, the Company had
placed letters of credit totaling $1,850,000 in connection with its insurance
programs. At November 1, 1998, the Company had 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 November 1, 1998 due
during each of the five succeeding fiscal years were $147,000 in 1999, $46,000
in the year 2000, $41,000 in 2001, and none in the years 2002 and 2003.
The Company incurred $1,553,000, $2,573,000, and $4,014,000 of interest charges
in 1998, 1997, and 1996, respectively. Of these amounts, $6,000 was capitalized
in 1998, $4,000 was capitalized in 1997, none was capitalized in 1996.
Note 6. 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.
At various times since August 1992, the Company's Board of Directors has
authorized the purchase of shares of the Company's common stock. On October 2,
1998, the board authorized the repurchase of up to 900,000 shares. Future
purchases with respect to the authorizations may be made from time to time in
the open market or through privately negotiated transactions and will be
dependent upon various business and financial considerations. At November 1,
1998, authorization to purchase an additional 686,300 common shares was
available. During 1998, 213,700 shares were purchased.
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 $28,878,000 of consolidated retained earnings were unrestricted at
November 1, 1998, as to the declaration of cash dividends and the acquisition of
the Company's common stock.
The following table summarizes shareholders' equity activity:
Common stock Total
----------------- Paid-in Retained shareholders'
(in thousands, except share data) Shares Amount capital earnings equity
- ---------------------------------------------------------------------------------------------------------
Balances at October 31, 1995 9,044,026 452 84,332 38,314 123,098
Net loss -- -- -- (929) (929)
Common stock options exercised
including income tax benefit 11,000 1 99 -- 100
- ---------------------------------------------------------------------------------------------------------
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 benefits 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
=========================================================================================================
Note 7. Stock option, stock purchase and profit-sharing plans
The Company has stock option plans which generally provide for granting
options to any employees and non-employee directors of the Company at
exercise prices not less than the market value of the common stock on the
date of the grant. The options generally vest over three years and expire
ten years after the date of grant or three months after employment
termination, whichever occurs first.
In October 1996, the Company adopted an Employee Stock Purchase Plan under
which any eligible employee who has completed 12 months of employment may
contribute up to $25,000 of their annual earnings toward the quarterly
purchase of the Company's common stock. The common stock will be purchased
from the Company 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 this plan, 9,612 shares were issued in fiscal
1998 and 14,860 shares were issued in fiscal 1997.
The Company also has an Outstanding Common Stock Purchase 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 still owns these
shares and is still employed by the Company after two years from the
purchase of the common shares, then a cash bonus equal to 25% of the
incentive compensation used to purchase the shares will be paid to the
participant. The plan expires the earlier of October 31, 1999 or when
100,000 common shares have been purchased by plan participants. 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 the participants while participating. Any full-time
employee, or any part-time employee meeting a one-thousand (1,000) hour
service requirement with the Company, is eligible to participate. Assets of
the profit-sharing plan can be invested in the Company's common stock or
among several other alternatives. The Company's expenses related to
contributions to the plan in 1998, 1997 and 1996 were $531,000, $515,000,
and $473,000, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation", which defines a fair value based method of accounting
for employee stock options and similar equity instruments. However,
companies may choose to continue to account for stock options using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and provide pro
forma disclosures of net income and earnings per share as if the fair value
based method had been applied.
The Company has elected to account for its stock-based compensation plans
using the intrinsic value based method of APB No. 25. For pro forma
disclosure purposes, the Company has computed the value of all options
granted during 1998, 1997, and 1996 using the Black-Scholes option pricing
model and the following assumptions:
1998 1997 1996
---- ---- ----
Risk-free weighted average interest rate..... 4.9% 6.7% 6.7%
Expected dividend yield...................... 0% 0% 0%
Expected weighted average lives.............. 6.28 yrs 6.25 yrs 6.25 yrs
Expected volatility.......................... 44.3% 44.7% 44.7%
The aggregate estimated fair value of stock options granted in 1998, 1997
and 1996 was $1,208,000 and $73,000, and $2,917,000 respectively. For
purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed
to the extent applicable to 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
November 1, October 31, October 31,
1998 1997 1996
---- ---- ----
Net Income (Loss)
As Reported $ 9,120 $ 6,899 $ (929)
Pro Forma $ 8,966 $ 6,472 $(1,402)
Net Income (Loss) per Common
and Common Equivalent Share
As Reported $ 0.98 $ 0.75 $ (.10)
Pro Forma $ 0.97 $ 0.71 $ (.15)
A summary of the status of the Company's stock option plans at November 1,
1998 and October 31, 1997 together with changes during the periods then
ended are presented in the following table:
Years Ended
November 1, October 31, October 31,
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Outstanding at
beginning of year 641,518 $13.96 868,300 $12.72 677,898 $16.88
Grants 164,000 $15.81 14,000 $12.25 534,000 $11.70
Exercised (139,001) $12.37 (122,900)* $ 5.82 (11,000) $ 7.69
Canceled (222,517) $12.87 (117,882) $13.08 (332,598) $21.09
--------- --------- ---------
Outstanding at
end of year 444,000 $15.68 641,518 $13.96 868,300 $12.20
======== ======= =======
* Includes 40,000 shares exercised by presenting 14,285 previously owned
shares. The issuance of 25,715 net shares to the employee has been
deferred.
The following table summarizes information about the stock options
outstanding and exercisable as of November 1, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Number
Average Weighted Exercisable Weighted
Remaining Average At Average
Range of Options Contractual Exercise November 1, Exercise
Exercise Prices Outstanding Life Price 1998 Price
- --------------- ----------- ---- ----- ---- -----
$11.50 100,000 7.80 years $11.50 50,000 $11.50
$12.25-$13.25 16,000 7.45 years $12.38 16,000 $12.38
$14.25 100,000 9.92 years $14.25 -- $ --
$14.50-$17.00 122,000 3.31 years $16.12 120,000 $16.15
$18.25-$26.00 106,000 6.96 years $20.98 68,500 $22.48
------- -------
$11.50-$26.00 444,000 6.83 years $15.68 254,500 $16.70
======= =======
Note 8. Asset disposal, impairment and related costs
In 1996, the Company recorded a $5,800,000 asset disposal charge related to
a decision to close and dispose of most of its Angel's Diner restaurants.
The disposal charge consisted of estimates to reduce the carrying amounts of
assets to net realizable value, accruals for closure and carrying costs, and
losses on sublease dispositions where it was expected that sublease rentals
would be lower than the Company's obligations under the prime lease.
In 1994, a $23,000,000 charge was recorded principally related to a plan to
close and dispose of 50 restaurants that had declining sales and profits and
that were in trade areas no longer considered appropriate for the Company's
operating concepts. The disposition plan also included a portion of the
Company's manufacturing and distribution operations which were no longer
economical to operate. The disposal charge consisted of estimates to reduce
the carrying amounts of assets to net realizable value, accruals for closure
and carrying costs, and losses on sublease dispositions where it was
expected that sublease rentals would be lower than the Company's obligations
under the prime lease. Included in the 1994 charge was an impairment of
assets of $2,287,000 for four restaurant properties with projected cash
flows insufficient to recover remaining investments.
As of the end of fiscal 1996, the Company had closed all the restaurants
related to the above mentioned disposal plans. In 1996, the Company closed
its bakery facilities in Denver, Colorado and Orlando, Florida.
Additionally, in 1996 the Company closed two restaurants which were not
included in the disposal plans. In 1997, the Company closed six restaurants
which were not included in the disposal plans. In 1998, the Company closed
one restaurant which was not included in the disposal plans.
Operating results for the closed restaurants for the past three fiscal years
were as follows (in thousands):
1998 1997 1996
------ ------ ------
Sales $146 $4,098 $14,534
Restaurant operating profit (loss) (26) (37) (719)
As of November 1, 1998, the Company had $3,582,000 of reserves remaining to
provide for the disposal of fifteen properties, including seven closed prior
to 1994. The reserves consisted of $2,488,000 to reduce the disposal
property to net realizable value and $1,094,000 to provide for carrying
costs and sublease losses. The Company believes that these reserves are
adequate to cover the remaining costs and losses associated with the
remaining disposal properties. During 1998, $619,000 of closure and
carrying costs were charged against the established liability.
Note 9. Income taxes
The total provisions for income taxes consisted of the following:
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------
Current
Federal $ 300 $ 200 $ 75
States 481 642 205
- -----------------------------------------------------------------------
781 842 280
- -----------------------------------------------------------------------
Deferred
Federal 4,008 2,084 (2,063)
States 449 623 113
- -----------------------------------------------------------------------
4,457 2,707 (1,950)
- -----------------------------------------------------------------------
Total provision for income taxes $ 5,238 $ 3,549 $(1,670)
=======================================================================
The components of the provision for income taxes included in the Company's
statements of operations were as follows:
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------
Current
Taxes on income before
carryforwards $6,064 $3,876 $ 280
Less benefit of loss
carryforwards utilized (5,283) (3,034) --
- -----------------------------------------------------------------------
781 842 280
- -----------------------------------------------------------------------
Deferred
Tax effect of net change in
temporary differences 126 234 858
Utilization of (addition to)
tax net operating loss carryforward 5,283 3,034 (1,734)
FICA tax credit (698) (815) (999)
AMT credit (254) (109) (75)
Expiration of net operating
loss carryforwards 20,046 -- --
Expiration of tax credit
carryforwards 1,009 363 --
Change in valuation allowance (21,055) -- --
- ------------------------------------------------------------------------
4,457 2,707 (1,950)
- ------------------------------------------------------------------------
Tax effect of deduction for
exercised stock options credited
to paid-in capital 4 331 16
- ------------------------------------------------------------------------
Income tax expense (benefit) $ 5,242 $3,880 $(1,654)
========================================================================
Income tax expense (benefit) differs from the amounts computed by applying
the federal income tax rate to income before income taxes as follows:
(in thousands) 1998 % 1997 % 1996 %
- -------------------------------------------------------------------------------------------------
Computed federal income taxes
using statutory rate $ 5,027 35.0% $ 3,773 35.0% $ (904) (35.0%)
FICA tax credit (698) (4.9) (815) (7.5) (999) (38.7)
AMT credit (300) (2.0) (109) (1.0) (75) (2.9)
State income taxes net of federal
income tax effect 605 4.2 822 7.6 207 8.0
Expiration of tax credit
carryforwards -- -- 363 3.4 -- --
Other 608 4.2 (154) (1.5) 117 4.6
- -------------------------------------------------------------------------------------------------
$ 5,242 36.5% $ 3,880 36.0% $(1,654) (64.0%)
=================================================================================================
The Company had federal taxable income (loss) for tax purposes and book
income (loss) before income taxes as follows:
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Federal taxable income (loss) $14,051 $ 6,894 $ (4,033)
Book income (loss) before income
taxes 14,362 10,779 (2,583)
Federal taxable income is generally less than book income before income
taxes due to state income taxes and temporary differences.
The components of the net deferred tax assets were as follows:
(in thousands) 1998 1997
- ------------------------------------------------------------------------
Deferred tax assets
Tax effect of net operating
loss carryforwards $ 52,639 $ 77,968
Tax credit carryforwards 2,835 3,844
FICA tax credit 4,041 3,343
Alternative minimum tax credits 2,603 2,349
Accrued insurance claims not yet deductible 2,432 2,548
Leasing transactions 2,552 3,169
Property and equipment 1,688 386
Other 3,915 4,401
- ------------------------------------------------------------------------
72,705 98,008
Valuation allowance (31,945) (53,000)
- ------------------------------------------------------------------------
Deferred tax assets, net of allowance 40,760 45,008
- ------------------------------------------------------------------------
Deferred tax liabilities (1,596) (1,389)
- ------------------------------------------------------------------------
Net deferred tax assets 39,164 43,619
Current portion 3,617 5,000
- ------------------------------------------------------------------------
Long-term portion $35,547 $38,619
========================================================================
As of November 1, 1998, the Company had federal net operating loss ("NOL")
carryforwards totaling $140,371,000 which expire $112,880,000 in 1999,
$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
$2,289,000 which expire in 1999 and 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
and only a portion of the operating loss carryforwards are expected to be
applied against future taxable income before they expire. The remaining
valuation allowance at November 1, 1998, is based on an assumption that the
Company will report taxable income in 1999 of approximately $34 million. To
the extent actual taxable income for fiscal 1999 varies from the assumed
amount, an adjustment to the valuation allowance will be required. Actual
taxable income for fiscal 1998 was approximately $14 million. Management is
currently pursuing certain tax planning strategies it believes can be
implemented to increase taxable income currently projected for fiscal 1999
to at least $34 million. However, there can be no assurance these tax
planning strategies will be successfully implemented and the adequacy of the
allowance is principally dependent on the actual amount of taxable income
ultimately reported for fiscal 1999.
Note 10. Commitments and contingencies
Prior to fiscal 1998, the Company retained a significant portion of certain
insurable risks primarily in the medical, dental, workers' compensation,
general liability and property areas. Traditional insurance coverage was
obtained for catastrophic losses. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of liabilities for
claims incurred, including those not yet reported. Such estimates utilize
prior Company history and actuarial assumptions followed in the insurance
industry. The Company has provided letters of credit totaling $1,850,000 in
connection with certain of these insurance programs. For its fiscal 1998
the Company obtained traditional insurance coverages for its insurable
risks, with the exception of medical and dental coverage.
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 or regulations
concerning the payment of wages, tip pooling, reimbursement for uniform
expenses, failure to remit tips, 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 California
Bakers Square Restaurant. The Plantiff is seeking damages, statutory
penalties, injunctive and declaratory relief, the disgorgement of amounts by
which VICORP has been unjustly enriched, interest, attorneys' fees, and costs
for alleged violations of California statutes and regulations concerning the
payment of wages and of the California Business and Professional Code.
The Company believes it has meritorious defenses to each of the claims in
both actions and it intends to vigorously defend them. Management believes
that the Company will ultimately prevail and that the final resolution of
the complaints will not have a material effect on its results of operations
or financial position. The cost of defense for these class actions will be
recognized as incurred.
VICORP has guaranteed certain leases for 21 restaurant properties sold to
others in 1986 and 18 restaurant leases of certain franchisees. Minimum
future rental payments remaining under these leases were approximately $7.3
million and $9.5 million as of November 1, 1998 and October 31, 1997,
respectively. These guarantees are included in the definition of financial
instruments with off-balance-sheet risk of accounting loss; however, the
Company has not been required to make payments with respect to these
guarantees and presently has no reason to believe any payments will be
required in the future. The Company believes it is impracticable to
estimate the fair value of these financial guarantees (e.g., amounts the
Company could pay to remove the guarantees) because the Company has no
present intention or need to attempt settlement of any of the guarantees.
At November 1, 1998, the Company had contractual commitments for restaurant
construction of approximately $1,450,000.
Note 11. Quarterly financial data (unaudited)
The Company's quarterly results of operations are summarized as follows (in
thousands, except per share data):
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 income 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
==============================================================================================
Quarter ended
-------------------------------------------------------------
January 31, April 30, July 31, October 31,
1997 1997 1997 1997
(92 days) (89 days) (92 days) (92 days)
- ----------------------------------------------------------------------------------------------
Revenues $83,930 $79,316 $81,575 $80,706
Restaurant operating income 8,678 8,237 8,398 7,974
Net income 1,826 1,733 1,902 1,438
Net income per share-diluted .20 .19 .21 .16
==============================================================================================
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 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 - November 1, 1998 and October 31, 1997.
Statements of Operations - Years ended November 1, 1998, October 31,
1997 and October 31, 1996.
Statements of Cash Flows - Years ended November 1, 1998, October 31,
1997 and October 31, 1996.
Statements of Shareholders' Equity - Years ended November 1, 1998,
October 31, 1997 and October 31, 1996 as presented in Note 6 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 33.
Report of Independent Public Accountants on Financial Statement
Schedule.
Schedule II - Valuation and Qualifying Accounts for the years ended
November 1, 1998, October 31, 1997 and October 31, 1996.
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 1998:
None.
(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 11, 1998.
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 11, 1998.
VICORP Restaurants, Inc.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended November 1, 1998
(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 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
Accumulated amortization 6,705 772 -- 70 7,407
--------- -------- -------- -------- ---------
$ 12,841 $ 840 $ 220 $ 3,295 $ 10,606
========= ======== ======== ======== =========
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
Accumulated amortization 6,038 697 -- 30 6,705
--------- -------- -------- -------- ---------
$ 13,235 $ 700 $ 187 $ 1,281 $ 12,841
========= ======== ======== ======== =========
Year ended October 31, 1996:
Allowance for doubtful accounts $ 2,268 $ 32 $ 189 $ 1,785 $ 704
Discounts and deferred gains 750 (63) -- -- 687
Allowance for loss on disposal 6,852 2,915 -- 3,961 5,806
Accumulated amortization 5,674 642 -- 278 6,038
--------- -------- -------- -------- ---------
$ 15,544 $ 3,526 $ 189 $ 6,024 $ 13,235
========= ======== ======== ======== =========
Charges to the accounts for purposes for which the reserves were created.
Asset dispositions and write-offs of fully amortized assets.
Establishment of reserves by charges directly to income.
Recognition of deferred gain.
Year-end balances are reflected in the Balance Sheets as follows:
November 1, October 31,
1998 1997
----------- -----------
Deducted from current receivables $ 562 $ 567
Deducted from property and equipment 2,357 4,669
Deducted from long-term receivables 149 769
Deducted from other assets 7,538 6,836
--------- ---------
$ 10,606 $ 12,841
========= =========
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-Form 10-K for the year ended October 31, 1997.
(iii) 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) Severance Agreement Charles R. Frederickson
- Form 10-K for the year ended October 31, 1993,
Exhibit 10(vi).
*(e) Employment Agreement for Richard E. Sabourin dated
July 25, 1996 - Form 10-Q for the quarter ended
July 31, 1996, Exhibit 10(ii)(b).
*(f) Stock Option Agreement of Richard E. Sabourin dated
August 19, 1996 - Form 10-Q for the quarter ended
July 31, 1996, Exhibit 10(ii)(d).
(g) Amended and Restated 1982 Stock Option Plan.
(h) Amended and Restated 1983 Stock Option Plan.
(i) Form Severance Agreement (Executive Officers excluding
Frederickson) - Form 10-Q for the quarter ended
July 31, 1998.
(j) Stock Option Agreement of Robert E. Kaltenbach dated
April 9, 1998.
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
20th day of January, 1999.
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 20, 1999 on
behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Charles R. Frederickson Chairman of the Board
--------------------------- President and Chief
(Charles R. Frederickson) Executive Officer
/s/ Richard E. Sabourin Executive Vice
----------------------- President/Chief Financial Officer
(Richard E. Sabourin) (Principal Financial
and Accounting Officer)
/s/ Charles R. Frederickson
---------------------------
(Charles R. Frederickson)*
* Charles R. Frederickson, as attorney-in-fact for 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.