Item 1. Business.
VICORP Restaurants, Inc., the registrant, is referred to herein as "VICORP" or the "Company." The Company was incorporated in 1959 and is headquartered in Denver, Colorado.
VICORP operates family style restaurants under the names "Bakers Square" and "Village Inn," and franchises restaurants under the Village Inn brandname. At October 31, 1999, VICORP operated two hundred fifty-two Company-owned restaurants in thirteen states. Of the two hundred fifty-two Company-owned restaurants, one hundred fifty were Bakers Squares and one hundred two were Village Inns, with an additional one hundred sixteen franchised Village Inn restaurants in twenty-one states. The Company-owned and franchised restaurants are concentrated in Arizona, California, Florida, the Rocky Mountain region and the upper Midwest. The Company operates a pie manufacturing division to support the restaurants, which operates under the name VICOM. VICOM has three production facilities located in Santa Fe Springs, California, Oak Forest, Illinois and Mounds View, Minnesota.
Company Operations
The Village Inn concept is focused on breakfast food, offering homestyle entrees for breakfast, lunch and dinner. Bakers Square emphasizes lunch and dinner with signature fresh baked pies in twenty-two, plus flavors. Each concept offers a relatively standard core menu supplemented with daily and monthly entree and pie specials with an average guest check of six to eight dollars.
Store management typically consists of a general manager and two assistant managers. The store managers are supported by regional managers, regional vice-presidents and the corporate office. Incentives are provided to encourage store and regional managers to maximize store sales and monitor controllable costs.
The Company believes the principal measure of success for the restaurants is the ability to provide the customer with a satisfying experience. Attracting and retaining the best people, continuous employee development, regular communication of expectations, and constant performance feedback are central factors to ensure customer satisfaction. Training programs are designed to meet these objectives and focus on outcome-based training, emphasizing the acquisition of basic skills and behavior that result in desired performance for specific positions.
Cost effective procurement of quality products is also critical to providing a satisfying customer experience. The Company makes centralized purchasing decisions for basic menu ingredients to gain favorable prices and ensure uniform quality specifications. Management does not anticipate any difficulty in obtaining food products of adequate quantity or quality at acceptable prices.
The Company utilizes advertising to promote the restaurant concepts and gain market share. Expenditures for marketing were 2.66% of Company-operated restaurant sales in the current fiscal year.
The Company-operated restaurants utilize point-of-sale and back-of-house computer systems. These systems capture sales information, payroll data, and provide restaurant managers with analytical and reporting tools.
During fiscal 1999, the Company opened seven new restaurants and closed four restaurants, of which three were converted to franchise operations and one closed due to the expiration of the lease. The Company intends to open eight to ten Company-operated restaurants during fiscal year 2000, with emphasis on the Village Inn concept.
Franchise Operations
The initial term of a Village Inn Franchise Agreement is twenty-five years. An initial franchise fee of $35,000 is due upon the grant of a franchise and ongoing royalty fees are 4% of gross sales. The Company supports its franchisees with regular visits to the restaurants by Quality Assurance Consultants to help ensure the Company's high quality service and cleanliness standards are upheld. A franchise advisory board, consisting of seven franchisees elected by their peers every two years, meets with Company management four times per year. The meetings provide a forum for the exchange of ideas, which will enable the Company and the franchisees to maximize growth, sales and profits.
During fiscal year 1999, the Company established eight new franchised Village Inn locations in Florida, Arkansas, Nevada, Oklahoma and Colorado; and two restaurants were closed. The Company plans to pursue franchise development as a source of providing a continued profitable revenue stream, as well as to gain market share, thus promoting the advancement of the Village Inn brandname. The Company expects to develop from five to ten franchised units during fiscal 2000.
Trademarks and Service Marks
The Company owns the right to use the trademarks and service marks, which have been registered with various state and federal patent and trademark offices. The Company considers the trademarks and service marks important to the business and actively defends and enforces them.
Competition
The restaurant industry is highly competitive with regards to quality, value, location, service and price, and is often affected by changes in consumer tastes, local and national economic and real estate conditions, traffic patterns and demographic trends. The Company competes directly and indirectly with all types of restaurants from national and regional chains to local establishments. Competitors include corporations much larger than the Company, which have greater capital resources and ability to withstand adverse business trends.
Research and Development
No material amounts were spent on Company sponsored research activities relating to the development or enhancement of products, services or techniques.
Regulation
The Company is subject to various federal, state and local laws governing the sale and preparation of food, zoning, sanitation, health and safety, minimum wage requirements, overtime, construction, environmental and sale of alcoholic beverages.
The Federal Trade Commission, as well as state laws regulate franchise operations, including laws imposing registration and disclosure requirements for franchisors during the offer and sale of franchises and, in certain cases, applying substantive standards to the relationship between the Company and the franchisee.
Employees
As of October 31, 1999 the Company had approximately 11,880 employees. None of the Company's employees are represented by a labor union or are the subject of a collective bargaining agreement.
Executive Officers of the Company
The following table sets forth the names, ages, position and business experience of the executive officers of the Company. Executive officers are appointed by the Board of Directors on an annual basis. There are no family relationships between the executive officers.
Name Age Position - ---- --- ------- Charles R. Frederickson 62 Chairman of the Board and Chief Executive Officer Joseph F. Trungale 58 President VICORP Restaurants, Inc./ Bakers Square Robert E. Kaltenbach 54 President Village Inn Richard E. Sabourin 49 Executive Vice President/Chief Financial Officer
Charles R. Frederickson has been a director of the Company since 1968, and Chairman of the Board since November 1986.
Joseph F. Trungale was appointed President of the Company on November 1, 1999, after serving as the President of the Bakers Square concept since August 1998. Previously, Mr. Trungale served in various positions with operational responsibility over the Company's Bakers Square restaurants. Prior to joining the Company, Mr. Trungale operated a family-owned real estate business from September 1995 through July 1997. For eight years preceding that, he was Vice President of Operations for Whataburger, Inc.
Robert E. Kaltenbach was appointed President of Village Inn in December 1994 after serving as Vice President of Franchise Operations since July 1988.
Richard E. Sabourin was appointed Executive Vice President and Chief Financial Officer in August 1996. From 1989 to August 1996, Mr. Sabourin was employed by Bestop, Inc. in various positions including President, Chief Operating Officer, and Chief Executive Officer.
Item 2.
Item 2. Properties.
The Company owns the corporate office complex located in Denver, Colorado and the bakery facility in Oak Forest, Illinois. The land and buildings at the Santa Fe Springs, California and Mounds View, Minnesota bakeries are leased.
Company operated Village Inn restaurants are concentrated in the Rocky Mountain region, Arizona and Florida, while Bakers Square restaurants are located primarily in California and the upper Midwest. The Company considers existing restaurant properties and equipment to be in good working condition. The Company intends to lease, sublease or sell seven idle restaurant properties. On October 28, 1999, the Company completed the sale and leaseback of the real estate related to twenty-one restaurant properties. The idle bakery facility in Denver, Colorado was sold on November 12, 1999. The following table sets forth properties owned in fee, buildings owned on leased land, and leased locations as of October 31, 1999:
Item 3.
Item 3. Legal Proceedings.
On September 28, 1998, two class actions were commenced in the Superior Court of Los Angeles County, California.
The first, Kirk v. VICORP Restaurants, Inc., Case No. BC-198202, was brought by a former manager of a California Bakers Square restaurant. Allegations in the amended complaint assert violations by VICORP of California wage and hour laws and regulations concerning overtime wages. The Plaintiff is seeking class certification, injunctive relief, damages in an unspecified amount, statutory penalties, interest, costs, and attorneys' fees.
The second, Schroeder v. VICORP Restaurants, Inc., Case No. BC-198203, was brought by a former server at a California Bakers Square restaurant. The Plaintiff alleges VICORP has violated California statutes and regulations concerning the payment of wages, tip pooling, reimbursement for uniform expenses, failure to remit tips, and the improper charging of walkouts to servers. Class certification is requested, as well as injunctive relief, damages in an unspecified amount, statutory penalties, interest, costs, and attorneys' fees.
On December 28, 1998, a third action was commenced in the Superior Court of Los Angeles County, California, Ontiveros v. VICORP Restaurants, Inc., Case No. BC-202962. This action was brought by a former manager of a California Bakers Square restaurant. The Plaintiff is seeking damages, statutory penalties, declaratory relief, interest, attorneys' fees, and costs for alleged violations of California statutes and regulations concerning the payment of wages.
The Company believes the legal actions described above are similar to plaintiff actions recently brought against other multi-location restaurant operators in the state of California. Resolution of these matters may require a significant period of time and is subject to substantial uncertainties common to the judicial process for class actions in general. The Company believes it has not violated California statutes and regulations and has meritorious defenses to each of the claims in these actions. While the Company intends to vigorously defend against the allegations, it is possible that the Company will not prevail, or that decisions made in other similar cases may result in interpretations of the California statutes that are adverse to the Company's position. The cost of defense for these actions is being recognized as incurred. No provision has been made for any judgements or settlements that might ultimately result. While a contingency exists that any such judgement or settlement could be material to the results of operations of the Company for some future period or periods, the Company currently believes that resolution of these amounts will not have a material adverse effect on the Company's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the Company's security holders during the fourth quarter ended October 31, 1999.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock is traded on the over-the-counter market and is quoted on the National Association of Securities Dealers (NASDAQ) National Market System under the symbol "VRES". As of January 20, 2000, the Company had 391 shareholders of record. The following table sets forth for the high and low closing sales quotations per share of common stock as reported by NASDAQ during each of the Company's fiscal quarters: [CAPTION]
The range of high and low closing sales quotations contained in the foregoing table reflects inter-dealer prices, without retail mark-up, markdown or commissions, and may not represent actual transactions.
The Company has not paid cash dividends on common stock since 1986. Future common stock dividend payments are dependent upon operating results, loan agreement restrictions and other financial and business considerations.
Item 6.
Item 6. Selected Financial Data.
* An asset impairment of $746,000 was included in results of operations for 1999. * A one-time tax benefit of approximately $5,400,000 from adjusting the valuation allowance relating to certain deferred tax assets was included in net income for 1999. * An asset disposal charge of $5,800,000 was included in results of operations for 1996. * An asset disposal, impairment and restructuring charge of $23,000,000 and income of $1,918,000 from settlement of litigation were included in results of operations for 1994. * A restructuring charge of $1,300,000 was included in results of operations for 1993. * Fiscal 1999 consisted of 364 days, while fiscal years 1998, 1997, 1996, 1995, 1994, 1993, consisted of 366 days, 365 days, 366 days, 366 days, 364 days, and 371 days, respectively. * The Company has not paid dividends on common stock during the last seven years.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Selected Financial Data (Item 6 of Part II) and the Financial Statements and Supplementary Data (Item 8
Item 8. Financial Statements and Supplementary Data.
Management's Report on Financial Statements
TO OUR SHAREHOLDERS:
The preparation and integrity of the financial statements of VICORP Restaurants, Inc. are the responsibility of its management. This responsibility includes the selection of accounting procedures and practices which conform with generally accepted accounting principles considered appropriate in the circumstances. Informed judgments and estimates which the Company believes to be reasonable are required in the determination of certain data used in the accounting and reporting process.
The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded in all material respects. Adequate communication of Company policies to its employees, segregation of responsibilities for the authorization and execution of transactions, and proper accountability for the Company's assets are essential elements of the system.
Each year the Board of Directors appoints an Audit Committee comprised of directors who are not employees of the Company. The principal responsibilities of this Committee are to recommend an independent auditor for the Company and to periodically meet with representatives of the independent auditors and with management to obtain reasonable assurances that the auditors are properly discharging their responsibilities and that the Company's financial reporting to stockholders and others is adequate and appropriate.
Arthur Andersen LLP has conducted an independent examination in order to render their opinion on the Company's financial statements.
Charles R. Frederickson Richard E. Sabourin Chief Executive Officer Executive Vice President and and Chairman of the Board Chief Financial Officer
Report of Independent Public Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VICORP RESTAURANTS, INC.:
We have audited the accompanying balance sheets of VICORP Restaurants, Inc. (a Colorado corporation) as of October 31, 1999 and November 1, 1998, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VICORP Restaurants, Inc. as of October 31, 1999 and November 1, 1998, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Denver, Colorado, December 22, 1999.
VICORP Restaurants, Inc. BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc. STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
VICORP Restaurants, Inc. NOTES TO FINANCIAL STATEMENTS
Note 1. Description of Business
VICORP ("the Company") operates family style restaurants under the names "Bakers Square" and "Village Inn," and franchises restaurants under the Village Inn brandname. At October 31, 1999, VICORP operated two hundred fifty-two Company-owned restaurants in thirteen states. Of the two hundred fifty-two Company-owned restaurants, one hundred fifty were Bakers Squares and one hundred two were Village Inns, with an additional one hundred sixteen franchised Village Inn restaurants in twenty-one states. The Company-owned and franchised restaurants are concentrated in Arizona, California, Florida, the Rocky Mountain region and the upper Midwest. The Company operates a pie manufacturing division to support the restaurants, which operates under the name VICOM. VICOM has three production facilities located in Santa Fe Springs, California, Oak Forest, Illinois and Mounds View, Minnesota.
Note 2. Summary of Significant Accounting Policies
Fiscal Year - ----------- Effective fiscal 1999, the Company adopted reporting on a 52/53 week fiscal year ending on the last Sunday in October. In conjunction with that change, the Company's last fiscal quarter of 1999 consisted of sixteen weeks and all other quarters consisted of twelve weeks. Prior to 1999, the Company utilized a fiscal year which, ended on the last day in October. Fiscal quarters in 1998 and 1997 consisted of three months.
Estimates - --------- The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash on hand and highly liquid instruments with original maturities of three months or less.
Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market and consist of food, paper, products and supplies. Inventories consisted of the following (in thousands):
Prepaid Expenses - ---------------- Prepaid expenses consist primarily of prepaid rent, supplies, prepaid contracts and prior to fiscal year 1999 restaurant pre-opening costs. Pre- opening costs consisted of salaries and other direct expenses incurred in connection with the set-up and stocking of stores, employee training and general store management costs incurred prior to the opening of new stores. Effective November 2,1998, the Company early adopted the provisions of AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). All pre-opening expenses were expensed as incurred in accordance with SOP 98-5. Prepaid pre-opening costs capitalized at October 31, 1999 and November 1, 1998 are $0 and $67,000, respectively, so the cumulative effect of the change in accounting principle was not significant to the Company's financial position or results of operations.
Property and Equipment - ---------------------- Property and equipment is stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization has been calculated using the straight-line method. The useful lives of assets range from twenty to forty years for buildings and three to ten years for equipment and improvements. Leasehold improvements and leasehold rights are amortized over the lesser of the useful life or the lease term. Property and equipment additions include acquisitions of building and equipment and costs incurred in the development and construction of new stores. Expenditures for maintenance and repairs are charged to expense as incurred.
The Company accounts for the cost of its information systems in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires capitalization of external and internal costs incurred during the application development stage. Costs incurred during the preliminary project stage, post-implementation stage, training and application maintenance are expensed as incurred.
Goodwill - -------- The excess purchase price over net assets acquired is included in other assets and amortized over twenty-five years.
Revenue Recognition - ------------------- Revenue from Company stores is recognized in the period during which related food and beverage products are sold.
Initial franchise fees are recognized as income upon commencement of the franchise operation and completion of all material services and conditions by the Company. Continuing service fees are calculated as a percentage of the franchisee gross sales and recognized in the period the sales are generated. Property rental income is recognized on a straight-line basis over the life of the lease. Interest income on franchisee notes receivable and equipment sales is recognized when earned. If collectibility is in doubt, revenue recognition is deferred until cash receipt.
Net franchise operations consisted of the following (in thousands):
Advertising Costs - ----------------- Advertising costs for television, radio, newspapers, direct mail and point- of-purchase materials are expensed in the period incurred. Production costs are expensed upon initial usage of the advertising. Advertising expense for 1999, 1998 and 1997 was $9,454,000, $7,982,000 and $5,788,000, respectively. At October 31, 1999 and November 1, 1998, $146,000 and $0 were reported as prepaid expenses.
Fair Value of Financial Instruments - ----------------------------------- The carrying value of cash and cash equivalents approximates fair value due to the length of maturity. Notes receivable is valued at estimated fair market value based on the respective facts and circumstances of each non- publicly traded instrument. The fair value of long-term debt approximates carrying value due to the variable, market-based interest rate feature.
Income Taxes - ------------ Deferred income tax assets and liabilities are recognized for the expected future income tax consequences of carryforwards and temporary differences between the GAAP and tax basis of assets and liabilities. Valuation allowances are established for deferred tax assets that are deemed unrealizable.
Earnings Per Share - ------------------ Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of potentially dilutive common stock using the treasury stock method. The number of potentially issuable shares as of October 31, 1997 has been restated to conform with Statement of Financial Accounting Standards No.128 "Earnings Per Share."
Recoverability of Long-Lived Assets - ----------------------------------- The Company evaluates long-lived assets to be held and used in the business for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment is determined by comparing estimated undiscounted future operating cash flows to the carrying amounts of assets. Assets are assessed on a restaurant by restaurant basis. If an impairment exists, the asset will be recorded at the lesser of its fair value or the estimated discounted future cash flows related to that asset.
New Accounting Pronouncements - ----------------------------- In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 which delayed the effective date of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), until fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives should be recognized in either net income or other comprehensive income, depending on the designated purpose of the derivative. At present the Company is investigating the effect the adoption of this statement will have on the Company's results of operations, financial position and cash flows, if any.
Note 3. Receivables
Receivables represent billings to outside bakery sales customers and franchisee billings for continuing royalty service fees, initial and renewal fees, equipment sales, and property rental for franchisees and other sublessees. The trade receivables are generally unsecured while notes receivable are typically secured by the property that gave rise to the transaction.
Year-end receivables consisted of the following:
Note 4. Property and Equipment
Property and equipment consisted of the following:
Depreciation and amortization expense was $18,635,000 in 1999, $18,790,000 in 1998, and $19,222,000 in 1997.
At October 31, 1999, all fee owned properties were free of mortgages, pledges or other liens.
Note 5. Leases
The Company is the prime lessee under various land, building and equipment leases for Company-owned and franchised restaurants, bakery facilities and other non-Company operated locations. The leases have initial terms ranging from fifteen to thirty-five years and, in certain instances, provide for renewal options ranging from five to twenty years. Many leases provide for purchase options at the end of the lease term and escalation clauses, either predetermined or based upon inflation. Leases may also include additional rental payments contingent upon restaurant sales volume. Under most leases, the Company is responsible for occupancy costs including taxes, insurance and maintenance. Subleases to franchisees or other non-Company operators generally provide for similar terms as the prime lease, as well as an obligation for occupancy costs. Implicit interest rates range from 7.2% to 13.8% on capital leases.
The following summarizes future minimum lease payments under capital and operating leases having an initial or remaining non-cancelable term of one year or more as of October 31, 1999:
Net rental expense consisted of the following:
On October 28, 1999, the Company completed the sale and leaseback of the real estate related to twenty-one restaurant properties. The Company received $28,700,000 in net proceeds with a resulting deferred gain of $16,500,000, which will be amortized to reduce future rent expenses over the terms of the operating leases in accordance with SFAS 98, "Accounting for Leases."
Note 6. Debt
Long-term debt consisted of the following:
On December 19, 1997, the Company executed an amended and restated credit agreement, which provides for an available credit limit of $40,000,000 in the aggregate with a sublimit of $10,000,000 on letters of credit. The credit agreement expires on February 28, 2001.
Advances under the amended and restated agreement bear interest at the higher of the Federal Funds rate plus 1/2 of 1% or the lender's Prime Rate, or the Company may elect to borrow at the lender's Eurodollar rate plus 1% to 1 5/8%. In addition, the Company is required to pay fees equal to 1/4 to 3/8 of 1% per annum on unused portions of the commitment, and 1% to 1 5/8% per annum on issued letters of credit.
The unused commitment and letter of credit fees and the margin on Eurodollar borrowings are adjusted based on the Company's debt-to-capitalization ratio and fixed charge coverage ratio. At the time of the closing of the amended and restated agreement, the Company qualified for minimum rates and fees provided in the agreement.
On October 28, 1999, the Company completed the sale and leaseback of the real estate related to twenty-one restaurant properties. In conjunction with the transaction the Company received a waiver letter dated October 22, 1999, under which the lender waived any default caused by the sale leaseback transaction, and agreed not to enforce their rights or remedies under the loan document. In consideration of the waiver, the Company agreed not to purchase any of its shares of common stock or exchange shares of one class of capital stock for another in excess of the lesser of $30,000,000 or the net proceeds of the sale leaseback transaction without the prior written consent of the lender through the maturity date of the loan agreement. The waiver does not constitute a waiver of any present or future violation of or noncompliance with any provision of the loan document. Subsequent to year- end, the Company commenced a tender offer to purchase 2,000,000 shares of the outstanding common stock for $19.00 per share as described in Note 13. The Company received a waiver letter dated November 22, 1999 from the lender consenting to the transaction and amending certain covenants.
During 1999, the largest aggregate outstanding balance under the Company's bank facilities was $650,000. The average balance outstanding was $3,022 with an average interest rate of 7.59%. At October 31, 1999, the Company had placed letters of credit totaling $1,850,000 in connection with its insurance programs and carried no outstanding debt under its credit agreement.
The credit agreement contains various restrictive covenants which include, among others, maintenance of certain financial ratios, maintenance of a minimum balance of tangible net worth and limitations on annual capital expenditures, indebtedness, dividends, dispositions and acquisitions and franchise guarantees.
Principal amounts of other long-term debt outstanding as of October 31, 1999 due during each of the five succeeding fiscal years were, $56,000 in the year 2000, $40,000 in 2001, and none in the years 2002, 2003 and 2004.
The Company incurred $1,012,000, $1,553,000, and $2,573,000, of interest charges in 1999, 1998, and 1997, respectively. Of these amounts, $0, $6,000 and $4,000 were capitalized in 1999, 1998, and 1997, respectively.
Deferred loan fees were $23,000 and $141,000 net of amortization at October 31, 1999 and November 1, 1998, respectively. These amounts are included in other assets and are amortized over the three-year loan commitment period using the straight-line method.
Note 7. Shareholders' Equity
The Company's authorized preferred stock consists of 5,000,000 $.10 par value shares issuable in series. The rights of each series are to be determined by the Company's Board of Directors.
Since August 1992, the Company's Board of Directors has authorized the repurchase of shares of the Company's common stock. During 1999, the Company repurchased 232,925 shares at an aggregate cost of $3,637,000. An additional 453,375 common shares remained available for repurchase under the existing authorizations. Future purchases may be made in the open market or through privately negotiated transactions and will be dependent upon various business and financial considerations.
Under Colorado law, repurchased shares of capital stock are considered authorized and unissued shares and have the same status as shares which have never been issued.
Under the most restrictive covenants of the Company's bank credit agreement, approximately $30,000,000 and $33,796,000 was unrestricted at October 31, 1999, as to the repurchase of the Company's common stock and to declaration of cash dividends, respectively.
The following table summarizes shareholders' equity activity:
Note 8. Stock Option, Stock Purchase, Profit-sharing Plan, Deferred Compensation Plan and Directors' Stock Plan
Under terms of the Company's stock option plans, officers and certain other employees may be granted options to purchase the Company's common stock at exercise prices not less than the market value of the common stock on the date of the grant. Options generally vest over three years and expire ten years after the date of grant or three months after employment termination, whichever occurs first.
The Company has elected to account for its stock-based compensation plans using the intrinsic value based method under APB No. 25. For pro forma disclosure purposes, the Company has computed the value of all options granted during 1999, 1998, and 1997 using the Black-Scholes option pricing model and the following assumptions:
The aggregate estimated fair value of stock options granted in 1999, 1998 and 1997 was $100,000, $1,208,000 and $73,000, respectively. For purposes of pro forma disclosure, the estimated fair value of options is amortized over the options' vesting period and previously recognized compensation expense is reversed for current year forfeitures of unvested options. If the Company had accounted for its employee stock compensation plans in accordance with SFAS No. 123, the Company's net income and pro forma net income per share would have been reported as follows:
Following is a summary of the Company's stock option plans at October 31, 1999, November 1, 1998 and October 31, 1997:
* For 1999, includes 50,000 shares exercised by presenting 49,097 previously owned shares. For 1997, includes 40,000 shares exercised by presenting 14,285 previously owned shares. The issuance of 903 and 25,715 incremental shares to the employee was deferred in 1999 and 1997, respectively. These shares are held in trust for the benefit of the employee under the terms of the Company's Deferred Compensation Plan described below.
The following table summarizes information about the stock options outstanding and exercisable as of October 31, 1999:
In October 1996, the Company adopted an Employee Stock Purchase Plan (the "Plan") under which eligible employees completing twelve months of employment may contribute up to $25,000 of their annual earnings toward the quarterly purchase of the Company's common stock at 85% of the quarter-end market value. There are no charges or credits to income in connection with the Plan. The Company has reserved 500,000 common shares for issuance under the Plan, which terminates on September 30, 2001. Under the Plan 8,502, 9,612 and 14,860 shares were issued in fiscal 1999, 1998 and 1997, respectively.
The Company has an Outstanding Common Stock Purchase Plan (the "Plan") under which eligible participants may elect to utilize incentive compensation that otherwise would be paid in cash to purchase the Company's common stock in the open market at prevailing prices. If the participant owns these shares and is employed by the Company after two years from the purchase of the common shares, a cash bonus equal to 25% of the incentive compensation used to purchase the shares will be paid to the participant. The Plan expired on October 31, 1999. No material expense under this Plan was incurred during the last three fiscal years.
The Company has an Employees' Profit-sharing Plan, established under Section 401(k) of the Internal Revenue Code of 1986, which provides for annual contributions by the Company in the amount of 2% of the aggregate compensation of participants. Full-time and part-time employees and part-time employee meeting a one thousand hour service requirement are eligible to participate. The Company contributed $651,000, $531,000 and $515,000 in 1999, 1998 and 1997, respectively.
The Company has a Deferred Compensation Plan (the "Plan") that allows officers of the Company to voluntarily defer compensation. All benefits under the Plan are unfunded obligations of the Company. Compensation expense is recorded for cash compensation deferred and a related liability is recognized. Participants may elect designated investment options for the notional investment of their deferred compensation. The recorded obligations and expense are adjusted for deemed income or loss related to the investments selected. The Company accounts for deferred cash compensation under EITF 97-14. On October 31, 1999 and November 1, 1998, the accrued obligation for deferred cash compensation and deemed earnings thereon was $1,553,000 and $874,000, respectively. The Plan provides that participants who hold stock options may irrevocably elect to exercise the stock options and have their Plan account credited with a number of shares equal in value to the incremental difference between the exercise price and the closing price of the Company's common stock on the surrender date. Under EITF 97-5, if the option holder presents "mature" shares (held for at least six months) that are deemed tendered for the exercise price, and the ultimate payment to the employee is limited to the number of shares deferred, no compensation expense is recognized at the time of exercise, or subsequently. If the employee has the right to receive cash or other considerations from the Plan, the intrinsic value of the options at the date of exercise would be expensed as well as subsequent changes in the fair value of the shares held by the Company for the benefit of the employee, until finally distributed. To date, no compensation expense has been recognized related to the deferred issuance of Company shares. Common shares held in trust by the Company totaled 29,495 in 1999 and 28,592 in 1998. These shares are accounted for in a manner similar to treasury stock, and consequently, under Colorado law, are treated as authorized but unissued shares. Upon eligibility for retirement or termination of a participant's employment, the participant shall have a 100% vested interest in their Plan account. Distributions of the participant's account shall be made in single lump sum payments or equal installments over a period of no less than two and no more than fifteen years.
The Company has a common stock award plan for non-employee directors ("Directors Plan") under which the maximum number of shares of common stock which may be granted during the term of the Directors Plan will be 150,000 shares. Under the terms of the Directors Plan, on the last day of each calendar quarter effective July 1, 1999, the Company will automatically grant a number of shares of common stock equal to $5,000 to each director. The fair market value is equal to the average of the closing price on the common stock for the five business days immediately preceding the grant date. A director may elect to defer receipt of the common stock until the expiration of five years from the date of such grant or the termination of the director's status as a director. Compensation expense is recognized for the fair value of the shares at the date of grant and adjusted for subsequent changes in their fair value until issued. As of October 31, 1999, 2,440 shares were granted at an option price of $16.38, of which 305 were issued and 2,135 were deferred for a total compensation expense of $41,068.
Note 9. Asset Disposal, Impairment and Related Costs
The Company recorded a pre-tax charge of $746,000 in fiscal 1999 for the write down of certain restaurant properties. Management assessed various factors relevant to the assets, including projected negative cash flow losses and concluded the historical performance trends were unlikely to improve materially, therefore an impairment of the assets was recognized.
In 1996, the Company determined the strategy of using the Angel's Diner restaurants concept to invigorate underperforming restaurant properties was not economically viable and recorded a $5,800,000 asset disposal charge. The charge reduced the carrying values of related assets to net realizable value and provided for closure and carrying costs.
In 1994, the Company recorded a $23,000,000 charge related primarily to a plan to close and dispose of underperforming restaurants and discontinue a portion of the Company's manufacturing and distribution activities. Also, included was the recognition of the impairment of the carrying values on four properties and an accrual for other costs directly related to the restructuring.
During 1999, the Company disposed of eight properties; five through sublease and three through lease termination. Closure and carrying costs of $336,000 were charged against the established reserve. Additional units closed that were not included in the disposal plan included one in 1999, one in 1998 and six in 1997.
Operating results for the closed restaurants for the past three fiscal years were as follows (in thousands):
As of October 31, 1999, the Company had $2,996,000 remaining to provide for the disposal of seven properties. The reserves consisted of $2,238,000 to reduce the disposal properties to realizable value and $758,000 to provide for carrying costs and sublease losses. The Company believes these reserves are adequate to cover the remaining costs and losses associated with the remaining disposal properties.
The Company closed the bakery facilities in Denver, Colorado and Orlando, Florida in 1996 and subsequently sold the Denver, Colorado bakery facility on November 12, 1999 for $690,000, with a resulting loss of $614,000 applied against the disposal reserve.
Note 10. Income Taxes
The total provisions for income taxes consisted of the following:
The components of the provision for income taxes included in the Company's statements of operations were as follows:
Income tax expense differs from the amounts computed by applying the federal income tax rate to income before income taxes as follows:
The Company had federal taxable income for tax purposes and book income before income taxes as follows:
The difference between federal taxable income and book income is due to state income taxes and temporary differences.
The components of the net deferred tax assets were as follows:
As of October 31, 1999, the Company had federal net operating loss ("NOL") carryforwards totaling $27,491,000 which expire $6,146,000 in 2001, $17,588,000 in 2010 and $3,757,000 in 2011. The Company also has investment tax credit ("ITC") carryforwards totaling $1,601,000, which expire in 2000. The Company has established a valuation allowance for the deferred tax assets related to these carryforwards because the ITC carryforwards are not expected to be realized.
Note 11. Operating Segments
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has adopted SFAS 131 for the year ended October 31, 1999.
The Company has three reportable segments; Village Inn, Bakers Square, and Franchising.
All amounts not attributed to segments relate to administrative functions and other non-reportable segments.
Financial data related to the Company's reportable segments is as follows (in thousands):
Note 12. Commitments and Contingencies
Prior to fiscal 1998, the Company retained a significant portion of certain insurable risks in the medical, dental, workers' compensation, general liability and property areas. Stop-loss coverage was obtained in order to limit exposure to any significant claims. Provisions for losses expected under these programs were recorded based upon the Company's estimates of liabilities for claims incurred, including those not yet reported, the Company's historical performance and actuarial assumptions followed in the insurance industry. Beginning in 1998, the Company obtained traditional insurance coverage for insurable risks other than medical and dental while maintaining stop-loss coverage for medical loss exposure. The Company has provided letters of credit totaling $1,850,000 in connection with certain of these insurance programs.
The Company is involved in various lawsuits and claims arising from the conduct of its business and has guaranteed certain indebtedness and leases of its franchisees and others. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
On September 28, 1998, two class actions were commenced in the Superior Court of Los Angeles County, California.
The first, Kirk v. VICORP Restaurants, Inc., Case No. BC-198202, was brought by a former manager of a California Bakers Square restaurant. Allegations in the amended complaint assert violations by VICORP of California wage and hour laws and regulations concerning overtime wages. The Plaintiff is seeking class certification, injunctive relief, damages in an unspecified amount, statutory penalties, interest, costs, and attorneys' fees.
The second, Schroeder v. VICORP Restaurants, Inc., Case No. BC-198203, was brought by a former server at a California Bakers Square restaurant. The Plaintiff alleges VICORP has violated California statutes and regulations concerning the payment of wages, tip pooling, reimbursement for uniform expenses, failure to remit tips, and the improper charging of walkouts to servers. Class certification is requested, as well as injunctive relief, damages in an unspecified amount, statutory penalties, interest, costs, and attorneys' fees.
On December 28, 1998, a third action was commenced in the Superior Court of Los Angeles County, California, Ontiveros v. VICORP Restaurants, Inc., Case No. BC-202962. This action was brought by a former manager of a California Bakers Square restaurant. The Plaintiff is seeking damages, statutory penalties, declaratory relief, interest, attorneys' fees, and costs for alleged violations of California statutes and regulations concerning the payment of wages.
The Company believes the legal actions described above are similar to plaintiff actions recently brought against other multi-location restaurant operators in the state of California. Resolution of these matters may require a significant period of time and is subject to substantial uncertainties common to the judicial process for class actions in general. The Company believes it has not violated California statutes and regulations and has meritorious defenses to each of the claims in these actions. While the Company intends to vigorously defend against the allegations, it is possible that the Company will not prevail, or that decisions made in other similar cases may result in interpretations of the California statutes that are adverse to the Company's position. The cost of defense for these actions is being recognized as incurred. No provision has been made for any judgements or settlements that might ultimately result. While a contingency exists that any such judgement or settlement could be material to the results of operations of the Company for some future period or periods, the Company currently believes that resolution of these amounts will not have a material adverse effect on the Company's financial position.
VICORP guaranteed certain leases for twenty-five restaurant properties sold in 1986 and sixteen restaurant leases of certain franchisees. Minimum future rental payments remaining under these leases were $5,300,000 and $7,300,000 as of October 31, 1999 and November 1, 1998, respectively. These guarantees are included in the definition of financial instruments with off- balance-sheet risk of accounting loss. The Company took possession of one of these properties, which has since been subleased, and settled on a defaulted lease in the amount of $57,000 as a result of a sublessee bankruptcy filing. The Company has no reason to believe that any material liability exists and believes it is impracticable to estimate the fair value of these financial guarantees (e.g., amounts the Company could pay to remove the guarantees).
Contractual obligations for restaurant construction amounted to approximately $2,487,000 as of October 31, 1999.
On September 1, 1999, the Company entered into an operating agreement with Pies, Inc. to operate a bakery facility for a term of five months and purchase the facility at the completion of the operating term. At the present time, management foresees purchasing the facility on February 1, 2000 at a cost of $2,600,000. This facility will replace an existing facility whose lease is due to expire.
Note 13. Subsequent Events
On November 23, 1999 the Company commenced a tender offer to purchase up to 2,000,000 shares of the outstanding common stock for $19.00 per share. The tender offer concluded on December 22, 1999, whereby 2,000,000 shares were purchased.
Note 14. Quarterly Financial Data (unaudited)
In conjunction with the change in the fiscal year, the Company determined that a significant amount of estimation would be required to restate quarterly 1998 operating results to correspond with the twelve week quarterly reporting. Therefore, restatements of results were not made and the quarterly results for 1999 and 1998 are not comparable. The following table highlights the differences in time periods:
The Company's quarterly results of operations are summarized as follows (in thousands, except per share data):
An asset impairment of $746,000 was included in net income for the fourth quarter ended October 31, 1999.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Item 11.
Item 11. Executive Compensation.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13.
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.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following Financial Statements of VICORP Restaurants, Inc. are filed as part of this report:
Management's Report on Financial Statements.
Report of Independent Public Accountants.
Balance Sheets - October 31, 1999 and November 1, 1998.
Statements of Operations - Years ended October 31, 1999, November 1, 1998, and October 31, 1997.
Statements of Cash Flows - Years ended October 31, 1999, November 1, 1998, and October 31, 1997.
Statements of Shareholders' Equity - Years ended October 31, 1999, November 1, 1998, and October 31, 1997 as presented in Note 7 of Notes to Financial Statements.
(a)(2) The following financial statement schedule for VICORP Restaurants, Inc., as listed in the Index below, is included herein beginning on page 36.
Report of Independent Public Accountants on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 1999, November 1, 1998, and October 31, 1997.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on Page 36.
For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's currently effective Registration Statements on Form S-8:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to any statute, charter provisions, bylaws, contract, or other arrangements, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceedings) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(b) Reports on Form 8-K filed in fourth quarter of 1999:
The Company filed a report on Form 8-K dated November 9, 1999, reporting a disposition of assets under Item 2. On October 28, 1999, the Company completed the sale and the leaseback of the real estate related to twenty-one restaurant properties. The Company received $28,700,000 in net proceeds from the sale.
(c) Exhibits filed with this report are attached hereto.
(d) Financial statement schedules filed with this report follow:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted auditing standards, the financial statements of VICORP Restaurants, Inc. included in this Form 10-K and have issued our report thereon dated December 22, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP Denver, Colorado, December 22, 1999.
Charges to the accounts for purposes for which the reserves were established. Recognition of deferred gain. Establishment of reserves by charges directly to income.
Year-end balances are reflected in the Balance Sheets as follows:
EXHIBIT INDEX
The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below by an asterisk (*). For each such exhibit, there is shown below the filing and exhibit number of the document in the previous filing. The registration statements were filed by the Company unless otherwise indicated. Exhibits which are not required for this report are omitted.
Exhibit Description of Document - ------- ----------------------- 3 - * (i) Articles of Incorporation, as Amended - Form 10-K for the year ended October 29, 1989. - *(ii) Bylaws - Form 10-K for the year ended October 29, 1989. 4 - * (i) Specimen Stock Certificate - Form 10-K for the year ended October 30, 1988. 10 - Material Contracts *(i) Franchise Operating Agreement - Registration Statement 2- 83326, Exhibit 10(b). *(ii) U. S. $40,000,000 Amended and Restated Credit Agreement dated December 19, 1997 between VICORP Restaurants, Inc. and NationsBank of Texas, N.A. and U. S. Bank National Association as amended on November 18, 1998; October 22, 1999; and November 22, 1999 - Schedule 13E4 dated November 23, 1999, Exhibit 99.B. (iii) Form of Purchase Agreement relating to the Sale and Leaseback of 21 restaurant properties on October 28, 1999. (iv) Form of Lease relating to the Sale and Leaseback of 21 restaurant properties on October 28, 1999. (v) Executive Compensation Plans and Arrangements *(a) VICORP Restaurants, Inc. Outstanding Stock Purchase Plan (1989) - Registration Statement 33-32608, Exhibit 4(h). *(b) VICORP Restaurants, Inc. Stock Purchase Plan - Registration Statement 333-11003, Form S-8 dated August 28, 1996. *(c) Deferred Compensation Plan of VICORP Restaurants, Inc. dated May 1, 1996 - Form 10-Q/A for the quarter ended July 31, 1996, Exhibit 10(iii). *(d) Deferred Stock Plan for Directors - Form 10-Q for the quarter ended July 11, 1999, Exhibit 10. *(e) Severance Agreement Charles R. Frederickson - Form 10-K for the year ended October 31, 1993, Exhibit 10(vi). *(f) Employment Agreement for Richard E. Sabourin dated July 25, 1996 - Form 10-Q for the quarter ended July 31, 1996, Exhibit 10(ii)(b). *(g) Stock Option Agreement for Richard E. Sabourin dated August 19, 1996 - Form 10-Q for the quarter ended July 31, 1996, Exhibit 10(ii)(d). *(h) Amended and Restated 1982 Stock Option Plan - Form 10-K for the year ended October 31, 1997, Exhibit 10(iii)(j). *(i) Amended and Restated 1983 Stock Option Plan - Form 10-K for the year ended October 31, 1997, Exhibit 10(iii)(b). *(j) Form Severance Agreement (Executive Officers excluding Frederickson)-Form 10-Q for the quarter ended July 31, 1998, Exhibit 10(iii)(i). *(k) Stock Option Agreement for Robert E. Kaltenbach dated April 9, 1998 - Form 10-K for the year ended November 1, 1998, Exhibit 10(iii)(j). *(l) Stock Option Agreement for Robert E. Kaltenbach dated October 2, 1998 - Form 10-K for the year ended November 1, 1998, Exhibit 10 (iii)(k). *(m) Stock Option Agreement for Joseph F. Trungale dated October 2, 1998 - Form 10-K for the year ended November 1, 1998, Exhibit 10 (iii)(l). *(n) Incentive Program Document Defined Positions of Officers and Directors dated December 4, 1998, Form 10-K for the year ended November 1, 1998, Exhibit 10(iii)(m). *(o) Incentive Program Document for President/Bakers Square dated December 14, 1998, Form 10-K for the year ended November 1, 1998, Exhibit 10(iii)(n). *(p) Incentive Program Document for President/Village Inn dated December 14, 1998, Form 10-K for the year ended November 1, 1998, Exhibit 10(iii)(o). (q) Stock Option Agreement for Joseph F. Trungale date November 1, 1999. (r) Incentive Program Document Defined Positions of Officers and Directors dated December 9, 1999. (s) Stock Option Agreement for Charles R. Frederickson dated December 9, 1999.
23 - Consents of Accountants 24 - Power of Attorney 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 21st day of January, 2000.
VICORP Restaurants, Inc. (Registrant)
By /s/ Charles R. Frederickson --------------------------- Charles R. Frederickson, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on January 21, 2000 on behalf of the registrant and in the capacities indicated.
Signature Title --------- ----- /s/ Charles R. Frederickson - ---------------------------- Chairman of the Board and (Charles R. Frederickson) Chief Executive Officer
/s/ Richard E. Sabourin - ----------------------- Executive Vice President and (Richard E. Sabourin) Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Charles R. Frederickson - --------------------------- (Charles R. Frederickson)*
* Charles R. Frederickson, as attorney-in-fact for Joseph F. Trungale, Carole Lewis Anderson, Bruce B. Brundage, John C. Hoyt, Robert T. Marto, Dudley C. Mecum, Dennis B. Robertson, Hunter Yager, and Arthur Zankel, constituting a majority of the Board of Directors of the registrant.