SELECTED FINANCIAL DATA
For each of the fiscal years ended
(In thousands except per share data)
August 1, August 2, July 28, July 29, July 30,
1997 1996 1995 1994 1993
________________________________________________________________________________
OPERATING RESULTS
Net sales $1,123,851 $943,287 $783,093 $640,899 $517,616
Cost of goods sold 387,703 324,905 264,809 215,071 171,709
Expenses:
Store operations:
Labor & other
related expenses 378,117 314,157 256,253 207,227 167,909
Other store
operating expenses 162,675 138,701 114,564 92,694 74,673
Store closing costs* -- 14,199 -- -- --
General and
administrative 57,798 50,627 44,746 36,807 30,096
Total expenses 598,590 517,684 415,563 336,728 272,678
Operating income 137,558 100,698 102,721 89,100 73,229
Interest expense 2,089 369 723 2,136 2,885
Interest income 1,988 2,051 3,335 3,604 2,600
Income before income
taxes and change in
accounting principle 137,457 102,380 105,333 90,568 72,944
Provision for income
taxes 50,859 38,865 39,290 33,609 27,292
Income before change in
accounting principle 86,598 63,515 66,043 56,959 45,652
Cumulative effect of
change in accounting
principle** -- -- -- 988 --
Net income $ 86,598 $ 63,515 $ 66,043 $ 57,947 $45,652
SHARE DATA
Earnings before change
in accounting principle
per share $1.41 $1.04 $1.09 $.94 $.78
Cumulative effect of
change in accounting
principle per share** -- -- -- .02 --
Net earnings per share 1.41 1.04 1.09 .96 .78
Dividends per share $ .02 $ .02 $ .02 $.02 $.02
Weighted average
shares outstanding 61,446 60,813 60,557 60,607 58,789
FINANCIAL POSITION
Working capital $ 60,654 $ 23,289 $ 43,600 $ 60,721 $ 76,115
Total assets 828,705 676,379 604,515 530,064 469,073
Property and equipment
-net 678,167 568,573 479,518 385,960 305,596
Long-term debt 62,000 15,500 19,500 23,500 36,576
Capital lease
obligations 1,302 1,468 1,598 1,709 1,802
Stockholders' equity 660,432 566,221 496,083 429,846 366,785
===============================================================================
*Represents one-time charge to close certain stores and other write-offs.
(See Note 1 to the Company's Consolidated Financial Statements.)
**The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", effective July 31, 1993.
MARKET PRICE AND DIVIDEND INFORMATION
The following table indicates the high and low sales prices of
the Company's common stock, as reported by The Nasdaq Stock Market (National
Market) and dividends paid.
Fiscal Year 1997 Fiscal Year 1996
____________________ ____________________
Prices Dividends Prices Dividends
_____________ _____________
Quarter High Low Paid High Low Paid
_________________________________________________________________________
First $25.63 $19.63 $.005 $21.50 $17.38 $.005
Second 28.38 19.88 .005 19.25 15.75 .005
Third 29.25 24.88 .005 24.88 17.88 .005
Fourth 29.88 23.75 .005 27.38 19.38 .005
=========================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table highlights operating results over the past three
fiscal years:
Period to Period
Relationship to Net Sales Increase(Decrease)
_________________________ _________________
1997 1996 1995 1997 vs 1996 1996 vs 1995
______________________________________________________________________________
Net Sales
Restaurant 76.8% 77.8% 77.9% 18% 20%
Retail 23.2 22.2 22.1 25 21
_____________________________________________________
100.0% 100.0% 100.0% 19 20
Cost of goods sold 34.5 34.4 33.8 19 23
Expenses:
Store operations:
Labor & other
related expenses 33.7 33.3 32.7 20 23
Other store
operating expenses 14.5 14.7 14.6 17 21
Store closing costs* -- 1.5 -- -- --
General & administrative 5.1 5.4 5.7 14 13
Operating income 12.2 10.7 13.1 37 (2)
Interest expense .2 .1 .1 466 (49)
Interest income .2 .2 .4 (3) (39)
Income before income taxes 12.2 10.8 13.5 34 (3)
Provision for income taxes 4.5 4.1 5.0 31 (1)
Net income 7.7 6.7 8.4 36 (4)
===========================================================================
*Represents one-time charge to close certain stores and other write-offs.
(See Note 1 to the Company's Consolidated Financial Statements.)
SAME STORE SALES ANALYSIS
Period to Period Increase
_________________________
1997 vs 1996 1996 vs 1995
(214 Stores) (181 Stores)
___________________________________________________________________________
Restaurant 3% 2%
Retail 8 2
Restaurant & retail 4 2
===========================================================================
Same store restaurant sales (which compare sales of stores open
throughout the fiscal years under comparison) increased 3% in fiscal 1997
versus the comparable 52 weeks of fiscal 1996. Same store restaurant sales
increased 2% for the comparable 52 weeks of fiscal 1996 versus fiscal 1995.
The increase in same store restaurant sales growth from fiscal 1996 to fiscal
1997 was primarily due to normal winter weather conditions in fiscal 1997
compared to the extreme winter weather experienced in fiscal 1996.
Same store retail sales increased 8% in fiscal 1997 versus the
comparable 52 weeks of fiscal 1996 while same store retail sales increased
2% for the comparable 52-week period in fiscal 1996 versus fiscal 1995. The
increase in same store retail sales growth from fiscal 1996 to fiscal 1997 was
primarily due to the introduction of three browsing books during the
Christmas, spring and summer seasons in fiscal 1997 as compared to only a
summer browsing book in fiscal 1996 and the normal winter weather conditions
in fiscal 1997 compared to the extreme winter weather experienced in fiscal
1996.
In fiscal 1997 total sales (restaurant and retail) in the 214 same
stores averaged $4.06 million. Restaurant sales were 77.0% of total sales in
the same 214 stores in fiscal 1997 and 77.8% in fiscal 1996.
Total net sales, which increased 19% and 20% in fiscal 1997 and
1996, respectively, benefited from comparable store sales growth and the
opening of 50, 43 and 36 new stores in fiscal 1997, 1996 and 1995,
respectively. The total net sales increase in fiscal 1996 also benefited from
an extra week, while the total net sales increase in fiscal 1997 was
negatively affected by the extra week in fiscal 1996. (See Note 1 to the
Company's Consolidated Financial Statements.)
Cost of goods sold as a percentage of net sales increased in fiscal
1997 to 34.5% from 34.4% in 1996. This increase was primarily due to an
increasing mix of retail sales which have a higher cost than restaurant sales.
Food cost as a percentage of net sales in fiscal 1997 was unchanged from fiscal
1996 primarily due to menu increases of approximately .6% and 2.3% taken in
October 1996 and May 1997, respectively, and operational efficiencies as a
result of the normal winter weather conditions in fiscal 1997 as compared to
the extreme conditions in fiscal 1996, which together were offset by increases
in coffee, dairy and hog complex prices. Cost of goods sold as a percentage of
net sales increased in fiscal 1996 to 34.4% from 33.8% in 1995. This increase
was primarily due to a new menu, implemented in May 1995, that raised ideal
food cost as the result of a change in menu mix. Additionally, the increase
in cost of goods sold was due to operating inefficiencies in the restaurants
as a result of extreme winter weather conditions as compared to fiscal 1995 and
substantial increases in hog complex prices in the Company's fourth fiscal
quarter of 1996.
Labor and other related expenses include all direct and indirect labor
and related costs incurred in store operations. Labor expenses as a percentage
of net sales were 33.7%, 33.3% and 32.7% in fiscal 1997, 1996 and
1995, respectively. The year to year increase in fiscal 1997 versus fiscal
1996 was primarily due to the introduction of a new store-level bonus program
at the beginning of fiscal 1997 and store-level, hourly-employee wage
inflation of approximately 2.7%. These increases were partially offset by
the enhanced productivity achieved through operational changes implemented in
the fourth quarter of fiscal 1996 and throughout fiscal 1997. The year to
year increase in fiscal 1996 versus fiscal 1995 was primarily due to continuing
labor cost pressures as the costs to hire and retain employees continued to
increase, unemployment rates remained low and competition remained high in the
industry.
Other store operating expenses include all unit-level operating
costs, the major components of which are operating supplies, repairs and
maintenance, advertising expenses, utilities, depreciation and amortization.
Other store operating expenses as a percentage of net sales were 14.5%, 14.7%
and 14.6% in fiscal 1997, 1996 and 1995, respectively. The year to year
decrease in fiscal 1997 versus fiscal 1996 was primarily due to a decrease in
operating supplies expense resulting from the return to paper napkins from
linen napkins in the stores during the fourth quarter of fiscal 1996. The
year to year increase in fiscal 1996 versus fiscal 1995 was attributable to
higher depreciation related to opening 43 and 36 new stores in fiscal 1996
and 1995, respectively. The store closing costs in fiscal 1996 were due to
the one-time charge for store closings and other write-offs in the fourth
quarter of fiscal 1996. (See Note 1 to the Company's Consolidated Financial
Statements.)
General and administrative expenses as a percentage of net sales were
5.1%, 5.4% and 5.7% in fiscal 1997, 1996 and 1995, respectively. The
reductions from year to year were accomplished largely through improved
volume. The largest areas of increased spending in absolute dollars in fiscal
1997 were in manager trainee costs to support the continued growth of the
business and in corporate bonuses as a result of the improvement in pretax
income in fiscal 1997 versus fiscal 1996.
Interest expense increased to $2.1 million in fiscal 1997 from $.4
million in fiscal 1996. The increase was primarily due to the Company's
drawing on a $50.0 million term loan on December 2, 1996. Interest expense
decreased to $.4 million in fiscal 1996 from $.7 million in fiscal 1995
primarily due to the scheduled principal payments on the 9.53% Senior Notes.
Interest income decreased in fiscal 1997 to $2.0 million from $2.1
million in fiscal 1996 and $3.3 million in fiscal 1995. The primary reason
for the decrease in interest income was lower average funds available for
investment.
Provision for income taxes as a percent of pretax income was 37.0%
for fiscal 1997, 38.0% for fiscal 1996 and 37.3% for fiscal 1995. The
primary reasons for the decrease in the tax rate in fiscal 1997 were decreases
in the effective state tax rates and the institution of the Work Opportunity Tax
Credit by the federal government to replace the expired Targeted Jobs Tax
Credit. The primary reason for the increase in the tax rate in fiscal
1996 was the expiration of the Targeted Jobs Tax Credit program and increases
in state rates.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Company will adopt SFAS No. 128, "Earnings per Share", in the
second quarter of fiscal 1998. The Company is still evaluating the effect of
adopting SFAS No. 128, but does not expect the adoption to have a material
effect on the Company's consolidated financial statements. SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", become effective for the
Company in the first quarter of fiscal 1999. The Company is still evaluating
the effects of adopting SFAS No. 130 and SFAS No. 131, but does not expect
the adoption of either pronouncement to have a material effect on the
Company's consolidated financial statements. (See Note 1 to the Company's
Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash generated from operating activities was $124.2
million in fiscal 1997. Most of this cash was provided by net income
adjusted by depreciation and amortization. Increases in accrued employee
compensation and deferred income taxes were partially offset by increases in
inventories and prepaid expenses and decreases in accounts payable.
Capital expenditures were $148.6 million in fiscal 1997. Land
purchases and cost of new stores accounted for substantially all of these
expenditures.
The Company's internally generated cash and short-term and long-
term investments were sufficient to finance all of its growth in fiscal 1997,
but not to meet its seasonal cash needs. As planned, the Company established
a $50.0 million term loan in the second quarter of fiscal 1997 to meet its
seasonal cash needs in fiscal 1997 and its planned needs in fiscal 1998.
The Company estimates that its capital expenditures for fiscal 1998
will be approximately $190 million, substantially all of which will be land
purchases and construction of new stores. On December 2, 1996 the Company
received the proceeds from a $50.0 million 5-year term loan bearing interest at
a three-month LIBOR-based rate ("London Interbank Offered Rate").
Concurrently, the Company entered into a swap agreement with a bank to fix the
interest rate at 6.36% for the life of the term loan. This $50.0 million term
loan is part of a $125.0 million bank credit facility that also includes a
$75.0 million revolver. Management believes that cash and short-term
investments at August 1, 1997, along with cash generated from the
Company's operating activities and its available $75.0 million revolver, will
be sufficient to finance its continued expansion plans through fiscal 1999.
CONSOLIDATED BALANCE SHEET
(In thousands except share data)
August 1, August 2,
ASSETS 1997 1996
____________________________________________________________________
Current Assets:
Cash and cash equivalents $ 64,933 $ 28,971
Short-term investments 1,666 4,735
Receivables 4,836 2,803
Inventories 73,269 61,470
Prepaid expenses 4,707 1,485
Deferred income taxes -- 6,972
____________________________________________________________________
Total current assets 149,411 106,436
____________________________________________________________________
Property and Equipment:
Land 192,258 165,376
Buildings and improvements 423,260 346,479
Buildings under capital leases 3,289 3,289
Restaurant and other equipment 176,959 151,018
Leasehold improvements 12,646 12,343
Construction in progress 22,985 13,738
____________________________________________________________________
Total 831,397 692,243
Less: Accumulated depreciation and
amortization of capital leases 153,230 123,670
____________________________________________________________________
Property and equipment-net 678,167 568,573
____________________________________________________________________
Long-term Investments -- 565
____________________________________________________________________
Other Assets 1,127 805
____________________________________________________________________
Total $828,705 $676,379
====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________________________________________
Current Liabilities:
Accounts payable $ 27,422 $ 30,565
Current maturities of
long-term debt 3,500 4,000
Current portion of capital lease
obligations 166 130
Taxes withheld and accrued 13,969 12,475
Income taxes payable 2,429 4,123
Deferred income taxes 2,362 --
Accrued employee compensation 22,374 15,647
Accrued employee benefits 9,961 9,692
Other accrued expenses 6,574 6,515
____________________________________________________________________
Total current liabilities 88,757 83,147
____________________________________________________________________
Long-term Debt 62,000 15,500
____________________________________________________________________
Capital Lease Obligations 1,302 1,468
____________________________________________________________________
Deferred Income Taxes 16,214 10,043
____________________________________________________________________
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - 150,000,000 shares of $.50
par value authorized; shares issued and
outstanding: 1997, 61,065,306; 1996,
60,594,353 30,533 30,297
Additional paid-in capital 211,850 202,951
Retained earnings 418,049 332,973
____________________________________________________________________
Total stockholders' equity 660,432 566,221
____________________________________________________________________
Total $828,705 $676,379
====================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
Fiscal years ended
August 1, August 2, July 28,
1997 1996 1995
___________________________________________________________________________
Net sales $1,123,851 $943,287 $783,093
Cost of goods sold 387,703 324,905 264,809
___________________________________________________________________________
Gross profit on sales 736,148 618,382 518,284
___________________________________________________________________________
Expenses:
Store operations:
Labor & other related
expenses 378,117 314,157 256,253
Other store operating
expenses 162,675 138,701 114,564
Store closing costs -- 14,199 --
General and administrative 57,798 50,627 44,746
___________________________________________________________________________
Total expenses 598,590 517,684 415,563
___________________________________________________________________________
Operating income 137,558 100,698 102,721
Interest expense 2,089 369 723
Interest income 1,988 2,051 3,335
___________________________________________________________________________
Income before income taxes 137,457 102,380 105,333
Provision for income taxes 50,859 38,865 39,290
___________________________________________________________________________
Net income $ 86,598 $ 63,515 $ 66,043
===========================================================================
Net earnings per share $1.41 $1.04 $1.09
===========================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except per share data)
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
___________________________________________________________________________
Balances at July 29, 1994 $29,950 $194,074 $205,822 $429,846
Cash dividends - $.02 per
share -- -- (1,199) (1,199)
Exercise of stock options 46 969 -- 1,015
Tax benefit realized upon
exercise of stock options -- 378 -- 378
Net income -- -- 66,043 66,043
___________________________________________________________________________
Balances at July 28, 1995 29,996 195,421 270,666 496,083
Cash dividends - $.02 per
share -- -- (1,208) (1,208)
Exercise of stock options 301 4,865 -- 5,166
Tax benefit realized upon
exercise of stock options -- 2,665 -- 2,665
Net income -- -- 63,515 63,515
___________________________________________________________________________
Balances at August 2, 1996 30,297 202,951 332,973 566,221
Cash dividends - $.02 per
share -- -- (1,522) (1,522)
Exercise of stock options 236 7,288 -- 7,524
Tax benefit realized upon
exercise of stock options -- 1,611 -- 1,611
Net income -- -- 6,598 86,598
___________________________________________________________________________
Balances at August 1, 1997 $30,533 $211,850 $418,049 $660,432
===========================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal years ended
August 1, August 2, July 28,
1997 1996 1995
___________________________________________________________________________
Cash flows from operating activities:
Net income $ 86,598 $ 63,515 $66,043
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 35,735 31,433 26,488
Loss (gain) on disposition of
property and equipment 135 14,689 (66)
Changes in assets and liabilities:
Receivables (2,033) 390 (199)
Inventories (11,799) (9,955) (9,525)
Prepaid expenses (3,222) (573) 182
Other assets (436) (212) (60)
Accounts payable (3,143) 814 3,985
Taxes withheld and accrued 1,494 1,651 3,416
Income taxes payable (1,694) (1,465) 548
Accrued employee compensation 6,727 1,965 494
Accrued employee benefits 269 2,590 (780)
Other accrued expenses 59 806 1,428
Deferred income taxes 15,505 (1,978) 418
_______________________________________________________________________________
Net cash provided by
operating activities 124,195 103,670 92,372
_______________________________________________________________________________
Cash flows from investing activities:
Purchase of short-term investments (603) (4,011) (7,169)
Proceeds from maturities of
short-term investments 4,237 13,852 38,994
Purchase of property and
equipment (148,649) (137,633) (121,052)
Proceeds from sale of property and
equipment 3,299 2,456 1,073
_______________________________________________________________________________
Net cash used in investing
activities (141,716) (125,336) (88,154)
_______________________________________________________________________________
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 50,000 -- --
Proceeds from exercise of
stock options 7,524 5,166 1,015
Tax benefit realized upon
exercise of stock options 1,611 2,665 378
Principal payments under
long-term debt and capital
lease obligations (4,130) (4,110) (3,594)
Dividends on common stock (1,522) (1,208) (1,199)
_______________________________________________________________________________
Net cash provided by (used in)
financing activities 53,483 2,513 (3,400)
_______________________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 35,962 (19,153) 818
Cash and cash equivalents,
beginning of year 28,971 48,124 47,306
______________________________________________________________________________
Cash and cash equivalents,
end of year $ 64,933 $ 28,971 $48,124
===============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,349 $ 2,084 $ 2,513
Income taxes 35,664 39,642 37,945
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal year - The Company's fiscal year ends on the Friday nearest
July 31st and each quarter consists of thirteen weeks. The Company's fiscal
year ended August 2, 1996 consisted of 53 weeks and the fourth quarter of fiscal
1996 consisted of 14 weeks.
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly owned. All significant intercompany transactions and balances have been
eliminated.
Cash and cash equivalents - The Company's policy is to consider all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. Cash equivalents consist primarily of auction
preferred stocks and commercial paper. The carrying value of these
instruments approximates market value due to their very short maturities.
Short-term investments - Short-term investments, primarily
consisting of federal government agency securities and commercial paper
which the Company intends to hold to maturity, are stated at amortized cost
in accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
(See Note 3.)
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method.
Property and equipment - Property and equipment are stated at cost.
For financial reporting purposes depreciation and amortization on these assets
are computed by use of the straight-line and double-declining balance methods
over the estimated useful lives of the respective assets, as follows:
Years
______________________________________________________________________________
Buildings and improvements 20-45
Buildings under capital leases 20-25
Restaurant and other equipment 5-10
Leasehold improvements 3-35
______________________________________________________________________________
Accelerated depreciation methods are generally used for income
tax purposes.
Interest is capitalized in accordance with SFAS No. 34, "Capitalization of
Interest Costs". Capitalized interest was $2,093, $2,010 and $2,072 for fiscal
years 1997, 1996 and 1995, respectively.
Gain or loss is recognized upon disposal of property and equipment,
and the asset and related accumulated depreciation and amortization amounts are
removed from the accounts.
Maintenance and repairs, including the replacement of minor items,
are charged to expense, and major additions to property and equipment
are capitalized.
Advertising - The Company generally expenses the costs of producing
and communicating advertising the first time the advertising takes place.
Net advertising expense was $25,178, $20,404 and $16,198 for the fiscal years
1997, 1996 and 1995, respectively.
Income taxes - The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." Targeted jobs tax credits
and employer tax credits for FICA taxes paid on tip income are accounted for by
the flow-through method. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. (See Note 7.)
Earnings per share - The computation of earnings per share is based
on the weighted average number of outstanding common shares and equivalents
(stock options) adjusted for stock splits. The weighted average number of
outstanding common shares and equivalents was 61,446,185, 60,813,172 and
60,556,977 for 1997, 1996 and 1995, respectively.
Long-term investments - Long-term investments, primarily
consisting of federal government agency securities and commercial paper
which the Company intends to hold to maturity, are stated at amortized cost
in accordance with SFAS No. 115. (See Note 3.)
Stock-based compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to adopt the fair
value method of accounting for stock-based employee compensation. The Company
has chosen to continue to account for stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations.
Start-up costs - Start-up costs of a new store are expensed in the
month in which the store opens.
Store closing costs - Upon the decision to close a store,
estimated unrecoverable costs are charged to expenses. Such costs include
buildings and improvements, leasehold improvements and restaurant and other
equipment, net of salvage value, and a provision for the present value of
future lease obligations, less estimated sub-rental income. The Company
recognized $14,199 in pretax costs for the closings of the Appleton, WI, the
Fond du Lac, WI and the Eagan, MN stores, the closings of the three Corner
Market stores in the middle Tennessee area and replacing the Company's
point-of-sale system in the fourth quarter of fiscal 1996. These
costs represent a one-time charge of $8,806 net of taxes, or $.15 per share.
Use of estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Recent accounting pronouncements not yet adopted - In February 1997,
SFAS No. 128, "Earnings per Share", was issued. SFAS No. 128 specifies
the computation, presentation and disclosure requirements for earnings per
share. This statement is effective for both interim and annual periods
ending after December 15, 1997, with restatement of all prior periods
shown. Earlier application is not permitted. The effective date of SFAS
No. 128 for the Company is for the quarter and six-month period ending
January 30, 1998. The Company estimates that SFAS No. 128 will have no
material effect on the Company's consolidated financial statements upon
adoption. In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. SFAS No. 130 specifies how to report and display comprehensive
income and its components. This statement is effective for fiscal years
beginning after December 15, 1997, with restatement of all prior periods shown.
The Company will adopt SFAS No. 130 in the first quarter of fiscal 1999.
The Company is currently evaluating the effect that SFAS No. 130 will have
on the Company's consolidated financial statements upon adoption. In June
1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued. SFAS No. 131 requires the disclosure of certain
information about operating segments in the financial statements. This
statement is effective for fiscal years beginning after December 15, 1997,
with restatement of all prior periods shown if not impracticable to do so.
The Company will adopt SFAS No. 131 in the first quarter of fiscal 1999.
The Company is currently evaluating the effect that SFAS No. 131 will have on
the Company's consolidated financial statements upon adoption. The Company does
not expect the adoption of SFAS Nos. 128, 130 or 131 to have a material effect
on the Company's consolidated financial statements.
2. INVENTORIES
Inventories were composed of the following at:
August 1, August 2,
1997 1996
_______________________________________________________________________
Retail $58,199 $50,474
Restaurant 11,214 9,472
Supplies 3,856 1,524
_______________________________________________________________________
Total $73,269 $61,470
=======================================================================
3. SHORT-TERM AND LONG-TERM INVESTMENTS
The amortized costs and fair values of held-to-maturity securities at
August 1, 1997 were as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
______________________________________________________________________
U.S. Treasury and U.S.
Government Agencies $ 501 -- -- $ 501
Corporate debt
securities 603 $ 5 -- 608
Other securities 562 128 -- 690
______________________________________________________________________
Short-term investments $1,666 $133 -- $1,799
======================================================================
The amortized costs and fair values of held-to-maturity securities at
August 2, 1996 were as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
______________________________________________________________________
U.S. Treasury and U.S.
Government Agencies $2,544 -- $ 9 $2,535
Corporate debt
securities 499 -- 3 496
Other securities 2,257 $1 -- 2,258
______________________________________________________________________
Short-term and long-term
investments $5,300 $1 $12 $5,289
======================================================================
The following table shows the maturity distribution of the Company's
investment securities at August 1, 1997:
Amortized Fair
Maturity (Fiscal Year) Cost Value
_______________________________________________________________________
1998 $1,666 $1,799
_______________________________________________________________________
Short-term investments $1,666 $1,799
=======================================================================
4. DEBT
Long-term debt consisted of the following at:
August 1, August 2,
1997 1996
___________________________________________________________________________
6.36% Term Loan payable on or before
December 1, 2001 $50,000 --
9.53% Senior Notes Payable in annual
installments of varying amounts from
January 15, 1994 to January 15, 2002,
with a final installment of $2,000
due January 15, 2003 15,500 $19,500
Less current maturities 3,500 4,000
___________________________________________________________________________
Long-term debt $62,000 $15,500
===========================================================================
The financial covenants related to the 6.36% Term Loan require that
the Company maintain an interest coverage ratio of 3.0 to 1.0 and a lease
adjusted funded debt to total capitalization ratio not to exceed 0.4 to 1.0.
The note agreements relating to the 9.53% Senior Notes placed in
January, 1991 in the original amount of $30,000 include, among other
provisions, requirements that the Company maintain minimum tangible net worth
of $70,000. The agreements also contain certain other restrictions related to
the payment of cash dividends and the purchase of treasury stock. Retained
earnings not restricted under the provisions of the agreements were
approximately $382,175 at August 1, 1997.
Based on discounted cash flows of future payment streams, assuming
rates equivalent to the Company's incremental borrowing rate on similar
liabilities, the fair value of the 6.36% Term Loan and the 9.53% Senior Notes
approximates carrying value as of August 1, 1997.
The Company has a revolving credit facility with a maximum principal
amount of $75,000. No amounts were outstanding under the revolving credit
facility at August 1, 1997.
At August 1, 1997 and August 2, 1996, the Company was in compliance
with all covenants.
The aggregate maturities of long-term debt subsequent to August 1,
1997 are as follows:
Fiscal year
___________________________________________________________________________
1998 $ 3,500
1999 2,500
2000 2,500
2001 3,000
2002 52,000
Later years 2,000
___________________________________________________________________________
Total $65,500
===========================================================================
5. COMMON STOCK
The Board of Directors granted certain executive officers hired in
fiscal 1996 a total of 37,000 restricted shares which vest over five
years. The Company's compensation expense for these restricted shares was $150
and $144 in fiscal 1997 and 1996, respectively. The weighted average fair
value of the restricted shares granted during fiscal 1996 was $20.27 per share.
6. STOCK OPTION PLANS
During fiscal 1997, the Company amended and restated the 1987 Option
Plan and retitled it as the Amended and Restated Stock Option Plan ("the New
Plan"), to allow flexibility to extend the duration of certain options under
the New Plan, to modify the option terms of certain retired, terminated,
disabled or deceased optionees, to make only non-qualified options available
for grant under the New Plan and to allow for the possibility of
transferability and assignability of options under the New Plan. With the
exception of the aforementioned items, the New Plan is substantially the same
as the 1987 Plan.
The New Plan, like the 1987 Plan and the 1982 Plan, is administered
by the Stock Option Committee (the "Committee"). Members of the
Committee are appointed by the Board and consist of members of the Board. The
Committee is authorized to determine, at time periods within its discretion
and subject to the direction of the Board, which key employees shall be
granted options, the number of shares covered by the options granted to each,
and within applicable limits, the terms and provisions relating to the exercise
of such options.
The Committee is currently authorized to grant options to purchase an
aggregate of 14,025,702 shares of the Company's common stock under all employee
stock option plans. The option price per share under the New Plan must be at
least 100% of the fair market value of a share of the Company's common stock
based on the closing price on the day next preceding the day the option is
granted. Options are generally exercisable each year on a cumulative basis
at a rate of 33% of the total number of shares covered by the option beginning
one year from the date of grant, expire ten years from the date of grant and
are non-transferrable. At August 1, 1997, there were 3,382,389 shares of
unissued common stock reserved for issuance under the New Plan.
In fiscal 1989, the Board of Directors adopted the 1989 Non-employee
Plan ("Directors Plan") for non-employee directors. The stock options were
granted with an exercise price equal to the fair market value of the Company's
common stock as of the date of grant and expire one year from the retirement
of the director from the board. An aggregate of 1,518,750 shares of the
Company's common stock is authorized to be issued under this plan. Due to
the overall plan limit, no shares have been granted under this plan since fiscal
1994.
Stock Options: A summary of the status of the Company's stock option
plans for fiscal 1997, 1996 and 1995, and changes during those years is
presented below:
(Shares in thousands) 1997 1996 1995
___________________________________________________________________________
Weighted- Weighted- Weighted-
Average Average Average
Fixed Options Shares Price Shares Price Shares Price
____________________________________________________________________________
Outstanding,
beginning of year 5,342 $21.34 4,831 $20.63 4,041 $19.48
Granted 1,297 22.80 1,449 19.35 1,133 25.21
Exercised (464) 16.14 (602) 8.49 (91) 11.43
Forfeited or canceled (528) 23.51 (336) 25.61 (252) 25.98
_____ _____ _____
Outstanding,
end of year 5,647 21.90 5,342 21.34 4,831 20.63
===== ===== =====
Options exercisable
at year-end 3,751 22.13 3,749 21.81 4,067 19.75
Weighted-average fair
value per share of
options granted
during the year $13.52 $11.18
The following table summarizes information about fixed stock
options outstanding at August 1, 1997:
(Shares in thousands) Options Outstanding Options Exercisable
_________________________________________________________________________
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 8/1/97 Life Price at 8/1/97 Price
_________________________________________________________________________
$ 3.33-10.00 374 2.54 $ 6.20 374 $ 6.20
10.01-20.00 1,488 6.92 18.19 848 17.53
20.01-29.50 3,785 7.18 24.91 2,529 26.03
_____ _____
$ 3.33-29.50 5,647 6.81 21.90 3,751 22.13
===== =====
Had the fair value of options granted under these plans beginning in fiscal
1996 been recognized as compensation expense on a straight-line basis over
the vesting period of the grant, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
1997 1996
_____________________________________________________________
Net income:
As reported $86,598 $63,515
Pro forma 76,767 61,001
Net earnings per share:
As reported 1.41 1.04
Pro forma 1.25 1.00
The pro forma effect on net income for 1997 and 1996 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in fiscal 1997 and 1996: dividend yield of
.1% for all years; expected volatility of 35 and 36 percent, respectively;
risk-free interest rate ranges of 6.3% to 6.7% and 5.3% to 6.3%,
respectively; and expected lives of six years.
The Company recognizes a tax deduction upon exercise of non-qualified
stock options in an amount equal to the difference between the option price
and the fair market value of the common stock. These tax benefits are
credited to Additional Paid-In Capital.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax
liability consisted of the following at:
August 1, August 2,
1997 1996
___________________________________________________________________________
Deferred tax assets:
Financial accruals without
economic performance $ 6,328 $ 6,304
Other 2,727 2,364
___________________________________________________________________________
Deferred tax assets 9,055 8,668
___________________________________________________________________________
Deferred tax liabilities:
Excess tax depreciation over book 17,068 10,756
Other 10,563 983
___________________________________________________________________________
Deferred tax liabilities 27,631 11,739
___________________________________________________________________________
Net deferred tax liability $18,576 $ 3,071
===========================================================================
The Company provided no valuation allowance against deferred tax
assets recorded as of August 1, 1997 and August 2, 1996, as the "more-likely-
than-not" valuation method determined all deferred assets to be fully
realizable in future taxable periods.
The components of the provision for income taxes for each of the
three fiscal years were as follows:
1997 1996 1995
___________________________________________________________________________
Current:
Federal $30,398 $34,965 $31,284
State 4,956 5,878 7,588
Deferred 15,505 (1,978) 418
___________________________________________________________________________
Total income tax provision $50,859 $38,865 $39,290
===========================================================================
A reconciliation of the provision for income taxes as reported and
the amount computed by multiplying the income before the provision for income
taxes by the U.S. federal statutory rate of 35% was as follows:
1997 1996 1995
___________________________________________________________________________
Provision computed at federal
statutory income tax rate $48,110 $35,833 $36,867
State and local income taxes,
net of federal benefit 3,753 4,126 4,199
Jobs credit (195) (33) (787)
Employer tax credits for FICA taxes
paid on tip income (1,403) (1,328) (1,194)
Other-net 594 267 205
___________________________________________________________________________
Total income tax provision $50,859 $38,865 $39,290
===========================================================================
8. SEGMENT INFORMATION
The Company operates stores which provide a combination of restaurant
and retail services to the motoring public. The Company considers this
combination of services to be one industry segment.
9. COMMITMENTS AND CONTINGENCIES
The Company has been involved in various legal matters during fiscal
1997 which are being defended and handled in the ordinary course of business.
While the ultimate results of such matters cannot be determined or
predicted, management does not believe that they will have a material adverse
effect on the Company's results of operations or financial position.
The Company operates seventeen stores from leased facilities and
also leases certain land and advertising billboards. These leases have
been classified as either capital or operating leases in accordance with the
criteria contained in SFAS No. 13, "Accounting for Leases". The interest
rates for capital leases vary from 10% to 17%. Amortization of capital leases
is included with depreciation expense. A majority of the Company's lease
agreements provide for renewal options and some of these options contain
escalation clauses. Certain store leases provide for contingent lease
payments based upon sales volume in excess of specified minimum levels.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the minimum lease
payments as of August 1, 1997:
Fiscal year
_________________________________________________________________________
1998 $ 368
1999 371
2000 371
2001 321
2002 214
Later years 693
_________________________________________________________________________
Total minimum lease payments 2,338
Less amount representing interest 870
_________________________________________________________________________
Present value of minimum lease payments 1,468
Less current portion 166
_________________________________________________________________________
Long-term portion of capital lease obligations $1,302
=========================================================================
The following is a schedule by years of the future minimum rental
payments required under noncancelable operating leases as of August 1, 1997:
Fiscal year
_________________________________________________________________________
1998 $12,890
1999 7,489
2000 2,988
2001 971
2002 1,307
Later years 5,184
_________________________________________________________________________
Total $30,829
=========================================================================
Rent expense under operating leases for each of the three fiscal years was:
Minimum Contingent Total
_________________________________________________________________________
1997 $14,163 $787 $14,950
1996 12,134 764 12,898
1995 9,717 685 10,402
10. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan, which provides for
retirement benefits for eligible employees. The plan is funded by
elective employee contributions up to 16% of their compensation and the Company
matches 25% of employee contributions for each participant up to 6% of
the employee's compensation. The Company contributed $1,188, $864 and $714 for
fiscal 1997, 1996 and 1995, respectively.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for fiscal 1997 and 1996 are summarized as
follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
___________________________________________________________________________
1997
Net sales $258,902 $267,854 $275,062 $322,033
Gross profit on
sales 169,587 170,282 182,615 213,664
Income before income
taxes 30,403 25,459 32,672 48,923
Net income 18,850 15,988 20,518 31,242
Net earnings per share .31 .26 .33 .51
___________________________________________________________________________
1996
Net sales $221,011 $219,484 $220,579 $282,213
Gross profit on
sales 147,404 138,855 146,566 185,557
Income before income
taxes* 27,086 20,217 26,212 28,865
Net income* 16,794 12,535 16,251 17,935
Net earnings per share* .28 .21 .27 .29
*Fiscal 1996 included $14,199 in pre-tax costs ($8,806 after tax or $.15
per share) related to a one-time charge for store closings and other write-
offs. (See Note 1).