BUFFETS INC, 10-K, 1996-03-27

BUFFETS INC
10-K, 1996-03-27
EATING PLACES

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the fiscal year ended: Commission file number:
January 3, 1996 0-14370
BUFFETS, INC.
(Exact name of registrant as specified in its charter)

Minnesota 41-1462294
(State of incorporation) (IRS Employer Identification No.)

10260 Viking Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices)

(612) 942-9760
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
Preferred Share Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

The aggregate market value of the shares of voting stock held by
non-affiliates of the registrant was approximately $388,933,386 at March 21,
1996, based on the closing sale price for such date as reported on The Nasdaq
Stock Market.

On March 21, 1996, there were 31,314,134 shares of common stock of the
Company, par value $.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for its 1996 Annual Meeting to be
held May 14, 1996 are incorporated by reference in Part III. Portions of
Registrant's Annual Report to Shareholders for the fiscal year ended January 3,
1996 (the "1995 Annual Report") are incorporated by reference in Parts II and
IV.

1
<PAGE>

PART I

ITEM 1. BUSINESS

General

Buffets, Inc., a Minnesota corporation, was organized in 1983. Its executive
offices are located at 10260 Viking Drive, Eden Prairie, Minnesota 55344.
References herein to the "Company" are to Buffets, Inc. and its subsidiaries,
Evergreen Buffets Inc., OCB Restaurant Co., OCB Realty Co., OCB Purchasing Co.
and OCB Property Co., unless the context indicates otherwise.

The Company is principally engaged in the development and operation of
"buffet" restaurants under the name "Old Country Buffet" ("Country Buffet" in
the state of Colorado). The Company obtained a federal trademark registration
covering the words "Old Country Buffet" in June of 1985.

The Company presently operates 248 company-owned restaurants in 31 states
(including six new openings and one closing since year end). The Company
contemplates that approximately 35 to 40 Company-owned restaurants will be
opened in 1996. In addition, six franchised Old Country Buffet restaurants are
in operation in Nebraska and Oklahoma.

The Company's restaurants offer a wide variety of freshly prepared menu items,
including soups, salads, entrees, vegetables, non-alcoholic beverages and
desserts, presented in a self-service buffet format in which customers select
the items and portions of their choice. The restaurants' typical dinner entrees
include chicken, carved roast beef and ham, and two or three other hot entrees
such as casseroles, shrimp and fish. Chicken, fish and two or three other
entrees usually are offered at lunch. The Company's restaurants utilize uniform
menus, recipes and ingredient specifications, except for certain variations
adopted in response to regional preferences.

The Company's restaurants range in size from approximately 8,000 to 14,840
square feet, seat from 260 to 390 people, and generally include areas that can
be partitioned to accommodate private meetings and group outings. The decor is
attractive and informal. To date, the Company has located its restaurants
primarily within or adjacent to strip or neighborhood shopping centers. The
Company also owns eight freestanding sites. The Company's restaurants generally
are open from 11:00 a.m. to 8:00 p.m. or 9:00 p.m. A majority of the Company's
restaurants also serve breakfast from 8:00 a.m. to 11:30 a.m. on weekends.

The discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
significantly from those discussed herein. Certain factors that could cause or
contribute to such differences are discussed herein and in the documents
incorporated by reference into this Form 10-K.

<PAGE>

Scatter System Format

Menu items generally are presented to diners using a "scatter system" rather
than a conventional straight buffet serving line. Under the scatter system, six
to eight separate food islands or counters are used to present various courses
of each meal to diners (for example, salads on one island, desserts on another),
with diners able to proceed directly to those islands presenting the menu items
they desire at the time. The scatter system promotes easier food access and has
helped reduce the long lines that often occurred during peak hours in the
Company's restaurants utilizing the conventional straight-line serving format.
The scatter system was introduced by the Company in August 1989 and has been
utilized in all of its restaurants developed since March 1990. In addition,
because of the success of the scatter system, the Company pursued a remodeling
program from February 1990 through 1995 with the goal of converting
substantially all of its 71 then-existing restaurants from the conventional
straight-line format to the scatter system. The last restaurant was converted
in 1995.

Small Batch Preparation

To ensure freshness, hot foods and bakery items are prepared repeatedly
throughout the day in relatively small batches. Restaurant managers closely
monitor the servicing area for the quality and availability of all items. The
Company believes the freshness achieved through small batch preparation
contributes significantly to the high quality of its food.

All-Inclusive Price

The Company's restaurants currently charge, depending on the market area,
$5.39 to $5.99 for lunch Monday through Saturday and $6.99 to $8.19 for dinner
Monday through Sunday. On Saturday and Sunday, certain restaurants serve
breakfast at prices ranging from $5.49 to $6.19. Reduced prices are available
to senior citizens who purchase an annual senior club card for $1.00 per year
and to children under the age of ten or twelve depending on the market area.
Children's prices for all meals are $.40 to $.55 per year of their age from two
through ten or twelve. Customers pay prior to entering the dining area and are
assisted to tables by restaurant employees. They may return for second helpings
and additional beverages and desserts without additional charge.

<PAGE>

Restaurant Operations and Controls

GENERAL. In order to maintain a consistently high level of food quality and
service in all of its restaurants, the Company has established uniform
operational standards which are implemented by the managers of each restaurant.
All restaurants are required to be operated in accordance with rigorous
standards and specifications relating to the quality of ingredients, preparation
of food, maintenance of premises and employee conduct.

MENU SELECTION AND PURCHASING. Headquarters personnel prepare and
periodically revise standard recipes and menus and a list of approved
ingredients and supplies based upon the quality, availability, cost and customer
acceptance of various menu items. Food quality is maintained through
centralized coordination with suppliers and frequent restaurant visits by
district managers and other management personnel.

The Company purchases its food and beverage inventories and restaurant
supplies from independent suppliers approved by headquarters personnel, who
negotiate quality specifications, delivery schedules and pricing and payment
terms (typically 28 days) directly with the suppliers. Although all supplier
invoices are paid from Company headquarters, restaurant managers place orders
for inventories and supplies with, and receive shipments directly from,
suppliers. Restaurant managers approve invoices before forwarding them to
Company headquarters for payment. To date, the Company has not experienced any
difficulties in obtaining food and beverage inventories or restaurant supplies,
and the Company does not anticipate that any material difficulties will develop
in the foreseeable future.

RESTAURANT MANAGEMENT. Each restaurant typically employs a general manager,
an associate general manager, and one to three assistant managers. Each of the
Company's restaurant general managers has primary responsibility for day-to-day
operations in one of the Company's restaurants, including customer relations,
food service, cost controls, restaurant maintenance, personnel relations,
implementation of Company policies and the restaurant's profitability. A
substantial portion of each general manager's and associate general manager's
compensation depends directly on the restaurant's profitability. In addition,
restaurant managers receive stock options under the Company's current stock
option program entitling them to acquire an equity interest in the Company. The
Company believes that its compensation policies have been important in
attracting, motivating and retaining qualified operating personnel.

Each restaurant general manager reports to a district manager, each of whom in
turn reports to a regional director (currently eight persons). Each regional
director reports to the Company's Executive Vice President of Operations.

The Company maintains centralized financial and accounting controls for its
restaurants. On a daily basis, restaurant managers forward customer counts,
sales, labor costs and deposit information to Company headquarters. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, and supplier invoices. Payroll data is forwarded every two weeks.

<PAGE>

MANAGEMENT TRAINING. Old Country Buffet has a series of Training Programs
which are designed to provide managers with the appropriate knowledge and skills
necessary to be successful in their current position. All new managers, hired
from outside the Company, are required to complete an extensive seven-week in-
field training program which focuses on the basic operating skills and
management functions necessary to shift manage an Old Country Buffet restaurant.
The Company also emphasizes the internal development of new management. There
is a three week intensive Management Training Program for managers promoted from
hourly positions, conducted at the Company's Training Center located in Eden
Prairie, Minnesota. These managers-in-training participate in a series of
seminars designed to develop basic management skills, food production,
operational programs and personnel management. Training and development of
these new managers, both internal promotions and external hires, continues
beyond the initial training periods. Managers continue to work with a
structured, self paced, Management Skills Training Manual, a training program
designed to further develop their proficiency in management supervisory skills.
Before a manager is promoted this Management Skills Training Manual must be
completed.

Advancement is tied both to current operational performance and training.
Before being promoted to Food Manager, managers must successfully complete a
two-week training program in food quality, food training and food production
conducted at the Company's Training Center. Individuals designated for
promotion to General Manager attend a General Manager two-week training program
conducted at the Training Center. This program focuses on advanced management
skills with emphasis on team building and performance accountability. General
Managers being considered for promotion to District Manager complete a two-week
training program for new District Managers. This training is also conducted at
the Company's Training Center and focuses on impact management, personnel
development, advanced problem solving and action plans.

Franchising and Joint Ventures

There currently are six franchised Old Country Buffet restaurants in Nebraska
and Oklahoma, owned by two franchisees. The Company's franchise agreements
generally have initial terms of 15 years and require the franchisee to pay an
initial fee of $25,000 and continuing royalties equal to four percent of the
franchisee's sales. The Company has an agreement with each franchisee whereby
the Company has options exercisable at various times over the next several years
to repurchase the Old Country Buffet restaurants developed by such franchisee at
a predetermined formula price based principally on restaurant gross sales.

The Company has taken advantage of joint venture opportunities from time to
time, principally as a means of entering new geographic markets. In November
1988, the Company established Evergreen Buffets, Inc., a majority owned joint
venture subsidiary of the Company, to develop and operate Old Country Buffet
restaurants in Washington and Oregon. The Company held 90% of the outstanding
capital stock of this subsidiary and, in December 1995, the Company purchased
the outstanding capital stock of the subsidiary held by the minority shareholder
in exchange for 92,991 shares of Company Common Stock and Evergreen Buffets,
Inc. thereby became a wholly owned subsidiary of the Company.

The Company at present is not actively seeking to grant additional franchises
or enter into additional joint ventures.

<PAGE>

Competition

The food service industry is highly competitive. Menu, price, service,
convenience, location and ambience are all important competitive factors, with
the relative importance of many such factors varying among different segments of
the consuming public.

By providing a wide variety of food and beverages at reasonable prices in an
attractive and informal environment, the Company seeks to appeal to a broad
range of value-oriented consumers. The Company believes that its primary
competitors in this market segment are other buffet and cafeteria restaurants,
and traditional casual dining restaurants with full menus and table service.
The Company believes that its success to date has been due to its particular
approach combining pleasant ambience, high food quality, breadth of menu,
cleanliness and reasonable prices with satisfactory levels of service and
convenience.

Sales are seasonal, with a lower percentage of annual sales occurring in most
of its current market areas during the winter months. Sales may also be
affected by unusual weather patterns or matters of public interest that compete
for the customers' attention.

Advertising and Promotion

To date the Company has relied primarily on customers' word-of-mouth
recommendations to promote its business. As a result, prior to 1993, annual
advertising costs never exceeded 1.1% of restaurant sales, such costs being
incurred primarily for menu cards, brochures and a limited amount of local
newspaper, radio and television advertising. Based on favorable results, the
Company increased its rate of expenditure on advertising to 1.3% of restaurant
sales in 1994, primarily for increased radio and television advertising. The
Company lowered its advertising spending to .9% of restaurant sales in 1995 due
to the decision in the fourth quarter of 1994 to use those dollars in food and
labor to better serve the guest. The Company expects to spend approximately
1.5% of restaurant sales on advertising in 1996. The Company is prepared to
increase its advertising expenditures in the future if it determines that
further increases are likely to generate sufficient additional revenues. The
Company believes its senior citizen discount program has encouraged many senior
citizens to eat at the Company's restaurants.

Regulation

The Company's restaurants must be constructed to meet federal, state and local
building and zoning requirements and must be operated in accordance with state
and local regulations relating to the preparation and serving of food. The
Company is also subject to various federal and state labor laws which govern its
relationships with its employees, including those relating to minimum wages,
overtime and other working conditions. Environmental regulations have not had a
material effect on the operations of the Company. The Company to date has been
successful in obtaining all necessary permits and licenses and complying with
applicable regulations, and does not expect to encounter any material
difficulties in the future with respect to these matters.

<PAGE>

Trademarks

In June 1985, the Company obtained a federal trademark registration covering
the words "Old Country Buffet." The Company has subsequently obtained trademark
protection for additional marks used in its business. Generally, federal
registration of a trademark gives the registrant the exclusive use of the
trademark in the United States in connection with the goods or services
associated with the trademark, subject to the common law rights of any other
person who began using the trademark (or a confusingly similar mark) prior to
the date of federal registration. Because of the common law rights of such a
pre-existing restaurant in certain portions of Colorado, the Company's
restaurants in that state use the name "Country Buffet." The Company intends to
take appropriate steps to develop and protect its marks.

Employees

As of March 13, 1996, the Company employed approximately 15,540 persons,
including 990 supervisory and administrative, 260 managerial, and 14,290
restaurant employees. Approximately 66% of the Company's restaurant employees
work part-time. Relations with employees have been satisfactory and no work
stoppages due to labor disputes have occurred. The Company anticipates that its
work force will increase by more than 16% by the end of 1996.

Restaurant Development

GENERAL. The Company opened 38 restaurants and closed three in 1995 and
expects to open approximately 35 to 40 restaurants in 1996, of which six were
open as of March 18, 1996. One restaurant was closed in February 1996. The
Company intends to pursue expansion during 1996 in both existing and new
markets.

The ability of the Company to open new restaurants depends on a number of
factors, including its ability to find suitable locations and negotiate
acceptable leases and land purchases, its ability to attract and retain a
sufficient number of qualified restaurant managers, and the availability of
capital. The Company actively and continuously attempts to identify and
negotiate leases and land purchases for additional new locations, and expects
that it will be able to achieve its intended development schedule for 1996,
though there is no assurance that this will be the case.

GEOGRAPHIC EXPANSION STRATEGY. The Company initially concentrated its
restaurant development in the Midwest, and then after several years expanded to
other regions of the country. The Company currently operates in 31 states and
opened its first restaurants in West Virginia and Maine during 1995. The
Company attempts to cluster its restaurants in geographic areas to achieve
economies of scale in costs of supervision, marketing and purchasing.

<PAGE>

SITE SELECTION CRITERIA. The primary criteria considered by the Company in
selecting new locations are a high level of customer traffic, convenience to
both lunch and dinner customers in demographic groups (such as families and
senior citizens) that tend to favor the Company's restaurants, and the occupancy
cost of the proposed restaurant. The Company has found that these criteria
frequently are satisfied by well-located strip shopping centers that benefit
from cotenancy with strong national retailers and visibility to high traffic
roads. All but 56 of the Company's current restaurants are located in such
centers. Twenty-eight of the other 56 restaurants are located in regional or
other enclosed shopping malls and twenty-eight are located in free-standing
structures. The Company will pursue free-standing locations only if the
projected return on investment falls within acceptable ranges. The Company
typically requires a population density of at least 100,000 within five miles of
each new location, and currently is concentrating its development efforts on
urban areas that can accommodate a number of Company restaurants. Because an
Old Country Buffet restaurant typically draws a significant volume of customers
and because of the Company's financial strength, the Company often has been able
to negotiate favorable lease terms.

RESTAURANT CONSTRUCTION. In an effort to better control costs and improve
quality, the Company is closely involved in the construction of its restaurants,
and also in the acquisition and installation of fixtures and equipment. The
Company acts as its own general contractor, using restaurant designs prepared by
the Company's own architectural staff. The Company normally satisfies the
equipment and other restaurant supply needs of its new restaurants from
inventory acquired directly from manufacturers and stored at the Company's
warehouse in Eden Prairie, Minnesota. Restaurants located in shopping centers
typically open approximately 11 weeks after construction begins, while free-
standing restaurants typically open approximately 17 weeks after construction
begins. The average cost to develop an Old Country Buffet restaurant located in
a shopping center during fiscal 1995 was approximately $759,000 for leasehold
improvements (net of landlord contributions) and approximately $627,000 for
equipment and furnishings. Free-standing owned restaurants developed in 1995
and the first part of 1996 entailed an average land cost of $521,000 and a
projected average building cost of $1,474,000. It is expected the increased
development of free-standing restaurants will increase the average cost per unit
and associated capital requirements in 1996.

ITEM 2. PROPERTIES

The Company's executive offices are located in approximately 30,000 square
feet of leased space in Eden Prairie, Minnesota, for a term ending October 31,
1997. The Company has the option to extend the lease or seek other
alternatives, including the development of a corporate headquarters in Eagan, MN
on a parcel of land purchased in 1995 for this potential use. The Company also
leases a 22,200 square foot warehouse and training center in Eden Prairie,
Minnesota for a term ending January 31, 1997. The lease has 5 one year options
which the Company could exercise to extend the lease through January 31, 2002.
The Company owns a 72,000 square foot facility in Marshfield, Wisconsin which it
utilizes for the fabrication of cabinetry and fixtures for restaurants.

<PAGE>

Most of the Company's restaurants are located in leased facilities, although
land purchases for free-standing restaurants will be considered in instances
where more acceptable return on investment justifies the additional investment.
Twenty-eight restaurants are located in free-standing buildings, twenty-eight
are located in regional or other enclosed shopping malls, and the rest are
located in strip or neighborhood shopping centers. Most of the leases provide
for a minimum annual rent and additional rent calculated as a percentage of
restaurant sales, generally 3% to 5%, if the rents so calculated exceed the
minimum. The initial terms of the Company's leases generally range from ten to
fifteen years, and the leases usually have renewal options for additional five
to ten year periods.

The Company owns substantially all of the equipment, furniture and fixtures in
its restaurants. Leasehold improvements made by the Company in leased premises
usually become the property of the landlord upon expiration or termination of
the lease. To date, most of the Company's strip mall landlords have agreed to
bear a portion of the cost of leasehold improvements by way of either rent
concessions or cash contributions.

ITEM 3. LEGAL PROCEEDINGS

IN RE BUFFETS, INC. SECURITIES LITIGATION, United States District Court for
the District of Minnesota, Master No. 3-94-1447. This action is a consolidation
of four separate lawsuits. The first lawsuit was commenced by ZSA Asset
Allocation Fund and ZSA Equity Fund on or about November 7, 1994. Three other
substantially similar actions were filed shortly thereafter by alleged
shareholders Marc Kushner, Trustee for Service Lamp Corp. Profit Sharing Plan,
Jerrine Fernandes, and John J. Nuttall. By Pretrial Order No. 1, entered in
early January 1995, the District Court ordered that the four lawsuits be
consolidated into the single pending action and that plaintiffs serve and file a
Consolidated Amended Class Action Complaint (the "Complaint"), which was served
on or about January 31, 1995. The Court ordered the dismissal of the Complaint
upon motion by the defendants, but granted plaintiffs leave to replead.
Plaintiffs filed their Second Amended, Consolidated Class Action Complaint (the
"Second Complaint") on December 11, 1995. Defendants have moved to dismiss the
Second Complaint, but defendants' motion has not yet been heard by the Court.

The Second Complaint is against the Company and several of its officers and
directors. In the Second Complaint, plaintiffs seek to represent a putative
class consisting of all persons and entities (excluding defendants and certain
others) who purchased shares of the Company's Common Stock during the period
commencing October 26, 1993 and ending October 25, 1994 (the "Class Period").
The Second Complaint alleges that the defendants made misrepresentations and
omissions of material fact during the Class Period with respect to the Company's
operations and restaurant development activities, as a result of which the price
of the Company's stock allegedly was artificially inflated during the Class
Period. The Second Complaint further alleges that certain defendants made sales
of Common Stock of the Company during the Class Period while in possession of
material undisclosed information about the Company's operations and restaurant
development activities. The Second Complaint alleges that the defendants'
conduct violated the Securities Exchange Act of 1934 and seeks compensatory
damages in an unspecified amount, prejudgment interest, and an award of
attorneys' fees, costs and expenses.

<PAGE>

Management of the Company believes that the action is without merit and
intends to defend it vigorously. Although the outcome of this proceeding cannot
be predicted with certainty, the Company's management believes that while the
outcome may have a material effect on earnings in a particular period, the
outcome should not have a material effect on the financial condition of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers are elected annually by the Board of Directors to serve
until the next annual meeting of the Board. The following table contains
information regarding the present executive officers, and all persons chosen to
become executive officers, of the Company.

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- - --------------------------------------------------------------------------------
Roe H. Hatlen (52) 1983 Founder and Chairman and Chief
Executive Officer of the Company since
December 1983; President of the Company, May
1989 to September 1992; Treasurer of the
Company, November 1983 to May 1986.

Clark C. Grant (44) 1986 Executive Vice President of
Finance and Administration since
December 1994 and Treasurer of the Company
since May 1986; Vice President of Finance of
the Company, January 1991 to December
1994; Controller of the Company, July 1984 to
April 1989.

<PAGE>

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- - --------------------------------------------------------------------------------
Jean C. Rostollan (44) 1991 Executive Vice President of
Development and Purchasing since
December 1994 and Assistant
Secretary of the Company since
February 1992; Vice President of
Purchasing and Distribution of the Company,
September 1992 to December 1994; Vice
President of Purchasing and Marketing of the
Company, January 1991 to August 1992;
Director of Purchasing and Marketing of the
Company, June 1987 to January 1991; Director
of Purchasing of the Company, October 1986 to
June 1987.

Rick H. White (38) 1993 Executive Vice President of Operations of the
Company since December 1994; Vice President
of Operations of the Company,
September 1992 to December 1994; Regional
Director of the Company, October 1990 to
August 1992; District Manager of the Company,
February 1988 to September 1990; Restaurant
General Manager of the Company, January 1986
to February 1988.

Marguerite C. Nesset (39) 1994 Vice President of Accounting since July 1994
and Controller of the Company since April
1989; Assistant Controller of the Company,
April 1987 to April 1989.

Brent P. DeMesquita (47) 1995 Vice President of Training and Human
Resources since June 1995; Director of
Training of the Company, September
1993 to June 1995; Vice President of
Organizational Development of Taco Time
International, Inc., July 1991 to September
1993; Vice President of Human Resources
and Training of Taco Time International,
Inc., December 1990 to June 1991; Director of
Human Resources and Training of Taco Time
International, Inc., August 1990 to November
1990; Director of Training of Taco Time
International, Inc., June 1987 to July 1990.
(1)

<PAGE>

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- - --------------------------------------------------------------------------------
H. Thomas Mitchell (39) 1995 Vice President and General Counsel of the
Company since June 1995; Corporate Counsel of
the Company, June 1994 to June 1995; General
Counsel of Lend Lease Trucks Inc., February
1992 to June 1994 (2); Senior Vice President
and General Counsel of Consul Restaurant
Corporation, February 1988 to February
1992.(3)

Brad J. McNaught (35) 1995 Vice President of Real Estate of the Company
since June 1995; Director of Real Estate of
the Company, June 1994 to June 1995; Real
Estate Representative of the Company,
September 1991 to June 1994; Asset Manager
for Dain Corporation, July 1988 to
September 1991. (4)

(1) Taco Time International, Inc. is a privately held operator of Mexican fast
food restaurants.

(2) Lend Lease Trucks Inc. is a privately held company providing leasing and
rentals of trucks.

(3) Consul Restaurant Corporation was a publicly held franchisee of Chi Chi's
restaurants which filed for Chapter 11 Bankruptcy protection in 1991.

(4) Dain Corporation is a full service real estate investment firm affiliated
with Dain Bosworth Incorporated., a subsidiary of Inter-Regional Financial
Group.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The information set forth under the caption "Market for the Company's Common
Stock and Related Stockholder Matters" on page 19 of the 1995 Annual Report is
incorporated herein by reference.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The information set forth under the caption, "Selected Consolidated Financial
Data" on page 4 of the 1995 Annual Report is incorporated herein by reference.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 5 through 8
of the Company's 1995 Annual Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under this Item 8 is incorporated herein by reference
to pages 9 through 19 of the Company's 1995 Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated herein by reference to the sections captioned "Number and
Election of Directors", "Certain Information Regarding Board of Directors of the
Company" and "Beneficial Ownership Reporting" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended January 3,
1996. For information concerning executive officers, see Item 4A of this Annual
Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference to the section captioned "Compensation of
Executive Officers" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended January 3, 1996; provided, however,
that the subsection thereof entitled "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated herein by reference to the similarly captioned section in the
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the fiscal
year ended January 3, 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated herein by reference to the section captioned "Certain
Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended January 3, 1996.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.

(a) The following documents are filed as part of this
Report.

1. Financial Statements

Consolidated Balance Sheets at December 28,
1994 and January 3, 1996*

Consolidated Statements of Earnings for the
Years Ended December 29, 1993, December 28,
1994 and January 3, 1996*

Consolidated Statements of Stockholders'
Equity for the Years Ended December 29, 1993,
December 28, 1994, and January 3, 1996*

Consolidated Statements of Cash Flows for the
Years Ended December 29, 1993, December
28, 1994, and January 3, 1996*

Notes to Consolidated Financial Statements*

Independent Auditors' Report*
_________________________

*Incorporated herein by reference to pages 9 through 19 of the
Company's 1995 Annual Report

<PAGE>

2. Supplemental Financial Schedules

None

3. Exhibits

3 (a) Composite Amended and Restated Articles
of Incorporation (1)

3 (b) By-laws of the Company (2)

3 (c) Form of Rights Agreement, dated as of October 24, 1995
between the Company and the American Stock Transfer &
Trust Company, as Rights Agent (the "Rights Agreement")
(3)

10(a) 1985 Stock Option Plan (4)*

10(b) 1988 Stock Option Plan (5)*

10(c) Amended and Restated Credit Agreement by and between
First Bank National Association and the Company dated as
of April 16, 1993 (1)

10(d) Amendment No. 1 to Amended and Restated Credit Agreement
dated as of June 29, 1993 between the Company and First
Bank National Association (6)

10(e) Letter dated July 8, 1993 from First Bank National
Association to the Company amending Amended and Restated
Credit Agreement (6)

10(f) Amendment No. 2 to Amended and Restated Credit Agreement
dated as of March 24, 1994 between the Company and First
Bank National Association (7)

10(g) Amendment No. 3 to Amended and Restated Credit Agreement
dated as of April 8, 1994 between the Company and First
Bank National Association (10)

10(h) Amendment No. 4 to Amended and Restated Credit Agreement
dated as of June 30, 1994 between the Company and First
Bank National Association (8)

10(i) Separation Agreement and Release dated March 2, 1995
between the Company and Joseph A. Conti, Sr. (9)

10(j) Amendment No. 5 Amended and Restated Credit Agreement
dated as of August 4, 1995 between the Company and First
Bank National Association (10)

10(k) 1995 Stock Option Plan(11)*

<PAGE>

11 Statement Regarding Computation of Per Share Earnings

13 Annual Report to Shareholders for the fiscal year ended
January 3, 1996

21 Subsidiaries of the Company

23 Consent of Deloitte & Touche LLP
dated March 27, 1996

27 Financial Data Schedule

*Management contract or compensatory plan or arrangement required to be filed
pursuant Item 14(c) of Form 10-K.
______________________________

(1) Incorporated by reference to Exhibits to Registration Statement on Form S-3
dated June 2, 1993 (Registration No.33-63694.)

(2) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 29, 1993.

(3) Incorporated by reference to Exhibits to Report on Form 8-K, dated October
24, 1995.

(4) Incorporated by reference to Exhibits to Registration Statement on Form S-1
dated October 25, 1985 (Registration No. 33-171).

(5) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 30, 1992.

(6) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for
the quarter ended July 14, 1993.

(7) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for
the quarter ended April 20, 1994.

(8) Incorporated by reference to Exhibits to Quarterly Report on Form
10-Q for the quarter ended July 13, 1994.

(9) Incorporated by reference to Exhibits to Annual Report on Form
10-K for the fiscal year ended December 28, 1994.

(10) Incorporated by reference to Exhibits to Quarterly Report on Form
10-Q for the quarter ended July 12, 1995.

(11) Incorporated by reference to Exhibits to Quarterly Report on Form
10-Q for the quarter ended October 4, 1995.

(b) Reports on Form 8-K.

The Company filed a Report on Form 8-K on November 1, 1995 relating to
the Rights Agreement.

<PAGE>

ANNUAL REPORT AND PROXY STATEMENT

With the exception of the matters specifically incorporated herein by
reference to the Company's 1995 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 14, 1996, no other portions of such 1995 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-K.

<PAGE>

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.

Buffets, Inc.

March 27, 1996 By /s/ Roe H. Hatlen
- - -------------------- -------------------
Date Roe H. Hatlen
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

Signature Capacity Date
--------- -------- ----

/s/ Roe H. Hatlen Chairman of the Board March 27,1996
- - ---------------------- and Chief Executive -------------
Roe H. Hatlen Officer (Principal
Executive Officer)

/s/ Clark C. Grant Executive Vice President March 27, 1996
- - ---------------------- of Finance and --------------
Clark C. Grant Administration and
Treasurer (Principal
Financial Officer)

/s/ Marguerite C. Nesset Vice President of March 27, 1996
- - ------------------------ Accounting and --------------
Marguerite C. Nesset Controller (Principal
Accounting Officer)

/s/ Alan S. McDowell Director March 27, 1996
- - ------------------------ --------------
Alan S. McDowell

/s/ Raymond A. Lipkin Director March 27, 1996
- - ------------------------ --------------
Raymond A. Lipkin

/s/ Keith H. Erickson Director March 27, 1996
- - ------------------------ --------------
Keith H. Erickson

/s/ David Michael Winton Director March 27, 1996
- - ------------------------ --------------
David Michael Winton

/s/ Walter R. Barry, Jr. Director March 27, 1996
- - ------------------------ --------------
Walter R. Barry, Jr.

<PAGE>

EXHIBIT INDEX

Exhibits Page
-------- ----

3 (a) Composite Amended and Restated Articles of Incorporation (1)

3 (b) By-laws of the Company (2)

3 (c) Form of Rights Agreement, dated as of October 24, 1995 between
the Company and the American Stock Transfer & Trust Company,
as Rights Agent (3)

10(a) 1985 Stock Option Plan (4)

10(b) 1988 Stock Option Plan (5)

10(c) Amended and Restated Credit Agreement by and between First
Bank National Association and the Company dated as of
April 16, 1993 (1)

10(d) Amendment No. 1 to Amended and Restated Credit Agreement dated
as of June 29, 1993 between the Company and First Bank National
Association (6)

10(e) Letter dated July 8, 1993 from First Bank National Association
to the Company amending Amended and Restated Credit Agreement (6)

10(f) Amendment No. 2 to Amended and Restated Credit Agreement dated
as of March 24, 1994 between the Company and First Bank National
Association (7)

10(g) Amendment No. 3 to Amended and Restated Credit Agreement dated as
of April 8, 1994 between the Company and First Bank National
Association (10)

10(h) Amendment No.4 to Amended and Restated Credit Agreement dated as
of June 30, 1994 between the Company and First Bank National
Association (8)

10(i) Separation Agreement and Release dated March 2, 1995 between the
Company and Joseph A. Conti, Sr. (9)

10(j) Amendment No.5 to Amended and Restated Credit Agreement dated as
of August 4, 1995 between the Company and First Bank National
Association (10)

10(k) 1995 Stock Option Plan (11)

<PAGE>

11 Statement Regarding Computation of Per
Share Earnings . . . . . . . . . . . . . . . Filed Electronically

13 Annual Report to Shareholders for the fiscal
year ended January 3, 1996 . . . . . . . . . Filed Electronically

21 Subsidiaries of the Company. . . . . . . . . Filed Electronically

23 Consent of Deloitte & Touche LLP . . . . . . Filed Electronically

27 Financial Data Schedule. . . . . . . . . . . Filed Electronically

____________________

(1) Incorporated by reference to Exhibits to Registration
Statement on Form S-3 dated June 2, 1993 (Registration No.
33-63694.)

(2) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for fiscal year ended December 29, 1993.

(3) Incorporated by reference to Exhibits to Report on Form 8-K,
dated October 24, 1995.

(4) Incorporated by reference to Exhibits to Registration
Statement on Form S-1 dated October 25, 1985 (Registration No.
33-171.)

(5) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for fiscal year ended December 30, 1992.

(6) Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended July 14, 1993.

(7) Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended April 20, 1994.

(8) Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended July 13, 1994.

(9) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 28, 1994.

(10) Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended July 12, 1995.

(11) Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended October 4, 1995.

<PAGE>

EXHIBIT 11

BUFFETS, INC. AND SUBSIDIARIES

CALCULATION OF PRIMARY EARNINGS PER SHARE (1)

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
January 1, December 30, December 29, December 28, January 3,
1992 1992 1993 1994 1996 (3)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net earnings $11,107 $15,220 $20,300 $22,476 $26,832
------- ------- ------- ------- -------
Weighted average number of
common shares 28,672 28,924 29,858 30,850 31,079

Dilutive effect of stock
options outstanding after
application of treasury
stock method 580 770 918 726 233
------- ------- ------- ------- -------
29,252 29,694 30,776 31,576 31,312
------- ------- ------- ------- -------

Net earnings, based upon
weighted average number of
common and common
equivalent shares
outstanding $.38 $.51 $.66 $.71 $.86
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

CALCULATION OF FULLY DILUTED EARNINGS PER SHARE (1) (2)

(In thousands, except per share amounts)

Dilutive effect of stock
options outstanding after
application of treasury
stock method 918 830 1,294 726 357
------- ------- ------- ------- -------
29,590 29,754 31,152 31,576 31,436
------- ------- ------- ------- -------

Net earnings, based upon
weighted average number of
common and common
equivalent shares outstanding $.38 $.51 $.65 $.71 $.85
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

(1) The number of shares has been restated to give effect to
the following stock splits:

3-for-2 stock split effected on November 15, 1991
2-for-1 stock split effected on May 28, 1993

(2) Fully diluted earnings per share are based upon the more
dilutive of the market price of the stock at the close of
the period or the average market price during the period.

(3) The Company's fiscal year consisted of 53 weeks.

<PAGE>

--------------------
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Year (52-53 Weeks) Ended
----------------------------------------------------------------------
January 1, December 30, December 29, December 28, January 3,
1992 1992 1993 1994 1996(1)
---------- ------------ ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)

<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Restaurant sales . . . . . . . . . . . . . . . . . . . . $196,212 $247,474 $334,896 $409,744 $509,928
Restaurant costs . . . . . . . . . . . . . . . . . . . . 164,418 204,400 276,469 344,382 439,814
-------- -------- -------- -------- --------
Restaurant profits . . . . . . . . . . . . . . . . . . . 31,794 43,074 58,427 65,362 70,114
Selling, general and administrative expenses . . . . . . 13,633 18,149 25,017 29,362 27,309
Other income . . . . . . . . . . . . . . . . . . . . . . 226 275 370 851 477
-------- -------- -------- -------- --------
Earnings before income taxes . . . . . . . . . . . . . . 18,387 25,200 33,780 36,851 43,282
Income taxes . . . . . . . . . . . . . . . . . . . . . . 7,280 9,980 13,480 14,375 16,450
-------- -------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 11,107 $ 15,220 $ 20,300 $ 22,476 $ 26,832
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net earnings per share . . . . . . . . . . . . . . . . . $.38 $.51 $.66 $.71 $.86
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . 29,252 29,694 30,776 31,576 31,312

BALANCE SHEET DATA:
Property/equipment (net) . . . . . . . . . . . . . . . . $ 66,423 $ 94,414 $130,771 $183,100 $220,627
Total assets . . . . . . . . . . . . . . . . . . . . . . 79,952 112,667 159,788 208,526 255,907
Long-term debt . . . . . . . . . . . . . . . . . . . . . 5,000 12,000 -- 7,000 14,000
Stockholders' equity . . . . . . . . . . . . . . . . . . 50,896 69,136 115,911 141,522 171,928

RESTAURANT DATA:
Restaurants opened or acquired during period . . . . . . 20 26 40 34 38
Restaurants closed or relocated during period. . . . . . (3)
Restaurants open (end of period):
Company-owned. . . . . . . . . . . . . . . . . . . . . 108 134 174 208 243
Franchised . . . . . . . . . . . . . . . . . . . . . . 6 6 6 6 6
-------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . 114 140 180 214 249

Average weekly sales of Company-owned restaurants
open during period . . . . . . . . . . . . . . . . . . $ 39,240 $ 40,925 $ 42,695 $ 42,615 $ 42,223
</TABLE>

(1) The Company's fiscal year consisted of 53 weeks

--------------------
4

<PAGE>

--------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS:

The Company opened its first restaurant on March 22, 1984. The number of
restaurants owned by the Company has grown to 243 at January 3, 1996. Certain
information concerning the operating results of the Company is presented in the
table below.

<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
December 29, December 28, January 3,
1993 1994 1996
---------- ---------- ---------
<S> <C> <C> <C>
Restaurant sales . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
------- ------- -------
Restaurant costs:
Food costs . . . . . . . . . . . . . . . . 34.3 34.3 35.2
Labor costs. . . . . . . . . . . . . . . . 26.4 26.9 27.7
Direct and occupancy costs . . . . . . . . 21.8 22.8 23.3
------- ------- -------
Total restaurant costs . . . . . . . . 82.5 84.0 86.2
------- ------- -------
Restaurant profits . . . . . . . . . . . . . 17.5 16.0 13.8

Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . 7.5 7.2 5.4
Other income . . . . . . . . . . . . . . . . .1 .2 .1
------- ------- -------
Earnings before income taxes . . . . . . . . 10.1 9.0 8.5
Income taxes . . . . . . . . . . . . . . . . 4.0 3.5 3.2
------- ------- -------
Net earnings . . . . . . . . . . . . . . . . 6.1% 5.5% 5.3%
------- ------- -------
------- ------- -------
Number of Company-owned
restaurants open at end of period. . . . . 174 208 243

Average weekly sales of Company-
owned restaurants open during period . . . $42,695 $42,615 $42,223
</TABLE>

Restaurant sales include only sales of restaurants owned by the Company and
its subsidiaries. Restaurant costs reflect only direct restaurant operating
costs, including food, labor, and direct and occupancy costs. Labor costs
include compensation and benefits for both hourly and restaurant management
employees. Direct and occupancy costs consist primarily of costs of supplies,
maintenance, utilities, rent, real estate taxes, insurance and depreciation.
Selling, general and administrative expenses reflect all costs not directly
related to the operation of restaurants, consisting primarily of corporate
administrative compensation and overhead, district and regional management
compensation and related management expenses, advertising and promotional costs
and the costs of recruiting, training and supervising restaurant management
personnel.

--------------------
5

<PAGE>

RESTAURANT SALES

Restaurant sales for 1995 increased $100.2 million or 24.5% over sales in
1994, which in turn had increased by $74.8 million or 22.3% over those achieved
in 1993. The increases in revenues during the three years have been mostly due
to sales generated by new restaurants and additionally in 1994 due to increased
revenues in restaurants converted from the traditional "straight line" to the
Company's "scatter system". In 1995, the Company opened 38 restaurants, compared
with 34 new restaurants in 1994 and 40 in 1993. In 1995, the Company closed two
underperforming restaurants and closed one for relocation. The Company
anticipates opening 35 to 40 new restaurants in 1996. The number of conversions
to the "scatter system" were one, three and 42, for 1995, 1994 and 1993,
respectively. Thus, out of 243 restaurants open at the end of 1995, 112 had been
opened during the three-year period and 46 had been converted from the "straight
line" to the "scatter system" format during the period. In addition, in 1995 19
restaurants were remodeled to add bakeries or to freshen the decor. The
Company's price increases have been nominal for the past three years.

Average weekly sales per restaurant decreased .9% from 1994 to 1995 and
decreased .2% from 1993 to 1994. Comparable sales per restaurant decreased 1.7%
from 1994 to 1995 and decreased 1.5% from 1993 to 1994. The Company manages its
business on average weekly sales, rather than comparable restaurant sales, as
the best measure of comparative unit sales performance. In contrast to
comparable sales, which would exclude the 40%, 38% and 70% for 1995, 1994 and
1993, respectively, of the Company's restaurants that had been open (or
converted to the scatter system or remodeled) for less than two full years at
the end of each fiscal year, the average weekly sales statistic reflects the
performance of the Company's restaurants, both new and old.

Sales are seasonal, with a lower percentage of annual sales occurring in
most of its current market areas during the winter months.

RESTAURANT COSTS

As a percentage of restaurant sales, total restaurant costs increased to
86.2% in 1995 from 84.0% in 1994 and 82.5% in 1993. Food costs as a percentage
of sales increased in 1995 from 1994 due to general food cost increases, an
increase in the number of items offered and menu changes. Food costs as a
percentage of sales did not change in 1994 from 1993. Labor costs as a
percentage of sales increased .8% to 27.7% in 1995 from 26.9% in 1994, which in
turn had increased from 26.4% in 1993. The increase in labor costs in the past
two fiscal years was primarily due to increases in management and employee wages
as a result of a more competitive labor market and increased training and
staffing of hourly and management employees to better serve the customer. These
increases were partially offset by decreases in workers' compensation insurance
rates in 1995 and 1994. During 1995, the Company increased training costs for
hourly employees to improve customers' dining experience. Direct and occupancy
costs as a percentage of sales were 23.3%, 22.8% and 21.8% in 1995, 1994 and
1993, respectively. The increase in direct and occupancy costs from 1994 to 1995
was due to a charge of $1.4 million for the anticipated closing of one
restaurant and small increases in numerous operating expense categories. The
increase in direct and occupancy costs from 1993 to 1994 resulted from an
increase in a variety of costs including a $1.5 million charge for the closing
of two under-performing restaurants and an increase of $550,000 in insurance
cost. The Company's policy of expensing all pre-opening costs when incurred
adversely affects restaurant costs and restaurant profits during the periods
when new restaurants are developed and opened. However, most restaurants are
profitable within the first month after opening.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $2.1 million and
decreased as a percentage of sales to 5.4% in 1995 from 7.2% in 1994. Selling,
general and administrative expenses in 1994 increased $4.3 million, but
decreased as a percentage of sales to 7.2% from 7.5% in 1993. The decrease in
selling, general and administrative costs in 1995 from 1994 was due to holding
the number of managers relatively constant, increased productivity and tight
cost controls over all areas, especially travel costs. The decrease in selling,
general and administrative expenses as a percentage of sales for 1994 from 1993
was due primarily to a decrease in management training expenditures to $5.0
million from $5.7 million the prior year. Management training costs were 1.0% of
sales in 1995 versus 1.2% of sales in 1994. Advertising costs represented .9% of
sales during 1995, compared with 1.3% of sales during 1994 and 1.4% of sales
during 1993.

INCOME TAXES

Income taxes were 38.0% of earnings before taxes in 1995, 39.0% in 1994 and
39.9% in 1993. The decreases in 1995 and 1994 resulted from lower effective
state income tax rates.

LIQUIDITY AND CAPITAL RESOURCES

The Company's restaurants generate cash immediately through sales. New
restaurants are generally profitable shortly after opening. The Company does not
have significant assets in the form of trade receivables or inventory, and often
receives several weeks of trade credit from food and supply purveyors;
therefore, the Company's operations generate substantial amounts of cash which
is available to fund new restaurants. The investment of cash flow from
operations in restaurant property and

--------------------
6

<PAGE>

equipment results in a "working capital deficit" (current liabilities exceeding
current assets) which, to a considerable extent, represents interest-free
financing from trade creditors that the Company intends to continue to utilize.

In fiscal 1995, net cash provided by operating activities increased by $.9
million to $57.7 million, as compared with $56.8 million in 1994 and $46.6
million in 1993. The increase in net cash provided by operations resulted from
increases in depreciation and amortization and accounts payable from the
addition of 38, 34, and 40 restaurants in 1995, 1994 and 1993, respectively. The
increasing number of restaurants was the primary factor resulting in increases
in the various current assets and current liabilities.

Cash flows used in investing activities total $60.1 million, $71.1 million
and $53.0 million for fiscal 1995, 1994 and 1993, respectively, consisting of
capital expenditures primarily for new restaurants, restaurants acquired or
remodeling of existing restaurants offset by cash received from landlords.

Cash flows provided by financing activities have been $9.0 million, $8.9
million and $13.7 million for fiscal 1995, 1994 and 1993, respectively. Cash
flows provided by financing activities in 1995 consisted of $2.0 million from
the exercise of employee stock options and $7.0 million from long-term debt
borrowings. Cash flows provided by financing activities in 1994 consisted of
$1.9 million from the exercise of employee stock options and $7.0 million from
long-term debt borrowings. Cash flows provided by financing activities in 1993
consisted of $1.1 million from the exercise of employee stock options and net
proceeds of $24.6 million from the sale of 1,437,500 shares of common stock
offset by a $12.0 million payment of long-term debt.

The Company has a $40 million unsecured revolving line of credit. The
Company is required to pay a quarterly commitment fee equal to 1/4 of 1% per
annum on the unused balance. At January 3, 1996, the Company had borrowings of
$14 million under the line of credit bearing interest rates ranging from 6.9% to
8.5%.

The Company requires significant amounts of capital to fund its growth.
During 1996, the Company expects to open approximately 35 to 40 new restaurants.
The Company expects to spend approximately $38 to $50 million in aggregate on
these new restaurants and an additional $5 to $10 million in 1996 for
restaurants that are not expected to open until early 1997, depending upon the
level of contributions obtained from landlords for leasehold improvements and
the number of acquisitions of freestanding Company owned sites.

The Company has traditionally grown without purchasing land and
constructing its own freestanding restaurants. In order to obtain the optimal
locations for expansion during 1994, the Company began acquiring land and
building freestanding restaurants. Based on prior years' experience, the
Company anticipates that, if it further pursues the development of
freestanding locations, the cost per location and related cash requirements
will increase substantially over prior years and such costs will not be
offset by landlord contributions that typically have been associated with
strip mall locations. The capital expenditure required for a freestanding
location can be over 100% greater than for a mall location. The Company will
carefully evaluate any additional freestanding locations to determine if it
will be able to generate an acceptable return on investment. The Company
estimates that less than 10% of 1996 new locations will be freestanding units
built and owned by the Company. The Company estimates that another 25% of
1996 locations will be freestanding leased units.

Sources of capital for restaurants to be opened in 1996 and early 1997 are
anticipated to be funds provided by operations, credit received from trade
suppliers, landlord contributions to leasehold improvements and current bank
financing. The Company believes that these sources will be adequate to finance
operations and the additional restaurants included in the Company's restaurant
development plans for 1996 and early 1997. However, in order to remain prepared
for further significant growth in future years, the Company will continue to
evaluate its financing needs and seek additional funding if appropriate. The
Company has not paid any cash dividends on its common stock and, pursuant to its
credit agreement, is restricted from declaring or paying cash dividends without
the approval of the Company's lender. The Board of Directors intends to retain
earnings for the foreseeable future for use in the expansion of the Company's
business.

EXTERNAL FACTORS AFFECTING
FUTURE PERFORMANCE

The primary inflationary factors affecting the Company's operations are
food and labor costs. A large number of the Company's non-management restaurant
personnel are paid at or near the minimum wage level and, accordingly, changes
in minimum wage rates affect the Company's labor costs. The cost impact of
possible federal health care reform legislation and the Company's ability to
recover such cost increases in the form of higher prices is not determinable at
this time.

The Company does not have any post-employment, retirement, or welfare
benefits; therefore, Statements of Financial Accounting Standards No. 106 and
No. 112 have no impact on the consolidated financial statements.

SHAREHOLDERS SUIT

The Company and certain of its directors and executive officers have been
named as defendants in a Second Amended Consolidated Class Action Complaint (the
"complaint") brought on behalf of a putative class of all purchasers of common
stock of the Company from October 26, 1993 through

--------------------
7

<PAGE>

October 25, 1994 (the "class period") in the United States District Court for
the District of Minnesota.

The complaint alleges that the defendants made misrepresentations and
omissions of material fact during the class period with respect to the Company's
operations and restaurant development activities, as a result of which the price
of the Company's stock allegedly was artificially inflated during the class
period. The complaint further alleges that certain defendants made sales of
Common Stock of the Company during the class period while in possession of
material undisclosed information about the Company's operations and restaurant
development activities. The complaint alleges that the defendants' conduct
violated the Securities Exchange Act of 1934 and seeks compensatory damages in
an unspecified amount, prejudgment interest, and an award of attorneys fees,
costs and expenses. The defendants have moved to dismiss the complaint, but the
matter has not yet been heard. Management of the Company believes that the
action is without merit and intends to defend it vigorously. Although the
outcome of this proceeding cannot be predicted with certainty, the Company's
management believes that while the outcome may have a material effect on
earnings in a particular period, the outcome should not have a material effect
on the financial condition of the Company.

BUSINESS ACQUISITIONS AND INVESTMENTS

On December 18, 1995, the Company acquired the remaining 10% minority
interest in the outstanding common stock of Evergreen Buffets, Inc., a majority
owned subsidiary of the Company, in exchange for 92,991 shares of the Company's
common stock with a market value of $1,267,000 and the cancellation of a
receivable of $83,000 due to the Company from the minority shareholder.

On February 4, 1994, the Company acquired the remaining 10% minority
interest in the outstanding common stock of Texas Buffets, Inc., also a majority
owned subsidiary of the Company, in exchange for 3,585 shares of the Company's
common stock with a market value of $100,000 and the cancellation of a
receivable of $55,000 due to the Company from the minority shareholder.

ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," which will be
effective for financial statements for fiscal years beginning after December 15,
1995. The statement requires that such long-lived assets used by the entity be
reviewed for impairment whenever the carrying amount of an asset may not be
recoverable. The Company has determined that the carrying amounts of its long-
lived assets and intangibles at January 3, 1996 are recoverable through expected
cash flows from the use of such assets. The Company does not currently expect
this new standard to have a significant impact on future earnings based on the
Company's history of closing or relocating only three restaurants out of 246
locations over the past ten years.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of specified disclosure provisions no
later than fiscal years beginning after December 15, 1995 and adoption of
certain recognition and measurement provisions for nonemployee transactions no
later than after December 15, 1995. The new standard defines a fair value method
of accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period.

Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies also are permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to
financial statements pro forma net income and earnings per share as if the
company had applied the new method of accounting.

The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption. The
Company has not yet determined if it will elect to change to the fair value
method for employee stock based transactions, nor has it determined the effect
the new standard would have on net income and earnings per share should it elect
to make such a change. Adoption of the new standard would have no effect on the
Company's cash flows.

FORWARD-LOOKING INFORMATION

The discussion in this Annual Report contains forward-looking statements
that involve risks and uncertainties, and actual results could differ materially
from these expectations. In addition to those discussed herein, the factors
that could cause actual results to differ materially from such expectations
include, but are not limited to, the following: general economic conditions;
competitive factors; being able to open new restaurants; food supply costs;
weather factors; and the risks and factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission, including
the Company's Annual Report on Form 10-K for the fiscal year ended January 3,
1996. The ability of the Company to open new restaurants depends on a number of
factors, including its ability to find suitable locations and negotiate
acceptable leases and land purchases, its ability to attract and retain a
sufficient number of qualified restaurant managers and the availability of
capital.

--------------------
8

<PAGE>

--------------------
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
December 29, December 28, January 3,
1993 1994 1996
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C>
RESTAURANT SALES . . . . . . . . . . . . . . . . . . . . . . $334,896 $409,744 $509,928

RESTAURANT COSTS:
Food costs . . . . . . . . . . . . . . . . . . . . . . . . 114,927 140,689 179,758
Labor costs. . . . . . . . . . . . . . . . . . . . . . . . 88,523 110,165 141,400
Direct and occupancy costs . . . . . . . . . . . . . . . . 73,019 93,528 118,656
-------- -------- --------
Total restaurant costs . . . . . . . . . . . . . . . . . 276,469 344,382 439,814
-------- -------- --------
RESTAURANT PROFITS . . . . . . . . . . . . . . . . . . . . . 58,427 65,362 70,114
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . 25,017 29,362 27,309
-------- -------- --------
33,410 36,000 42,805
OTHER INCOME (EXPENSE):
Franchise fees and royalties . . . . . . . . . . . . . . . 393 430 474
Interest income. . . . . . . . . . . . . . . . . . . . . . 236 507 166
Interest expense . . . . . . . . . . . . . . . . . . . . . (170) (12) (100)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (89) (74) (63)
-------- -------- --------
370 851 477
-------- -------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 33,780 36,851 43,282

INCOME TAXES (NOTE E). . . . . . . . . . . . . . . . . . . . 13,480 14,375 16,450
-------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . $ 20,300 $ 22,476 $ 26,832
-------- -------- --------
-------- -------- --------
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE . . . . . . . . . . . . . . . . . . . . . $.66 $.71 $.86
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING. . . . . . . . . . . . . . . 30,776 31,576 31,312
-------- -------- --------
-------- -------- --------
</TABLE>

See notes to consolidated financial statements.

--------------------
9

<PAGE>

--------------------
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
December 28, January 3,
1994 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 6,822 $ 13,375
Receivable from landlords. . . . . . . . . . . . . . . . . 4,291 2,028
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . 2,438 3,044
Notes receivable . . . . . . . . . . . . . . . . . . . . . 133 11
Prepaid rents. . . . . . . . . . . . . . . . . . . . . . . 1,950
Other current assets . . . . . . . . . . . . . . . . . . . 1,587 1,435
Refundable income taxes. . . . . . . . . . . . . . . . . . 1,829
Deferred income taxes (NOTE E) . . . . . . . . . . . . . . 5,249 5,723
-------- --------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . 20,520 29,395
-------- --------
PROPERTY AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,936 8,135
Building . . . . . . . . . . . . . . . . . . . . . . . . . 8,013 13,221
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 141,261 164,371
Leasehold improvements . . . . . . . . . . . . . . . . . . 95,852 122,125
-------- --------
249,062 307,852
Less accumulated depreciation and amortization . . . . . . 65,962 87,225
-------- --------
183,100 220,627
GOODWILL, net of accumulated amortization of
$1,046 and $1,274 respectively . . . . . . . . . . . . . . 4,319 5,365
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 587 520
-------- --------
$208,526 $255,907
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 21,757 $ 24,375
Accrued payroll and related benefits . . . . . . . . . . . 10,308 12,602
Accrued rents. . . . . . . . . . . . . . . . . . . . . . . 7,685 9,306
Accrued sales taxes. . . . . . . . . . . . . . . . . . . . 1,998 2,463
Other accrued expenses . . . . . . . . . . . . . . . . . . 6,584 8,656
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 356
-------- --------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . 48,688 57,402

LONG-TERM DEBT (NOTE B). . . . . . . . . . . . . . . . . . . 7,000 14,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES . . . . . . . 544
DEFERRED INCOME. . . . . . . . . . . . . . . . . . . . . . . 598
DEFERRED INCOME TAXES (NOTE E) . . . . . . . . . . . . . . . 10,772 11,979
COMMITMENTS AND CONTINGENCIES (NOTE D)
STOCKHOLDERS' EQUITY (NOTE C):
Preferred stock, $.01 par value; authorized 5,000 shares;
none issued and outstanding
Common stock, $.01 par value; authorized 60,000 shares;
issued and outstanding 30,939 and 31,282 shares,
respectively. . . . . . . . . . . . . . . . . . . . . . . 309 313
Additional paid-in capital . . . . . . . . . . . . . . . . 49,158 52,728
Retained earnings. . . . . . . . . . . . . . . . . . . . . 92,055 118,887
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 141,522 171,928
-------- --------
$208,526 $255,907
-------- --------
-------- --------
</TABLE>

See notes to consolidated financial statements.

--------------------
10

<PAGE>

--------------------
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------ ---------- -------- --------
(IN THOUSANDS)

<S> <C> <C> <C> <C>
BALANCES, December 30, 1992. . . . . . . . . . . . . . . . . . . . . . $290 $19,567 $ 49,279 $ 69,136
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,300 20,300
Common stock issued under employees' stock option plans. . . . . . . 3 1,118 1,121
Tax benefit from early disposition of common stock issued
under employees' stock option plans (NOTE E) . . . . . . . . . . . 770 770
Sale of common stock less related expenses of $213 . . . . . . . . . 14 24,570 24,584
---- ------- -------- --------
BALANCES, December 29, 1993. . . . . . . . . . . . . . . . . . . . . . 307 46,025 69,579 115,911
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,476 22,476
Common stock issued under employees' stock option plans. . . . . . . 2 1,943 1,945
Tax benefit from early disposition of common stock issued
under employees' stock option plans (NOTE E) . . . . . . . . . . . 1,090 1,090
Common stock issued for acquisition of Texas Buffets, Inc. . . . . . 100 100
---- ------- -------- --------
BALANCES, December 28, 1994. . . . . . . . . . . . . . . . . . . . . . 309 49,158 92,055 141,522
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,832 26,832
Common stock issued under employees' stock option plans. . . . . . . 3 1,996 1,999
Tax benefit from early disposition of common stock issued
under employees' stock option plans (NOTE E) . . . . . . . . . . . 308 308
Common stock issued for acquisition of Evergreen Buffets, Inc. . . . 1 1,266 1,267
---- ------- -------- --------
BALANCES, January 3, 1996. . . . . . . . . . . . . . . . . . . . . . . $313 $52,728 $118,887 $171,928
---- ------- -------- --------
---- ------- -------- --------
</TABLE>

See notes to consolidated financial statements.

--------------------
11

<PAGE>

--------------------
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
December 29, December 28, January 3,
1993 1994 1996
------------ ------------ -----------
(IN THOUSANDS)

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $20,300 $22,476 $26,832
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 15,629 19,673 25,198
Tax benefit from early disposition of common stock . . . . . 770 1,090 308
Deferred income. . . . . . . . . . . . . . . . . . . . . . . 598
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 804 424 733
Changes in assets and liabilities net of acquisitions:
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . (322) (590) (606)
Other current assets . . . . . . . . . . . . . . . . . . . (409) (531) (1,759)
Refundable income taxes. . . . . . . . . . . . . . . . . . (1,829)
Other assets . . . . . . . . . . . . . . . . . . . . . . . 86 (289) (501)
Accounts payable . . . . . . . . . . . . . . . . . . . . . 4,407 7,330 2,618
Accrued payroll and related benefits . . . . . . . . . . . 2,188 2,066 2,294
Other accrued expenses . . . . . . . . . . . . . . . . . . 3,001 5,397 4,158
Income taxes currently payable . . . . . . . . . . . . . . 130 (295) (356)
------- ------- -------
Total adjustments . . . . . . . . . . . . . . . . . . . 26,284 34,275 30,856
------- ------- -------
Net cash provided by operating activities . . . . . . . 46,584 56,751 57,688

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (59,729) (79,072) (65,645)
Cash received from landlords . . . . . . . . . . . . . . . . . 6,727 8,005 5,511
------- ------- -------
Net cash used in investing activities. . . . . . . . . . (53,002) (71,067) (60,134)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options . . . . . . . 1,121 1,945 1,999
Payments of long-term debt . . . . . . . . . . . . . . . . . . (12,000)
Borrowings under long-term debt. . . . . . . . . . . . . . . . 7,000 7,000
Proceeds from stock offering less related expenses of $213 . . 24,584
------- ------- -------
Net cash provided by financing activities. . . . . . . . 13,705 8,945 8,999
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . 7,287 (5,371) 6,553

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . 4,906 12,193 6,822
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . $12,193 $ 6,822 $13,375
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Business acquisitions (NOTE F)
Cash paid during the year for:
Interest (net of capitalized interest of $170, $63,
and $317 in 1993, 1994, and 1995, respectively). . . . . . . . $ 207 $ 1 $ 91
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11,776 13,156 17,594
</TABLE>

See notes to consolidated financial statements.

--------------------
12

<PAGE>

--------------------
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 29, 1993 (52 WEEKS),
DECEMBER 28, 1994 (52 WEEKS) AND JANUARY 3, 1996 (53 WEEKS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS:

Buffets, Inc. and subsidiaries (the Company) owns and operates a chain of
buffet restaurants under the name of Old Country Buffet and Country Buffet. The
Company had 243 Company-owned restaurants and
6 franchised restaurants operating as of January 3, 1996. In addition to initial
franchise fees, franchisees pay royalties based on gross sales.

CONSOLIDATION:

The consolidated financial statements include the accounts of Buffets,
Inc., and its subsidiaries Evergreen Buffets Inc. (Evergreen), OCB Restaurant
Co., OCB Realty Co., OCB Purchasing Co. and OCB Property Co. All significant
intercompany transactions have been eliminated.

FISCAL YEAR:

The Company's fiscal year, which ends on the Wednesday nearest December 31,
is comprised of fifty-two or fifty-three weeks divided into four periods of
sixteen, twelve, twelve and twelve or thirteen weeks, respectively. The fiscal
years ended December 29, 1993 and December 28, 1994 were fifty-two week years
and the fiscal year ended January 3, 1996 was a fifty-three week year.

CASH EQUIVALENTS:

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The fair value of cash
equivalents approximates the carrying value because of their short-term
maturity.

RECEIVABLES FROM LANDLORDS:

The portions of costs for leasehold improvements remaining to be reimbursed
by landlords at year end are recorded as receivables.

INVENTORIES:

Inventories, which consist primarily of food, are stated at the lower of
cost or market. Cost is determined by the first-in, first-out method.

PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax reporting purposes. Equipment is depreciated over
estimated useful lives, ranging from three to ten years.

Leasehold improvements are amortized over the terms of the related leases,
generally ten to twenty-five years. Buildings are depreciated over estimated
useful lives, generally 39 1/2 years.

GOODWILL:

Goodwill is amortized on a straight-line basis over primarily twenty-five
years. The Company periodically evaluates the carrying value of goodwill based
upon undiscounted future cash flows.

DEFERRED INCOME:

Deferred income represents a payment received from a vendor as part of an
agreement to use the vendor's products exclusively for three years, maintenance
allotment and training sponsorship.

--------------------
13

<PAGE>

PRE-OPENING COSTS:

Costs incurred in connection with the opening of new restaurants are
expensed as incurred.

POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS:

The Company does not provide post-employment or post-retirement benefits.

LABOR:

The Company is currently experiencing a labor market that is becoming more
competitive. This, combined with possible legislation requiring health insurance
for all employees, could cause significant increases in labor costs in the
future.

INCOME TAXES:

The Company utilizes Statement of Financial Accounting Standard (SFAS) No.
109, "Accounting for Income Taxes". Under SFAS No. 109, the deferred tax
provision is determined under the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between the
financial statement and tax bases of assets and liabilities using presently
enacted tax rates.

USE OF ESTIMATES:

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

NET EARNINGS PER SHARE:

Net earnings per common and common equivalent share are computed on the
basis of the weighted average number of common shares outstanding during each
year adjusted for incremental shares assumed issued on the exercise of stock
options. Earnings per share assuming full dilution would be substantially the
same.

B. DEBT

The Company has a $40 million unsecured revolving line of credit which
expires June 30, 1998. On July 1, 1998, providing no default or event of default
has occurred and is continuing, the line of credit is convertible, at the
Company's option, to a three year term loan, maturing on July 1, 2001. Among
other things, pursuant to the agreement with the lender, the Company is required
to maintain specified levels of net worth, is limited in net capital
expenditures to $85 million in 1996, is required to meet various financial
performance criteria, and is restricted from declaring or paying cash dividends
to shareholders without the lender's approval. As of January 3, 1996, the
Company had borrowings of $14 million under the line of credit bearing interest
rates ranging from 6.9% to 8.5%. Quarterly, the Company is required to pay a
commitment fee equal to 1/4 of 1% per annum on the unused balance of the
revolving line of credit. The fair value of the debt is estimated at its
carrying value based upon the floating nature of interest rates, the three year
term and current rates available to the Company.

Letters of credit are issued by the Company during the ordinary course of
business through a major domestic bank as required by certain insurance
policies. As of January 3, 1996 and December 28, 1994
the Company had outstanding letters of credit for $4.2 million and $4.9 million,
respectively.

C. STOCKHOLDERS' EQUITY

AUTHORIZED SHARES:

The Company has 65 million authorized shares, consisting of 5 million
shares of preferred stock with rights and preferences to be established by the
Board of Directors and 60 million shares of common stock.

SHAREHOLDER PREFERRED STOCK PURCHASE RIGHTS IN THE EVENT OF A CHANGE OF CONTROL:

During 1995, the Company adopted a shareholder rights plan and distributed
to its shareholders one preferred share purchase right for each outstanding
share of common stock. The rights become exercisable only after a person or
group acquires beneficial ownership of 20% or more of the Company's outstanding

--------------------
14

<PAGE>

common stock or announces a tender offer, the consummation of which would result
in beneficial ownership by a person or group of 20% or more of the Company's
outstanding common stock. Each right will entitle its holder to purchase one
one-hundredth share of a new Series A Junior Participating Preferred Share
(consisting of 600,000 shares, par value $.01 per share) at an exercise price of
$65, subject to adjustment. If a person or group acquires beneficial ownership
of 20% or more of the Company's outstanding common stock, each right will
entitle its holder (other than such person or group) to purchase, at the then
current exercise price of the right, that number of shares of the Company's
common stock having a market value of two times the exercise price of the right,
subject to certain possible adjustments. In addition, if the Company is acquired
in a merger or other business combination transaction, each right will entitle
its holder to purchase, at the then current exercise price of the right, that
number of common shares of the acquiring company (or, in certain cases, one of
its affiliates) having a market value of two times the exercise price of the
right. Following the acquisition by a person or group of beneficial ownership of
20% or more of the Company's outstanding common stock and prior to an
acquisition by any person or group of 50% or more of the Company's outstanding
common stock, the Board of Directors may exchange the outstanding rights (other
than rights owned by such person or group), in whole or in part, for common
stock of the Company (or equivalent securities) at an exchange ratio per right
equal to the result obtained by dividing the exercise price of a right by the
current per share market price of the Company's common stock, subject to
adjustment. The Company may redeem the rights at $.01 per right, subject to
adjustment, at any time prior to an acquisition by a person or group of 20% or
more of the Company's outstanding common stock and -- unless there has been a
change in control of the Company's Board -- during the
20-day period thereafter (subject to possible extension). The rights expire on
November 13, 2005, unless extended or earlier redeemed or exchanged by the
Company.

STOCK OPTIONS:

Under the Company's 1985, 1988 and 1995 Stock Option Plans (the Plans), 6.3
million shares were reserved for future grants. The stock options generally
become exercisable in 20% increments on five anniversary dates after the date of
grant. The 1985 Stock Option Plan expired in 1995. Under the 1995 Stock Option
Plan, 1.0 million shares were reserved for future grants. No previously issued
options have been repriced.

Changes in outstanding stock options under the Plans since 1993 were as
follows:

Average Options
Price Outstanding
------- -----------

<S> <C> <C>
Balance at December 30, 1992 . . . . . . . . $10.29 2,160,448
Granted. . . . . . . . . . . . . . . . . . 16.50 1,161,150
Cancelled. . . . . . . . . . . . . . . . . 13.68 (261,200)
Exercised. . . . . . . . . . . . . . . . . 6.88 (178,204)
---------
Balance at December 29, 1993 . . . . . . . . 12.70 2,882,194
Granted. . . . . . . . . . . . . . . . . . 19.46 707,700
Cancelled. . . . . . . . . . . . . . . . . 16.33 (443,240)
Exercised. . . . . . . . . . . . . . . . . 7.58 (270,810)
---------
Balance at December 28, 1994 . . . . . . . . 14.27 2,875,844
Granted. . . . . . . . . . . . . . . . . . 11.62 684,200
Cancelled. . . . . . . . . . . . . . . . . 15.28 (773,336)
Exercised. . . . . . . . . . . . . . . . . 8.04 (250,798)
---------
Balance at January 3, 1996 . . . . . . . . . $13.84 2,535,910
------ ---------
------ ---------
Exercisable at January 3, 1996 . . . . . . . $12.74 1,070,010
------ ---------
------ ---------
</TABLE>

The options granted under the Plans are exercisable at not less than 100%
of the fair market value ($2.3526 to $24.6250) as of the dates of grant. Options
for the remaining 1,465,900 shares that were not exercisable as of January 3,
1996, will become exercisable through 2000. As of January 3, 1996, there were
1,368,484 shares available for future grants under the Plans.

--------------------
15

<PAGE>

D. COMMITMENTS AND CONTINGENCIES

COMMITMENTS:

The Company conducts most of its operations from leased restaurant
facilities, all of which are classified as operating leases. The following is a
schedule of future minimum rental payments required under noncancelable
operating leases as of January 3, 1996 (in thousands):

<TABLE>
<CAPTION>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,738
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,640
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,835
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,256
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,514
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 204,594
--------
$333,577
--------
--------
</TABLE>

Certain of these leases require additional rent based on a percentage of
net sales and may require additional payments for real estate taxes and common
area maintenance on the properties. Many of these leases also contain renewal
options exercisable at the election of the Company.

Rent expense was as follows (in thousands):

CONTINGENCIES:

The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a significant effect on the Company's consolidated financial statements.

The Company and certain of its directors and executive officers have been
named as defendants in a Second Amended Consolidated Class Action Complaint (the
"complaint") brought on behalf of a putative class of all purchasers of Common
Stock of the Company from October 26, 1993 through October 25, 1994 (the "class
period") in the United States District Court for the District of Minnesota.

The complaint alleges that the defendants made misrepresentations and
omissions of material fact during the class period with respect to the Company's
operations and restaurant development activities, as a result of which the price
of the Company's stock allegedly was artificially inflated during the class
period. The complaint further alleges that certain defendants made sales of
Common Stock of the Company during the class period while in possession of
material undisclosed information about the Company's operations and restaurant
development activities. The complaint alleges that the defendants' conduct
violated the Securities Exchange Act of 1934 and seeks compensatory damages in
an unspecified amount, prejudgement interest, and an award of attorneys fees,
costs and expenses. The defendents have moved to dismiss the complaint, but the
motion has not yet been heard. Management of the Company believes that the
action is without merit and intends to defend it vigorously. Although the
outcome of this proceeding cannot be predicted with certainty, the Company's
management believes that while the outcome may have a material effect on
earnings in a particular period, the outcome should not have a material effect
on the financial condition of the Company.

--------------------
16

<PAGE>

E. INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
December 29, December 28, January 3,
1993 1994 1996
------------ ------------ -----------
<S> <C> <C> <C>
Federal:
Current. . . . . . . . . . . . . . . . . . . . $ 9,716 $10,639 $13,459
Deferred . . . . . . . . . . . . . . . . . . . 684 354 640
------- ------- -------
10,400 10,993 14,099
State:
Current. . . . . . . . . . . . . . . . . . . . 2,190 2,222 1,950
Deferred . . . . . . . . . . . . . . . . . . . 120 70 93
------- ------- -------
2,310 2,292 2,043
Tax benefit from early disposition of
common stock . . . . . . . . . . . . . . . . . 770 1,090 308
------- ------- -------
$13,480 $14,375 $16,450
------- ------- -------
------- ------- -------
</TABLE>

Deferred income taxes are provided to record the income tax effect of
temporary differences that occur when transactions are reported in one period
for financial statement purposes and in another period for tax purposes. The
tax effect of the temporary differences giving rise to the Company's deferred
tax assets and liabilities are as follows (in thousands):

December 28, 1994 January 3, 1996
----------------------- -----------------------
Current Long-Term Current Long-Term
Assets Liability Assets Liability
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Depreciation . . . . . . . . . . . . . . . . $10,772 $11,979
Deferred rent. . . . . . . . . . . . . . . . $2,400 $2,984
Self-insurance reserve . . . . . . . . . . . 1,062 1,454
Accrued workers' compensation. . . . . . . . 1,391 1,161
Accrued vacation . . . . . . . . . . . . . . 393 124
Other. . . . . . . . . . . . . . . . . . . . 3
------ ------- ------ -------
$5,249 $10,772 $5,723 $11,979
------ ------- ------ -------
------ ------- ------ -------
</TABLE>

The following is a reconciliation of the expected ordinary federal income
tax (at statutory rates) to the actual income tax provided (in thousands):

Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
December 29, December 28, January 3,
1993 1994 1996
------------ ------------ -----------
<S> <C> <C> <C>
Expected ordinary federal income tax . . . . . . . $11,824 $12,898 $15,149
State income taxes, net of federal tax benefit . . 1,689 1,490 1,328
General business credits . . . . . . . . . . . . . (265) (527) (337)
Other. . . . . . . . . . . . . . . . . . . . . . . 232 514 310
------- ------- -------
$13,480 $14,375 $16,450
------- ------- -------
------- ------- -------
</TABLE>

--------------------
17

<PAGE>

F. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

On December 18, 1995, the Company acquired the remaining 10% minority
interest in Evergreen in exchange for 92,991 shares of the Company's common
stock with a market value of $1,267,000. On February 4, 1994, the Company
acquired the remaining 10% minority interest in Texas Buffets, Inc. (Texas) in
exchange for 3,585 shares of the Company's common stock with a market value of
$100,000. The acquisition of the minority interest in Texas in 1994 and
Evergreen in 1995 involved the following non-cash items (in thousands):

<TABLE>
<CAPTION>
Texas Evergreen
----- ---------
<S> <C> <C>
Goodwill . . . . . . . . . . . . . . . . $ 693
Minority interest. . . . . . . . . . . . $ 155 657
Cancellation of receivable . . . . . . . (55) (83)
Common shares issued . . . . . . . . . . (100) (1,267)
----- -------
$ 0 $ 0
----- -------
----- -------
</TABLE>

G. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Year (53 Weeks) Ended January 3, 1996
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C> <C>
Restaurant sales . . . . . . . . . . . . . . $142,090 $119,282 $125,053 $123,503
Restaurant profits . . . . . . . . . . . . . 19,130 17,981 18,279 14,724
Earnings before income taxes . . . . . . . . 10,982 12,213 10,828 9,259
Net earnings . . . . . . . . . . . . . . . . $ 6,809 $ 7,571 $ 6,715 $ 5,737
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings per share . . . . . . . . . . . $.22 $.24 $.21 $.19
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common and common
equivalent shares. . . . . . . . . . . . . 31,156 31,331 31,404 31,410

Year (52 Weeks) Ended December 28, 1994
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Restaurant sales . . . . . . . . . . . . . . $112,488 $ 98,922 $100,512 $ 97,822
Restaurant profits . . . . . . . . . . . . . 18,053 18,790 17,084 11,435
Earnings before income taxes . . . . . . . . 10,044 11,560 9,833 5,414
Net earnings . . . . . . . . . . . . . . . . $ 6,024 $ 6,944 $ 6,098 $ 3,410
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings per share . . . . . . . . . . . $.19 $.22 $.19 $.11
-------- -------- -------- --------
-------- -------- -------- --------

Weighted average common and common
equivalent shares. . . . . . . . . . . . . 31,994 31,603 31,510 31,157
</TABLE>

--------------------
18

<PAGE>

EXHIBIT 21

Subsidiaries of Buffets, Inc.

State of
Name of Subsidiaries Incorporation Doing Business As
- - -------------------- ------------- -----------------

Evergreen Buffets Inc. Oregon Old Country Buffet
OCB Restaurant Co. Minnesota Old Country Buffet
OCB Realty Co. Minnesota
OCB Purchasing Co. Minnesota
OCB Property Co. Minnesota

<PAGE>

EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements of
Buffets, Inc. on Form S-8 related to the 1995 Stock Option Plan, the 1988
Incentive Stock Option Plan and the 1985 Stock Option Plan of our report dated
February 9, 1996, appearing in and incorporated by reference in the Annual
Report on Form 10-K of Buffets, Inc. and Subsidiaries for the year ended
January 3, 1996.

Deloitte & Touche LLP
Minneapolis, Minnesota
March 27, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 3, 1996 AND THE CONSOLIDATED STATEMENT
OF EARNINGS FOR THE PERIOD ENDED JANUARY 3, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000750274
<NAME> BUFFETS, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1996
<PERIOD-START> DEC-29-1994
<PERIOD-END> JAN-03-1996
<CASH> 13,375
<SECURITIES> 0
<RECEIVABLES> 2,028
<ALLOWANCES> 0
<INVENTORY> 3,044
<CURRENT-ASSETS> 29,395
<PP&E> 307,852
<DEPRECIATION> 87,225
<TOTAL-ASSETS> 255,907
<CURRENT-LIABILITIES> 57,402
<BONDS> 14,000
0
0
<COMMON> 313
<OTHER-SE> 171,615
<TOTAL-LIABILITY-AND-EQUITY> 225,907
<SALES> 509,928
<TOTAL-REVENUES> 509,928
<CGS> 439,814
<TOTAL-COSTS> 439,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 43,282
<INCOME-TAX> 16,450
<INCOME-CONTINUING> 26,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,832
<EPS-PRIMARY> .86
<EPS-DILUTED> .85

</TABLE>