SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For Quarter Ended: Commission File Number
October 8, 1997 0-14370
BUFFETS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
(State of incorporation) (I.R.S. Employer Identification No.)
10260 Viking Drive, Eden Prairie, MN 55344
(Address of principal executive offices)
(612) 942-9760
(Registrant's telephone number)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 14,1997
----- ----------------------------------
Common Stock, $.01 par value 45,369,541 shares
1
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BUFFETS, INC. AND SUBSIDIARIES
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-
January 1, 1997 and October 8, 1997 . . . 3
Consolidated Statements of Operations-
Forty Weeks ended October 9, 1996
and October 8, 1997 and Twelve Weeks
ended October 9, 1996 and
October 8, 1997 . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows-
Forty Weeks ended October 9, 1996
and October 8, 1997 . . . . . . . . . . . 5
Notes to Consolidated Financial
Statements. . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION . . . . . . . . . . . . 13
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Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JANUARY 1, OCTOBER 8,
1997 1997
---------- ----------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . $ 10,772 $ 39,044
Receivable from landlords . . . . . . . . . . . 2,642 2,247
Inventory. . . . . . . . . . . . . . . . . . . . 3,653 3,961
Notes receivable . . . . . . . . . . . . . . . . 52 29
Prepaid rents. . . . . . . . . . . . . . . . . . 2,782 2,243
Other current assets . . . . . . . . . . . . . . 2,587 1,185
Deferred income taxes. . . . . . . . . . . . . . 11,975 11,010
-------- --------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . 34,463 59,719
PROPERTY AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . 15,686 15,688
Building . . . . . . . . . . . . . . . . . . . . 30,537 30,986
Equipment. . . . . . . . . . . . . . . . . . . . 228,046 243,152
Leasehold improvements . . . . . . . . . . . . . 185,263 199,519
-------- --------
459,532 489,345
Less accumulated depreciation and amortization . 131,811 158,863
-------- --------
327,721 330,482
GOODWILL, net of accumulated amortization of $1,615 and
$1,884, respectively . . . . . . . . . . . . . . 5,974 5,705
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 2,525 2,268
-------- --------
$370,683 $398,174
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . $ 29,483 $ 26,862
Accrued payroll and related benefits . . . . . . 16,229 17,096
Accrued rents. . . . . . . . . . . . . . . . . . 13,892 15,035
Accrued sales taxes. . . . . . . . . . . . . . . 3,497 4,428
Accrued insurance. . . . . . . . . . . . . . . . 4,390 5,648
Accrued site closing costs . . . . . . . . . . . 7,703 6,461
Other accrued expenses . . . . . . . . . . . . . 5,779 7,755
Income taxes . . . . . . . . . . . . . . . . . . 615 3,190
Current portion of capital leases. . . . . . . . 2,055 1,939
-------- --------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . 83,643 88,414
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 41,500 41,500
LONG-TERM PORTION OF CAPITAL LEASES. . . . . . . . 5,078 3,535
DEFERRED INCOME. . . . . . . . . . . . . . . . . . 405 302
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 3,266 3,463
MINORITY INTEREST. . . . . . . . . . . . . . . . . 17
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 60,000 shares
authorized; issued and outstanding 45,159 and
45,327 shares, respectively . . . . . . . . . . 452 453
Additional paid-in capital . . . . . . . . . . . 116,330 117,434
Retained earnings. . . . . . . . . . . . . . . . 120,009 143,056
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . 236,791 260,943
-------- --------
$370,683 $398,174
-------- --------
-------- --------
See Notes to Consolidated Financial Statements.
3
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FORTY WEEKS ENDED TWELVE WEEKS ENDED
---------------------- ----------------------
OCTOBER 9, OCTOBER 8, OCTOBER 9, OCTOBER 8,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
RESTAURANT SALES . . . . . . . . $580,837 $625,422 $180,846 $194,145
RESTAURANT COSTS:
Food costs . . . . . . . . . . 202,084 212,609 62,957 65,078
Labor costs. . . . . . . . . . 166,430 186,325 51,974 56,412
Direct and occupancy costs . . 136,565 151,867 43,362 47,148
-------- -------- -------- --------
Total restaurant costs . . . . 505,079 550,801 158,293 168,638
-------- -------- -------- --------
RESTAURANT PROFITS . . . . . . . 75,758 74,621 22,553 25,507
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES. . . . 36,867 36,301 12,578 12,190
MERGER AND OTHER RELATED COSTS . 6,584 6,584
DUPLICATE SITE CLOSING COSTS . . 10,702 10,702
IMPAIRMENT OF ASSETS . . . . . . 27,739 27,739
OTHER SITE CLOSING COSTS . . . . 4,547 4,547
-------- -------- -------- --------
(10,681)* 38,320 (39,597)* 13,317
OTHER (EXPENSE) INCOME NET . . . (561) (533) (147) 99
-------- -------- -------- --------
(LOSS) EARNINGS BEFORE INCOME
TAX BENEFIT (EXPENSE) . . . . (11,242)* 37,787 (39,744)* 13,416
INCOME TAX BENEFIT (EXPENSE) . . 1,300 (14,740) 12,298 (5,236)
-------- -------- -------- --------
NET (LOSS) EARNINGS . . . . . . $ (9,942)* $ 23,047 $(27,446)* $ 8,180
-------- -------- -------- --------
-------- -------- -------- --------
NET (LOSS) EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE. . $(.22)* $.51 $(.60)* $.18
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING . . . . . . . . . 45,490 45,577 45,073 45,824
*Reflects non-cash and merger charge totaling $49,572,000 ($32,666,000 or
$.72 per share after tax)
See Notes to Consolidated Financial Statements.
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FORTY WEEKS ENDED
------------------------
OCTOBER 9, OCTOBER 8,
1996 1997
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings . . . . . . . . . . . . . . . $ (9,942) $23,047
Adjustments to reconcile net (loss) earnings
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 31,508 31,575
Impairment of assets and site closing costs . . 42,988
Tax benefit from early disposition of
common stock . . . . . . . . . . . . . . . . 186 263
Deferred income . . . . . . . . . . . . . . . . (256) (103)
Deferred income taxes . . . . . . . . . . . . . (15,245) 1,162
Changes in assets and liabilities:
Inventory. . . . . . . . . . . . . . . . . . . 148 (308)
Other current assets . . . . . . . . . . . . . 1,194 1,993
Refundable income taxes. . . . . . . . . . . . 1,829
Other assets . . . . . . . . . . . . . . . . . 242 (45)
Accounts payable . . . . . . . . . . . . . . . (9,561) (2,621)
Accrued payroll and related benefits . . . . . 514 867
Accrued site closing costs . . . . . . . . . . (1,242)
Other accrued expenses . . . . . . . . . . . . 7,483 5,308
Income taxes currently payable . . . . . . . . 620 2,575
-------- -------
Total adjustments . . . . . . . . . . . . . 61,650 39,424
-------- -------
Net cash provided by operating activities. . 51,708 62,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments . . . . . . . . . . . . . (125,251)
Proceeds from sale of investments. . . . . . . . . 153,079
Purchase of minority interest in HTB I . . . . . . (950)
Capital expenditures, net of retirements
and net receipts from landlords . . . . . . . . . (51,469) (37,217)
Cash receipts from landlords . . . . . . . . . . . 1,960 3,835
-------- -------
Net cash used in investing activities. . . . . (22,631) (33,382)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options . 1,101 842
Payments of long-term debt . . . . . . . . . . . . (14,000)
Net payments on short-term debt. . . . . . . . . . (2,000)
Payments on capital leases . . . . . . . . . . . . (1,491) (1,659)
-------- -------
Net cash used in financing activities. . . . . (16,390) (817)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . 12,687 28,272
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . 14,530 10,772
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $ 27,217 $39,044
-------- -------
-------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of capitalized interest of $252 and
$215 in 1996 and 1997, respectively) . . . . . . $ 2,300 $ 2,214
Income taxes . . . . . . . . . . . . . . . . . . . 11,212 10,785
See Notes to Consolidated Financial Statements.
5
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BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position
of Buffets, Inc. and subsidiaries as of October 8, 1997 and the results
of operations for the twelve weeks ended October 9, 1996 and October 8,
1997 and the results of operations and cash flows for the forty weeks
ended October 9, 1996 and October 8, 1997.
2. Minority interest reflects a 20% ownership interest in Dinertainment, Inc.
3. On May 13, 1997, the Company's Board of Directors approved the repricing
of stock options to substantially all employees with outstanding options.
The employees had the opportunity from May 23, 1997 to June 30, 1997 to
have their options repriced at the higher of $9.00 per share or at the
fair market value of the Company's common stock on the date they elected
to reprice their options if they surrendered 50% of the options being
repriced. Employees having stock options to purchase 907,226 shares of
common stock with exercise prices ranging from $9.13 to $24.63 exchanged
those options for stock options to purchase 453,613 shares of common stock
with an average exercise price of $9.00.
Also on May 13, 1997 the Board approved a stock option grant plan for
three Executive Officers who were excluded from the repricing program.
The plan provides for the three Officers the option to purchase an
aggregate of 275,000 shares for $9.00 per share, the fair market value
on the date awarded. The options vest one third if the fair market value
as of the close of trading exceeds $12 per share for thirty consecutive
trading days, one third if the price exceeds $16 per share for thirty
consecutive trading days and one third if the price exceeds $20 per share
for thirty consecutive trading days. The plan also provides that all
options become exercisable no later than May 19, 2006.
4. These statements should be read in conjunction with the Notes to
Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 1997 and with
Management's Discussion and Analysis of Financial Condition and Results
of Operations appearing on pages 7 through 12 of this quarterly report.
6
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company operates on a fifty-two or fifty-three week fiscal year,
which ends on the Wednesday nearest December 31. The Company's first quarter
consists of sixteen weeks; all other quarters are comprised of twelve weeks.
When a fifty-three week year occurs, the Company's fourth quarter consists of
thirteen weeks.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED OCTOBER 8, 1997
RESTAURANT SALES. Restaurant sales of $194.1 million during the third
quarter of 1997 represented a 7.4% increase over sales of $180.8 million
for the comparable period of 1996, primarily due to sales generated by new
restaurants and higher sales at recently converted restaurants, partially
offset by the temporary closing of restaurants during conversion. Two new
restaurants opened in the third quarter of 1997 compared to seven during the
third quarter of 1996, bringing the total number of Company-owned restaurants
to 359 at the end of the quarter (243 Old Country Buffet, 112 HomeTown Buffet
and four Roadhouse Grill), compared to 341 restaurants open at the end of the
third quarter of 1996. Nine Old Country Buffet restaurants were converted to
HomeTown Buffet restaurants during the quarter. Average weekly sales per
restaurant for the third quarter of 1997 increased 2.9% to $45,972 from
$44,697 in the comparable period of 1996. The 14 new restaurants opened
during 1997 generated average weekly sales of $53,445 during the third
quarter. Comparable restaurant sales were up .4% for the comparable period.
Management believes that this increase is partially attributable to increased
advertising in the third quarter of 1997. The Company's price increases have
been in line with inflation.
RESTAURANT COSTS. As a percentage of restaurant sales, total restaurant
costs decreased to 86.9% for the third quarter of 1997 from 87.5% for the
third quarter of 1996. Food costs as a percentage of restaurant sales
decreased to 33.5% from 34.8%, due primarily to a reduction in the cost of
dairy products; and labor costs increased to 29.1% of sales from 28.7%,
primarily due to increases in the base compensation of store level managers
and higher expenditure on hourly wages due to a system wide implementation
of a menu change in July of 1997 and the ongoing rollout of a certified
training program. Direct and occupancy costs increased as a percentage of
restaurant sales to 24.3% in 1997 from 24.0% in 1996, due to increases in
various restaurant costs including janitorial and repair and maintenance
expenses.
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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of restaurant sales decreased to
6.3% in the third quarter of 1997 from 7.0% in the third quarter of 1996.
Such expenses in absolute terms decreased 3.1% to $12.2 million for the third
quarter of 1997 from $12.6 million for the comparable period of 1996,
primarily due to a decrease in opening crew expense in the 1997 quarter
offset by the increase in advertising expense. The Company expects to incur
approximately $3.1 million in marketing expenditures in the fourth quarter
relating to the Company's current marketing campaign, which will cover
approximately 50% of the Company's buffet restaurants. The Company expects
to spend approximately 1.2% of restaurant sales on advertising in fiscal 1997.
1996 MERGER COSTS, DUPLICATE SITE CLOSING COSTS AND IMPAIRMENT OF ASSETS.
Merger costs related to the Company's acquisition of HomeTown Buffets Inc. in
September 1996, were $17,286,000, of which $6,584,000 was for investment
banking, accounting, legal and other merger costs and $10,702,000 was for the
closure of five duplicate restaurants and HomeTown's San Diego headquarters.
Non-merger charges taken in the third quarter of 1996 included $4,547,000
relating to the closure of three non-performing restaurants and $27,739,000
relating to the application of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company determined that an
impairment write down was necessary for these locations because of a
significant drop in average weekly sales and corresponding trend of
increasing operating losses at these locations during the first 40 weeks of
fiscal 1996 (a period that includes the fiscal third quarter, which
traditionally has been a strong quarter for sales). The SFAS No. 121
impairment was determined based upon 38 specific restaurant locations which
had incurred operating or cash flow losses. It was computed using estimated
fair value of the assets and the associated future cash flows of the specific
location. HomeTown Buffet represented 27% of the impairment. Depreciation
of the impaired assets and losses from eight restaurants amounted to $3,777,000
through the third quarter of fiscal year 1996 ($2,342,000 or $.05 per share
after taxes).
INCOME TAX BENEFIT (EXPENSE). The Company's effective income tax rate was
39.0% for the third quarter of 1997. This rate is higher then the statutory
rate primarily due to state income taxes. The Company's effective income tax
rate was 30.9% for third quarter 1996. This rate is lower than the statutory
rate primarily due to certain merger related costs which are not deductible
for tax purposes.
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FORTY WEEKS ENDED OCTOBER 8, 1997
RESTAURANT SALES. For the first forty weeks of 1997, restaurant sales
increased 7.7% to $625.4 million from $580.8 million in 1996, primarily due
to sales generated by new restaurants and higher sales at recently converted
restaurants, partially offset by the temporary closing of restaurants during
conversion. The Company opened 15 restaurants in the first forty weeks of
1997 as compared to 31 in the first forty weeks of 1996. The average weekly
sales per restaurant in the 1997 period increased by .9% to $44,693 from
$44,279 in 1996. Comparable restaurant sales were down 1.9% for the
comparable periods. Management believes that this decrease is partially
attributable to lower advertising expenditure in the first two quarters of
1997 than in the first two quarters of 1996 offset by the increased
advertising expenditure in the third quarter of 1997 compared to third
quarter of 1996. The Company's price increases have been in line with
inflation.
RESTAURANT COSTS. Restaurant costs for the first forty weeks in 1997
increased to $550.8 million from $505.1 million in 1996. As a percentage of
restaurant sales, the 1997 period costs were 88.1% and the 1996 period costs
were 87.0%. Food costs decreased to 34.0% from 34.8% for the comparable
periods; and labor costs increased to 29.8% from 28.7%, primarily due to
increases in the base compensation of store level managers and higher
expenditure on hourly wages due to a system wide implementation of a menu
change and the rollout of a certified training program. Direct and occupancy
costs increased to 24.3% in the first forty weeks of 1997 from 23.5% in the
comparable period in 1996, due to increases in various restaurant costs
including janitorial and repair and maintenance expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first forty weeks of
1997, selling, general and administrative expenses decreased to $36.3 million
from $36.9 million in 1996. This decrease was primarily due to a decrease in
opening crew expense in 1997. As a percentage of sales, selling, general and
administrative expenses decreased to 5.8% in the 1997 period from 6.3% in the
1996 period. Advertising for the first forty weeks of 1997 and 1996 was 1%
of restaurant sales.
INCOME TAXES. Income taxes were 39.0% of earnings before income taxes for
the 1997 period. Income taxes reflect a tax benefit of $1.3 million or 11.6%
of the loss for the forty weeks in 1996. The Company's effective tax rates
for 1996 was lower than the statutory rate primarily due to certain merger
related costs which are not deductible for tax purposes.
9
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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 cash
which is available to fund new restaurants. The investment of cash flow from
operations in restaurant property and 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.
The Company currently has an unsecured revolving line of credit of up to
$50 million with interest payable at the option of the Company, at the
applicable "eurodollar rate", "certificate of deposit rate", or the
"reference rate" of the bank at the time of the advance. The Company is
also required to pay a commitment fee equal to 1/4 of 1% per annum of the
unused balance, payable quarterly in arrears. On July 1, 1999, 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, 2002. As of October 8, 1997, the Company had no borrowings
outstanding under this credit line.
In 1995, HomeTown Buffet, Inc., a wholly-owned subsidiary of the Company
("HomeTown"), issued $41.5 million in aggregate principal amount of 7.0%
subordinated convertible notes due on December 1, 2002. Interest is payable
semi-annually on June 1 and December 1, commencing June 1, 1996. The notes
are convertible into shares of the Company's common stock at a conversion
price of $11.67, subject to adjustment under certain conditions, at any time
until maturity. The notes are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The notes are
redeemable in whole or in part, at the option of the Company, at any time on
or after December 2, 1998.
The Company continues to require substantial amounts of capital to fund its
growth. The Company currently expects to open a total of approximately 19
new restaurants and convert 25 restaurants, principally from Old Country
Buffets to HomeTown Buffets and one HomeTown Buffet to a Roadhouse Grill,
during 1997, with 15 new restaurants already opened and all 25 conversions
completed at October 8, 1997.
The Company expects to spend an aggregate of approximately $5 to $8 million
during the remainder of 1997 on its restaurants being opened in 1997 and
early 1998, depending on the level of contributions obtained from landlords
for leasehold improvements and the amount of land purchased for freestanding
buildings. The Company anticipates that, as it further pursues the
development of freestanding locations, the cost per location and related cash
requirements will increase substantially over prior years and that
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these 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 expects that approximately 50% of 1997 new locations will be
freestanding units, and of the freestanding restaurants virtually all will be
ground leased rather than owned. Sources of capital for restaurant development
projects 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 and restaurant
conversions included in the Company's restaurant development plans for at
least through fiscal 1997 and early fiscal 1998. 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.
NON-PERFORMING RESTAURANTS
The Company evaluates impairment of individual restaurants whenever events
or changes in circumstances indicate the carrying amount of a restaurant may
not be recoverable. If individual restaurant sales during the fourth quarter
do not meet management's expectations, it is reasonably possible although
not currently quantifiable that the Company will incur impairment charges. The
Company has reviewed all underperforming locations and is considering options
for these locations including expanding advertising or conversion to a
different brand or concept.
ACCOUNTING PRONOUCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which
is effective for interim and annual reporting periods ending after December
15, 1997. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
Earnings per Share, and replaces the presentation of primary earnings per share
with a presentation of basics earnings per share. It also requires dual
presentation for all entities with complex capital structures and provides
guidance on other computational changes. Basic earnings per share is not
expected to be materially different than primary earnings per share due to
the impact of common stock equivalents being insignificant.
FORWARD-LOOKING INFORMATION
Certain statements in this quarterly report and in the Company's press
releases and oral statements made by or with the approval of the Company's
executive officers constitute or will constitute "forward-looking statements.
All forward-looking statements involve risks and uncertainties, and actual
results may be materially different. The following factors are among those
that could cause the Company's actual results to differ materially from those
set forth in such forward-looking statements.
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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 proportion of new restaurants that will be free-standing units,
either owned or leased, rather than strip mall locations will depend upon the
availability of suitable mall locations. The costs of restaurant development
and conversion will depend upon the level of contributions from landlords for
leasehold improvements, the actual number of free-standing sites utilized in
such development, and whether such sites involve land purchases, the cost of
building supplies and general construction risks and costs. The Company's
ability to generate revenue as currently expected, unexpected expenses and
the need for additional funds to react to changes in the marketplace,
including unexpected increases in personnel costs and food supply costs, may
impact whether the Company has sufficient cash resources to fund its restaurant
development and conversion plans for 1997 and early 1998.
Other factors that could cause actual results of the Company to differ
materially from those contained in any such forward-looking statements
include the success and timing of the continuing integration of the operations
of the Company and HomeTown, the number, cost and success of restaurant
conversions, changes in the cost and supply of food and labor, the impact of
menu changes, the timing of television advertising planned for the remainder
of 1997 and the cost and effectiveness of such advertising as well as the
Company's other marketing programs, general economic conditions, the actions
of existing and future competitors, weather factors, unforseen health and
safety developments regarding restaurant operations, and regulatory constraints.
The Company assumes no obligation to publicly release the results of any
revision or updates to these forward-looking statements to reflect future
events or unanticipated occurrences.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 Third 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 defendants have
moved to dismiss the current complaint with prejudice. A hearing on
the motion to dismiss was held before The Honorable Michael J. Davis,
United States District Judge, on June 13, 1997. Judge Davis took the
motion under advisement, and has not indicated when or how he might
rule. The two previous complaints were dismissed without prejudice.
Management of the Company believes that the action is without merit
and intends to defend it vigorously. Although the outcome of this
action 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.
On August 9, 1996 HTB Restaurants, Inc. ("HTB Restaurants"), a
franchisee of HomeTown, along with its parent entities, Summit Family
Restaurants, Inc. ("Summit") and CKE Restaurants, Inc. (collectively,
the
13
<PAGE>
"Plaintiffs"), filed suit against the Company and HomeTown in United
States District Court for the District of Utah, Central Division. The
suit alleged, among other things, that the Company and HomeTown
illegally conspired to restrict competition and to prevent the
Plaintiffs from developing additional HomeTown restaurants under the
Multiple Unit Agreement between HomeTown and HTB Restaurants (the
"Multiple Unit Agreement"). The suit included claims against the
Company and HomeTown for violations of both federal and state antitrust
laws, for unfair business practices, and for tortuous interference
with contract and economic relations. The suit also alleged claims
against HomeTown for breach of contract and breach of the covenant of
good faith and fair dealing. Plaintiffs sought damages and attempted
to enjoin the merger between the Company and HomeTown. On September
19, 1996, the court denied Plaintiffs' motion for preliminary
injunctive relief. On January 31, 1997, an arbitrator ruled in binding
arbitration that HomeTown was entitled to terminate the Multiple
Unit Agreement, along with all of HTB Restaurants' future development
rights. By Order and Judgement filed on September 10, 1997, the court
confirmed the arbitration award. On October 8, 1997, the Plaintiffs,
an entity affiliated with Plaintiffs named Star Buffet, Inc., the
Company, and HomeTown entered into a Settlement Agreement with respect
to the litigation. Pursuant to the Settlement Agreement, the
litigation was dismissed with prejudice, and Plaintiffs and Star
Buffet, Inc. released the Company and HomeTown from any and all claims
that they might have relating to, among other things, the merger
between the Company and HomeTown, the Multiple Unit Agreement, and
the performance of HomeTown as a franchisor. The Company and HomeTown
released Plaintiffs from any claims that they might have for malicious
prosecution, abuse of process, or sanctions under the federal or state
rules of civil procedure, in connection with the filing and prosecution
of the litigation and the arbitration proceeding. HomeTown waived its
option to review the transfer of the stock of Summit to Star Buffet,
Inc. In doing so, however, HomeTown did not approve or acquiesce to
the formation of Star Buffet, Inc. or to any of its activities or
operations. Neither the Company nor HomeTown paid any money in the
settlement.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
3(a) Composite Amended and Restated Articles of
Incorporation (1)
3(b) By-laws of the Company (2)
4(a) Form of Rights Agreement, dated as of October 24,
1995 between the Company and the American Stock
Transfer and Trust Company, as Rights Agent (3)
10(b) Third Amendment dated September 12, 1997 to Second
Amended and Restated Credit Agreement by and
between the Company and First Bank National
Association
27 Financial Data Schedule
b) Reports on 8-K
None
(1) Incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-3 dated June 2, 1993 (Registration No. 33-
63694).
(2) Incorporated by reference to Exhibit 3(b) to Annual Report on
Form 10-K for the fiscal year ended December 29, 1993.
(3) Incorporated by reference to Exhibit 1 to Report on Form 8-K
dated October 24, 1995.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
November 19, 1997
/s/ Roe H. Hatlen
------------------------------
Roe H. Hatlen
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
/s/ Clark C. Grant
------------------------------
Clark C. Grant
Executive Vice President of
Finance and Administration
and Treasurer
(Principal Financial
Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibits Page
10(b) Third Amendment dated September 12,
1997 to Second Amended and Restated
Credit Agreement by and between the
Company and First Bank National
Association . . . . . . . . . . . . . Filed Electronically
27 Financial Data Schedule . . . . . . . Filed Electronically
THIRD AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED
CREDIT AGREEMENT (the "Amendment") is made and entered into as of
September 12, 1997 by and between BUFFETS, INC., a Minnesota
corporation (the "Borrower"), the Banks as defined in the Credit
Agreement (as hereinafter defined) and FIRST BANK NATIONAL
ASSOCIATION, a national banking association, one of the Banks, as
agent for the Banks (in such capacity, the "Agent").
RECITALS
1. The Borrower, the Banks and the Agent are parties
to that certain Second Amended and Restated Credit Agreement,
dated as of April 30, 1996, as amended by that certain First
Amendment thereto dated as of September 20, 1996 and that certain
Second Amendment thereto dated as of May 28, 1997 (as so amended
and as the same may be amended, supplemented, restated, or
otherwise modified, the "Credit Agreement").
2. The Borrower has requested that the Banks amend
certain provisions contained in the Credit Agreement, and the
Banks have agreed to do so, subject to the terms and conditions
set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby covenant and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used
herein and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement, unless the context
shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby
amended as follows:
2.1 Fixed Charge Coverage Ratio. Section 6.17 of the
Credit Agreement is amended to read in its entirety as follows:
Section 6.17 Minimum Fixed Charge Coverage Ratio.
The Borrower shall not permit its Fixed Charge Coverage
Ratio for any four consecutive Quarterly Periods to be less
than (a) for the four consecutive Quarterly Periods ending
on October 9, 1996, January 1, 1997 and April 23, 1997,
1.15 to 1.00, (b) for the four consecutive Quarterly
Periods ending on July 16, 1997, 1.10 to 1.00, (c) for the
four consecutive Quarterly Periods ending on October 8,
1997, 1.15 to 1.00, and (d) for any other four consecutive
Quarterly Periods, 1.75 to 1.00.
Section 3. Effectiveness of Amendments. This Amendment
shall be effective as of July 16, 1997, subject to delivery to
the Agent, with sufficient counterparts for the Banks, this
Amendment, executed by the Borrower and the Majority Banks.
Section 4. Representations; No Default. The Borrower
hereby represents that on and as of the date hereof and after
giving effect to this Amendment (a) all of the representations
and warranties contained in the Credit Agreement are true,
correct and complete in all material respects as of the date
hereof as though made on and as of such date, except to the
extent such representations and warranties specifically relate to
an earlier date, in which case they are true and correct as of
such earlier date, and (b) there will exist no Default or Event
of Default on such date which has not been waived by the Banks.
The Borrower represents and warrants that the Borrower has the
power and legal right and authority to enter into the Amendment
and has duly authorized as appropriate the execution and delivery
of the Amendment, and the Amendment does not contravene or
constitute a default under any agreement, instrument or indenture
to which the Borrower or any of its Subsidiaries is a party or a
signatory or a provision of the Borrower's or any such
Subsidiary's certificate of incorporation, bylaws or, to the best
of the Borrower's knowledge, any other agreement or requirement
of law. The Borrower represents and warrants that no consent,
approval or authorization of or registration or declaration with
any Person, including but not limited to any governmental
authority, is required in connection with the execution and
delivery by the Borrower of the Amendment or the performance of
obligations of the Borrower herein described. The Borrower
represents and warrants that the Amendment is the legal, valid
and binding obligation of the Borrower enforceable in accordance
with its terms. The Borrower warrants that no events have taken
place and no circumstance exists at the date hereof which would
give the Borrower or any of its Subsidiaries a basis to assert a
defense, offset or counterclaim to any claim of the Agent or any
Bank as to any obligations of the Borrower or any of its
Subsidiaries to the Agent or any Bank.
Section 5. Affirmation, Further References. The Banks,
the Agent and the Borrower each acknowledge and affirm that the
Credit Agreement, as hereby amended, is hereby ratified and
confirmed in all respects and all terms, conditions and
provisions of the Credit Agreement, except as amended by this
Amendment, shall remain unmodified and in full force and effect.
All references in any document or instrument to the Credit
Agreement are hereby amended and shall refer to the Credit
Agreement as amended by this Amendment.
Section 6. Merger and Integration, Superseding Effect.
This Amendment, from and after the date hereof, embodies the
entire agreement and understanding between the parties hereto
with respect to the subject matter hereof, and supersedes and has
merged into it all prior oral and written agreements on the same
subjects by and between the parties hereto with the effect that
this Amendment shall control with respect to the specific
subjects hereof.
Section 7. Legal Expenses. As provided in Section 9.2
of the Credit Agreement, the Borrower agrees to reimburse the
Agent upon demand for all reasonable out-of-pocket expenses
(including attorneys' fees and legal expenses of Dorsey & Whitney
LLP, counsel for the Agent) incurred in connection with the
negotiation or preparation of this Amendment and all other
documents negotiated and prepared in connection with this
Amendment, and the Borrower agrees to reimburse the Agent upon
demand for all other reasonable expenses, including attorneys'
fees incurred as a result of or in connection with the
enforcement of the Credit Agreement as amended hereby, and
including, without limitation, all expenses of collection of any
loans made or to be made under the Credit Agreement as amended
hereby.
Section 8. Severability. Each provision of this
Amendment and any other statement, instrument or transactions
contemplated hereby or relating hereto shall be interpreted in
such manner as to be effective, valid and enforceable under the
applicable law of any jurisdiction, but, if any provision of this
Amendment or relating hereto or thereto shall be held to be
prohibited, invalid or unenforceable under the applicable law,
such provision shall be ineffective in such jurisdiction only to
the extent of such prohibition, invalidity or unenforceability,
without invalidating or rendering unenforceable the remainder of
such provision or the remaining provisions of this Amendment or
any other statement, instrument or transaction contemplated
hereby or thereby or relating hereto or thereto in such
jurisdiction, or affecting the effectiveness, validity or
enforceability of such provision in any such jurisdiction.
Section 9. Successors. This Amendment shall be binding
upon the Borrower, the Banks and the Agent and their respective
successors and assigns, and shall inure to the benefit of the
Borrower, the Banks and the Agent and the successors and assigns
of the Borrower, the Banks and the Agent.
Section 10. Headings. The headings of various sections
of this Amendment have been inserted for reference only and shall
not be deemed to be a part of this Amendment.
Section 11. Counterparts. This Amendment may be executed
in several counterparts, all or any of which shall be regarded as
<PAGE>
one and the same document and either party to such agreements may
execute any such agreement by executing a counterpart of such
agreement.
Section 12. Governing Law. This Amendment shall be
governed by the internal laws of the State of Minnesota, without
giving effect to conflict of law principles thereof, but giving
effect to federal laws applicable to national banks.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date and year first above
written.
BUFFETS, INC.
By /s/ Clark C. Grant
------------------------------
Its EVP of Finance
Address for Borrower:
10260 Viking Drive
Suite 100
Eden Prairie, Minnesota 55344
Attention: Clark C. Grant
FIRST BANK NATIONAL ASSOCIATION
In its individual corporate
capacity and as Agent
By /s/ Megan G. Mourning
------------------------------
Its Vice President
Address:
First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
Attention: Megan Mourning MPFP0601
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 8, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE FORTY WEEK PERIOD ENDED OCTOBER 8, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> OCT-08-1997
<CASH> 39,044
<SECURITIES> 0
<RECEIVABLES> 2,247
<ALLOWANCES> 0
<INVENTORY> 3,961
<CURRENT-ASSETS> 59,719
<PP&E> 489,345
<DEPRECIATION> 158,863
<TOTAL-ASSETS> 398,174
<CURRENT-LIABILITIES> 88,414
<BONDS> 41,500
0
0
<COMMON> 453
<OTHER-SE> 260,490
<TOTAL-LIABILITY-AND-EQUITY> 398,174
<SALES> 625,422
<TOTAL-REVENUES> 625,422
<CGS> 550,801
<TOTAL-COSTS> 550,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,280
<INCOME-PRETAX> 37,787
<INCOME-TAX> 14,740
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,047
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
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