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:
December 31, 1997 0-14370
BUFFETS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
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(State of incorporation) (IRS Employer Identification No.)
10260 Viking Drive, Eden Prairie, Minnesota 55344-4668
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(Address of principal executive offices) (Zip code)
(612) 942-9760
(Registrant's telephone number, including area code)
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
7% Convertible Subordinated Notes due 2002
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 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. /X/
The aggregate market value of the shares of voting stock held by
non-affiliates of the registrant was approximately $566,866,582 at March
23,1998, based on the closing sale price for that date as reported on The Nasdaq
National Market.
On March 23, 1998, there were 45,404,267 shares of common stock of the
Company, par value $.01 per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 1998 Annual Meeting to
be held May 12, 1998 are incorporated by reference in Part III. Portions of
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1997 (the "1997 Annual Report") are incorporated by reference in Parts II
and IV.
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PART I
ITEM 1. BUSINESS
GENERAL
Buffets, Inc., a Minnesota corporation ("Buffets" or the "Company"),
was organized in 1983. Its executive offices are located at 10260 Viking Drive,
Eden Prairie, Minnesota 55344-4668. In September 1996, Buffets acquired HomeTown
Buffet, Inc., a Delaware corporation ('HomeTown Buffet'), as discussed below.
References herein to the "Company" are to Buffets, Inc. and its subsidiaries,
Dinertainment, Inc., Evergreen Buffets Inc., HTB Ventures I, Inc., HTB Ventures
II, Inc., HomeTown Buffet, Inc., HomeTown Construction and Development, Inc.,
OCB Restaurant Co., OCB Realty Co., OCB Purchasing Co. and OCB Property Co.,
unless the context indicates otherwise.
On September 20, 1996, HomeTown Buffet merged with Country Delaware,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, with
HomeTown Buffet as the surviving corporation (the "Merger"). Under the Merger,
HomeTown Buffet became a wholly-owned subsidiary of the Company. In connection
with the Merger, which was accounted for as a pooling of interests, the Company
issued a total of 13,733,728 shares of its common stock in exchange for all
outstanding shares of HomeTown Buffet common stock (at an exchange ratio of 1.17
shares of Company common stock for each share of HomeTown Buffet common stock).
The Company also assumed options covering, in the aggregate, 1,967,167 shares of
the Company's common stock in substitution for previously outstanding options to
acquire shares of HomeTown Buffet's common stock. In addition, the Company
guaranteed the obligations of HomeTown Buffet under its outstanding 7%
Subordinated Convertible Notes, and the Company's common stock will be issued
upon any conversion thereof. Approximately $41.5 million in principal amount of
these notes were outstanding at the time of the Merger.
The Company is principally engaged in the development and operation of
buffet style restaurants under the names Old Country Buffet(R) ("OLD COUNTRY
BUFFET") ("Country Buffet" in the state of Colorado and Wyoming) and HomeTown
Buffet(R) ("HOMETOWN BUFFET"). The Company obtained a federal trademark
registration covering the words OLD COUNTRY BUFFET in June of 1985. Under the
Merger, the Company gained access to a perpetual license to the HOMETOWN BUFFET
mark, including a California state trademark registration, a U.S. trademark
registration for HOMETOWN BUFFET, and a U.S. trademark registration for "HTB"
in the restaurant field.
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As of March 24, 1998, the Company operated 364 Company-owned
restaurants (242 OLD COUNTRY BUFFET, 116 HOMETOWN BUFFET, one Country Roadhouse
Buffet & GrillSM ("COUNTRY ROADHOUSE BUFFET & GRILL") four Roadhouse GrillSM
("ROADHOUSE GRILL") and one PIZZAPLAYSM ("PIZZAPLAY")) in 34 states (including
five new openings, one closing, one relocaton and one OLD COUNTRY BUFFET
converted to a COUNTRY ROADHOUSE BUFFET & GRILL since fiscal year-end 1997). The
Company contemplates that approximately 25 (22 buffet and three ROADHOUSE GRILL)
Company-owned restaurants will be opened in 1998. In addition, the Company has
24 franchised restaurants (five OLD COUNTRY BUFFET and 19 HOMETOWN BUFFET) in
operation in ten states.
The Company's buffet 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 buffet restaurants range in size from approximately 5,500
to 15,740 square feet, seat from 225 to 600 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 has 80 freestanding locations, 21 of which it owns. The
Company's buffet 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 buffet restaurants also serve breakfast
from 8:00 a.m. to 11:30 a.m. on weekends.
FORWARD-LOOKING INFORMATION
Certain statements in this Annual Report on Form 10-K 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, and the allocation
of new restaurants among the Company's currently available and future concepts,
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, the comparative
potential return and risk associated with the particular restaurant concept, 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 and cost 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 ultimate level of television advertising expenditures in 1998 will be
contingent upon the effectiveness of the commercials, the availability and cost
of advertising air time, and changes in the Company's marketing priorities. 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 1998 and early 1999. The prospect of future
restaurant conversions is contingent upon the costs of the conversions, the
financial return anticipated with such conversions, and the availability of
viable alternative concepts. The Company periodically reviews the operating
results of individual restaurants to determine if impairment charges on
underperforming assets are necessary, and the need for restaurant closings, and
it is reasonable to expect that such actions will be required from time to time
in the future. There is no certainty that currently available sources of cash
will remain available to the Company over time.
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
Buffets and HomeTown Buffet, general economic conditions, the actions of
existing and future competitors, weather factors, the success of conversions,
health and safety developments regarding restaurant operations (including the
risks described below in the section entitled "FOOD QUALITY AND SAFETY"), and
regulatory constraints. The Company assumes no obligation to publicly release
the results of any revision or updates to forward-looking statements to reflect
future events or unanticipated occurrences.
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SCATTER SYSTEM FORMAT
Buffet 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.
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
Depending on the market area, the Company's buffet restaurants
currently charge an all-inclusive price of $4.99 to $6.59 for lunch, Monday
through Saturday, and $5.99 to $9.19 for dinner Monday through Sunday. On
Saturday and Sunday, certain restaurants serve breakfast at prices ranging from
$5.49 to $6.59. 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 $.60 per year of their age from two through ten or twelve depending on the
market and in limited markets $3.49 to $4.99 depending on age. 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. This all-inclusive pricing approach exists
at virtually all of the Company's buffet restaurants, although alternative
pricing and service arrangements are occasionally implemented on a test basis.
BUFFET 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
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specifications relating to the quality of ingredients, preparation of food,
maintenance of premises and employee conduct.
MENU SELECTION AND PURCHASING. Headquarter 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
Representatives and other management personnel.
The Company purchases its food and beverage inventories and restaurant
supplies from independent suppliers approved by headquarter 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 buffet restaurant typically employs a
Senior General Manager or General Manager, Kitchen Manager, Service Manager, and
one to two 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 portion of each general manager's and
other restaurant 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. In 1997, the Company also implemented a "PRIDE" program
providing financial incentives to General Managers making a three year service
commitment in a single restaurant. The program was designed to enhance the
retention of restaurant managers and to build a sense of proprietorship. 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 Representative,
each of whom in turn reports to a Regional Director (currently 12 persons). Each
Regional Director reports to one of
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four divisional heads (one divisional Vice President and three Senior Regional
Directors), who in turn report 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 headquarter. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, and supplier invoices. Payroll data is generally forwarded every two
weeks.
MANAGEMENT TRAINING. The Company has a series of training programs that
are designed to provide managers with the appropriate knowledge and skills
necessary to be successful in their current position. All new restaurant
managers hired from outside the Company and hourly employees considered for
promotion to restaurant management are required to complete ten days of
classroom training at the Buffets Training Center in Eden Prairie, Minnesota.
After their ten days at the Training Center, they continue their training for
four or five weeks in a Certified Training Restaurant in the field. This six to
eight week program provides the basic operating skills and management functions
necessary to shift-manage a Company restaurant. The information covered includes
basic management skills, food production, labor management, operating programs
and human resource management.
Advancement is tied to both current operational performance and
training. Individuals designated for promotion to the position of General
Manager attend a specialized one-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 Representative complete a one-week training program for
new District Representatives. This training is conducted at the Company's
Training Center and focuses on coaching and development, performance management,
advanced problem solving and action plans.
In addition to these programs, a series of field seminars are conducted
for all existing management covering topics from ServSafe, the Company's food
safety procedures, to management skills.
FOOD QUALITY AND SAFETY. The Company is dedicated to serving fresh,
appealing, highly varied and wholesome food to its guests. This has been pivotal
to maintaining high guest satisfaction and is a primary contributor to the
Company's past success.
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In recent years, other reputable food service companies have been
materially and adversely impacted by foodborne illness incidents, some of which
involved third party food suppliers and transporters outside of their reasonable
control. The Company has implemented rigorous internal standards, training and
other programs to attempt to minimize the risk of such occurrences in its
operations. There can be no assurance, however, that these efforts will be fully
effective in preventing all food-borne illness transmission, or that new
illnesses resistant to current precautions will not develop in the future.
The Company also shares a risk common to all multi-unit food service
businesses. Specifically, one or more instances of foodborne illness in a
Company-owned or franchised restaurant, poor health inspection scores, or
adverse publicity can have a material adverse impact extending far beyond the
vicinity of the originally impacted restaurant to affect some or all of the
Company's other foodservice operations. This material adverse risk to the
Company exists even if it is subsequently determined that the incidents were
improperly attributed to the Company's restaurants, or that the negative
publicity was false or misleading.
NON-BUFFET RESTAURANT CONCEPTS. The Company currently operates three
restaurant concepts, comprising six units, that differ from the core buffet
business. The Company's PIZZAPLAY restaurant combines buffet style Italian
entrees and pizza with non-food entertainment services including coin operated
gaming, movies, and a tube-type gymnasium equipment for children. One COUNTRY
ROADHOUSE BUFFET & GRILL is currently in operation, featuring many of the
elements of the Company's buffet restaurants, while adding display cooking of
grill offerings in a relaxed country atmosphere. The four Company operated
ROADHOUSE GRILL restaurants do not utilize buffet style food service, but
instead feature steaks, seafood and other entrees ordered from a menu and then
prepared using an "on display" grill. At the commencement of HomeTown's
development activities involving its ROADHOUSE GRILL restaurants, it engaged a
predecessor in interest to Roadhouse Grill, Inc. to provide certain consulting
services in exchange for the payment of defined consulting fees. That agreement
was terminated by the mutual agreement of the parties in March, 1998 and the
Company and Roadhouse Grill, Inc. are free to develop their respective variant
on the ROADHOUSE GRILL theme without restriction. The Company agreed, as part of
the termination understanding, to rename its existing and future ROADHOUSE GRILL
restaurants with an alternative name that adds one or more words before
"ROADHOUSE" or "ROADHOUSE GRILL." The Company is currently determining the
appropriate trade name for the concept and anticipates that the remarking will
occur in 1998. Any reference herein to current or future ROADHOUSE GRILL
restaurants operated by
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the Company shall be deemed to refer to the concept as it is to be renamed in
1998. The ROADHOUSE GRILL restaurants are the Company's only units serving
alcohol. The real estate leases for the buffet restaurants generally reserve the
right to serve alcohol although this privilege has not been exercised to date.
FRANCHISING AND JOINT VENTURES
OLD COUNTRY BUFFET FRANCHISES. There are currently five franchised OLD
COUNTRY BUFFET restaurants in Nebraska and Oklahoma, owned by two franchisees.
The Company's OLD COUNTRY BUFFET 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.
HOMETOWN BUFFET FRANCHISES. HomeTown Buffet has three franshisees:
HTB Restaurants, Inc. ("HTB Restaurants"), Chi-Chi's Inc. ("Chi-Chi's") and
Carlton A. Hargrave, Inc. ("Hargrave").
With respect to each franchised restaurant, HTB Restaurants and
HomeTown Buffet entered into a separate franchise agreement. HTB Restaurants
paid an initial franchise fee for each new HOMETOWN BUFFET restaurant opened and
a percentage royalty fee based on gross sales. Under its agreements with HTB
Restaurants, HomeTown Buffet has a right of first refusal with respect to the
sale of the HOMETOWN BUFFET restaurants operated by HTB Restaurants and any
transfer of franchise rights granted by HomeTown to HTB Restaurants would
require HomeTown Buffet's consent, which may not be unreasonably withheld.
In May 1993, Chi-Chi's opened a HOMETOWN BUFFET restaurant in Peabody,
Massachusetts. Chi-Chi's opened a second franchised unit in March 1994 in
Wichita, Kansas.
Hargrave operates a single franchised restaurant in Calexico,
California, which opened in December 1993. HomeTown Buffet served as general
contractor for the restaurant and in connection with the construction loaned
Hargrave approximately $150,000. The loan was fully paid in 1994. In April 1995
HomeTown Buffet made a loan to Hargrave in the principal amount of $100,000 and
an additional $100,000 in October 1995 under a promissory note that permits
Hargrave to borrow up to $200,000 in principal amount. The note provides for
interest to be paid at 1% above the announced reference rate of US Bank of
Oregon. All outstanding principal and
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interest on the note was due on December 31, 1995 and remains due and payable at
this time. HomeTown Buffet agreed to defer Hargrave's franchise royalty
payments, commencing April 1995. Hargrave resumed paying franchise royalty
payments starting July 17, 1997 with prior unpaid royalties still due and
payable.
HomeTown Buffet's standard franchise agreement has a 15-year term (with
two five-year renewal options) and provides for a one-time payment to HomeTown
Buffet of an initial franchise fee and a continuing royalty fee at a variable
rate of between 2% and 4% of gross sales. HomeTown Buffet collects weekly sales
reports from its franchisees as well as periodic and annual financial
statements.
Each HOMETOWN BUFFET franchisee is responsible for selecting the
location for its restaurant, subject to HomeTown Buffet approval. HomeTown
Buffet considers such factors as demographics, competition, traffic volume and
patterns, parking, site layout, size and other physical characteristics in
approving proposed sites. In addition, all site and building plans and
specifications must be approved by HomeTown Buffet.
Franchisees must operate their HOMETOWN BUFFET restaurants in
compliance with HomeTown Buffet's operating and recipe manuals. Franchisees are
not required to purchase food products or other supplies through HomeTown
Buffet's or the Company's suppliers. Each franchised restaurant is required at
all times to have a designated Manager and Assistant Manager who have completed
the required manager training program. For the opening of a restaurant, HomeTown
Buffet provides consultation and makes its personnel generally available to a
franchisee. In addition, HomeTown Buffet sends a team of personnel to the
restaurant for up to two weeks to assist the franchisee and its managers in the
opening, the initial marketing and training effort as well as the overall
operation of the restaurant.
The HOMETOWN BUFFET franchisees do not currently have any contractual
rights to develop additional HomeTown Buffet restaurants, and they and their
affiliates are constrained from certain development activities involving other
buffet restaurants.
HomeTown Buffet may terminate a franchise agreement for a number of
reasons, including a franchisee's failure to pay royalty fees when due, failure
to comply with applicable laws, or repeated failure to comply with one or more
requirements of the franchise agreement. Many state franchise laws limit the
ability of a franchisor to terminate or refuse to renew a franchise. Generally,
a franchisee may terminate a franchise agreement only if HomeTown Buffet
violates a material and substantial provision of the
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agreement and fails to remedy the violation within a specified period. The
Company does not anticipate that the termination of any or all of the franchise
agreements would have a materially adverse effect on its operations.
JOINT VENTURES. The Company has taken advantage of joint venture
opportunities from time to time, principally as a means of entering new
geographic markets.
On March 7, 1997, the Company used this approach to develop a new
restaurant concept. It established Dinertainment, Inc. at that time to develop
and operate restaurants that combine Italian-style buffet service with family
oriented games. One location opened December 2, 1997 in Columbus, Ohio. The
Company holds 80% of the outstanding capital stock of the subsidiary.
The Company at present is not actively seeking to grant additional
franchises or enter into additional joint ventures relating to its OLD COUNTRY
BUFFET, HOMETOWN BUFFET, or other restaurant concepts.
RISKS ASSOCIATED WITH NON-COMPANY RESTAURANT OPERATIONS. The Company is
constrained in the manner in which it can regulate its franchised restaurants,
at least in real-time. In the event that a franchised restaurant fails to meet
current franchisor operating standards, the Company's own restaurants could be
adversely affected due to customer confusion or adverse publicity. A similar
risk exists with totally unrelated foodservice businesses if customers draw an
improper correlation with the Company's own operations.
COMPETITION
The food service industry is highly competitive. Menu, price, service,
convenience, location and ambiance 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 industry segment are other buffet and cafeteria restaurants,
and traditional family and 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 ambiance, high food quality, breadth of
menu, cleanliness and reasonable prices with satisfactory levels of service and
convenience.
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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
In 1995, the Company's advertising spending was at .9% of restaurant
sales. Following a positive return on increased advertising, the Company
increased its advertising spending to 1.2% of restaurant sales during 1996.
Similarly in 1997 1.3% of restaurant sales was dedicated to advertising
spending. It is expected that the advertising spending will double to
approximately $18,000,000 in 1998.
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.
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, including the
trademarks of HOMETOWN BUFFET in connection with the Merger. 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 and Wyoming, the
Company's restaurants in those states use the name "Country Buffet." In 1997,
the Company filed applications for federal registration of the trademarks
"COUNTRY ROADHOUSE BUFFET & GRILL" and "PIZZAPLAY." The Company intends to take
appropriate steps to develop and protect its various marks.
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EMPLOYEES
As of February 25, 1998, the Company employed approximately 24,830
persons, including 395 supervisory and administrative, 1,575 managerial, and
22,860 restaurant employees. Approximately 61% 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 7% by the end of 1998, subject to
unexpected turnover levels, availability of qualified personnel and changes in
restaurant development plans.
RESTAURANT DEVELOPMENT
GENERAL. The Company opened 18 restaurants and closed four in 1997 and
expects to open approximately 25 restaurants in 1998 (22 buffet and three
Roadhouse Grill), of which five were open as of March 24, 1998. As of March 24,
1998, the Company has converted one existing OLD COUNTRY BUFFET restaurant to a
COUNTRY ROADHOUSE BUFFET & GRILL, relocated one OLD COUNTRY BUFFET, and closed
one OLD COUNTRY BUFFET.
The ability of the Company to open new restaurants, and the allocation
of new restaurants among the Company's currently available and future concepts,
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, the comparative
potential return and risk associated with the particular restaurant concept, 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 1998, 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 Merger strengthened the Company's presence in
California and other key markets. The Company currently operates in 34 states.
The Company attempts to cluster its restaurants in geographic areas to achieve
economies of scale in costs of supervision, marketing and purchasing.
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
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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 116 of the Company's
current restaurants are located in such centers. Thirty-six of the other 116
restaurants are located in regional or other enclosed shopping malls and 80 are
located in free-standing structures. The Company will generally pursue
free-standing locations only if the projected return on investment falls within
acceptable ranges or unique market positioning objectives are involved. 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. The
Company is developing a small market prototype for test in markets with a
population of at least 75,000. There is no certainty that the test will prove
successful or that the smaller prototype unit will be developed beyond the test
restaurant. Because OLD COUNTRY BUFFET or HOMETOWN BUFFET restaurants typically
draw 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 staff with final documents completed by an
outside architectural firm. The Company normally satisfies the equipment and
other restaurant supply needs of its new restaurants by purchasing from
equipment suppliers. 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 a buffet restaurant located in a shopping center during
fiscal 1997 was approximately $818,000 for leasehold improvements (net of
landlord contributions) and approximately $672,000 for equipment and
furnishings. Free-standing leased buffet restaurants opened in 1997 cost an
average of approximately $1,210,000 for building and leasehold improvements and
approximately $701,000 for equipment and furnishings. Free-standing owned
restaurants developed in 1997 entailed an average land cost of $810,000 and an
average building cost of $1,535,000. It is expected the increased development of
free-standing restaurants will increase the average cost per unit and associated
capital requirements in 1998.
15
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 36,000
square feet of leased space in Eden Prairie, Minnesota, for a term ending April
30, 2000. The Company is negotiating an option to extend the lease while it
concurrently reviews other alternatives, including the potential development of
a corporate headquarters in Eagan, Minnesota on a parcel of land purchased in
1995 for this possible use. The Company also leases a 22,200 square foot
warehouse and training center in Eden Prairie, Minnesota for a term ending
January 31, 1999. The lease has three one-year options that the Company could
exercise to extend the lease through January 31, 2002. The Company owns a 72,000
square foot facility in Marshfield, Wisconsin that it utilizes for the
fabrication of cabinetry, fixtures and upholstery of chairs and booths for its
restaurants.
Until 2001, the Company remains obligated under certain leases related
to approximately 32,000 square feet of office space in San Diego, California,
previously utilized by HomeTown Buffet as its headquarters. All of that space
has been sublet to third parties. However, the amount of rent receivable by the
Company pursuant to such subleases is less than the rent payable by the Company
pursuant to the principal leases. In 1997, the Company entered into two separate
lease agreements for new down-sized regional and executive offices in San Diego
and La Jolla, California, respectively. The regional office is comprised of
approximately 1,800 square feet and the lease expires October 24, 1999, with one
two-year extension available. The La Jolla regional executive office constitutes
approximately 1,950 square feet and its lease expires October 24, 1999.
Most of the Company's restaurants are located in leased facilities,
although the Company will consider land purchases for free-standing restaurants
in instances where an acceptable return on investment, or market positioning,
justifies the additional investment. Eighty restaurants are located in
free-standing buildings, 36 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 periods of five to ten years.
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
16
<PAGE>
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 moved to dismiss the Second
Complaint. On September 11, 1996, the District Court dismissed the Second
Complaint without prejudice, with leave to plaintiffs to replead. On November 8,
1996, plaintiffs filed their Third Amended, Consolidated Class Action Complaint
(the "Third Complaint"). Defendants moved to dismiss the Third Complaint. By
Memorandum Opinion and Order filed on January 6, 1998, the District Court denied
defendants' motion to dismiss the plaintiff's Corrected, Third Amended,
Consolidated Class Action Compaint.
The Third Complaint is against the Company and several of its current
and former officers and directors. In the Third 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 Third 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 Third 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 Third Complaint
alleges that the
17
<PAGE>
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.
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.
18
<PAGE>
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT. The officers of the
Company are elected annually by the Board of Directors to serve until the next
annual meeting of the Board. Sixteen officers were so elected by the Board of
Directors in 1997, including ten executive officers (currently, those
designated as Senior Vice President or higher) who serve on the Company's
"Executive Committee." 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
- --------------------------------------------------------------------------------
Glenn D. Drasher (46) 1997 Executive Vice President of
Marketing of the Company since
January 1997; Executive Vice
President of Country Kitchen
International, family dining
restaurants, June 1996 to
January 1997; Vice President of
Marketing of Country Kitchen,
September 1993 to June 1996;
Senior Vice President of
Marketing of Chi-Chi's, Inc.,
Mexican casual restaurants, 1983
to September 1993.
David Goronkin (35) 1996 Executive Vice President of
Operations for the Company since
September 1996; Vice President
of Operations of HomeTown
Buffet, May 1996 to September
1996; Director of Operations of
HomeTown Buffet, November 1994
to May 1996; various positions,
HomeTown Buffet, 1989 to
November 1994.
Clark C. Grant (46) 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.
19
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Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Roe H. Hatlen (54) 1983 Co-Founder of the Company;
Chairman and Chief Executive
Officer of the Company since
December 1983; President of the
Company, May 1989 to September
1992.
Thomas F. Hubbard (46) 1996 Executive Vice President of Real
Estate and Development of the
Company since September 1996;
President of HomeTown
Development and Construction,
Inc. since 1995; Vice President
of Construction and Development
for HomeTown Buffet since 1992;
Director of Construction for
HomeTown Buffet from 1991
through 1992.
Kerry A. Kramp (42) 1996 President of the Company since
September 1996; President of
HomeTown Buffet from December
1995 to September 1996 and its
Chief Operating Officer since
May 1995; Vice President of
Operations of HomeTown Buffet
from February 1992 to December
1995; Director of Specialty
Foods for Geo. A. Hormel Company
from 1988 to February 1992.
Jean C. Rostollan (46) 1991 Executive Vice President of
Purchasing since September 1996;
Executive Vice President of
Development and Purchasing,
December 1994 to September 1996;
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.
20
<PAGE>
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
C. Dennis Scott (51) 1996 Co-Founder of the Company; Vice
Chairman and Chief Operating
Officer of the Company since
September 1996; Co-Founder of
HomeTown Buffet; Director and
Chief Executive Officer of
HomeTown Buffet since 1989.
K. Michael Shrader (54) 1996 Executive Vice President of
Human Resources and Training of
the Company since March 1997;
Vice President of Human
Resources of the Company,
September 1996 to March 1997;
Vice President of Human
Resources of HomeTown Buffet,
January 1996 to September 1996;
Director of Human Resources of
HomeTown Buffet, August 1995 to
January 1996; Selection Analyst,
the Gallup Organization,
February 1995 to August 1995;
Self-employed business
consultant, March 1993 to
February 1995; Vice President of
Human Resources of Red Robin
International, Inc., September
1987 to March 1993.
Neal L. Wichard (55) 1996 Senior Vice President of Real
Estate of the Company since
September 1996; Co-Founder of
HomeTown Buffet; Vice Chairman
of HomeTown Buffet, October 1995
to September 1996; Secretary and
Director of HomeTown Buffet,
July 1990 to September 1996.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTER
The information set forth under the caption "Market for the Company's
Common Stock and Related Stockholder Matters" on page 23 of the 1997 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 1997 Annual Report is incorporated herein by
reference.
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 9 of the Company's 1997 Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Except for KPMG Peat Marwick LLP's opinion relating to the consolidated
statements of income, stockholders' equity (deficit), and cash flows of HomeTown
Buffet, Inc. and its subsidiaries for the year ended January 3, 1996, the
information required under this Item 8 is incorporated herein by reference to
pages 10 through 23 of the Company's 1997 Annual Report. KPMG Peat Marwick LLP's
opinion appears at page 30 of this Annual Report on Form 10-K.
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 "Compliance With Section 16(a) of the Securities Exchange Act of
1934" 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 December 31, 1997. For information concerning executive
officers, see Item 4A of this Annual Report on Form 10-K.
22
<PAGE>
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 December 31, 1997; 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 December 31, 1997.
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 December 31, 1997.
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 January 1, 1997 and
December 31, 1997*
Consolidated Statements of Operations for the Years
Ended January 3, 1996, January 1, 1997 and December
31, 1997*
Consolidated Statements of Stockholders' Equity for
the Years Ended January 3, 1996, January 1, 1997, and
December 31, 1997*
23
<PAGE>
Consolidated Statements of Cash Flows for the Years
Ended January 3, 1996, January 1, 1997, and December
31, 1997*
Notes to Consolidated Financial Statements*
Independent Auditors' Report of Deloitte & Touche LLP*
Independent Auditor's Report of KPMG Peat Marwick LLP
(See page 30 of this Annual Report on Form 10-K)
*Incorporated herein by reference to pages 10 through 23 of the
Company's 1997 Annual Report
2. Supplemental Financial Schedules
None
3. Exhibits
2 Agreement and Plan of Merger by and among
the Company, Country Delaware, Inc., and
HomeTown Buffet (1)
3(a) Composite Amended and Restated Articles of
Incorporation. (2)
3(b) By-laws of the Company. (3)
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. (4)
4(a) Indenture dated as of November 27, 1995
related to 7% Convertible Subordinated
Notes of HomeTown Buffet due 2002. (5)
4(b) First Supplemental Indenture dated as of
September 20, 1996 among the Company,
HomeTown Buffet and Wells Fargo Bank,
N.A.(6)
10(a) 1985 Stock Option Plan. (7)*
10(b) 1988 Stock Option Plan. (8)*
24
<PAGE>
10(c) 1995 Stock Option Plan. (9)*
10(d) 1997 Non-Employee Director Stock Option Plan.*
10(e) Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association. (10)
10(f) Amendment No. 1 dated as of September 20,
1996 to Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association. (11)
10(g) Amendment No. 2 dated as of May 28, 1997 to
Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association. (12)
10(h) Amendment No. 3 dated as of September 12,
1997 to Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association. (13)
10(i) Letter dated as of January 14, 1998 to
Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association.
10(j) Management Bonus Program.*
10(k) 1991 HomeTown Buffet Stock Option Plan, as
amended. (14)*
10(l) Consolidating Promissory Note issued by
Kerry A. Kramp to the Company and related
Stock Pledge Agreement, each dated December
31, 1996. (15)*
10(m) Promissory Note issued by Thomas E.
Hubbard to HomeTown Buffet and related
Pledge Agreement, each dated November 9,
1993. (16)*
10(n) Promissory Note issued by Thomas E. Hubbard
to HomeTown Buffet and related Pledge
Agreement, each dated August 13, 1996. (17)*
25
<PAGE>
10(o) Promissory Note issued by Michael Shrader to
HomeTown Buffet and related Pledge Agreement,
each dated August 7, 1996. (18)*
10(p) Employment Agreement with Kerry A. Kramp
dated September 20, 1996. (19)*
10(q) Form of Franchise Agreement. (20)
10(r) Nonstatutory Stock Option Agreement with Roe
H. Hatlen dated May 19, 1997.
10(s) Nonstatutory Stock Option Agreement with C.
Dennis Scott dated May 19, 1997.
10(t) Nonstatutory Stock Option Agreement with
Kerry A. Kramp dated May 19, 1997.
11 Statement Regarding Computation of Per Share
Earnings (Loss).
13 Annual Report to Shareholders for the
fiscal year ended December 31, 1997.
21 Subsidiaries of the Company.
23.(a) Consent of Deloitte & Touche LLP.
23.(b) Consent of KPMG Peat Marwick LLP.
27.(a) Financial Data Schedule.
27.(b) Financial Data Schedule.
27.(c) Financial Date Schedule.
* Management or Director contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
(1) Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K
dated June 3, 1996.
(2) Incorporated by reference to Exhibits to Registration Statement on Form
S-3 dated June 2, 1993 (Registration No. 33-63694).
(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 29, 1993.
26
<PAGE>
(4) Incorporated by reference to Exhibits to Report on Form 8-K, dated
October 24, 1995.
(5) Incorporated by reference to Exhibit 4.6 to Registration Statement on
Form 8-A dated November 7, 1996.
(6) Incorporated by reference to Exhibit 4.7 to Registration Statement on
Form 8-A dated November 7, 1996.
(7) Incorporated by reference to Exhibits to Registration Statement on Form
S-1 dated October 25, 1985 (Registration No. 33-171).
(8) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 30, 1992.
(9) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q
for the quarter ended October 4, 1995.
(10) Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q for the quarter ended April 24, 1996.
(11) Incorporated by reference to Exhibit 4.5 to Registration Statement on
Form 8-A dated November 7, 1996.
(12) Incorporated by reference to Exhibit 10.1 to Exhibit 10.1 to
Registration Statement on Form 8-A dated April 23, 1997.
(13) Incorporated by reference to Exhibit 10(b) to the Company's quarterly
Report on Form 10Q for the period ended October 8, 1997.
(14) Incorporated by reference to Exhibit 10.1 to HomeTown Buffet's
Quarterly Report on Form 10-Q for the period ended April 24, 1996 (File
No. 0-22402).
(15) Incorporated by reference to Exhibit 10(h) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(16) Incorporated by reference to Exhibits to HomeTown Buffet's Registration
Statement on Form S-1, as amended, effective March 23, 1994
(Registration No. 33-75810).
(17) Incorporated by reference to Exhibit (10)j to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(18) Incorporated by reference to Exhibit 10(k) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
27
<PAGE>
(19) Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the period ended October 9, 1996.
(20) Incorporated by reference from Exhibits to HomeTown Buffet's
Registration Statement on Form S-1, as amended, effective September 22,
1993 (Registration No. 33-67326).
(b) Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
28
<PAGE>
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically incorporated herein by
reference to the Company's 1997 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 12, 1998, no other portions of the 1997 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-K.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HomeTown Buffet, Inc.:
We have audited the consolidated statements of income, stockholders'
equity (deficit), and cash flows of HomeTown Buffet, Inc. and
subsidiaries for the year ended January 3, 1996 (not presented herein).
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
the cash flows of HomeTown Buffet, Inc. and subsidiaries for the year
ended January 3,1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Diego, California
February 16, 1996, except as to Note 6
to the consolidated financial statements
which is as of March 8, 1996
30
<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, 1998 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, 1998
- ------------------------ and Chief Executive
Roe H. Hatlen Officer (Principal
Executive Officer)
/s/ Clark C. Grant Executive Vice March 27, 1998
- ------------------------ President of Finance
Clark C. Grant and Administration and
Treasurer (Principal
Financial Officer)
/s/ Marguerite C. Nesset Vice President of March 27, 1998
- ------------------------ Accounting and
Marguerite C. Nesset Controller (Principal
Accounting Officer)
/s/ C. Dennis Scott Vice Chairman of March 27, 1998
- ------------------------ the Board, Chief
C. Dennis Scott Operating Officer
and Director
/s/ Walter R. Barry, Jr. Director March 27, 1998
- ------------------------
Walter R. Barry, Jr.
/s/ Marvin W. Goldstein Director March 27, 1998
- ------------------------
Marvin W. Goldstein
/s/ Alan S. McDowell Director March 27, 1998
- ------------------------
Alan S. McDowell
/s/ Michael T. Sweeney Director March 27, 1998
- ------------------------
Michael T. Sweeney
31
<PAGE>
EXHIBIT INDEX
EXHIBITS
2 Agreement and Plan of Merger by and among the
Company, Country Delaware, Inc., and HomeTown
Buffet, Inc......................................Incorporated by Reference
3(a) Composite Amended and Restated Articles
of Incorporation.................................Incorporated by Reference
3(b) By-laws of the Company...........................Incorporated by Reference
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..Incorporated by Reference
4(a) Indenture dated as of November 27, 1995
related to 7% Convertible Subordinated Notes
of HomeTown Buffet due 2002......................Incorporated by Reference
4(b) First Supplemental Indenture dated as of
September 20, 1996 among the Company,
HomeTown Buffet and Wells Fargo Bank, N.A........Incorporated by Reference
10(a) 1985 Stock Option Plan...........................Incorporated by Reference
10(b) 1988 Stock Option Plan...........................Incorporated by Reference
10(c) 1995 Stock Option Plan...........................Incorporated by Reference
10(d) 1997 Non-Employee Director Stock Option Plan..........Filed Electronically
10(e) Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(f) Amendment No. 1 dated as of September 20, 1996
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(g) Amendment No. 2 dated as of May 28, 1997
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(h) Amendment No. 3 dated as of September 12, 1997
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(i) Letter dated as of January 14, 1998 to Second
Amended and Restated Credit Agreement by and
between the Company and First Bank National
Association...........................................Filed Electronically
32
<PAGE>
10(j) Management Bonus Program..............................Filed Electronically
10(k) 1991 HomeTown Buffet Stock Option Plan,
as amended.......................................Incorporated by Reference
10(l) Promissory Note issued by Kerry A. Kramp to the
Company and related Stock Pledge Agreement,
each dated December 31, 1996.....................Incorporated by Reference
10(m) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated November 9, 1993......................Incorporated by Reference
10(n) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated August 13, 1996.......................Incorporated by Reference
10(o) Promissory Note issued by Michael Shrader to
HomeTown Buffet and related Pledge Agreement,
each dated August 7, 1996........................Incorporated by Reference
10(p) Employment Agreement with Kerry A. Kramp
dated September 20, 1996.........................Incorporated by Reference
10(q) Form of Franchise Agreement......................Incorporated by Reference
10(r) Nonstatutory Stock Option Agreement with
Roe H. Hatlen dated May 19, 1997......................Filed Electronically
10(s) Nonstatutory Stock Option Agreement with
C. Dennis Scott dated May 19, 1997....................Filed Electronically
10(t) Nonstatutory Stock Option Agreement with
Kerry A. Kramp dated May 19, 1997.....................Filed Electronically
11 Statement Regarding Computation of Per
Share Earnings (Loss).................................Filed Electronically
13 Annual Report to Shareholders for the
fiscal year ended December 31, 1997...................Filed Electronically
21 Subsidiaries of the Company...........................Filed Electronically
23(a) Consent of Deloitte & Touche LLP......................Filed Electronically
23(b) Consent of KPMG Peat Marwick LLP......................Filed Electronically
27(a) Financial Data Schedule...............................Filed Electronically
27(b) Financial Data Schedule...............................Filed Electronically
27(c) Financial Data Schedule...............................Filed Electronically
33
<PAGE>
BUFFETS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of this Non-Employee Director Stock Option Plan
(the "Plan") is to promote the interests of Buffets, Inc., a Minnesota
corporation (the "Company"), and its shareholders by providing non-employee
directors of the Company with an opportunity to acquire a proprietary interest
in the Company and thereby provide an additional incentive to put forth maximum
effort for the continued success and growth of the Company. In addition, the
opportunity to acquire a proprietary interest in the Company will aid in
attracting and retaining non-employee directors of outstanding ability.
2. ADMINISTRATION.
(a) General. This Plan shall be administered by the Company's
Board of Directors (the "Board"). The Board shall have the power,
subject to the limitations contained in this Plan, to fix any terms and
conditions for the grant or exercise of any award under this Plan.
Subject to the provisions of this Plan, the Board may from time to time
adopt such rules for the administration of this Plan as it deems
appropriate. The decision of the Board on any matter affecting this
Plan or the rights and obligations arising under this Plan or any award
granted hereunder, shall be final, conclusive and binding upon all
persons, including without limitation the Company, shareholders and
optionees.
(b) Indemnification. To the full extent permitted by law, (i)
no member of the Board shall be liable for any action or determination
taken or made in good faith with respect to this Plan or any award
granted hereunder and (ii) the members of the Board shall be entitled
to indemnification by the Company against and from any loss incurred by
such member or person by reason of any such actions and determinations.
3. SHARES. The shares that may be made subject to options granted under
this Plan shall be authorized and unissued shares of Common Stock of the
Company, par value $.0l per share ("Shares," and each individually a "Share"),
and they shall not exceed 25,000 Shares in the aggregate, subject to adjustment
as provided in paragraph 12 below, except that if any option lapses or
terminates for any reason before such option has been completely exercised, the
Shares covered by the unexercised portion of such option may again be made
subject to options granted under this Plan.
4. ELIGIBLE PARTICIPANTS. Stock options may be granted under this Plan
to any director of the Company who is not an employee of the Company or any
parent or subsidiary thereof (a "non-employee director"). References herein to
"employed," "employment" and similar terms (except "employee") shall refer to
the providing of services as a director.
5. TERMS AND CONDITIONS OF DIRECTOR OPTIONS.
(a) Discretionary Grants. Subject to the terms and
conditions of this Plan, the Board may, from time to time
during the term of this Plan, grant to any non-employee
<PAGE>
director options to purchase such number of Shares of the Company on
such terms and conditions as the Board may determine. In determining
the non-employee directors to whom options shall be granted and the
number of Shares to be covered by each option, the Board may take into
account the nature of the services rendered by the respective
non-employee directors, their present and potential contributions to
the success of the Company, and such other factors as the Board in its
sole discretion may deem relevant. The date and time of approval by the
Board of the granting of an option shall be considered the date and the
time of the grant of such option. The maximum number of Shares subject
to options that may be granted to any one non-employee director under
the Plan in any fiscal year of the Company (including options granted
under paragraph 5(b)) may not exceed 10,000 Shares (subject to
adjustment pursuant to paragraph 12 hereof).
(b) Initial Options (New Director). With respect to any
non-employee director who is first elected or appointed to the Board on
a date after the date of the 1997 shareholders Meeting, the Company
shall grant to such non-employee director on the day following his or
her first being so elected or appointed to the Board an option to
purchase 10,000 Shares ("Initial Options"). If a non-employee director
is first elected or appointed to the Board at an Annual Meeting of the
shareholders of the Company, such non-employee director shall be
granted an Initial Option at such time. Subject to the limitation
contained in paragraph 5(a) as to the maximum annual aggregate grant to
any one Individual, the Board may increase or decrease the number of
shares to be granted to non-employee directors on any date pursuant to
this said paragraph 5(b).
(c) Purchase Price. The purchase price of each Share subject
to an option granted pursuant to this paragraph 5 shall be 100% of the
Fair Market Value of a Share on the date of grant.
(d) Vesting. With respect to any option granted under
paragraph 5(a), the option agreement provided for in paragraph 6
relating to such option shall specify when such option shall become
exercisable. With respect to any Initial Options, such options shall be
exercisable immediately on the date of grant.
(e) Termination. Each option granted pursuant to this
Paragraph 5 shall expire, and all rights to purchase Shares thereunder
shall terminate, on the earliest of:
(i) ten years after the date such option is granted
or on such date prior thereto as may be fixed by the Board on
or before the date such option is granted;
(ii) the expiration of the period after the
termination of the optionee's service as a non-employee
director within which the option is exercisable as specified
in paragraph 9(b) provided that the Board may, in any option
agreement provided for in paragraph 6 or by Board action with
respect to any outstanding option, extend the periods
specified in paragraph 9(b); or
(iii) the date, if any, fixed for cancellation
pursuant to paragraph 10(c) or 11 below.
<PAGE>
(f) Allocation of Common Shares. If as of a date on which
Initial Option or Options are to be awarded pursuant to the provisions
of this paragraph 5, the number of Shares available for issuance under
the Plan as of such date are less than the number of options to
purchase Shares that otherwise would be awarded, then the following
formula shall determine how the remaining number of Shares are to be
allocated:
(i) if only one non-employee director is to receive
an option on such date, then such non-employee director shall
receive an option to purchase Shares equal to the number of
Shares remaining.
(ii) if two or more non-employee directors are to
receive options on such date:
A. all Initial Options shall first be
awarded; if, however, the number of Shares available
is less than the number of options to purchase Shares
that would otherwise be awarded as Initial Options
then each such non-employee director eligible to
receive an Initial Option shall receive the number of
options which results from the following equation:
the whole number of Shares available divided by the
number of non-employee directors eligible to receive
such an option, provided, however, that no fractional
shares shall be awarded; and if such allocation
occurs, any remaining Shares shall not be awarded and
shall be deemed not subject to distribution for
purposes of paragraph 16; and
B. if on such date all Initial Options to be
awarded are awarded in the full amount of Shares or
if no Initial Options are to be awarded then each
non-employee director eligible for a discretionary
option grant shall receive a discretionary option to
purchase Shares in the amount that results from the
following equation: the whole number of Shares
available divided by the number of non-employee
directors eligible for discretionary options based on
the relative proportion of their intended grant of
options, provided, however, that no fractional shares
shall be awarded; and any remaining Shares shall not
be awarded and shall be deemed not subject to
distribution for purposes of paragraph 16.
6. OPTION AGREEMENTS. All options granted under this Plan shall be
evidenced by a written agreement in such form or forms as the Board may from
time to time determine.
7. FAIR MARKET VALUE. For Purposes of this Plan, the "Fair Market
Value" of a Share at a specified date shall, unless otherwise expressly provided
in this Plan, mean the closing sale price of a Share on the date immediately
preceding such date or, if no sale of Shares shall have occurred on that date,
on the next preceding day on which a sale of Shares occurred, on the Composite
Tape for New York Stock Exchange listed shares or, if Shares are not quoted on
the Composite Tape for New York Stock Exchange listed shares, on the Nasdaq
National Market or any
<PAGE>
similar system then in use or, if Shares are not included in the Nasdaq National
Market or any similar system then in use, the mean between the closing "bid" and
the closing "asked" quotation of a Share on the date immediately preceding the
date as of which such Fair Market Value is being determined, or, if no closing
bid or asked quotation is made on that date on the next preceding day on which a
quotation is made, on the Nasdaq Small Cap Market or any similar system then in
use, provided that if the Shares in question are not quoted on any such system,
Fair Market Value shall be what the Board determines in good faith to be 100% of
the fair market value of a Share as of the date in question. Notwithstanding
anything stated in this paragraph 7, if the applicable securities exchange or
system has closed for the day by the time the determination is being made, all
references in this paragraph to the date immediately preceding the date in
question shall be deemed to be references to the date in question.
8. MANNER OF EXERCISE OF OPTIONS. A person entitled to exercise an
option granted under this Plan may, subject to its terms and conditions and the
terms and conditions of this Plan, exercise it in whole at any time, or in part
from time to time, by delivery to the Company at its principal executive office,
to the attention of its Chief Financial Officer, of written notice of exercise,
specifying the number of Shares with respect to which the option is being
exercised. The purchase price of the Shares with respect to which an option is
being exercised shall be payable in full at the time of exercise, provided that,
to the extent permitted by law, the holder of an option may simultaneously
exercise an option and sell all or a portion of the Shares thereby acquired
pursuant to a brokerage or similar relationship and use the proceeds from such
sale to pay the purchase price of such Shares. The purchase price of each Share
on the exercise of any option shall be paid in full in cash (including check,
bank draft or money order) or, at the discretion of the person exercising the
option, by delivery to the Company of unencumbered Shares, by a reduction in the
number of Shares delivered upon exercise of the option, or by a combination of
cash and such Shares (in each case such Shares having an aggregate Fair Market
Value on the date of exercise equal to the amount of the purchase price being
paid through such delivery or reduction of Shares); provided, however, that no
person shall be permitted to pay any portion of the purchase price with Shares
if the Board, in its sole discretion, determines that payment in such manner is
undesirable. The granting of an option to a person shall give such person no
rights as a shareholder except as to Shares issued to such person.
9. TRANSFERABILITY AND TERMINATION OF EMPLOYMENT
(a) Transferability. During the lifetime of an optionee, only
such optionee or his or her guardian or legal representative may
exercise options granted under this Plan, and no option granted under
this Plan shall be assignable or transferable by the optionee otherwise
than by will or the laws of descent and distribution or pursuant to a
domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder;
provided, however, that any optionee may transfer a non-statutory stock
option granted under this Plan to a member or members of his or her
immediate family (i.e., his or her children, grandchildren and spouse)
or to one or more trusts for the benefit of such family members or
partnerships in which such family members are the only partners, if (i)
the option agreement with respect to such options expressly so provides
either at the time of initial grant or by amendment to an outstanding
option
<PAGE>
agreement and (ii) the optionee does not receive any consideration for
the transfer. Any options held by any such transferee shall continue to
be subject to the same terms and conditions that were applicable to
such options immediately prior to theft transfer and may be exercised
by such transferee only as and to the extent that such option has
become exercisable and has not terminated in accordance with the
provisions of the Plan and the applicable option agreement. For
purposes of any provision of this Plan relating to notice to an
optionee or to vesting or termination of an option upon the death,
disability or termination of employment of an optionee, the references
to "optionee" shall mean the original grantee of an option and not any
transferee.
(b) Termination of Employment. In the event that an
optionee ceases to be employed as a non-employee director by reason of:
(i) death,
(ii) disability preventing continued service,
(iii) retirement from the Board in accordance with
the policy of the Company, if any, on retirement of
non-employee directors then in effect, or
(iv) termination of service as a non-employee
director by reason of (x) resignation at the request of the
Board (other than for gross misconduct, as determined by the
Board) (y) the director's failure to have been nominated for
re-election to the Board (unless such failure results from the
non-employee director's unwillingness to continue to serve) or
to have been re-elected by the shareholders of the Company, or
(v) the director's removal by the shareholders of the
Company; then any option granted to such optionee that was not
previously exercisable shall become immediately exercisable in full if
the optionee shall have been continuously employed by the Company or a
parent or subsidiary thereof between the date such option was granted
and the date of such termination of service and such option shall
continue to be exercisable for five years after termination of such
optionee's employment. If an optionee's employment terminates in any
manner other than as provided for in the preceding sentence, any option
granted to such optionee shall terminate immediately upon such
termination of employment.
(c) Right to Terminate Employment. Nothing contained in this
Plan, or in any option granted pursuant to this Plan, shall confer upon
any optionee any right to continued employment by the Company or limit
in any way the right of the Company to terminate such optionee's
employment at any time.
(d) Expiration Date. In no event shall any option be
exercisable at any time after the time it shall have expired in
accordance with paragraph 5(e) of this Plan. When an option is no
longer exercisable, it shall be deemed to have lapsed or terminated and
will no longer be outstanding.
<PAGE>
10. CHANGE IN CONTROL.
(a) Subject to paragraph 10(c), but anything else to the
contrary in this Plan notwithstanding, in the event of a "Change in
Control" of the Company, as defined in paragraph 10(b), an option held
by a person under this Plan that shall not have expired shall become
immediately exercisable in full.
(b) A "Change in Control," for Purposes for this Plan, means:
(i) a majority of the directors of the Company
shall be persons that are not Continuing Directors.
"Continuing Directors" shall mean directors:
(A) for whose election proxies shall have
been solicited by the Board of Directors of the
Company, or
(B) who are then serving as directors
appointed by the Board of Directors to fill vacancies
on the Board of Directors caused by death or
resignation (but not by removal) or to fill
newly-created directorships;
(ii) 30% or more of the outstanding voting stock of
the Company shall have been acquired or beneficially owned (as
defined in Rule 13d-3 under the Exchange Act) by any person
(other than the Company, a subsidiary of the Company or the
person holding the option) or group of persons (which group
does not include the person holding the option) acting in
concert; or
(iii) The shareholders of the Company shall have
approved a definitive agreement or plan to:
(A) merge or consolidate the Company with or
in to another corporation (other than (1) a merger or
consolidation with a subsidiary of the Company or (2)
a merger in which the Company is the surviving
corporation and either (a) no outstanding voting
stock of the Company (other than fractional shares)
held by shareholders immediately prior to the merger
is converted into cash, securities, or other property
or (b) all holders of outstanding voting stock of the
Company (other than fractional shares) immediately
prior to the merger have substantially the same
proportionate ownership of the voting stock of the
Company or of its parent corporation immediately
after the merger);
(B) exchange, pursuant to a statutory
exchange of shares of voting stock of the Company
held by shareholders of the Company immediately prior
to the exchange, shares of one or more classes or
series of voting stock of the Company for cash
securities or other property;
<PAGE>
(C) sell or otherwise dispose of all or
substantially all of the assets of the Company (in
one transaction or a series of transactions); or
(D) liquidate or dissolve the Company;
provided, however, that if the transaction contemplated by
such definitive agreement or plan approved by the shareholders
of the Company is not actually consummated, a Change in
Control shall retroactively be deemed not to have occurred and
the acceleration of the exercise dates of options pursuant to
paragraph 11(a) shall be deemed null and void;
unless a majority of the voting stock (or the voting equity interest)
of the surviving corporation or of any corporation (or other entity)
acquiring all or substantially all of the assets of the Company (in the
case of a merger, consolidation or disposition of assets) or the
Company or its parent corporation (in the case of a statutory share
exchange) is beneficially owned by the person holding the option or a
group of persons that includes the person holding the option acting in
concert.
(c) Cash Payment. If a Change in Control of the Company shall
occur, then, so long as a majority of the members of the Board are
Continuing Directors, the Board, in its sole discretion, and without
the consent of the holder of any option affected thereby, may determine
that some or all outstanding options shall be canceled as of the
effective date of any such Change in Control and that the holder or
holders of such canceled options shall receive, with respect to some or
all of the Shares subject to such options, as of the date of such
cancellation, cash in an amount, for each Share subject to an option,
equal to the excess of the per Share Fair Market Value of such Shares
immediately prior to such Change in Control of the Company over the
exercise price per Share of such options.
(d) Limitation on Change in Control Payments. Notwithstanding
anything in paragraph 10(a) or 10(c) above or paragraph 11 below to the
contrary, if, with respect to an optionee, the acceleration of the
exercisability of an option or the payment of cash in exchange for all
or part of an option as provided in paragraph 10(a) or 10(c) above or
paragraph 11 (which acceleration or payment could be deemed a "payment"
within the meaning of Section 280G(b)(2) of the Code), together with
any other payments which such optionee has the right to receive from
the Company or any corporation which is a member of an "affiliated
group" (as defined in Section 1504(a) of the Code without regard to
Section 1504(c) of the Code) of which the Company is a member, would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of
the Code), then such acceleration of exercisability and payments
pursuant to paragraph 10(a) or 10(c) above or paragraph 11 shall be
reduced to the largest amount as, in the sole judgment of the Board,
will result in no portion of such payments being subject to the excise
tax imposed by Section 4999 of the Code.
11. DISSOLUTION, LIQUIDATION, MERGER. In the event of the
proposed dissolution or liquidation of the Company or in the event of a proposed
sale of substantially all of
<PAGE>
the assets of the Company or in the event of a proposed merger or consolidation
of the Company with or into any other corporation, regardless of whether the
Company is the surviving corporation, or a statutory share exchange involving
capital stock of the Company (such dissolution, liquidation, sale, merger,
consolidation or exchange being herein called an "Event"), the Board may, but
shall not be obligated to:
(a) if the Event is a merger or consolidation or statutory
share exchange, make appropriate provision for the protection of the
outstanding options granted under this Plan by the substitution, in
lieu of such options, of options to purchase appropriate voting common
stock (the "Survivor's Stock") of the corporation surviving any merger
or consolidation or, if appropriate, the parent corporation of the
Company or such surviving corporation, or, alternatively, by the
delivery of a number of shares of the Survivor's Stock which has a Fair
Market Value as of the effective date of the Event equal to the Fair
Market Value as of such effective date of the Shares covered by the
option, or
(b) At least ten (10) days prior to the actual effective date
of an Event, declare,
and provide written notice to each optionee of the declaration, that
each outstanding option, whether or not then exercisable, shall be
canceled at the time of or immediately prior to the occurrence of, the
Event (unless it shall have been exercised prior to the occurrence of
the Event) in exchange for payment to each option holder, within ten
days after the Event, of cash equal to the amount (if any), for each
share covered by the canceled option, by which the Event Proceeds per
Share (as hereafter defined) exceeds the exercise price per Share
covered by such option. At the time of the declaration provided for in
the immediately preceding sentence, except as otherwise set forth in
paragraph 10(d), each option shall immediately become exercisable in
full and each person holding an option shall have the right, during the
period preceding the time of cancellation of the option, to exercise
his or her option as to all or any part of the Shares covered thereby.
In the event of a declaration pursuant to this paragraph 11(b), each
outstanding option granted pursuant to this Plan that shall not have
been exercised prior to the Event shall be canceled at the time of, or
immediately prior to, the Event, as provided in the declaration, and
this Plan shall terminate at the time of such cancellation, subject to
the payment obligations of the Company provided in this paragraph
11(b). For purposes of this paragraph, "Event Proceeds" per share shall
mean the cash plus the fair market value, as determined in good faith
by the Board, of the non-cash consideration to be received per Share by
the shareholders of the Company upon the occurrence of the Event.
<PAGE>
12. ADJUSTMENTS. In the event of any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock dividend,
stock split, combination of shares, rights offering, or extraordinary dividend
or divestiture (including a spin-off), or any other change in the corporate
structure or Shares of the Company, the Board (or if the Company does not
survive any such transaction, the Board of Directors of the surviving
corporation) may, without the consent of any holder of an option, make such
adjustment as it determines in its discretion to be appropriate as to the number
and kind of securities subject to and reserved under this Plan and, in order to
prevent dilution or enlargement of rights of participants in this Plan, the
number and kind of securities issuable upon exercise of outstanding options and
the exercise price thereof.
13. COMPLIANCE WITH LEGAL REQUIREMENTS. No certificate for Shares
distributable under this Plan shall be issued and delivered unless the issuance
of such certificate complies with all applicable legal requirements including,
without limitation, compliance with the provisions of applicable state
securities laws, the Securities Act of 1933, as amended, and the Exchange Act.
14. GOVERNING LAW. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken under this Plan
shall be governed by the laws of the State of Minnesota, without regard to the
conflicts of law provisions thereof, and construed accordingly.
15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time
amend, suspend or discontinue this Plan; provided, however, that no amendment to
this Plan shall, without the consent of the holder of the option, alter or
impair any option previously granted under this Plan. To the extent considered
necessary to comply with applicable provisions of the Code, any such amendments
to this Plan may be made subject to approval by the shareholders of the Company.
16. TERM.
(a) Effective Date. This Plan shall be effective as of
May 13, 1997.
(b) Termination. This Plan shall remain in effect
until all Shares subject to it are distributed or this Plan is
terminated under paragraph 15 above.
<PAGE>
<PAGE>
January 14, 1998
Buffets, Inc.
10260 Viking Drive
Suite 100
Eden Prairie, Minnesota 55344
Attention: Clark C. Grant
Re: Second Amended and Restated Credit Agreement dated as of
April 30, 1996, as amended, by and among Buffets, Inc.,
the Banks, as parties thereto, and First Bank National
Association, in its individual capacity and as agent for
the banks
Dear Mr. Grant:
Reference is made to the above-referenced Second Amended and
Restated Credit Agreement, as amended (the "Credit Agreement"). Each capitalized
term used herein without being defined that is defined in the Credit Agreement
shall have the meaning given to it in the Credit Agreement.
Pursuant to Section 6.7 of the Credit Agreement the Borrower is
prohibited from making Restricted Payments in excess of the limitations set
forth in such section.
The Borrower has requested the permission of the Banks to repurchase
its common stock during 1998 for an amount not to exceed $40,000,000 at a price
per share not to exceed ten dollars ("Proposed Stock Repurchase"). The Proposed
Stock Repurchase would constitute a Restricted Payment and would exceed the
limitations set forth in Section 6.7 of the Credit Agreement.
In reliance upon the Borrower's description of the Proposed Stock
Repurchase, as set forth in this letter, and in reliance upon the other
information provided by the Borrower to the Banks, the Banks hereby consent to
the Proposed Stock Repurchase. This consent is limited to the Proposed Stock
Repurchase, and shall not extend to any other Restricted Payment. The Proposed
Stock Repurchase shall be in lieu of any other Restricted Payments that would
otherwise be permitted by the terms of Section 6.7(b) of the Credit Agreement
during 1998. Any material deviation from the description of the Proposed Stock
Repurchase contained in this letter and as described by the Borrower to the
Banks, shall render this consent null and void. This Consent shall automatically
terminate upon the occurrence of an Event of Default.
<PAGE>
Except as specifically provided above, the Credit Agreement shall
remain in full force and effect in accordance with its terms. This consent shall
take effect when the Agent shall have received a copy of this consent letter,
duly acknowledged by the Borrower.
Very truly yours,
FIRST BANK NATIONAL ASSOCIATION
in its individual capacity and
as Agent
By /s/ Megan G. Mourning
------------------------
Its: Vice President
------------------------
Acknowledged and Agreed to this 27 day of January 1998.
BUFFETS, INC.
By /s/ Clark C. Grant
- ---------------------
Its: EVP
- ---------------------
<PAGE>
<PAGE>
BUFFETS, INC.
MANAGEMENT BONUS PROGRAM
The Company has a management cash bonus program designed to attract,
retain and provide performance incentives for key management personnel. The
Bonus Program provides for cash bonuses (which vary in amount based upon
individual evaluations) to be paid to certain employees upon attainment by the
Company of predetermined performance objectives. Awards made to the executive
officers of the Company under the Bonus Program are determined by the
Compensation Committee of the Board of Directors.
<PAGE>
<PAGE>
NONSTATUTORY STOCK OPTION AGREEMENT
Grant Under Buffets, Inc. 1988 Stock Option Plan
Full Name of Employee:
Roe H. Hatlen
- --------------------------------------------------------------------------------
No. of Shares Covered: Date of Grant:
100,000 May 19, 1997
- --------------------------------------------------------------------------------
Exercise Price Per Share: Expiration Date:
$9.00 May 19, 2007
- --------------------------------------------------------------------------------
Exercise Schedule (Cumulative):
No. of Shares
Initial Date of As to which Option
Exercisability Becomes Exercisable
May 19, 2006(1) 100,000
- --------------------------------------------------------------------------------
Note: By signing here, The Employee expressly acknowledges that by accepting
these stock options, he or she is agreeing to abide by the restrictions on
competition described in paragraph 13 below.
(Employee's Signature)
/s/ Roe H. Hatlen
--------------------------
This NONSTATUTORY STOCK OPTION AGREEMENT is made by and between
Buffets, Inc., a Minnesota corporation (the "Company"), and the above-named
employee of the Company or of a parent or subsidiary corporation of the Company
(the "Employee").
- ------------------------------------
(1) If the Fair Market Value of the Company's Common Shares, as defined in
Section 6 of the Plan, equals or exceeds $12 at the close of trading for 30
consecutive calendar days, then the Option will become exercisable as to 33,333
Shares on the first day following that 30-day period. The Option will become
exercisable as to an additional 33,333 Shares on the first day following any
period of 30 consecutive calendar days during which the Fair Market Value of
such Shares equals or exceeds $16 at the close of trading each day. Finally, the
Option will become exercisable as to the remaining 33,334 Shares on the first
day following any period of 30 consecutive calendar days during which the Fair
Market Value of such Shares equals or exceeds $20 at the close of trading each
day. Notwithstanding the foregoing, the entire Option will become exercisable on
May 19, 2006
-1-
<PAGE>
WHEREAS the Company, in order to carry out the purposes of its Buffets,
Inc. 1988 Stock Option Plan (the "Plan"), desires to offer the Employee an
opportunity to purchase Common Stock of the Company, par value $.01 per share
(the "Common Shares"), according to the terms set forth herein; and
WHEREAS the Employee wishes to accept such opportunity, subject to and in
accordance with the terms and conditions set forth herein;
NOW THEREFORE, the Company and the Employee mutually agree as follows:
1. Grant of Option. Subject to the terms of the Plan, the Company hereby
grants to the Employee the right and option (the "Option") to purchase the
number of Common Shares specified at the beginning of this Agreement, on the
terms and conditions hereinafter set forth. The Option is intended by the
Company to be a nonstatutory stock option for purposes of the Internal Revenue
Code of 1986, as amended (the "Code").
2. Purchase Price. The purchase price of each of the Common Shares subject
to the Option shall be the exercise price per share specified at the beginning
of this Agreement, which price has been specified in accordance with paragraph 6
of the Plan.
3. Option Period.
(a) Subject to the provisions of paragraphs 5(a), 5(b), 6(a), 6(b), and
6(c) hereof the Option shall become exercisable as to the number of shares and
on the dates specified in the exercise schedule at the beginning of this
Agreement. The exercise schedule shall be cumulative; thus, to the extent the
Option has not already been exercised and has not expired, terminated or been
canceled, the Optionee may at any time, and from time to time, purchase all or
any portion of the Common Shares then purchasable under the exercise schedule,
except that the Option shall become immediately exercisable:
(i) Upon the occurrence of the death or disability within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), of the Employee (as more particularly described in
paragraphs 5(a) or 5(b) and 6(a) hereof);
(ii) Upon a Change in Control (as defined in paragraph 11 of the
Plan); or
(iii) In the event that the Stock Option Committee under the Plan
(the "Committee") shall declare pursuant to paragraph 6(c)(ii) hereof that
the Option shall be canceled at the time of or immediately prior to the
occurrence of an Event, as defined in paragraph 6(c) hereof
(b) The Option and all rights to purchase shares thereunder shall cease on
the earliest of:
(i) The expiration date specified at the beginning of this
Agreement (which date shall not be more than ten years after the date of
this Agreement);
-2-
<PAGE>
(ii) The expiration of the period after the Employee's termination
of employment within which the Option is exercisable as specified in
paragraph 5(a) or 5(b), whichever is applicable; or
(iii) The date, if any, fixed for cancellation pursuant to
paragraph 6(c)(ii) hereof.
Notwithstanding any other provision in this Agreement, in no event may anyone
exercise the Option, in whole or in part, after its original expiration date.
4. Manner of Exercising Option.
(a) Subject to the terms and conditions of this Agreement, the Option may
be exercised by mailing written notice of exercise to the Company at its
principal executive office, marked for the attention of its Secretary. The
notice shall state the election to exercise the Option and the number of Common
Shares in respect of which it is being exercised, and shall be signed by the
person exercising the Option. If the person exercising the Option is not the
Employee, he or she shall also send with the notice appropriate proof of his or
her right to exercise the Option. Such notice shall be accompanied by either:
(i) Payment (by check, bank draft or money order payable to the
Company) of the full purchase price of the Common Shares being purchased;
or
(ii) Certificates for unencumbered Common Shares having an
aggregate Fair Market Value (as defined in paragraph 6 of the Plan) on the
date of exercise equal to the purchase price of the Common Shares to be
purchased; or
(iii) A combination of cash and such unencumbered Common Shares.
The employee shall duly endorse all certificates delivered to the Company
pursuant to the foregoing subparagraph (a)(ii) or (iii) in blank and shall
represent and warrant in writing that he or she is the owner of the shares so
delivered free and clear of all liens, security interests and other restrictions
or encumbrances.
(b) As soon as practicable after receipt of the purchase price provided for
above, the Company shall deliver to the person exercising the Option, in the
name of the Employee, or his or her estate or heirs, as the case may be, a
certificate or certificates representing the Common Shares being purchased. The
Company shall pay all original issue or transfer taxes, if any, with respect to
the issue or transfer of the Common Shares to the person exercising the Option
and all fees and expenses necessarily incurred by the Company in connection
therewith. All Common Shares so issued shall be fully paid and nonassessable.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be required, upon the exercise of this Option or, any part thereof, to issue
or deliver any Common Shares prior to the completion of such registration or
other qualification of such Common Shares under any State law, rule or
regulation as the Company shall determine to be necessary or desirable.
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<PAGE>
5. Exercisability of Option After Termination of Employment.
(a) During the lifetime of the Employee, the Option may be exercised only
while the Employee is an employee of the Company or a parent or subsidiary
thereof, and only if the Employee has been continuously so employed since the
date of this Agreement, except that:
(i) If the Employee has been continuously employed by the Company
(or a parent or subsidiary thereof) for at least twelve (12) full calendar
months following the date of this Agreement, the Employee may exercise the
Option within three (3) months after termination of the Employee's
employment, but only to the extent that the Option was exercisable
immediately prior to the Employee's termination of employment;
(ii) In the event the Employee is disabled (within the meaning of
Section 22(e)(3) of the Code) while employed, the Employee or his or her
legal representative may exercise the Option within one year after the
termination of the Employee's employment;
(iii) If the Employee's employment terminates following a Change
of Control, as defined in paragraph 11 of the Plan, the Employee may
exercise the Option within three (3) months after such termination; and
(iv) If the Employee's employment terminates after a declaration
pursuant to paragraph 6(c)(ii) of this Agreement, the Employee may exercise
the Option at any time permitted by such declaration.
(b) In the event of the Employee's death while employed by the Company or a
parent or subsidiary thereof, or within three months after his or her
termination of employment, the legal representative of the Employee's estate or
the person who acquired the right to exercise the Option by bequest or
inheritance may exercise the Option within one year after the death of the
Employee.
(c) Neither the transfer of the Employee between any combination of the
Company, its parent and any subsidiary of the Company, nor a leave of absence
granted to the Employee and approved by the Committee, shall be deemed a
termination of employment. The terms "parent" and "subsidiary" as used herein
shall have the meaning ascribed to "parent corporation" and "subsidiary
corporation," respectively, in Sections 425(e) and (f) (or successor provisions)
of the Code.
6. Acceleration of Option.
(a) Disability or Death. If paragraph 5(a)(ii) or 5(b) of this Agreement is
the Option, whether or not previously exercisable, shall become immediately
exercisable in full.
(b) Change in Control. Subject to paragraph 6(d) hereof, in the event of a
"Change of Control" of the Company, as defined in paragraph 11 of the Plan, the
unexpired portion of the Option shall become immediately exercisable in full.
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<PAGE>
(c) Dissolution, Liquidation, Merger. In the event of the proposed
dissolution or liquidation of the Company or in the event of a proposed sale of
substantially all of the assets of the Company or in the event of a proposed
merger or consolidation of the Company with or into any other corporation,
regardless of whether the Company is the surviving corporation, or a statutory
share exchange involving capital stock of the Company (such dissolution,
liquidation, sale, merger, consolidation or exchange being herein called an
"Event'), the Committee may, but shall not be obligated to.
(i) If the Event is a merger or consolidation or statutory share
exchange, make appropriate provision for the protection of the Option by
the substitution, in lieu of the Option, of an option to purchase
appropriate voting common stock (the "Survivor's Stock") of the corporation
surviving any merger or consolidation or, if appropriate, the parent
corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's
Stock which has a Fair Market Value (as defined in paragraph 6 of the Plan)
as of the effective date of the Event equal to the Fair Market Value as of
such effective date of the Common Shares covered by the Option; or
(ii) At least ten (10) days prior to the actual effective date of
an Event, declare, and provide written notice to the Employee of the
declaration, that the Option, whether or not then exercisable, shall be
canceled at the time of, or immediately prior to the occurrence of, the
Event (unless it shall have been exercised prior to the occurrence of the
Event) in exchange for payment to the Employee, within ten (10) days after
the Event, of cash equal to the amount (if any), for each Common Share
covered by the canceled Option, by which the Event Proceeds per Common
Share (as defined in the last sentence of this subparagraph) exceeds the
exercise price per Common Share. At the time of the declaration provided
for in the immediately preceding sentence, except as otherwise set forth in
paragraph 6(d) hereof, the Option shall immediately become exercisable in
full and the Employee shall have the right, during the period preceding the
time of cancellation of the Option, to exercise the Option as to all or any
part of the Common Shares covered thereby. In the event of a declaration
pursuant to this paragraph 6(c)(ii), the Option, to the extent it shall not
have been exercised prior to the Event, shall be canceled at the time of,
or immediately prior to, the Event, as provided in the declaration, subject
to the payment obligations of the Company provided in this paragraph
6(c)(ii). For purposes of this paragraph 6(c)(ii), "Event Proceeds" per
Common Share shall mean the cash plus the fair market value, as determined
in good faith by the Company, of the non-cash consideration to be received
per Common Share by the shareholders of the Company upon the occurrence of
the Event.
(d) Adjustment in Certain Events. Notwithstanding the provisions of
paragraphs 6(b) and 6(c) hereof, if the exercise of the Option, either alone or
together with other payments in the nature of compensation to the Employee which
are contingent on a change in the ownership or effective control of the Company
or in the ownership of a substantial portion of the assets of the Company or
otherwise, would result in any portion thereof being subject to an excise tax
imposed under Section 4999 of the Code or would not be deductible in whole or in
part by the Company, an affiliate of the Company (as defined in Section 1504 of
the Code), or other person making such payment as a result of Section 280G of
the Code, the Option and/or such other benefits and payments
-5-
<PAGE>
shall be reduced (but not below zero) to the largest aggregate amount as will
result in no portion thereof being subject to an excise tax or being not
deductible. For purposes hereof:
(i) No portion of payments the receipt or enjoyment of which the
Employee shall have effectively waived in writing prior to the date of
issuance of stock or distribution of a payment hereunder shall be taken
into account;
(ii) No portion of the Option, benefits and other payments shall
be taken into account which, in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the Employee, does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code;
(iii) The Option, benefits and other payments shall be reduced
only to the extent necessary so that the total of such payments (other than
those referred to in clause (i) or (ii)) in their entirety constitute
reasonable compensation for services rendered within the meaning of Section
280G(b)(4) of the Code, in the opinion of the tax counsel referred to in
clause (ii); and
(iv) The value of any non-cash benefit or any deferred payment or
benefit included in such payment shall be determined by the Company's
independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.
Any portion of the Option not exercised or paid as a result of this paragraph
6(d), or reduced to zero as a result of the limitations imposed hereby, shall
remain outstanding in full force and effect in accordance with the other terms
and provisions of this Agreement.
7. Limitation on Transfer. During the lifetime of the Employee, only the
Employee or his or her guardian or legal representative may exercise the Option.
The Employee shall not assign or transfer the Option otherwise than by will or
the laws of descent and distribution, and the Option shall not be subject to
pledge, hypothecation, execution, attachment or similar process. Any attempt to
assign, transfer, pledge, hypothecate or otherwise dispose of the Option
contrary to the provisions hereof, and the levy of any attachment or similar
process upon the Option, shall be null and void.
8. Shareholder Rights Before Exercise. The Employee shall have none of the
rights of a shareholder of the Company with respect to any share subject to the
Option until the share is actually issued to him or her upon exercise of the
Option.
9. Discretionary Adjustment. The Committee may in its sole discretion make
appropriate adjustments in the number of shares subject to the Option and in the
purchase price per share to give effect to any change made in the number of
outstanding Common Shares of the Company through a merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock split or
other relevant change, provided that fractional shares shall be rounded to the
nearest whole share.
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<PAGE>
10. Tax Withholding. The parties hereto recognize that the Company or a
subsidiary of the Company may be obligated to withhold federal and state income
taxes and social security or other taxes upon the Employee's exercise of the
Option. The Employee agrees that, at the time he or she exercises the Option, if
the Company or a subsidiary is required to withhold such taxes, he or she will
promptly pay in cash upon demand to the Company, or the subsidiary having such
obligation, such amounts as shall be necessary to satisfy such obligation,
provided, however, that in lieu of all or any part of such a cash payment, the
Committee may, but shall not be required to, permit the Employee to elect to
cover all or any part of the required withholdings, and to cover any additional
withholdings up to the amount needed to cover the Employee's full FICA and
federal, state and local income tax with respect to income arising from the
exercise of the Option, through a reduction of the number of Common Shares
delivered to the Employee or through a subsequent return to the Company of
shares delivered to the Employee.
11. Interpretation of this Agreement. All decisions and interpretations
made by the Committee with regard to any question arising hereunder or under the
Plan shall be binding and conclusive upon the Company and the Employee. In the
event that there is any inconsistency between the provisions of this Agreement
and the Plan, the provisions of the Plan shall govern.
12. Discontinuance of Employment. This Agreement shall not give the
Employee a right to continued employment with the Company or any parent or
subsidiary thereof, and the Company or any such parent or subsidiary thereof
employing the Employee may terminate his or her employment and otherwise deal
with the Employee without regard to the effect it may have upon him or her under
this Agreement.
13. Restrictions on Competition by Employee. In consideration for receipt
of his or her option:
(a) The Employee acknowledges that the Employee has had and will continue
to have access to significant confidential and valuable information which can be
used unfairly and to the harm of the Company by present or potential competitors
in the buffet segment of the restaurant industry.
(b) The Employee agrees that, during the period of the Employee's continued
employment by the Company or its affiliates, the Employee will not render
services or give advice to, affiliate with (as employee, partner, consultant or
otherwise), or invest or acquire any interest in, in whole or in significant
part, any other person or organization which is engaged in or about to become
engaged in franchising, developing, owning or operating a restaurant or other
food service establishment that utilizes, in whole or in significant part, a
buffet, smorgasbord or cafeteria service format (a "Conflicting Organization").
The Employee shall not, however, be prohibited from investing in securities of
any company that is listed on a national securities exchange or traded on
NASDAQ, provided that the Employee does not hereafter own, or have the right to
acquire, more than 3% of the outstanding voting securities of such company.
-7-
<PAGE>
(c) The Employee further agrees that, for a period of two (2) years after
cessation or termination of his or her employment with the Company or any
affiliate of the Company, whether voluntary or involuntary, with or without
cause, the Employee will not render services or give advice to, or affiliate
with (as employee, partner, consultant or otherwise) or invest or acquire any
interest in, any Conflicting Organization operating within twenty-five miles of
any location where an Old Country Buffet restaurant is then currently operating,
or where the Company, an affiliate or a present or prospective franchise
operator has leased or purchased, or is then negotiating to lease or purchase, a
site on which it plans to operate an Old Country Buffet restaurant.
Notwithstanding the foregoing, if the business of the Conflicting Organization
has separate and distinct divisions, Employee may, following termination of such
employment, render services or give advice to, or affiliate with, a division
which would not itself constitute a Conflicting Organization if, prior thereto,
the Company receives written assurances satisfactory to the Company from the
Conflicting Organization and Employee that Employee will not directly or
indirectly render services or give advice or information to any division of such
Conflicting Organization which would itself constitute a Conflicting
Organization.
(d) The Employee further agrees that, during the periods described in
subparagraphs (b) and (c) of this paragraph 13, the Employee will not, directly
or indirectly, assist or encourage any other person to carry out, directly or
indirectly, any activity that would be prohibited by the above provisions of
this paragraph 13 if such activity were carried out by the Employee, either
directly or indirectly; and in particular the Employee agrees that the Employee
will not, directly or indirectly, induce any employee of the Company to carry
out, directly or indirectly, any such activity.
(e) The Employee acknowledges and agrees that the Company will not have an
adequate remedy at law in the event of any breach by the Employee of this
paragraph 13 and the Company shall therefore be entitled, in addition to any
other remedies that may be available, to injunctive and/or other equitable
relief to prevent or remedy a breach of this paragraph 13 by the Employee This
paragraph 13 shall survive the exercise, expiration, surrender or termination of
the Option for any reason whatsoever.
(f) The Employee acknowledges that this paragraph 13 limits the Employee's
right to compete only to the extent necessary to protect the Company from unfair
competition. The Employee therefore agrees that a court of competent
jurisdiction may, if it finds the restrictions to be unlawful or excessive,
modify and enforce them to the extent it believes to be reasonable under the
circumstances.
14. General. The Company shall at all times during the term of this Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement. This Agreement shall be
binding in all respects on the Employee's heirs, representatives, successors and
assigns. This Agreement is entered into under the laws of the State of Minnesota
and shall be construed and interpreted thereunder.
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<PAGE>
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement as of the day and year first above written.
/s/ Roe H. Hatlen
--------------------------------------
Roe H. Hatlen
BUFFETS, INC.
By: /s/ Clark C. Grant
-----------------------------------
Its:EVP
-----------------------------------
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<PAGE>
NONSTATUTORY STOCK OPTION AGREEMENT
Grant Under Buffets, Inc. 1988 Stock Option Plan
Full Name of Employee:
C. Dennis Scott
- --------------------------------------------------------------------------------
No. of Shares Covered: Date of Grant:
100,000 May 19, 1997
- --------------------------------------------------------------------------------
Exercise Price Per Share: Expiration Date:
$9.00 May 19, 2007
- --------------------------------------------------------------------------------
Exercise Schedule (Cumulative):
No. of Shares
Initial Date of As to which Option
Exercisability Becomes Exercisable
May 19, 2006(1) 100,000
- --------------------------------------------------------------------------------
Note: By signing here, The Employee expressly acknowledges that by accepting
these stock options, he or she is agreeing to abide by the restrictions on
competition described in paragraph 13 below.
(Employee's Signature)
/s/ C. Dennis Scott
-------------------------------
This NONSTATUTORY STOCK OPTION AGREEMENT is made by and between
Buffets, Inc., a Minnesota corporation (the "Company"), and the above-named
employee of the Company or of a parent or subsidiary corporation of the Company
(the "Employee").
- ------------------------------------
(1) If the Fair Market Value of the Company's Common Shares, as defined in
Section 6 of the Plan, equals or exceeds $12 at the close of trading for 30
consecutive calendar days, then the Option will become exercisable as to 33,333
Shares on the first day following that 30-day period. The Option will become
exercisable as to an additional 33,333 Shares on the first day following any
period of 30 consecutive calendar days during which the Fair Market Value of
such Shares equals or exceeds $16 at the close of trading each day. Finally, the
Option will become exercisable as to the remaining 33,334 Shares on the first
day following any period of 30 consecutive calendar days during which the Fair
Market Value of such Shares equals or exceeds $20 at the close of trading each
day. Notwithstanding the foregoing, the entire Option will become exercisable on
May 19, 2006
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<PAGE>
WHEREAS the Company, in order to carry out the purposes of its Buffets,
Inc. 1988 Stock Option Plan (the "Plan"), desires to offer the Employee an
opportunity to purchase Common Stock of the Company, par value $.01 per share
(the "Common Shares"), according to the terms set forth herein; and
WHEREAS the Employee wishes to accept such opportunity, subject to and in
accordance with the terms and conditions set forth herein;
NOW THEREFORE, the Company and the Employee mutually agree as follows:
1. Grant of Option. Subject to the terms of the Plan, the Company hereby
grants to the Employee the right and option (the "Option") to purchase the
number of Common Shares specified at the beginning of this Agreement, on the
terms and conditions hereinafter set forth. The Option is intended by the
Company to be a nonstatutory stock option for purposes of the Internal Revenue
Code of 1986, as amended (the "Code").
2. Purchase Price. The purchase price of each of the Common Shares subject
to the Option shall be the exercise price per share specified at the beginning
of this Agreement, which price has been specified in accordance with paragraph 6
of the Plan.
3. Option Period.
(a) Subject to the provisions of paragraphs 5(a), 5(b), 6(a), 6(b), and
6(c) hereof the Option shall become exercisable as to the number of shares and
on the dates specified in the exercise schedule at the beginning of this
Agreement. The exercise schedule shall be cumulative; thus, to the extent the
Option has not already been exercised and has not expired, terminated or been
canceled, the Optionee may at any time, and from time to time, purchase all or
any portion of the Common Shares then purchasable under the exercise schedule,
except that the Option shall become immediately exercisable:
(i) Upon the occurrence of the death or disability within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), of the Employee (as more particularly described in
paragraphs 5(a) or 5(b) and 6(a) hereof);
(ii) Upon a Change in Control (as defined in paragraph 11 of the
Plan); or
(iii) In the event that the Stock Option Committee under the Plan
(the "Committee") shall declare pursuant to paragraph 6(c)(ii) hereof that
the Option shall be canceled at the time of or immediately prior to the
occurrence of an Event, as defined in paragraph 6(c) hereof
(b) The Option and all rights to purchase shares thereunder shall cease on
the earliest of:
(i) The expiration date specified at the beginning of this
Agreement (which date shall not be more than ten years after the date of
this Agreement);
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<PAGE>
(ii) The expiration of the period after the Employee's termination
of employment within which the Option is exercisable as specified in
paragraph 5(a) or 5(b), whichever is applicable; or
(iii) The date, if any, fixed for cancellation pursuant to
paragraph 6(c)(ii) hereof.
Notwithstanding any other provision in this Agreement, in no event may anyone
exercise the Option, in whole or in part, after its original expiration date.
4. Manner of Exercising Option.
(a) Subject to the terms and conditions of this Agreement, the Option may
be exercised by mailing written notice of exercise to the Company at its
principal executive office, marked for the attention of its Secretary. The
notice shall state the election to exercise the Option and the number of Common
Shares in respect of which it is being exercised, and shall be signed by the
person exercising the Option. If the person exercising the Option is not the
Employee, he or she shall also send with the notice appropriate proof of his or
her right to exercise the Option. Such notice shall be accompanied by either:
(i) Payment (by check, bank draft or money order payable to the
Company) of the full purchase price of the Common Shares being purchased;
or
(ii) Certificates for unencumbered Common Shares having an
aggregate Fair Market Value (as defined in paragraph 6 of the Plan) on the
date of exercise equal to the purchase price of the Common Shares to be
purchased; or
(iii) A combination of cash and such unencumbered Common Shares.
The employee shall duly endorse all certificates delivered to the Company
pursuant to the foregoing subparagraph (a)(ii) or (iii) in blank and shall
represent and warrant in writing that he or she is the owner of the shares so
delivered free and clear of all liens, security interests and other restrictions
or encumbrances.
(b) As soon as practicable after receipt of the purchase price provided for
above, the Company shall deliver to the person exercising the Option, in the
name of the Employee, or his or her estate or heirs, as the case may be, a
certificate or certificates representing the Common Shares being purchased. The
Company shall pay all original issue or transfer taxes, if any, with respect to
the issue or transfer of the Common Shares to the person exercising the Option
and all fees and expenses necessarily incurred by the Company in connection
therewith. All Common Shares so issued shall be fully paid and nonassessable.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be required, upon the exercise of this Option or, any part thereof, to issue
or deliver any Common Shares prior to the completion of such registration or
other qualification of such Common Shares under any State law, rule or
regulation as the Company shall determine to be necessary or desirable.
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<PAGE>
5. Exercisability of Option After Termination of Employment.
(a) During the lifetime of the Employee, the Option may be exercised only
while the Employee is an employee of the Company or a parent or subsidiary
thereof, and only if the Employee has been continuously so employed since the
date of this Agreement, except that:
(i) If the Employee has been continuously employed by the Company
(or a parent or subsidiary thereof) for at least twelve (12) full calendar
months following the date of this Agreement, the Employee may exercise the
Option within three (3) months after termination of the Employee's
employment, but only to the extent that the Option was exercisable
immediately prior to the Employee's termination of employment;
(ii) In the event the Employee is disabled (within the meaning of
Section 22(e)(3) of the Code) while employed, the Employee or his or her
legal representative may exercise the Option within one year after the
termination of the Employee's employment;
(iii) If the Employee's employment terminates following a Change
of Control, as defined in paragraph 11 of the Plan, the Employee may
exercise the Option within three (3) months after such termination; and
(iv) If the Employee's employment terminates after a declaration
pursuant to paragraph 6(c)(ii) of this Agreement, the Employee may exercise
the Option at any time permitted by such declaration.
(b) In the event of the Employee's death while employed by the Company or a
parent or subsidiary thereof, or within three months after his or her
termination of employment, the legal representative of the Employee's estate or
the person who acquired the right to exercise the Option by bequest or
inheritance may exercise the Option within one year after the death of the
Employee.
(c) Neither the transfer of the Employee between any combination of the
Company, its parent and any subsidiary of the Company, nor a leave of absence
granted to the Employee and approved by the Committee, shall be deemed a
termination of employment. The terms "parent" and "subsidiary" as used herein
shall have the meaning ascribed to "parent corporation" and "subsidiary
corporation," respectively, in Sections 425(e) and (f) (or successor provisions)
of the Code.
6. Acceleration of Option.
(a) Disability or Death. If paragraph 5(a)(ii) or 5(b) of this Agreement is
the Option, whether or not previously exercisable, shall become immediately
exercisable in full.
(b) Change in Control. Subject to paragraph 6(d) hereof, in the event of a
"Change of Control" of the Company, as defined in paragraph 11 of the Plan, the
unexpired portion of the Option shall become immediately exercisable in full.
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<PAGE>
(c) Dissolution, Liquidation, Merger. In the event of the proposed
dissolution or liquidation of the Company or in the event of a proposed sale of
substantially all of the assets of the Company or in the event of a proposed
merger or consolidation of the Company with or into any other corporation,
regardless of whether the Company is the surviving corporation, or a statutory
share exchange involving capital stock of the Company (such dissolution,
liquidation, sale, merger, consolidation or exchange being herein called an
"Event'), the Committee may, but shall not be obligated to.
(i) If the Event is a merger or consolidation or statutory share
exchange, make appropriate provision for the protection of the Option by
the substitution, in lieu of the Option, of an option to purchase
appropriate voting common stock (the "Survivor's Stock") of the corporation
surviving any merger or consolidation or, if appropriate, the parent
corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's
Stock which has a Fair Market Value (as defined in paragraph 6 of the Plan)
as of the effective date of the Event equal to the Fair Market Value as of
such effective date of the Common Shares covered by the Option; or
(ii) At least ten (10) days prior to the actual effective date of
an Event, declare, and provide written notice to the Employee of the
declaration, that the Option, whether or not then exercisable, shall be
canceled at the time of, or immediately prior to the occurrence of, the
Event (unless it shall have been exercised prior to the occurrence of the
Event) in exchange for payment to the Employee, within ten (10) days after
the Event, of cash equal to the amount (if any), for each Common Share
covered by the canceled Option, by which the Event Proceeds per Common
Share (as defined in the last sentence of this subparagraph) exceeds the
exercise price per Common Share. At the time of the declaration provided
for in the immediately preceding sentence, except as otherwise set forth in
paragraph 6(d) hereof, the Option shall immediately become exercisable in
full and the Employee shall have the right, during the period preceding the
time of cancellation of the Option, to exercise the Option as to all or any
part of the Common Shares covered thereby. In the event of a declaration
pursuant to this paragraph 6(c)(ii), the Option, to the extent it shall not
have been exercised prior to the Event, shall be canceled at the time of,
or immediately prior to, the Event, as provided in the declaration, subject
to the payment obligations of the Company provided in this paragraph
6(c)(ii). For purposes of this paragraph 6(c)(ii), "Event Proceeds" per
Common Share shall mean the cash plus the fair market value, as determined
in good faith by the Company, of the non-cash consideration to be received
per Common Share by the shareholders of the Company upon the occurrence of
the Event.
(d) Adjustment in Certain Events. Notwithstanding the provisions of
paragraphs 6(b) and 6(c) hereof, if the exercise of the Option, either alone or
together with other payments in the nature of compensation to the Employee which
are contingent on a change in the ownership or effective control of the Company
or in the ownership of a substantial portion of the assets of the Company or
otherwise, would result in any portion thereof being subject to an excise tax
imposed under Section 4999 of the Code or would not be deductible in whole or in
part by the Company, an affiliate of the Company (as defined in Section 1504 of
the Code), or other person making such payment as a result of Section 280G of
the Code, the Option and/or such other benefits and payments
-5-
<PAGE>
shall be reduced (but not below zero) to the largest aggregate amount as will
result in no portion thereof being subject to an excise tax or being not
deductible. For purposes hereof:
(i) No portion of payments the receipt or enjoyment of which the
Employee shall have effectively waived in writing prior to the date of
issuance of stock or distribution of a payment hereunder shall be taken
into account;
(ii) No portion of the Option, benefits and other payments shall
be taken into account which, in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the Employee, does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code;
(iii) The Option, benefits and other payments shall be reduced
only to the extent necessary so that the total of such payments (other than
those referred to in clause (i) or (ii)) in their entirety constitute
reasonable compensation for services rendered within the meaning of Section
280G(b)(4) of the Code, in the opinion of the tax counsel referred to in
clause (ii); and
(iv) The value of any non-cash benefit or any deferred payment or
benefit included in such payment shall be determined by the Company's
independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.
Any portion of the Option not exercised or paid as a result of this paragraph
6(d), or reduced to zero as a result of the limitations imposed hereby, shall
remain outstanding in full force and effect in accordance with the other terms
and provisions of this Agreement.
7. Limitation on Transfer. During the lifetime of the Employee, only the
Employee or his or her guardian or legal representative may exercise the Option.
The Employee shall not assign or transfer the Option otherwise than by will or
the laws of descent and distribution, and the Option shall not be subject to
pledge, hypothecation, execution, attachment or similar process. Any attempt to
assign, transfer, pledge, hypothecate or otherwise dispose of the Option
contrary to the provisions hereof, and the levy of any attachment or similar
process upon the Option, shall be null and void.
8. Shareholder Rights Before Exercise. The Employee shall have none of the
rights of a shareholder of the Company with respect to any share subject to the
Option until the share is actually issued to him or her upon exercise of the
Option.
9. Discretionary Adjustment. The Committee may in its sole discretion make
appropriate adjustments in the number of shares subject to the Option and in the
purchase price per share to give effect to any change made in the number of
outstanding Common Shares of the Company through a merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock split or
other relevant change, provided that fractional shares shall be rounded to the
nearest whole share.
-6-
<PAGE>
10. Tax Withholding. The parties hereto recognize that the Company or a
subsidiary of the Company may be obligated to withhold federal and state income
taxes and social security or other taxes upon the Employee's exercise of the
Option. The Employee agrees that, at the time he or she exercises the Option, if
the Company or a subsidiary is required to withhold such taxes, he or she will
promptly pay in cash upon demand to the Company, or the subsidiary having such
obligation, such amounts as shall be necessary to satisfy such obligation,
provided, however, that in lieu of all or any part of such a cash payment, the
Committee may, but shall not be required to, permit the Employee to elect to
cover all or any part of the required withholdings, and to cover any additional
withholdings up to the amount needed to cover the Employee's full FICA and
federal, state and local income tax with respect to income arising from the
exercise of the Option, through a reduction of the number of Common Shares
delivered to the Employee or through a subsequent return to the Company of
shares delivered to the Employee.
11. Interpretation of this Agreement. All decisions and interpretations
made by the Committee with regard to any question arising hereunder or under the
Plan shall be binding and conclusive upon the Company and the Employee. In the
event that there is any inconsistency between the provisions of this Agreement
and the Plan, the provisions of the Plan shall govern.
12. Discontinuance of Employment. This Agreement shall not give the
Employee a right to continued employment with the Company or any parent or
subsidiary thereof, and the Company or any such parent or subsidiary thereof
employing the Employee may terminate his or her employment and otherwise deal
with the Employee without regard to the effect it may have upon him or her under
this Agreement.
13. Restrictions on Competition by Employee. In consideration for receipt
of his or her option:
(a) The Employee acknowledges that the Employee has had and will continue
to have access to significant confidential and valuable information which can be
used unfairly and to the harm of the Company by present or potential competitors
in the buffet segment of the restaurant industry.
(b) The Employee agrees that, during the period of the Employee's continued
employment by the Company or its affiliates, the Employee will not render
services or give advice to, affiliate with (as employee, partner, consultant or
otherwise), or invest or acquire any interest in, in whole or in significant
part, any other person or organization which is engaged in or about to become
engaged in franchising, developing, owning or operating a restaurant or other
food service establishment that utilizes, in whole or in significant part, a
buffet, smorgasbord or cafeteria service format (a "Conflicting Organization").
The Employee shall not, however, be prohibited from investing in securities of
any company that is listed on a national securities exchange or traded on
NASDAQ, provided that the Employee does not hereafter own, or have the right to
acquire, more than 3% of the outstanding voting securities of such company.
(c) The Employee further agrees that, for a period of two (2) years after
cessation or
-7-
<PAGE>
termination of his or her employment with the Company or any affiliate of the
Company, whether voluntary or involuntary, with or without cause, the Employee
will not render services or give advice to, or affiliate with (as employee,
partner, consultant or otherwise) or invest or acquire any interest in, any
Conflicting Organization operating within twenty-five miles of any location
where an Old Country Buffet restaurant is then currently operating, or where the
Company, an affiliate or a present or prospective franchise operator has leased
or purchased, or is then negotiating to lease or purchase, a site on which it
plans to operate an Old Country Buffet restaurant. Notwithstanding the
foregoing, if the business of the Conflicting Organization has separate and
distinct divisions, Employee may, following termination of such employment,
render services or give advice to, or affiliate with, a division which would not
itself constitute a Conflicting Organization if, prior thereto, the Company
receives written assurances satisfactory to the Company from the Conflicting
Organization and Employee that Employee will not directly or indirectly render
services or give advice or information to any division of such Conflicting
Organization which would itself constitute a Conflicting Organization.
(d) The Employee further agrees that, during the periods described in
subparagraphs (b) and (c) of this paragraph 13, the Employee will not, directly
or indirectly, assist or encourage any other person to carry out, directly or
indirectly, any activity that would be prohibited by the above provisions of
this paragraph 13 if such activity were carried out by the Employee, either
directly or indirectly; and in particular the Employee agrees that the Employee
will not, directly or indirectly, induce any employee of the Company to carry
out, directly or indirectly, any such activity.
(e) The Employee acknowledges and agrees that the Company will not have an
adequate remedy at law in the event of any breach by the Employee of this
paragraph 13 and the Company shall therefore be entitled, in addition to any
other remedies that may be available, to injunctive and/or other equitable
relief to prevent or remedy a breach of this paragraph 13 by the Employee This
paragraph 13 shall survive the exercise, expiration, surrender or termination of
the Option for any reason whatsoever.
(f) The Employee acknowledges that this paragraph 13 limits the Employee's
right to compete only to the extent necessary to protect the Company from unfair
competition. The Employee therefore agrees that a court of competent
jurisdiction may, if it finds the restrictions to be unlawful or excessive,
modify and enforce them to the extent it believes to be reasonable under the
circumstances.
14. General. The Company shall at all times during the term of this Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement. This Agreement shall be
binding in all respects on the Employee's heirs, representatives, successors and
assigns. This Agreement is entered into under the laws of the State of Minnesota
and shall be construed and interpreted thereunder.
-8-
<PAGE>
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement as of the day and year first above written.
/s/ C. Dennis Scott
--------------------------------------
C. Dennis Scott
BUFFETS, INC.
By: /s/ Clark C. Grant
--------------------------------
Its:EVP
--------------------------------
-9-
<PAGE>
NONSTATUTORY STOCK OPTION AGREEMENT
Grant Under Buffets, Inc. 1988 Stock Option Plan
Full Name of Employee:
Kerry A. Kramp
- --------------------------------------------------------------------------------
No. of Shares Covered: Date of Grant:
75,000 May 19, 1997
- --------------------------------------------------------------------------------
Exercise Price Per Share: Expiration Date:
$9.00 May 19, 2007
- --------------------------------------------------------------------------------
Exercise Schedule (Cumulative):
No. of Shares
Initial Date of As to which Option
Exercisability Becomes Exercisable
May 19, 2006(1) 100,000
- --------------------------------------------------------------------------------
Note: By signing here, The Employee expressly acknowledges that by accepting
these stock options, he or she is agreeing to abide by the restrictions on
competition described in paragraph 13 below.
(Employee's Signature)
/s/ Kerry A. Kramp
---------------------------
This NONSTATUTORY STOCK OPTION AGREEMENT is made by and between
Buffets, Inc., a Minnesota corporation (the "Company"), and the above-named
employee of the Company or of a parent or subsidiary corporation of the Company
(the "Employee").
- ------------------------------------
(1) If the Fair Market Value of the Company's Common Shares, as defined in
Section 6 of the Plan, equals or exceeds $12 at the close of trading for 30
consecutive calendar days, then the Option will become exercisable as to 25,000
Shares on the first day following that 30-day period. The Option will become
exercisable as to an additional 25,000 Shares on the first day following any
period of 30 consecutive calendar days during which the Fair Market Value of
such Shares equals or exceeds $16 at the close of trading each day. Finally, the
Option will become exercisable as to the remaining 25,000 Shares on the first
day following any period of 30 consecutive calendar days during which the Fair
Market Value of such Shares equals or exceeds $20 at the close of trading each
day. Notwithstanding the foregoing, the entire Option will become exercisable on
May 19, 2006
-1-
<PAGE>
WHEREAS the Company, in order to carry out the purposes of its Buffets,
Inc. 1988 Stock Option Plan (the "Plan"), desires to offer the Employee an
opportunity to purchase Common Stock of the Company, par value $.01 per share
(the "Common Shares"), according to the terms set forth herein; and
WHEREAS the Employee wishes to accept such opportunity, subject to and in
accordance with the terms and conditions set forth herein;
NOW THEREFORE, the Company and the Employee mutually agree as follows:
1. Grant of Option. Subject to the terms of the Plan, the Company hereby
grants to the Employee the right and option (the "Option") to purchase the
number of Common Shares specified at the beginning of this Agreement, on the
terms and conditions hereinafter set forth. The Option is intended by the
Company to be a nonstatutory stock option for purposes of the Internal Revenue
Code of 1986, as amended (the "Code").
2. Purchase Price. The purchase price of each of the Common Shares subject
to the Option shall be the exercise price per share specified at the beginning
of this Agreement, which price has been specified in accordance with paragraph 6
of the Plan.
3. Option Period.
(a) Subject to the provisions of paragraphs 5(a), 5(b), 6(a), 6(b), and
6(c) hereof the Option shall become exercisable as to the number of shares and
on the dates specified in the exercise schedule at the beginning of this
Agreement. The exercise schedule shall be cumulative; thus, to the extent the
Option has not already been exercised and has not expired, terminated or been
canceled, the Optionee may at any time, and from time to time, purchase all or
any portion of the Common Shares then purchasable under the exercise schedule,
except that the Option shall become immediately exercisable:
(i) Upon the occurrence of the death or disability within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), of the Employee (as more particularly described in
paragraphs 5(a) or 5(b) and 6(a) hereof);
(ii) Upon a Change in Control (as defined in paragraph 11 of the
Plan); or
(iii) In the event that the Stock Option Committee under the Plan
(the "Committee") shall declare pursuant to paragraph 6(c)(ii) hereof that
the Option shall be canceled at the time of or immediately prior to the
occurrence of an Event, as defined in paragraph 6(c) hereof
(b) The Option and all rights to purchase shares thereunder shall cease on
the earliest of:
(i) The expiration date specified at the beginning of this
Agreement (which date shall not be more than ten years after the date of
this Agreement);
-2-
<PAGE>
(ii) The expiration of the period after the Employee's termination
of employment within which the Option is exercisable as specified in
paragraph 5(a) or 5(b), whichever is applicable; or
(iii) The date, if any, fixed for cancellation pursuant to
paragraph 6(c)(ii) hereof.
Notwithstanding any other provision in this Agreement, in no event may anyone
exercise the Option, in whole or in part, after its original expiration date.
4. Manner of Exercising Option.
(a) Subject to the terms and conditions of this Agreement, the Option may
be exercised by mailing written notice of exercise to the Company at its
principal executive office, marked for the attention of its Secretary. The
notice shall state the election to exercise the Option and the number of Common
Shares in respect of which it is being exercised, and shall be signed by the
person exercising the Option. If the person exercising the Option is not the
Employee, he or she shall also send with the notice appropriate proof of his or
her right to exercise the Option. Such notice shall be accompanied by either:
(i) Payment (by check, bank draft or money order payable to the
Company) of the full purchase price of the Common Shares being purchased;
or
(ii) Certificates for unencumbered Common Shares having an
aggregate Fair Market Value (as defined in paragraph 6 of the Plan) on the
date of exercise equal to the purchase price of the Common Shares to be
purchased; or
(iii) A combination of cash and such unencumbered Common Shares.
The employee shall duly endorse all certificates delivered to the Company
pursuant to the foregoing subparagraph (a)(ii) or (iii) in blank and shall
represent and warrant in writing that he or she is the owner of the shares so
delivered free and clear of all liens, security interests and other restrictions
or encumbrances.
(b) As soon as practicable after receipt of the purchase price provided for
above, the Company shall deliver to the person exercising the Option, in the
name of the Employee, or his or her estate or heirs, as the case may be, a
certificate or certificates representing the Common Shares being purchased. The
Company shall pay all original issue or transfer taxes, if any, with respect to
the issue or transfer of the Common Shares to the person exercising the Option
and all fees and expenses necessarily incurred by the Company in connection
therewith. All Common Shares so issued shall be fully paid and nonassessable.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be required, upon the exercise of this Option or, any part thereof, to issue
or deliver any Common Shares prior to the completion of such registration or
other qualification of such Common Shares under any State law, rule or
regulation as the Company shall determine to be necessary or desirable.
-3-
<PAGE>
5. Exercisability of Option After Termination of Employment.
(a) During the lifetime of the Employee, the Option may be exercised only
while the Employee is an employee of the Company or a parent or subsidiary
thereof, and only if the Employee has been continuously so employed since the
date of this Agreement, except that:
(i) If the Employee has been continuously employed by the Company
(or a parent or subsidiary thereof) for at least twelve (12) full calendar
months following the date of this Agreement, the Employee may exercise the
Option within three (3) months after termination of the Employee's
employment, but only to the extent that the Option was exercisable
immediately prior to the Employee's termination of employment;
(ii) In the event the Employee is disabled (within the meaning of
Section 22(e)(3) of the Code) while employed, the Employee or his or her
legal representative may exercise the Option within one year after the
termination of the Employee's employment;
(iii) If the Employee's employment terminates following a Change
of Control, as defined in paragraph 11 of the Plan, the Employee may
exercise the Option within three (3) months after such termination; and
(iv) If the Employee's employment terminates after a declaration
pursuant to paragraph 6(c)(ii) of this Agreement, the Employee may exercise
the Option at any time permitted by such declaration.
(b) In the event of the Employee's death while employed by the Company or a
parent or subsidiary thereof, or within three months after his or her
termination of employment, the legal representative of the Employee's estate or
the person who acquired the right to exercise the Option by bequest or
inheritance may exercise the Option within one year after the death of the
Employee.
(c) Neither the transfer of the Employee between any combination of the
Company, its parent and any subsidiary of the Company, nor a leave of absence
granted to the Employee and approved by the Committee, shall be deemed a
termination of employment. The terms "parent" and "subsidiary" as used herein
shall have the meaning ascribed to "parent corporation" and "subsidiary
corporation," respectively, in Sections 425(e) and (f) (or successor provisions)
of the Code.
6. Acceleration of Option.
(a) Disability or Death. If paragraph 5(a)(ii) or 5(b) of this Agreement is
the Option, whether or not previously exercisable, shall become immediately
exercisable in full.
(b) Change in Control. Subject to paragraph 6(d) hereof, in the event of a
"Change of Control" of the Company, as defined in paragraph 11 of the Plan, the
unexpired portion of the Option shall become immediately exercisable in full.
-4-
<PAGE>
(c) Dissolution, Liquidation, Merger. In the event of the proposed
dissolution or liquidation of the Company or in the event of a proposed sale of
substantially all of the assets of the Company or in the event of a proposed
merger or consolidation of the Company with or into any other corporation,
regardless of whether the Company is the surviving corporation, or a statutory
share exchange involving capital stock of the Company (such dissolution,
liquidation, sale, merger, consolidation or exchange being herein called an
"Event'), the Committee may, but shall not be obligated to.
(i) If the Event is a merger or consolidation or statutory share
exchange, make appropriate provision for the protection of the Option by
the substitution, in lieu of the Option, of an option to purchase
appropriate voting common stock (the "Survivor's Stock") of the corporation
surviving any merger or consolidation or, if appropriate, the parent
corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's
Stock which has a Fair Market Value (as defined in paragraph 6 of the Plan)
as of the effective date of the Event equal to the Fair Market Value as of
such effective date of the Common Shares covered by the Option; or
(ii) At least ten (10) days prior to the actual effective date of
an Event, declare, and provide written notice to the Employee of the
declaration, that the Option, whether or not then exercisable, shall be
canceled at the time of, or immediately prior to the occurrence of, the
Event (unless it shall have been exercised prior to the occurrence of the
Event) in exchange for payment to the Employee, within ten (10) days after
the Event, of cash equal to the amount (if any), for each Common Share
covered by the canceled Option, by which the Event Proceeds per Common
Share (as defined in the last sentence of this subparagraph) exceeds the
exercise price per Common Share. At the time of the declaration provided
for in the immediately preceding sentence, except as otherwise set forth in
paragraph 6(d) hereof, the Option shall immediately become exercisable in
full and the Employee shall have the right, during the period preceding the
time of cancellation of the Option, to exercise the Option as to all or any
part of the Common Shares covered thereby. In the event of a declaration
pursuant to this paragraph 6(c)(ii), the Option, to the extent it shall not
have been exercised prior to the Event, shall be canceled at the time of,
or immediately prior to, the Event, as provided in the declaration, subject
to the payment obligations of the Company provided in this paragraph
6(c)(ii). For purposes of this paragraph 6(c)(ii), "Event Proceeds" per
Common Share shall mean the cash plus the fair market value, as determined
in good faith by the Company, of the non-cash consideration to be received
per Common Share by the shareholders of the Company upon the occurrence of
the Event.
(d) Adjustment in Certain Events. Notwithstanding the provisions of
paragraphs 6(b) and 6(c) hereof, if the exercise of the Option, either alone or
together with other payments in the nature of compensation to the Employee which
are contingent on a change in the ownership or effective control of the Company
or in the ownership of a substantial portion of the assets of the Company or
otherwise, would result in any portion thereof being subject to an excise tax
imposed under Section 4999 of the Code or would not be deductible in whole or in
part by the Company, an affiliate of the Company (as defined in Section 1504 of
the Code), or other person making such payment as a result of Section 280G of
the Code, the Option and/or such other benefits and payments
-5-
<PAGE>
shall be reduced (but not below zero) to the largest aggregate amount as will
result in no portion thereof being subject to an excise tax or being not
deductible. For purposes hereof:
(i) No portion of payments the receipt or enjoyment of which the
Employee shall have effectively waived in writing prior to the date of
issuance of stock or distribution of a payment hereunder shall be taken
into account;
(ii) No portion of the Option, benefits and other payments shall
be taken into account which, in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the Employee, does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code;
(iii) The Option, benefits and other payments shall be reduced
only to the extent necessary so that the total of such payments (other than
those referred to in clause (i) or (ii)) in their entirety constitute
reasonable compensation for services rendered within the meaning of Section
280G(b)(4) of the Code, in the opinion of the tax counsel referred to in
clause (ii); and
(iv) The value of any non-cash benefit or any deferred payment or
benefit included in such payment shall be determined by the Company's
independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.
Any portion of the Option not exercised or paid as a result of this paragraph
6(d), or reduced to zero as a result of the limitations imposed hereby, shall
remain outstanding in full force and effect in accordance with the other terms
and provisions of this Agreement.
7. Limitation on Transfer. During the lifetime of the Employee, only the
Employee or his or her guardian or legal representative may exercise the Option.
The Employee shall not assign or transfer the Option otherwise than by will or
the laws of descent and distribution, and the Option shall not be subject to
pledge, hypothecation, execution, attachment or similar process. Any attempt to
assign, transfer, pledge, hypothecate or otherwise dispose of the Option
contrary to the provisions hereof, and the levy of any attachment or similar
process upon the Option, shall be null and void.
8. Shareholder Rights Before Exercise. The Employee shall have none of the
rights of a shareholder of the Company with respect to any share subject to the
Option until the share is actually issued to him or her upon exercise of the
Option.
9. Discretionary Adjustment. The Committee may in its sole discretion make
appropriate adjustments in the number of shares subject to the Option and in the
purchase price per share to give effect to any change made in the number of
outstanding Common Shares of the Company through a merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock split or
other relevant change, provided that fractional shares shall be rounded to the
nearest whole share.
-6-
<PAGE>
10. Tax Withholding. The parties hereto recognize that the Company or a
subsidiary of the Company may be obligated to withhold federal and state income
taxes and social security or other taxes upon the Employee's exercise of the
Option. The Employee agrees that, at the time he or she exercises the Option, if
the Company or a subsidiary is required to withhold such taxes, he or she will
promptly pay in cash upon demand to the Company, or the subsidiary having such
obligation, such amounts as shall be necessary to satisfy such obligation,
provided, however, that in lieu of all or any part of such a cash payment, the
Committee may, but shall not be required to, permit the Employee to elect to
cover all or any part of the required withholdings, and to cover any additional
withholdings up to the amount needed to cover the Employee's full FICA and
federal, state and local income tax with respect to income arising from the
exercise of the Option, through a reduction of the number of Common Shares
delivered to the Employee or through a subsequent return to the Company of
shares delivered to the Employee.
11. Interpretation of this Agreement. All decisions and interpretations
made by the Committee with regard to any question arising hereunder or under the
Plan shall be binding and conclusive upon the Company and the Employee. In the
event that there is any inconsistency between the provisions of this Agreement
and the Plan, the provisions of the Plan shall govern.
12. Discontinuance of Employment. This Agreement shall not give the
Employee a right to continued employment with the Company or any parent or
subsidiary thereof, and the Company or any such parent or subsidiary thereof
employing the Employee may terminate his or her employment and otherwise deal
with the Employee without regard to the effect it may have upon him or her under
this Agreement.
13. Restrictions on Competition by Employee. In consideration for receipt
of his or her option:
(a) The Employee acknowledges that the Employee has had and will continue
to have access to significant confidential and valuable information which can be
used unfairly and to the harm of the Company by present or potential competitors
in the buffet segment of the restaurant industry.
(b) The Employee agrees that, during the period of the Employee's continued
employment by the Company or its affiliates, the Employee will not render
services or give advice to, affiliate with (as employee, partner, consultant or
otherwise), or invest or acquire any interest in, in whole or in significant
part, any other person or organization which is engaged in or about to become
engaged in franchising, developing, owning or operating a restaurant or other
food service establishment that utilizes, in whole or in significant part, a
buffet, smorgasbord or cafeteria service format (a "Conflicting Organization").
The Employee shall not, however, be prohibited from investing in securities of
any company that is listed on a national securities exchange or traded on
NASDAQ, provided that the Employee does not hereafter own, or have the right to
acquire, more than 3% of the outstanding voting securities of such company.
-7-
<PAGE>
(c) The Employee further agrees that, for a period of two (2) years after
cessation or termination of his or her employment with the Company or any
affiliate of the Company, whether voluntary or involuntary, with or without
cause, the Employee will not render services or give advice to, or affiliate
with (as employee, partner, consultant or otherwise) or invest or acquire any
interest in, any Conflicting Organization operating within twenty-five miles of
any location where an Old Country Buffet restaurant is then currently operating,
or where the Company, an affiliate or a present or prospective franchise
operator has leased or purchased, or is then negotiating to lease or purchase, a
site on which it plans to operate an Old Country Buffet restaurant.
Notwithstanding the foregoing, if the business of the Conflicting Organization
has separate and distinct divisions, Employee may, following termination of such
employment, render services or give advice to, or affiliate with, a division
which would not itself constitute a Conflicting Organization if, prior thereto,
the Company receives written assurances satisfactory to the Company from the
Conflicting Organization and Employee that Employee will not directly or
indirectly render services or give advice or information to any division of such
Conflicting Organization which would itself constitute a Conflicting
Organization.
(d) The Employee further agrees that, during the periods described in
subparagraphs (b) and (c) of this paragraph 13, the Employee will not, directly
or indirectly, assist or encourage any other person to carry out, directly or
indirectly, any activity that would be prohibited by the above provisions of
this paragraph 13 if such activity were carried out by the Employee, either
directly or indirectly; and in particular the Employee agrees that the Employee
will not, directly or indirectly, induce any employee of the Company to carry
out, directly or indirectly, any such activity.
(e) The Employee acknowledges and agrees that the Company will not have an
adequate remedy at law in the event of any breach by the Employee of this
paragraph 13 and the Company shall therefore be entitled, in addition to any
other remedies that may be available, to injunctive and/or other equitable
relief to prevent or remedy a breach of this paragraph 13 by the Employee This
paragraph 13 shall survive the exercise, expiration, surrender or termination of
the Option for any reason whatsoever.
(f) The Employee acknowledges that this paragraph 13 limits the Employee's
right to compete only to the extent necessary to protect the Company from unfair
competition. The Employee therefore agrees that a court of competent
jurisdiction may, if it finds the restrictions to be unlawful or excessive,
modify and enforce them to the extent it believes to be reasonable under the
circumstances.
14. General. The Company shall at all times during the term of this Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement. This Agreement shall be
binding in all respects on the Employee's heirs, representatives, successors and
assigns. This Agreement is entered into under the laws of the State of Minnesota
and shall be construed and interpreted thereunder.
-8-
<PAGE>
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement as of the day and year first above written.
/s/ Kerry A. Kramp
--------------------------------------
Kerry A. Kramp
BUFFETS, INC.
By: /s/ Clark C. Grant
----------------------------------
Its:EVP
----------------------------------
-9-
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CALCULATION OF BASIC EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
January 3, January 1, December 31,
1996(1) 1997 1997
--------- --------- -----------
Net earnings (loss) ............... $ 32,907 $ (7,203) $28,598
======== ======== =======
Weighted average common
shares outstanding .............. 44,604 45,068 45,257
======== ======== =======
Net earnings (loss)
per share ....................... $ .74 $ (.16) $ .63
======== ======== =======
CALCULATION OF DILUTED EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
January 3, January 1, December 31,
1996(1) 1997 1997
--------- --------- -----------
Net earnings (loss) ................. $ 32,907 $ (7,203) $ 28,598
Interest on convertible
subordinated notes
(after tax) ........................ 138 1,786
-------- -------- --------
Income (loss) available to
common shareholders and
assumed conversion ................. $ 33,045 $ (7,203) $ 30,384
======== ======== ========
Weighted average common
shares outstanding ................. 44,604 45,068 45,257
Dilutive effect of:
Convertible subordinated
notes .............................. 274 3,556
Stock options ...................... 700 327
-------- -------- --------
Common shares assuming
dilution ........................... 45,578 45,068 49,140
======== ======== ========
Net earnings (loss)
per share .......................... $ .73 $ (.16) $ .62
======== ======== ========
(1) The Company's fiscal year consisted of 53 weeks.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR (52-53 WEEKS) ENDED
-------------------------------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3, JANUARY 1, DECEMBER 31,
1993 1994 1996 (1) 1997 1997
----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Restaurant sales ........................................... $ 369,580 $ 484,459 $ 661,445 $ 750,707 $ 808,529
Restaurant costs ........................................... 306,016 406,497 567,290 659,784 712,004
--------- --------- --------- --------- ---------
Restaurant profits ......................................... 63,564 77,962 94,155 90,923 96,525
Selling, general, and
administrative expenses ................................... 28,516 38,460 40,276 47,594 48,158
Merger, impairment, and
site closing costs ........................................ 1,500 1,370 49,572 1,500
Other income (expense) ..................................... 886 2,586 574 (520) (359)
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes .............................................. 35,934 40,588 53,083 (6,763) 46,508
Income taxes ............................................... 13,849 15,284 20,176 440 17,910
--------- --------- --------- --------- ---------
Net earnings (loss) ........................................ $ 22,085 $ 25,304 $ 32,907 $ (7,203) $ 28,598
========= ========= ========= ========= =========
Earnings (loss) per share:
Basic ..................................................... $ .63 $ .58 $ .74 $ (.16) $ .63
========= ========= ========= ========= =========
Diluted ................................................... $ .60 $ .56 $ .73 $ (.16) $ .62
========= ========= ========= ========= =========
Weighted average common shares assumed outstanding:
Basic ..................................................... 35,299 43,962 44,604 45,068 45,257
Diluted ................................................... 36,890 45,291 45,578 45,068 49,140
BALANCE SHEET DATA:
Property and equipment(net) ................................ $ 151,954 $ 248,526 $ 328,573 $ 327,721 $ 330,647
Total assets ............................................... 211,131 290,289 399,752 370,683 403,576
Long-term debt (including
current portion) .......................................... 978 7,789 64,655 48,633 46,693
Stockholders' equity ....................................... 159,487 205,842 242,434 236,791 266,687
RESTAURANT DATA:
Restaurants opened or
acquired during period .................................... 48 60 65 41 18
Restaurants closed or
relocated during period ................................... (3) (8) (4)
Restaurants open (end of period):
Company-owned ............................................. 191 251 313 346 360
Franchised ................................................ 15 23 25 24 24
--------- --------- --------- --------- ---------
Total ................................................. 206 274 338 370 384
Average weekly sales of
Company-owned restaurants
open during period ........................................ $ 43,728 $ 44,395 $ 44,447 $ 43,669 $ 44,242
</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
The Company operates and franchises high-quality, scatter bar buffet
restaurants principally under the names Old Country Buffet and HomeTown Buffet.
The Company also operates four Roadhouse Grill restaurants, one Country
Roadhouse Buffet & Grill restaurant (opened in January 1998) and one PIZZAPLAY
restaurant. Restaurants in the states of Colorado and Wyoming operate under the
name of Country Buffet. The Company opened its first Old Country Buffet
restaurant on March 22, 1984. As of December 31, 1997, the Company operated 360
Company-owned restaurants in total, and had 24 franchisee-operated restaurants.
On September 20, 1996, a wholly-owned subsidiary of the Company merged
into HomeTown Buffet, Inc. ("HomeTown Buffet"). See Note B to the consolidated
financial statements. As a result of the merger, HomeTown Buffet became a
wholly-owned subsidiary of the Company. The merger was accounted for as a
pooling of interests and, accordingly, the following discussion and the
accompanying consolidated financial statements include the accounts and
operations of Buffets and HomeTown Buffet for all periods presented. The
acquisition of HomeTown Buffet enabled the Company to quickly increase its
presence in additional geographic markets, most notably in California, provided
the Company with additional management expertise and depth, and provided
synergistic opportunities. In connection with the merger, the Company recognized
certain merger-related costs during 1996. See "Merger Costs, Duplicate Site
Closing Costs, and Impairment of Assets" on page 6.
Certain information concerning the operating results of the Company is
presented in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Restaurant sales ................... 100.0% 100.0% 100.0%
--------- --------- ---------
Restaurant costs:
Food costs ....................... 35.6 35.0 33.9
Labor costs ...................... 27.9 29.1 29.8
Direct and occupancy costs ....... 22.3 23.8 24.4
--------- --------- ---------
Total restaurant costs ......... 85.8 87.9 88.1
--------- --------- ---------
Restaurant profits ................. 14.2 12.1 11.9
Selling, general, and
administrative expenses .......... 6.1 6.3 6.0
Merger and merger related costs .... .9
Duplicate site closing costs ....... 1.4
Impairment of assets ............... 3.7
Other site closing costs ........... .2 .6 .1
--------- --------- ---------
7.9 (.8) 5.8
Other income (expense) ............. .1 (.1)
--------- --------- ---------
Earnings (loss) before
income taxes ..................... 8.0 (.9) 5.8
Income taxes ....................... 3.0 .1 2.3
--------- --------- ---------
Net earnings (loss) ................ 5.0% (1.0)% 3.5%
========= ========= =========
Number of Company-owned
restaurants open at
end of period .................... 313 346 360
Average weekly sales of
Company-owned restaurants
open during period ............... $ 44,447 $ 43,669 $ 44,242
</TABLE>
5
<PAGE>
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, depreciation and
amortization. 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.
RESTAURANT SALES
Restaurant sales for 1997 increased $57.8 million or 7.7% over sales in
1996, which in turn had increased by $89.3 million or 13.5% over those achieved
in 1995. The increases in revenues during the three years have been primarily
due to sales generated by new restaurants. In 1997, the Company opened 18
restaurants, compared with 41 new restaurants in 1996 and 65 in 1995. In 1997,
the Company closed three underperforming restaurants and one duplicate site
restaurant. In 1996, the Company closed four underperforming restaurants and
four duplicate site restaurants. In 1998, the Company anticipates that it will
open approximately 25 new restaurants, primarily buffet style, and convert
several existing restaurants to our new buffet concepts. The Company's price
increases have been in line with inflation for the past three years.
Average weekly sales per restaurant increased 1.3% from 1996 to 1997
and decreased 1.7% from 1995 to 1996. Comparable sales per restaurant decreased
.9% from 1996 to 1997 and decreased 3.4% from 1995 to 1996. The average weekly
sales statistic reflects the performance of the Company's restaurants, both new
and old. The Company manages its business on average weekly sales, rather than
comparable restaurant sales, as the best measure of comparative restaurant sales
performance. The comparable restaurant sales statistic would exclude 26% and 37%
for 1997 and 1996, respectively, of the Company's restaurants that had been open
or converted to the scatter bar system or remodeled for less than two full years
at the end of each fiscal year.
Sales are seasonal, with a lower percentage of annual sales occurring
in most of the Company's current market areas during the winter months.
6
<PAGE>
RESTAURANT COSTS
As a percentage of restaurant sales, total restaurant costs increased
to 88.1% in 1997 from 87.9% in 1996 and 85.8% in 1995. Food costs as a
percentage of sales decreased to 33.9% in 1997 from 35.0% in 1996 primarily due
to a decrease in the cost of various meats and dairy products. Food costs as a
percentage of sales decreased to 35.0% in 1996 from 35.6% in 1995 due to a
decrease in the cost of fruits and vegetables. Labor costs as a percentage of
sales increased to 29.8% in 1997 from 29.1% in 1996, which in turn had increased
from 27.9% in 1995. 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. Direct and occupancy costs as
a percentage of sales were 24.4%, 23.8% and 22.3% in 1997, 1996 and 1995,
respectively. 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 increased $.6 million,
but decreased as a percentage of sales to 6.0% in 1997 from 6.3% in 1996.
Selling, general, and administrative expenses in 1996 increased $7.3 million,
and increased as a percentage of sales to 6.3% from 6.1% in 1995. The increase
in selling, general, and administrative expenses in 1997 from 1996 was due
primarily to an increase in advertising costs partially offset by a decrease in
general, and administrative expenses. The Company is anticipating doubling its
marketing spending in 1998 to approximately $18.0 million which includes the
development of four new television commercials to run in 1998. The increase in
selling, general, and administrative costs as a percentage of sales in 1996 from
1995 was due primarily to an increase in advertising costs. Advertising costs
represented 1.3% of sales during 1997, compared with 1.2% of sales during 1996
and .9% of sales during 1995.
MERGER COSTS, DUPLICATE SITE CLOSING COSTS, AND IMPAIRMENT OF ASSETS
In 1996, costs related to the HomeTown Buffet merger totaled $17.3
million, of which $6.6 million was for investment banking, accounting, legal and
other merger costs and $10.7 million was for the closure of five duplicate
restaurants and HomeTown Buffet's San Diego headquarters.
The application of Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" resulted in the Company determining an impairment
write down was necessary for certain locations due to a significant drop in
average weekly sales
7
<PAGE>
and corresponding trend of increasing operating losses at certain locations. The
Company wrote down the carrying value of specific restaurants and decided to
close certain restaurants. In October 1996, the Company determined a $27.7
million impairment write down was necessary for 38 restaurants and decided to
close three restaurants. In December 1997, the Company determined a further
impairment write down of $.3 million relating to one restaurant was necessary
and decided to close two restaurants previously impaired. The write downs
represented a reduction of the carrying amounts of specifically identified
impaired restaurants to their estimated fair value, as determined by using
discounted estimated future cash flows. The cost of closing the restaurants in
fiscal 1996 and 1997 was $4.5 million and $1.2 million, respectively. In 1996,
depreciation and amortization relating to the impaired assets and the eight
restaurants closed amounted to $3.8 million through the third quarter of fiscal
year 1996.
In the future, it is reasonably possible although not currently
estimable that the Company will incur future impairment charges. These charges
will generally arise as estimates used in the evaluation and measurement of
impairments relating to the restaurants written down are refined based on new
information or as a result of future events or changes in circumstances that
cause other restaurants to be impaired. Also, any future expenditures for
impaired restaurants that would normally be capitalized will have to be
immediately evaluated for recoverability. The application of SFAS No. 121 could
result in lower closure costs or increased gains for impaired restaurants that
are closed or sold, respectively.
OTHER INCOME (EXPENSE)
Other expense remained relatively constant for the years 1997 and 1996.
The increase in other expense in 1997 and 1996 compared to 1995, relates to the
increase in interest expense for the $41.5 million 7% subordinated notes issued
by HomeTown Buffet in November 1995.
INCOME TAXES
In 1997, income taxes were 38.5% of earnings before taxes. In 1996, the
Company recorded income tax expense of $440,000 despite having a loss before
income taxes primarily due to a portion of the merger-related costs not being
deductible for tax purposes and the impact of state income taxes. Income taxes
were 38.0% of earnings before taxes in 1995. The utilization of HomeTown
Buffet's 1994 net operating loss carryforwards were fully utilized in 1995.
8
<PAGE>
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 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 1997, net cash provided by operating activities increased by
$13.9 million to $75.6 million, as compared with $61.7 million in 1996 and $76.1
million in 1995. The increase in net cash provided by operations in 1997 was
primarily due to the increase in net earnings compared to the net loss in 1996.
Cash flows used in investing activities totaled $42.5 million, $48.8
million and $116.9 million for fiscal 1997, 1996 and 1995, respectively,
consisting of capital expenditures primarily for new restaurants, conversion of
restaurants, restaurants acquired, or remodeling of existing restaurants, offset
by cash received from landlords.
Cash flows (used in) or provided by financing activities have been
$(.9) million, $(16.7) million and $48.4 million for fiscal 1997, 1996 and 1995,
respectively. Cash flows used in financing activities in 1997 consisted
primarily of debt payments of $1.9 million partially offset by $1.0 million
received from the exercise of employee stock options. Cash flows used in
financing activities in 1996 consisted of debt payments of $18.0 million
partially offset by $1.3 million received from the exercise of employee stock
options. Cash flows provided by financing activities in 1995 consisted
principally of the proceeds from the issuance of long-term debt of $47.3 million
and $2.1 million from the exercise of employee stock options.
The Company has a $50 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 December 31, 1997, and during the fiscal year
then ended, the Company had no borrowings under the line of credit.
9
<PAGE>
In 1995, HomeTown Buffet issued $41.5 million 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 requires significant amounts of capital to fund its growth.
During 1998, the Company expects to open approximately 25 new restaurants,
primarily buffet style restaurants. The Company expects to potentially spend
approximately $45 to $50 million in aggregate on these new restaurants,
depending upon the level of contributions obtained from landlords for leasehold
improvements and the number of acquisitions of freestanding Company-owned sites,
along with improvement costs at existing locations.
The Company also expects to convert several existing restaurants to
either the PIZZAPLAY or Country Roadhouse Buffet & Grill concept. At the present
time, management is unable to estimate the number of restaurant conversions.
The Company has traditionally located its restaurants within or
adjacent to strip or neighborhood shopping centers in principally leased
facilities. However, depending upon the availability of suitable mall locations,
or in order to obtain optimal locations within particular markets, the Company
also purchases or ground-leases land on which it constructs freestanding
restaurants. The Company currently has 80 freestanding locations, 21 of which it
owns. In 1997, 9 of the 18 restaurants opened were freestanding units, 1 of
which was constructed on land owned by the Company. The mix of freestanding to
in-line mall units in 1998 is expected to be similar to 1997. The capital
expenditure required for a freestanding location can be over 100% greater than
for a mall location. If the Company further pursues development of freestanding
locations, the cost per location and related cash requirements will increase
substantially over the Company's historical costs of development and will not be
offset by landlord contributions that typically have been associated with
in-line mall locations.
Sources of capital for restaurants to be opened or converted in 1998
and early 1999 are anticipated to be funds from existing cash and cash
equivalents, cash provided by operations, credit received from trade suppliers,
landlord contributions for leasehold improvements and current bank financing.
The Company believes that these sources will be adequate to finance operations
and the additional restaurants and conversions included in the Company's
10
<PAGE>
restaurant development plans for 1998 and early 1999. 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 currently 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.
YEAR 2000 COMPLIANCE
All major internal information systems have been replaced due to the
Company's growth in the last four years. Year 2000 issues were addressed when
selecting and implementing these systems. All hardware, software, phone and
security systems have been reviewed for year 2000 compliance. The Company will
continue to invest in technology to accommodate the Company's future growth.
Compliance with year 2000 is a byproduct of these upgrades.
LITIGATION
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 litigation brought on behalf of a putative class of
all purchasers of common stock of the Company from October 26, 1993 through
October 25, 1994, in the United States District Court for the District of
Minnesota, as described further in Note G to the Company's consolidated
financial statements included in this Annual Report. 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.
11
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which will be effective for the
Company beginning January 1, 1998. SFAS No. 131 redefines how operating segments
are determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The Company anticipates the
adoption of SFAS No. 131 will result in the Company continuing to operate in one
segment, the casual dining restaurant segment.
FORWARD-LOOKING INFORMATION
Certain statements in this Annual Report (which are summarized below)
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.
The ability of the Company to open new restaurants, and the allocation
of new restaurants among the Company's currently available and future concepts,
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, the comparative
potential return and risk associated with the particular restaurant concept, and
the availability of capital. The proportion of new restaurants that will be
freestanding units, either owned or leased, rather than in-line mall locations
will depend upon the availability and cost 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
freestanding sites utilized in such development and whether such sites involve
land purchases, the cost of building supplies and general construction risks and
costs. The ultimate level of television advertising expenditures in 1998 will be
contingent upon the effectiveness of the commercials, the availability and cost
of advertising air time, and changes in the Company's marketing priorities. 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 1998 and early
12
<PAGE>
1999. The prospect of future restaurant conversions is contingent upon the costs
of the conversions, the financial return anticipated with such conversion, and
the availability of viable alternative concepts. The Company periodically
reviews the operating results of individual restaurants to determine if
impairment charges on underperforming assets are necessary, and the need for
restaurant closings, and it is reasonable to expect that such actions will be
required from time to time in the future. There is no certainty that currently
available sources of cash will remain available to the Company over time.
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
Buffets and HomeTown Buffet, general economic conditions, the actions of
existing and future competitors, weather factors, the success of conversions,
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.
13
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- ---------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
RESTAURANT SALES........................ $661,445 $750,707 $808,529
RESTAURANT COSTS:
Food costs............................ 235,083 263,137 273,942
Labor costs........................... 184,732 218,121 240,956
Direct and occupancy costs............ 147,475 178,526 197,106
-------- -------- --------
Total restaurant costs................ 567,290 659,784 712,004
-------- -------- --------
RESTAURANT PROFITS...................... 94,155 90,923 96,525
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES.............................. 40,276 47,594 48,158
MERGER AND MERGER RELATED
COSTS (NOTE B)........................ 6,584
DUPLICATE SITE CLOSING
COSTS (NOTE B)........................ 10,702
IMPAIRMENT OF ASSETS (NOTE C)........... 27,739 258
OTHER SITE CLOSING COSTS................ 1,370 4,547 1,242
-------- -------- --------
52,509 (6,243) 46,867
OTHER INCOME (EXPENSE):
Franchise fees and royalties.......... 1,356 1,506 1,395
Interest income....................... 607 1,517 1,668
Interest expense...................... (1,391) (3,617) (3,541)
Other................................. 2 74 119
-------- -------- --------
574 (520) (359)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES..... 53,083 (6,763) 46,508
INCOME TAXES (NOTE I)................... 20,176 440 17,910
-------- -------- --------
NET EARNINGS (LOSS)..................... $ 32,907 $ (7,203) $ 28,598
======== ======== ========
EARNINGS (LOSS) PER SHARE:
BASIC.................................. $.74 $(.16) $.63
======== ======== ========
DILUTED................................ $.73 $(.16) $.62
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
BASIC.................................. 44,604 45,068 45,257
DILUTED................................ 45,578 45,068 49,140
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
January 1, December 31,
1997 1997
--------- -----------
(in thousands, except par value amounts)
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents....................... $ 10,772 $ 43,030
Receivable from landlords....................... 2,642 1,430
Inventory....................................... 3,653 4,934
Prepaid rents................................... 2,782
Other current assets............................ 2,639 1,986
Refundable income taxes......................... 1,313
Deferred income taxes (NOTE I).................. 11,975 12,418
-------- --------
TOTAL CURRENT ASSETS.......................... 34,463 65,111
-------- --------
PROPERTY AND EQUIPMENT:
Land............................................ 15,686 15,688
Buildings....................................... 30,537 31,773
Equipment....................................... 228,046 246,006
Leasehold improvements.......................... 185,263 203,874
-------- --------
459,532 497,341
Less accumulated depreciation and
amortization.................................. 131,811 166,694
-------- --------
327,721 330,647
GOODWILL, net of accumulated amortization
of $1,615 and $1,965, respectively............ 5,974 5,624
OTHER ASSETS...................................... 2,525 2,194
-------- --------
$370,683 $403,576
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 29,483 $ 29,910
Accrued payroll and related benefits............ 16,229 15,520
Accrued rents................................... 13,892 15,640
Accrued sales taxes............................. 3,497 3,393
Accrued insurance............................... 4,390 5,561
Accrued store closing costs..................... 7,703 7,955
Other accrued expenses.......................... 5,779 5,310
Income taxes payable............................ 615
Current portion of capital leases (NOTE G)...... 2,055 2,239
-------- --------
TOTAL CURRENT LIABILITIES..................... 83,643 85,528
LONG-TERM DEBT (NOTE D).......................... 41,500 41,500
LONG-TERM PORTION OF CAPITAL LEASES (NOTE G)...... 5,078 2,954
DEFERRED INCOME................................... 405 212
DEFERRED INCOME TAXES (NOTE I)................... 3,266 6,695
COMMITMENTS AND CONTINGENCIES (NOTE G)............
STOCKHOLDERS' EQUITY (NOTE F):
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
45,159 and 45,371 shares, respectively........ 452 454
Additional paid-in capital...................... 116,330 117,626
Retained earnings............................... 120,009 148,607
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................... 236,791 266,687
-------- --------
$370,683 $403,576
======== ========
</TABLE>
See notes to consolidated financial statements.
15
<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 28, 1994................. $443 $111,094 $ 94,305 $205,842
Net earnings.............................. 32,907 32,907
Common stock issued under employees'
stock option plans...................... 4 2,106 2,110
Tax benefit from early disposition
of common stock issued under
employees' stock option
plans (NOTE I).......................... 308 308
Common stock issued for acquisition
of Evergreen Buffets, Inc............... 1 1,266 1,267
---- -------- -------- --------
BALANCES, January 3, 1996................... 448 114,774 127,212 242,434
Net loss.................................. (7,203) (7,203)
Common stock issued under employees'
stock option plans...................... 4 1,333 1,337
Tax benefit from early disposition
of common stock issued under
employees' stock option
plans (NOTE I).......................... 223 223
---- -------- -------- --------
BALANCES, January 1, 1997................... 452 116,330 120,009 236,791
Net earnings.............................. 28,598 28,598
Common stock issued under employees'
stock option plans...................... 2 1,027 1,029
Tax benefit from early disposition
of common stock issued under
employees' stock option
plans (NOTE I).......................... 269 269
---- -------- -------- --------
BALANCES, December 31, 1997................. $454 $117,626 $148,607 $266,687
==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- ---------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings (loss).............................................. $ 32,907 $ (7,203) $ 28,598
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization.............................. 32,617 39,504 41,192
Amortization of premium/discount in investments............ 135
Impairment of assets and site closing costs................ 1,370 42,988 1,500
Tax benefit from early disposition of
common stock............................................. 308 223 269
Deferred income............................................ 598 (193) (193)
Deferred income taxes...................................... 1,636 (15,866) 2,986
Changes in assets and liabilities, net of acquisitions:
Inventory............................................ (1,028) 485 (1,281)
Other current assets................................. (940) (611) 3,435
Refundable income taxes.............................. (1,829) 1,829 (1,313)
Other assets......................................... (533) (75) (43)
Accounts payable..................................... 5,708 (7,249) 427
Accrued payroll and related benefits................. 1,119 1,268 (709)
Other accrued expenses............................... 4,401 5,985 1,368
Income taxes payable................................. (356) 615 (615)
-------- -------- --------
Total adjustments................................ 43,206 68,903 47,023
-------- -------- --------
Net cash provided by operating activities........ 76,113 61,700 75,621
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................. (105,463) (78,752) (47,439)
Cash received from landlords..................................... 5,511 3,101 4,987
Purchase of investments.......................................... (123,468) (125,251)
Proceeds from sale of investments................................ 106,556 153,079
Purchase of minority interest in HTB I........................... (950)
-------- -------- --------
Net cash used in investing activities............ (116,864) (48,773) (42,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under short-term debt................................. 22,564
Payments of short-term debt...................................... (21,600) (2,000)
Borrowings under long-term debt.................................. 47,255
Debt offering expenses........................................... (319)
Payments of long-term debt....................................... (14,000)
Payments of capital leases....................................... (1,636) (2,022) (1,940)
Proceeds from exercise of employee stock options................. 2,110 1,337 1,029
-------- -------- --------
Net cash provided by (used in)
financing activities........................... 48,374 (16,685) (911)
-------- -------- --------
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS................ 7,623 (3,758) 32,258
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 6,907 14,530 10,772
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 14,530 $ 10,772 $ 43,030
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Business acquisitions (NOTE J)
Cash paid during the year for:
Interest (net of capitalized interest of $305, $63,
and $304 in 1995, 1996, and 1997, respectively)................ $ 1,380 $ 3,635 $ 3,768
Income taxes..................................................... 14,275 14,661 16,831
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 1996 (53 WEEKS), JANUARY 1, 1997 (52 WEEKS),
AND DECEMBER 31, 1997 (52 WEEKS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
Buffets, Inc. and subsidiaries (the Company) owns and operates a chain
of restaurants under the name of Old Country Buffet, Country Buffet, HomeTown
Buffet, Roadhouse Grill, Country Roadhouse Buffet & Grill and PIZZAPLAY. The
Company had 360 Company-owned restaurants and 24 franchised restaurants
operating as of December 31, 1997. 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"), HomeTown
Buffet, Inc. ("HomeTown Buffet"), Dinertainment, Inc., HomeTown Construction and
Development, Inc., HTB Ventures I, Inc., HTB Ventures II, Inc., 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
year ended January 3, 1996 was a fifty-three week year and the fiscal years
ended January 1, 1997 and December 31, 1997 were fifty-two week years.
CASH EQUIVALENTS:
The Company considers investments 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.
RECEIVABLE FROM LANDLORDS:
The portions of costs for leasehold improvements remaining to be
reimbursed by landlords at year end are recorded as receivables.
INVENTORY:
Inventory, which consists primarily of food, is stated at the lower of
cost or market. Cost is determined by the first-in, first-out method.
18
<PAGE>
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.
RECOVERABILITY OF LONG-LIVED ASSETS:
The Company reviews long-lived assets and goodwill related to those
assets for impairment whenever events or changes in circumstances indicate the
carrying value amount of an asset or group of assets may not be recoverable. The
Company considers a history of operating losses to be its primary indicator of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows, individual
restaurants. A restaurant is deemed to be impaired if a forecast of undiscounted
future operating cash flows directly related to the restaurant, including
disposal value, if any, is less than its carrying amount. If a restaurant is
determined to be impaired, the loss is measured as the amount by which the
carrying amount of the restaurant exceeds its fair value. Fair value is based on
quoted market prices in active markets, if available. If quoted market prices
are not available, an estimate of fair value is based on the best information
available, including prices for similar assets or the results of valuation
techniques such as discounted estimated future cash flows as if the decision to
continue to use the impaired restaurant was a new investment decision. The
Company generally measures fair value by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.
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.
PRE-OPENING COSTS:
Costs incurred in connection with the opening of new restaurants are
expensed as incurred.
19
<PAGE>
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 basis 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 (LOSS) PER SHARE:
Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings
per Share." Earnings (loss) per share amounts presented for 1996 and 1995 have
been restated for the adoption of SFAS No. 128.
Basic earnings (loss) per share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings per share assumes conversion of convertible subordinated notes as of
the beginning of the year and exercise of stock options using the treasury stock
method, if dilutive. In 1996, diluted loss per share is the same as basic loss
per share due to the antidilutive effect of the assumed conversion of
convertible subordinated notes and the exercise of stock options. The following
is a reconciliation of the numerators and denominators used to calculate diluted
earnings (loss) per share:
20
<PAGE>
<TABLE>
<CAPTION>
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- --------- ----------
<S> <C> <C> <C>
Net earnings (loss)................... $32,907 $ (7,203) $28,598
Interest on convertible
subordinated notes (after tax)....... 138 1,786
------- -------- -------
Income (loss) available to
common shareholders and assumed
conversion........................... $33,045 $ (7,203) $30,384
======= ======== =======
Weighted average common
shares outstanding................... 44,604 45,068 45,257
Dilutive effect of:
Convertible subordinated notes....... 274 3,556
Stock options........................ 700 327
------- -------- -------
Common shares assuming dilution....... 45,578 45,068 49,140
======= ======== =======
</TABLE>
B. HOMETOWN MERGER
On September 20, 1996, the Company completed the merger of HomeTown
Buffet. The merger was accounted for as a pooling of interests. Accordingly, all
prior period consolidated financial statements presented have been restated as
if the merger took place at the beginning of such periods. In connection with
the merger, the Company issued approximately 13,733,700 shares of its common
stock and issued 1,967,200 options in substitution for previously outstanding
HomeTown Buffet stock options. In addition, the Company guaranteed the
obligations of HomeTown Buffet under HomeTown Buffet's outstanding 7%
subordinated convertible notes, and the Company's common stock will be issued
upon any conversion thereof. Approximately $41.5 million in principal amount of
the notes are currently outstanding.
In connection with the merger, the Company incurred approximately $17.3
million of merger and merger-related costs, including $6.6 million for
investment banking, accounting, legal, and other merger costs and $10.7 million
for the closure of five duplicate restaurants and HomeTown Buffet's San Diego
headquarters.
C. IMPAIRMENT OF LONG-LIVED ASSETS
In October 1996 and December 1997, the Company determined that an
impairment write down was necessary for certain locations due to a significant
drop in average weekly sales and corresponding trend of increasing operating
losses at certain locations. The Company wrote down the carrying value of
specific restaurants and decided to close certain restaurants. In 1996, the
Company determined a $27.7 million impairment write down was necessary for 38
restaurants and decided to close three restaurants. In 1997, the Company
determined a further impairment write down of $.3 million relating to one
restaurant was necessary and decided to close two
21
<PAGE>
restaurants previously impaired. The write downs represented a reduction of the
carrying amounts of the impaired restaurants to their estimated fair value, as
determined by using discounted estimated future cash flows. The cost of closing
the restaurants in 1996 and 1997 was $4.5 million and $1.2 million,
respectively. Considerable management judgement is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
As a result of the reduced carrying amount of the impaired restaurants
in 1996, depreciation and amortization expense for the fourth quarter of fiscal
1996 was reduced by $.7 million and full-year 1997 depreciation and amortization
expense was reduced by $3.0 million.
D. DEBT
The Company has a $50 million unsecured revolving line of credit which
expires June 30, 1999. 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. 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 $95 million in 1998, 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 1, 1997, and
December 31, 1997, the Company had no borrowings under the line of credit.
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.
In November 1995, HomeTown Buffet issued $41.5 million of 7.0%
Convertible Subordinated 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, as defined in the Indenture relating thereto, as
amended. The notes are redeemable in whole or in part, at the option of the
Company, at any time on or after December 2, 1998.
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 December 31, 1997 the Company had outstanding letters of credit
for $4.6 million.
The fair value of the debt is estimated at its carrying value based
upon current rates available to the Company.
22
<PAGE>
E. CORPORATE JOINT VENTURES
In October 1993, the Company formed two joint ventures, HTB Ventures I,
Inc. ("HTB I") and HTB Ventures II, Inc. ("HTB II"). HTB I was formed to
establish and operate HomeTown Buffet restaurants in states including, but not
limited to, Illinois and Ohio. The total capital of HTB I included an $800,000
stock subscription receivable from the Company and a $200,000 promissory note
from the private investor. HTB II was formed to establish and operate HomeTown
Buffet restaurants in states including, but not limited to, Missouri, Kentucky,
and Kansas. The total capital of HTB II included an $800,000 cash investment by
the Company and a $200,000 promissory note from the private investor.
HTB II was terminated in April 1995 and HTB I was terminated in
February 1996. Under the termination agreement for HTB II, the Company acquired
the minority interest in that joint venture and assumed 100% ownership of the
two restaurants that were operated by that joint venture in consideration for
the forgiveness of the principal and interest on the initial promissory note
from the investor. The terms of the termination agreement for HTB I were
substantially the same terms as for HTB II, except that in addition to the
forgiveness of the principal and interest on the initial promissory note from
the investor, the Company paid additional cash consideration of $950,000.
F. 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 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
23
<PAGE>
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, 1991 and 1995 Employee Stock Option
Plans and 1997 Non-Employee Director Stock Option Plan (the "Director Plan")(the
"Plans"), 6.3 million shares were reserved for future grants. Collectively,
options outstanding under the Company's stock option plans: 1) are granted at
prices equal to the market value of the stock on the date of the grant, 2)
generally vest ratably over a five year vesting period, with the Director Plan
vesting upon grant date, and 3) expire over a period not greater than ten years
from 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. The
Company is seeking to obtain shareholder approval at the 1998 annual meeting to
increase this amount to 2.5 million shares, and to increase the number of shares
reserved under the Director Plan from 25,000 to 150,000. The 1991 Stock Option
Plan of HomeTown Buffet expired on September 20, 1996.
In May 1997, the Compensation Committee of the Company's Board of
Directors approved the repricing of stock options to substantially all employees
with outstanding options. The Compensation Committee's action was in response to
the decline in the market price of the Company's stock during the preceding
24
<PAGE>
months, which had effectively eliminated the incentive value of options with a
significantly higher exercise price. The Compensation Committee's decision was
also based on a number of other factors, including a concern that the Stock
Options Plans' ability to recruit and retain employees in the highly competitive
restaurant industry had been impaired by the declining value of 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 in May 1997, the Board approved a stock option grant program for
three executive officers who were excluded from the repricing program. The
program 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 calendar days, one third if the
price exceeds $16 per share for thirty consecutive calendar days and one third
if the price exceeds $20 per share for thirty consecutive calendar days. The
program also provides that all options become exercisable in May 2006, to the
extent they have not already vested as a consequence of meeting the share price
criteria described above.
A summary of the status of the Company's stock options is presented
below (shares in thousands):
<TABLE>
<CAPTION>
Fifty-Three Weeks Fifty-Two Weeks Fifty-Two Weeks
Ended Ended Ended
January 3, 1996 January 1, 1997 December 31, 1997
--------------------- -------------------- --------------------
Wgtd Avg Wgtd Avg Wgtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................... 3,993 $12.05 4,081 $11.49 4,339 $11.81
Granted...................... 1,251 10.77 1,296 11.27 1,828 9.07
Exercised.................... (318) 6.70 (326) 3.85 (211) 4.80
Canceled..................... (845) 14.87 (712) 12.63 (1,621) 14.18
----- ----- ------
Outstanding at end of
year....................... 4,081 $11.49 4,339 $11.81 4,335 $10.11
===== ====== ===== ====== ====== ======
Options exercisable at
year end................... 1,534 $10.36 1,805 $11.54 1,691 $10.15
===== ====== ===== ====== ====== ======
Options available for future
grant....................... 2,003 774 364
===== ===== ======
</TABLE>
25
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the plans. No compensation cost has been
recognized for options issued under the plans when the exercise price of the
options granted is at least equal to the fair value of the common stock on the
date of grant. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1995, 1996,
and 1997 consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's net earnings (loss) would have changed
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss), as reported......... 32,907 $(7,203) $28,598
Net earnings (loss), pro forma........... 30,248 $(9,717) 22,892
Basic earnings (loss) per common
share, as reported..................... $.74 $(.16) $.63
Basic earnings (loss) per common
share, pro forma....................... $.68 $(.22) $.51
Diluted earnings (loss) per common
share, as reported..................... $.73 $(.16) $.62
Diluted earnings (loss) per common
share, pro forma....................... $.67 $(.22) $.50
</TABLE>
The fair value of each option grant is estimated on the grant date using the
Black-Sholes option-pricing model with the following assumptions and results for
the grants:
1995 1996 1997
---- ---- ----
Dividend yield......................... None None None
Expected volatility.................... 67.67% 64.21% 61.18%
Expected life of option................ 10 10 10
Risk free interest rate................ 6.88% 6.68% 6.57%
Fair value of options on grant date.... $8.86 $8.45 $9.04
The following table summarizes information about stock options outstanding
at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Wgtd Avg
Range of Remaining Wgtd Avg Wgtd Avg
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- -------- ----------- ------------ ----- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.43-$ 7.38 551 5.93 $ 5.24 323 $ 3.95
$ 7.42-$ 8.76 136 5.19 $ 7.93 81 $ 7.70
$ 9.00-$ 9.00 840 7.92 $ 9.00 250 $ 9.00
$ 9.06-$ 9.62 555 8.03 $ 9.33 155 $ 9.40
$ 9.72-$10.50 664 9.19 $10.18 71 $10.23
$10.58-$11.86 560 7.37 $11.20 168 $11.02
$12.00-$13.00 718 6.32 $12.72 403 $12.88
$13.44-$20.25 287 5.53 $15.24 226 $15.21
$24.25-$24.63 24 6.16 $24.54 14 $24.54
----- -----
$ 1.43-$24.63 4,335 7.29 $10.11 1,691 $10.15
===== ==== ====== ===== ======
</TABLE>
26
<PAGE>
G. COMMITMENTS AND CONTINGENCIES
COMMITMENTS:
The Company conducts most of its operations from leased restaurant
facilities, all of which are classified as operating leases. The Company also
leases certain equipment under capital lease agreements. Amortization of assets
under capital leases is included in depreciation and amortization expense.
Equipment includes the following capital lease amounts:
January 1, December 31,
1997 1997
--------- -----------
Equipment............................ $10,560 $10,560
Less accumulated amortization........ 3,578 5,215
------- -------
$ 6,982 $ 5,345
======= =======
The following is a schedule of future minimum rental payments required
under capitalized leases and noncancellable operating leases as of December 31,
1997 (in thousands):
Capital Operating
Leases Leases
------ ----------
1998................................ $ 2,643 $ 36,240
1999................................ 2,324 36,466
2000................................ 798 36,909
2001................................ 17 36,791
2002................................ 17 36,750
Thereafter.......................... 43 256,228
------- --------
Total minimum lease payments........ 5,842 $439,384
========
Less amount representing interest
(at rates ranging from 6.38%
to 11.80%)........................ 649
-------
Present value of net minimum
capital lease..................... 5,193
Less current portion of
capital lease payments............ 2,239
-------
Long-term portion of capital
leases........................... $ 2,954
=======
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.
27
<PAGE>
Rent expense was as follows (in thousands):
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- ---------- -----------
Minimum rents.......... $28,388 $34,154 $34,609
Percentage rents....... 1,855 1,601 1,670
------- ------- -------
$30,243 $35,755 $36,279
======= ======= =======
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 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. By Memorandum Opinion and Order filed on January 6, 1998, the District
Court denied defendants' motion to dismiss the plaintiffs' Corrected, Third
Amended, Consolidated Class Action Complaint ("Third Complaint"). Thus, the
action will go forward based upon the allegations of the Third Complaint.
Defendants have not yet answered the Third Complaint, but intend to deny
plaintiffs' allegations and to assert certain affirmative defenses. Neither a
pretrial schedule nor a trial date have been set. Discovery is just beginning.
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.
H. RETIREMENT PLAN
The Company adopted a 401(k) plan beginning June 1, 1997 covering all
employees with one year of service, age 21 or older, who worked at least 1,000
hours in the prior year. The Company's discretionary contributions to the plan
are determined annually by the Board of Directors and are used to match a
portion of employees' voluntary contributions.
28
<PAGE>
Participants are 100% vested in their own contributions immediately and in the
Company's contributions 20% per year of service with the Company such that they
are fully vested at the end of five years of service with the Company. The
Company intends to match a portion of the employees 1997 contributions in 1998
totaling approximately $345,000, of which $300,000 was accrued by the Company in
1997.
I. Income Taxes
The provision for income taxes consists of the following (in thousands):
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- ---------- -----------
Federal:
Current................... $15,833 $13,872 $12,436
Deferred.................. 1,257 (13,385) 2,595
------- ------- -------
17,090 487 15,031
State:
Current................... 2,399 2,211 2,219
Deferred.................. 379 (2,481) 391
------- ------- -------
2,778 (270) 2,610
Tax effect from early
disposition of common
stock..................... 308 223 269
------- ------- -------
$20,176 $ 440 $17,910
======= ======= =======
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):
January 1, 1997 December 31, 1997
-------------------- ---------------------
Current Long-Term Current Long-Term
Asset Liability Asset Liability
------- --------- ------- ---------
Property and equipment.......... $5,876 $7,523
Deferred rent................... $ 3,465 $ 5,067
Self-insurance reserve.......... 1,462 2,153
Accrued workers' compensation... 1,663 1,818
Accrued vacation................ 411 274
Deferred income................. 154 82
Accrued store closing costs..... 4,548 3,067
Alternative minimum tax credit
carryforward.................. (2,610) (828)
Other........................... 272 (43)
------- ------ -------
$11,975 $3,266 $12,418 $6,695
======= ====== ======= ======
29
<PAGE>
The Company has federal and state alternative minimum tax credit
carryforwards of $828,000 at December 31, 1997, which can be carried forward
indefinitely. Future utilization of the carryforward is based on the
profitability of HomeTown Buffet's operations.
The following is a reconciliation of the expected ordinary federal income
tax expense (benefit) (at statutory rates) to the actual income tax provided (in
thousands):
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
January 3, January 1, December 31,
1996 1997 1997
---------- ---------- -----------
Expected ordinary federal
income tax expense (benefit)
at 35%............................ $18,579 $(2,367) $16,278
State income taxes, net of
federal effect.................... 1,890 (176) 1,697
Merger related costs................ 2,785
General business credits............ (337) (29) (137)
Change in valuation allowance....... (140)
Other............................... 184 227 72
------- ------- -------
$20,176 $ 440 $17,910
======= ======= =======
J. 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. The Company also purchased the minority
interests in HTB I and HTB II (see Note E). The acquisition of the minority
interests involved the following non-cash items (in thousands):
Fifty-Three Fifty-Two
Weeks Ended Weeks Ended
January 3, January 1,
1996 1997
--------------------- -----------
Evergreen HTB II HTB I
--------- ------ -----
Goodwill....................... $ 693 $950
Minority interest.............. 657 200 200
Cancellation of receivable..... (83) (200) (200)
Common shares issued........... (1,267)
------
Cash consideration paid........ $ 0 $ 0 $950
====== ==== ====
During 1995, the Company incurred non-cash capital lease obligations
totaling $10,002,000 for equipment.
30
<PAGE>
K. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year (52 Weeks) Ended January 1, 1997
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Restaurant sales................ $240,741 $190,536 $194,145 $183,107
Restaurant profits.............. 24,210 24,904 25,507 21,904
Earnings before income taxes.... 10,455 13,916 13,416 8,721
Net earnings ................... $ 6,375 $ 8,492 $ 8,180 $ 5,551
======== ======== ======== ========
Earnings per share:
Basic.......................... $.14 $.19 $.18 $.12
======== ======== ========= ========
Diluted........................ $.14 $.18 $.18 $.12
======== ======== ========= ========
Weighted average common shares
assumed outstanding:
Basic.......................... 45,191 45,219 45,276 45,363
Diluted........................ 45,440 49,070 49,380 49,162
</TABLE>
<TABLE>
<CAPTION>
Year (52 Weeks) Ended January 1, 1997
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Restaurant sales................ $217,452 $182,539 $180,846 $169,870
Restaurant profits.............. 25,181 28,024 22,553 15,165
Earnings (loss) before
income taxes.................. 11,881 16,621 (39,744) 4,479
Net earnings (loss)............. $ 7,297 $ 10,207 $(27,446)* $ 2,739
======== ======== ======== ========
Earnings (loss)
per share:
Basic.......................... $.16 $.23 $(.61) $.06
======== ======== ======== ========
Diluted ....................... $.16 $.22 $(.61) $.06
======== ======== ======== ========
Weighted average common shares
assumed outstanding:
Basic.......................... 45,036 45,056 45,074 45,089
Diluted........................ 49,212 49,243 45,074 45,486
</TABLE>
* Reflects non-cash (impairment and site closing costs) and merger charges
totaling $49,572,000 ($32,666,000 or $.72 per share -diluted after tax). See
Managements Discussion and Analysis of Results of Operations and Financial
Conditions on Merger Costs, Duplicate Site Closing Costs, and Impairment of
Assets.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Buffets, Inc.
We have audited the accompanying consolidated balance sheets of
Buffets, Inc. and subsidiaries (the Company) as of January 1, 1997 and December
31, 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years (52-53 weeks) in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements give retroactive effect to the merger of the
Company and HomeTown Buffet, Inc. and subsidiaries (HomeTown Buffet), which has
been accounted for as a pooling of interests as described in Note B to the
consolidated financial statements. We did not audit the consolidated statements
of operations, stockholders' equity, and cash flows of HomeTown Buffet for the
year ended January 3, 1996, which statements reflect total restaurant sales of
$151,517,000 for the year ended January 3, 1996. Those statements, before the
restatements to conform the accounting policies of the two companies, were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for HomeTown Buffet for
the year ended January 3, 1996, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits and
the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Buffets, Inc. and subsidiaries as
of January 1, 1997 and December 31, 1997 and the results of their operations and
their cash flows for each of the three years (52-53 weeks) in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 11, 1998
32
<PAGE>
S T O C K I N F O R M A T I O N
Market for the Company's Common Stock
and Related Stockholder Matters
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"BOCB." As of March 16, 1998, the approximate number of holders of the Company's
common stock was 12,500 based upon the number of record holders and an estimate
of individual participants in security position listings.
The following table sets forth the range of high and low closing sale prices
for the Company's common stock as reported on The Nasdaq Stock Market for the
period from January 1, 1996 through December 31, 1997.
High Low
------- -------
Calendar 1996
First Quarter.............. $14 1/4 $11 7/8
Second Quarter............. 14 1/8 11 5/8
Third Quarter.............. 14 7/8 9 5/8
Fourth Quarter............. 11 1/8 8 15/16
Calendar 1997
First Quarter.............. $9 3/4 $6 1/2
Second Quarter............. 9 1/8 6 7/8
Third Quarter.............. 11 7/8 8 3/8
Fourth Quarter............. 11 1/4 7 3/4
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.
33
<PAGE>
<TABLE>
<CAPTION>
CORPORATE DIRECTORY
<S> <C> <C>
Directors Walter R. Barry, Jr. Private investor
Marvin W. Goldstein Private investor
Roe H. Hatlen Chairman of the Board and Chief Executive Offifer of the
Company
Alan S. McDowell Private investor
C. Dennis Scott Vice Chairman of the Board and Chief Operating Officer
Michael T. Sweeney President and Chief Executive Officer of The Minnesota
Pizza Company, L.L.C.
- -------------------------------------------------------------------------------------------------------
Executive Glenn D. Drasher Executive Vice President of Marketing
Officers David Goronkin Executive Vice President of Operations
Clark C. Grant Executive Vice President of Finance and
Administration and Treasurer
Roe H. Hatlen Chairman of the Board and Chief Executive Officer
Thomas F. Hubbard Executive Vice President of Real Estate & Development
Kerry A. Kramp President
Jean C. Rostollan Executive Vice President of Purchasing and
Assistant Secretary
C. Dennis Scott Vice Chairman of the Board and Chief Operating Officer
K. Michael Shrader Executive Vice President of Human Resources
Neal L. Wichard Senior Vice President of Real Estate
- -------------------------------------------------------------------------------------------------------
Other Brent P. DeMesquita Vice President of Organizational Planning
Officers and Management Development
Brad J. McNaught Vice President of Real Estate
H. Thomas Mitchell Vice President, General Counsel & Secretary
Marguerite C. Nesset Vice President of Accounting and Controller
Kenneth W. Smith Vice President of Field Training
Vurl E. Warmoth Vice President of Information Systems
- -------------------------------------------------------------------------------------------------------
Counsel Faegre & Benson LLP Minneapolis, Minnesota
- -------------------------------------------------------------------------------------------------------
Registrar American Stock New York, New York
Transfer Company
- -------------------------------------------------------------------------------------------------------
Auditors Deloitte & Touche LLP Minneapolis, Minnesota
- -------------------------------------------------------------------------------------------------------
Transfer Agent American Stock New York, New York
Transfer Company
- -------------------------------------------------------------------------------------------------------
</TABLE>
ANNUAL MEETING
The annual meeting of shareholders will be held Tuesday, May 12, 1998, starting
at 9:00 a.m., Central Standard Time, at the Company's Old Country Buffet
restaurant, 4808 Highway 101,
Minnetonka, Minnesota 55245.
FORM 10-K
A copy of the Company's Form 10-K Report for fiscal 1997, as filed with the
Securities and Exchange Commission, may be obtained without charge upon written
request to Clark C. Grant, Executive Vice President of Finance and
Administration, at the Executive Offices.
EXECUTIVE OFFICES
Buffets, Inc.
10260 Viking Drive
Eden Prairie, MN 55344-7229
(612) 942-9760
BUFFETS, INC. NEWS RELEASES
As a service to our shareholders and prospective investors, copies of the
Company's recent news releases can be transmitted at no charge via fax by
calling "Company News On Call" at 1-800-758-5804 ext.122825. This electronic,
menu-driven system, a service of PR Newswire, allows callers to receive specific
Buffets, Inc. news releases within minutes of request. We are also listed on the
Internet at http://www.buffet.com
Old Country Buffet(R) is a registered trademark of Buffets, Inc.
HomeTown Buffet(R) is a registered trademark licened to HomeTown Buffet, Inc.
Roadhouse Grill(SM), Country Roadhouse Buffet & Grill(SM), and PIZZAPLAY(SM)
are Service Marks of Buffets,Inc.
34
<PAGE>
SUBSIDIARIES OF BUFFETS, INC.
STATE OF
NAME OF SUBSIDIARIES INCORPORATION DOING BUSINESS AS
- -------------------- ------------- -----------------
Dinertainment, Inc. Minnesota
Evergreen Buffets, Inc. Oregon Old Country Buffet
HTB Ventures I, Inc. Delaware
HTB Ventures II, Inc. Delaware
HomeTown Buffet, Inc. Delaware HomeTown Buffet
HomeTown Construction and
Development, Inc. Delaware
OCB Restaurant Co. Minnesota Old Country Buffet
OCB Realty Co. Minnesota
OCB Purchasing Co. Minnesota
OCB Property Co. Minnesota
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-8388, No. 33-30981, No. 33-41958, No. 33-47893, No. 333-1191, and No.
333-15857 of Buffets, Inc. on Form S-8 and in Registration Statement No. 333-663
of Buffets, Inc. on form S-3 of our report dated February 11, 1998, incorporated
by reference in the Annual Report on Form 10-K of Buffets, Inc. for the fiscal
year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 25, 1998
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
HomeTown Buffet, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 33-8388, 33-30981, 33-41958, 33-47893, 333-01191 and 333-15857) on Form
S-8 and (No. 333-00663) on Form S-3 of Buffets, Inc. of our report dated
February 16, 1996, except as to Note 6 to the consolidated financial statements,
which is as of March 8, 1996, relating to the consolidated statements of income,
stockholders' equity (deficit), and cash flows for the year ended January 3,
1996, which appears in the Annual Report of Form 10-K of Buffets, Inc. for the
year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
San Diego, California
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEED AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,030
<SECURITIES> 0
<RECEIVABLES> 1,430
<ALLOWANCES> 0
<INVENTORY> 4,934
<CURRENT-ASSETS> 65,111
<PP&E> 497,341
<DEPRECIATION> 166,694
<TOTAL-ASSETS> 403,576
<CURRENT-LIABILITIES> 85,528
<BONDS> 44,454
0
0
<COMMON> 454
<OTHER-SE> 266,233
<TOTAL-LIABILITY-AND-EQUITY> 403,476
<SALES> 808,529
<TOTAL-REVENUES> 808,529
<CGS> 712,004
<TOTAL-COSTS> 712,004
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,541
<INCOME-PRETAX> 46,508
<INCOME-TAX> 17,910
<INCOME-CONTINUING> 28,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,598
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 4-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-03-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-START> DEC-29-1994 JAN-04-1996 JAN-04-1996 JAN-04-1996 JAN-04-1996
<PERIOD-END> JAN-03-1996 JAN-01-1997 APR-24-1996 JUL-17-1996 OCT-09-1996
<CASH> 14,530 10,772 15,706 23,756 27,217
<SECURITIES> 27,828 0 20,834 14,958 0
<RECEIVABLES> 3,212 2,642 4,341 4,507 2,154
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 4,138 3,653 4,001 4,086 3,990
<CURRENT-ASSETS> 62,939 34,463 53,827 57,037 46,722
<PP&E> 428,321 459,532 446,554 461,898 440,907
<DEPRECIATION> 99,748 131,811 110,970 119,126 130,980
<TOTAL-ASSETS> 399,752 370,683 398,501 408,765 364,967
<CURRENT-LIABILITIES> 80,328 83,643 73,694 78,444 77,530
<BONDS> 62,643 46,578 58,092 52,545 47,004
0 0 0 0 0
0 0 0 0 0
<COMMON> 448 452 449 450 451
<OTHER-SE> 241,986 236,339 249,283 266,787 233,328
<TOTAL-LIABILITY-AND-EQUITY> 399,752 370,683 398,501 408,765 364,967
<SALES> 661,445 750,707 217,452 399,991 580,837
<TOTAL-REVENUES> 661,445 750,707 217,452 399,991 580,837
<CGS> 567,290 659,784 192,271 346,786 505,079
<TOTAL-COSTS> 567,290 659,784 192,271 346,786 505,079
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1,391 3,617 1,231 2,131 3,043
<INCOME-PRETAX> 53,083 (6,763) 11,881 28,502 (11,242)
<INCOME-TAX> 20,176 440 4,584 10,998 (1,300)
<INCOME-CONTINUING> 32,907 (7,203) 7,297 17,504 (9,942)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 32,907 (7,203) 7,297 17,504 (9,942)
<EPS-PRIMARY> .74 (.16) .16 .39 (.22)
<EPS-DILUTED> .73 (.16) .16 .38 (.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 4-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-02-1997 JAN-02-1997 JAN-02-1997
<PERIOD-END> APR-23-1997 JUL-16-1997 OCT-08-1997
<CASH> 16,053 29,399 39,044
<SECURITIES> 0 0 0
<RECEIVABLES> 3,822 3,368 2,247
<ALLOWANCES> 0 0 0
<INVENTORY> 3,878 4,032 3,961
<CURRENT-ASSETS> 38,211 52,834 59,719
<PP&E> 475,768 483,520 489,345
<DEPRECIATION> 143,106 150,704 158,863
<TOTAL-ASSETS> 379,174 393,784 398,174
<CURRENT-LIABILITIES> 84,908 91,848 88,414
<BONDS> 46,027 45,528 45,035
0 0 0
0 0 0
<COMMON> 452 452 453
<OTHER-SE> 243,018 251,547 260,490
<TOTAL-LIABILITY-AND-EQUITY> 379,174 393,784 398,174
<SALES> 240,741 431,277 625,422
<TOTAL-REVENUES> 240,741 431,277 625,422
<CGS> 216,531 382,163 550,801
<TOTAL-COSTS> 216,531 382,163 550,801
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,231 1,999 2,820
<INCOME-PRETAX> 10,455 24,371 31,787
<INCOME-TAX> 4,080 9,504 14,740
<INCOME-CONTINUING> 6,375 14,867 23,047
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,375 14,867 23,047
<EPS-PRIMARY> .14 .33 .51
<EPS-DILUTED> .14 .32 .50
</TABLE>
