SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For Quarter Ended: Commission File Number
October 7, 1998 0-14370
BUFFETS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
(State of incorporation) (I.R.S. Employer Identification No.)
10260 Viking Drive, Eden Prairie, MN 55344
(Address of principal executive offices)
(612) 942-9760
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 9,1998
Common Stock, $.01 par value 44,997,364 shares
1
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BUFFETS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-
December 31, 1997 and October 7, 1998 ................... 3
Consolidated Statements of Operations-
Forty Weeks ended October 8, 1997 and
October 7, 1998 and Twelve Weeks ended
October 8, 1997 and October 7, 1998 ......................4
Consolidated Statements of Cash Flows-
Forty Weeks ended October 8, 1997
and October 7, 1998 ..................................... 5
Notes to Consolidated Financial
Statements .............................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................. 7
PART II. OTHER INFORMATION ....................................... 14
2
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Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
DECEMBER 31, OCTOBER 7,
1997 1998
------------ ----------
(in thousands, except par value amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ................................ $ 43,030 $86,468
Receivable from landlords ................................ 1,430 1,310
Inventory................................................. 4,934 3,959
Prepaid rents............................................. 2,207
Other current assets...................................... 1,986 1,834
Refundable income taxes................................... 1,313 5,774
Deferred income taxes..................................... 12,418 14,037
-------- -------
TOTAL CURRENT ASSETS................................... 65,111 115,589
PROPERTY AND EQUIPMENT:
Land...................................................... 15,688 15,690
Buildings................................................. 31,773 32,735
Equipment................................................. 246,006 260,511
Leasehold improvements.................................... 203,874 218,585
-------- --------
497,341 527,521
Less accumulated depreciation and amortization............ 166,694 195,984
-------- --------
330,647 331,537
GOODWILL, net of accumulated amortization of $1,965 and
$2,099, respectively...................................... 5,624 8,824
OTHER ASSETS.................................................. 2,194 1,882
-------- --------
$403,576 $457,832
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 29,910 $ 29,351
Accrued payroll and related benefits..................... 15,520 18,502
Accrued rents............................................ 15,640 17,174
Accrued sales taxes...................................... 3,393 4,769
Accrued insurance........................................ 5,561 6,861
Accrued store closing costs.............................. 7,955 6,482
Other accrued expenses................................... 5,310 8,105
Current portion of capital leases........................ 2,239 2,001
-------- --------
TOTAL CURRENT LIABILITIES............................. 85,528 93,245
LONG-TERM DEBT............................................... 41,500 41,500
LONG-TERM PORTION OF CAPITAL LEASES.......................... 2,954 1,336
DEFERRED INCOME.............................................. 212
DEFERRED INCOME TAXES........................................ 6,695 29,880
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 45,371 and
44,988 shares, respectively............................. 454 450
Additional paid-in capital............................... 117,626 119,395
Retained earnings........................................ 148,607 172,026
-------- --------
TOTAL STOCKHOLDERS' EQUITY ........................... 266,687 291,871
-------- --------
$403,576 $457,832
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
FORTY WEEKS ENDED TWELVE WEEKS ENDED
---------------------- ---------------------
OCTOBER 8, OCTOBER 7, OCTOBER 8, OCTOBER 7,
1997 1998 1997 1998
---------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
RESTAURANT SALES ..................... $625,422 $668,536 $194,145 $207,128
RESTAURANT COSTS:
Food costs ........................ 212,609 215,511 65,078 65,482
Labor costs ....................... 186,325 201,353 56,412 62,664
Direct and occupancy costs ........ 151,867 154,741 47,148 47,903
-------- -------- -------- --------
Total restaurant costs .......... 550,801 571,605 168,638 176,049
-------- -------- -------- --------
RESTAURANT PROFITS ................... 74,621 96,931 25,507 31,079
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........... 36,301 46,472 12,190 15,017
OTHER SITE CLOSING COSTS.............. 200
-------- -------- -------- --------
38,320 50,259 13,317 16,062
OTHER (EXPENSE) INCOME, NET........... (533) 1,395 99 698
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES.......... 37,787 51,654 13,416 16,760
INCOME TAXES.......................... 14,740 19,760 5,236 6,325
-------- -------- -------- --------
NET EARNINGS.......................... $ 23,047 $ 31,894 $ 8,180 $ 10,435
======== ======== ======== ========
EARNINGS PER SHARE:
Basic.............................. $.51 $.70 $.18 $.23
======== ======== ======== ========
Diluted............................ $.50 $.67 $.18 $.22
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic.............................. 45,225 45,448 45,276 45,393
Diluted............................ 49,133 49,977 49,380 49,987
</TABLE>
See Notes to Consolidated Financial Statements.
4
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FORTY WEEKS ENDED
---------------------
OCTOBER 8, OCTOBER 7,
1997 1998
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................... $23,047 $31,894
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization ...................... 31,575 32,198
Impairment of assets and site closing costs......... 200
Tax benefit from early disposition of common stock.. 263 841
Deferred income..................................... (103) (212)
Deferred income taxes .............................. 1,162 21,566
Changes in assets and liabilities:
Inventory ....................................... (308) 1,048
Other current assets ............................ 1,993 (2,055)
Refundable income taxes.......................... (4,461)
Other assets..................................... (45) 432
Accounts payable ................................ (2,621) (792)
Accrued payroll and related benefits ............ 867 2,982
Accrued store closing costs...................... (1,242) (1,473)
Other accrued expenses .......................... 5,308 6,988
Income taxes payable ............................ 2,575
------- -------
Total adjustments ............................ 39,424 57,262
------- -------
Net cash provided by operating activities..... 62,471 89,156
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (37,217) (32,530)
Purchase of eleven restaurants......................... (5,557)
Cash received from landlords........................... 3,835 1,776
------- -------
Net cash used in investing activities ........ (33,382) (36,311)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock............................... (10,440)
Proceeds from exercise of employee stock options....... 842 2,889
Payments on capital leases............................. (1,659) (1,856)
------- -------
Net cash used in financing activities......... (817) (9,407)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 28,272 43,438
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........... 10,772 43,030
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $39,044 $86,468
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of capitalized interest of $215 and
$222 in 1997 and 1998, respectively).................. $ 2,214 $ 1,838
Income taxes .......................................... 10,785 1,803
See Notes to Consolidated Financial Statements.
5
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial position of Buffets, Inc. and subsidiaries as of October 7,
1998 and the results of operations for the twelve weeks ended October
8, 1997 and October 7, 1998 and the results of operations and cash
flows for the forty weeks ended October 8, 1997 and October 7, 1998.
2. These statements should be read in conjunction with the Notes to
Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and
with Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 7 through 14 of this
quarterly report.
3. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." For
the periods presented, comprehensive income is the same as net
earnings.
4. On May 11, 1998, the Company reached an agreement in principle to
purchase 11 Country Harvest Buffet restaurants from Country Harvest
Buffet Restaurants, Inc. of Seattle, Washington. The transaction
closed on June 29, 1998, and became effective on June 30, 1998.
5. Basic earnings per share are computed by dividing net earnings 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. The following is a reconciliation
of the numerators and denominators used to calculate diluted earnings
per share:
<TABLE>
Forty Forty Twelve Twelve
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 8, October 7, October 8, October 7,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings ........................ $23,047 $31,894 $ 8,180 $10,435
Interest on convertible
subordinated notes (after tax)...... 1,375 1,380 412 414
------- ------- ------- -------
Income available to common
shareholders and assumed
conversion ......................... $24,422 $33,274 $ 8,592 $10,849
======= ======= ======= =======
Weighted average common
shares outstanding.................. 45,225 45,448 45,276 45,393
Dilutive effect of:
Convertible subordinated notes...... 3,556 3,556 3,556 3,556
Stock options....................... 352 973 548 1,038
------- ------- ------- -------
Common shares assuming dilution...... 49,133 49,977 49,380 49,987
======= ======= ======= =======
</TABLE>
6. During the forty weeks ended October 7, 1998, the Company purchased
and retired 756,000 shares of Common Stock for $10.4 million.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company operates on a fifty-two or fifty-three week fiscal year, which
ends on the Wednesday nearest December 31. The Company's first quarter consists
of sixteen weeks; all other quarters are comprised of twelve weeks. When a
fifty-three week year occurs, the Company's fourth quarter consists of thirteen
weeks.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED OCTOBER 7, 1998
RESTAURANT SALES. Restaurant sales of $207.1 million during the third quarter of
1998 represented a 6.7% increase over sales of $194.1 million for the comparable
period of 1997. The increase in sales is primarily due to sales generated by new
restaurants and an increase in comparable restaurant sales of .9%. Three new
restaurants opened in the third quarter of 1998 compared to two during the third
quarter of 1997, bringing the total number of Company-owned restaurants to 379
at the end of the quarter, (249 Old Country Buffet(R), 118 HomeTown Buffet(R),
five Country Harvest Buffet(TM), four Original Roadhouse Grill(SM), two Country
Roadhouse Buffet & Grill(SM), and one PIZZAPLAY(SM)), compared to 359
restaurants open at the end of the third quarter of 1997. Average weekly sales
per restaurant for the third quarter of 1998 increased .3% to $46,087 from
$45,972 in the comparable period of 1997. The ten new restaurants opened during
1998 generated average weekly sales of $50,406 during the third quarter. The
Company's price increases have been approximately comparable to inflation.
RESTAURANT COSTS. As a percentage of restaurant sales, total restaurant costs
decreased to 85.0% for the third quarter of 1998 from 86.9% for the third
quarter of 1997. Food costs as a percentage of restaurant sales decreased to
31.6% from 33.5% for the comparable prior-year quarter, due primarily to a
reduction in the cost of various meat products; and labor costs increased to
30.3% of sales from 29.1%, primarily due to an increase in compensation of store
level managers and hourly employees. Direct and occupancy costs decreased as a
percentage of restaurant sales to 23.1% in 1998 from 24.3% in 1997, due to
increases in various restaurant costs offset by a claims credit to insurance
expense due to lower than expected losses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of restaurant sales increased to 7.2% in
the third quarter of 1998 from 6.3% in the third quarter of 1997. Such expenses
in absolute terms increased 23.2% to $15.0 million for the third quarter of 1998
from $12.2 million for the comparable period of 1997. The increase is primarily
due to an increase in advertising costs. The Company is anticipating doubling
its marketing spending in 1998 versus the prior year, to approximately $18.0
which would be approximately $4.6 million in the fourth quarter of 1998.
INCOME TAX EXPENSE. The Company's effective income tax rate was 37.7% for the
third quarter of 1998 compared to 39.0% in the comparable quarter of 1997.
7
<PAGE>
FORTY WEEKS ENDED OCTOBER 7, 1998
RESTAURANT SALES. For the first forty weeks of 1998, restaurant sales increased
6.9% to $668.5 million from $625.4 million in the comparable period in 1997. The
increase in sales is primarily due to sales generated by new restaurants and an
increase in comparable sales of 2.5%. The Company opened ten restaurants and
purchased 11 Country Harvest Buffet restaurants in the first forty weeks of 1998
as compared to 15 restaurants opening in the first forty weeks of 1997. The
average weekly sales per restaurant in the 1998 period increased by 1.9% to
$45,549 from $44,693 in 1997.
RESTAURANT COSTS. Restaurant costs for the first forty weeks in 1998 increased
to $571.6 million from $550.8 million in the comparable period in 1997. As a
percentage of restaurant sales, the 1998 period costs were 85.5% and the 1997
period costs were 88.1%. Food costs decreased to 32.2% from 34.0% for the
comparable periods; and labor costs increased to 30.1% from 29.8%. Direct and
occupancy costs decreased to 23.2% in the first forty weeks of 1997 from 24.3%
in the comparable period in 1997, due to increases in various restaurant costs
including janitorial, repair and maintenance, and insurance expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first forty weeks of 1998,
selling, general and administrative expenses increased to $46.5 million from
$36.3 million in 1997. This increase was primarily due to an increase in
advertising expense in 1998. As a percentage of sales, selling, general and
administrative expenses increased to 7.0% in the 1998 period from 5.8% in the
1997 period. Advertising for the first forty weeks of 1998 was 2.0% of
restaurant sales compared to 1.0% in the comparable 1997 period.
INCOME TAXES. Income taxes were 38.3% of earnings before income taxes for the
1998 period compared to 39.0% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurants generate cash immediately through sales. New
restaurants are generally profitable shortly after opening. The Company does not
have significant assets in the form of trade receivables or inventory, and often
receives several weeks of trade credit from food and supply purveyors;
therefore, the Company's operations generate substantial cash which is available
to fund new restaurants. The investment of cash flow from operations in
restaurant property and equipment may result in a "working capital deficit"
(current liabilities exceeding current assets) which, to a considerable extent,
represents interest-free financing from trade creditors that the Company intends
to continue to utilize.
The Company currently has an unsecured revolving line of credit of up to
$50 million with interest payable at the option of the Company, at the
applicable "eurodollar rate", "certificate of deposit rate", or the "reference
rate" of the bank at the time of the advance. On October 1, 1998, the Company
amended the agreement to reduce the commitment fee to .1875% per annum on the
unused base commitment amount, currently $20 million, and .05% per annum on the
unused reserve commitment amount, currently $30 million. On July 1, 1999,
providing no default or event of default has occurred and is continuing, the
line of credit is convertible, at the Company's option, to a three-year term
loan, maturing on July 1, 2002. As of October 7, 1998, the Company had no
borrowings outstanding under this credit line.
8
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In 1995, HomeTown Buffet, Inc., a wholly-owned subsidiary of the Company
("HomeTown"), issued $41.5 million in aggregate principal amount of 7.0%
subordinated convertible notes due on December 1, 2002. Interest is payable
semi-annually on June 1 and December 1, commencing June 1, 1996. The notes are
convertible into shares of the Company's common stock at a conversion price of
$11.67, subject to adjustment under certain conditions, at any time until
maturity. The notes are subordinated in right of payment to all existing and
future senior indebtedness of the Company. The notes are redeemable in whole or
in part, at the option of the Company, at any time on or after December 2, 1998.
On June 30, 1998 the Company completed the acquisition of eleven
restaurants from Country Harvest Buffet Restaurants, Inc. The Company has
converted nine of the Country Harvest Buffet restaurants to the Company's buffet
style restaurants and is currently in the process of converting one more
location. The last restaurant will be converted to an Original Roadhouse Grill
in early 1999.
The Company currently expects to open an additional eight new restaurants
in 1998, six Old Country Buffet and two Original Roadhouse Grill, with ten new
restaurants already opened (excluding the Country Harvest Buffet acquisitions)
and two conversions completed as of October 30, 1998.
On May 12, 1998, the Company's Board of Directors authorized the
expenditure of up to $40 million for the purchase of outstanding shares of the
Company's common stock, to be effected from time to time in transactions on the
Nasdaq National Market or otherwise. As of October 30, 1998, the Company had
repurchased 756,000 shares at an average of $13.81 per share or $10.4 million.
The Company continues to require substantial amounts of capital to fund its
growth. The Company expects to spend an aggregate of approximately $40 to $45
million during 1998 on its restaurants being opened in 1998 depending on the
level of contributions obtained from landlords for leasehold improvements and
the amount of land purchased for freestanding buildings, and the start of
construction at a new corporate office located in Eagan, Minnesota. It will also
incur costs in remodeling and converting the 11 acquired Country Harvest Buffet
restaurants. The Company anticipates that, as it further pursues the development
of freestanding locations, the cost per location and related cash requirements
will increase substantially over prior years and that these costs will not be
offset by landlord contributions that typically have been associated with strip
mall locations. The capital expenditure required for a freestanding location can
be over 100% greater than for a mall location. The Company estimates that
approximately 40% of 1998 new locations will be freestanding units, and of the
freestanding restaurants virtually all will be ground leased rather than owned.
Sources of capital for restaurant development projects are anticipated to be
funds provided by operations, credit received from trade suppliers, landlord
contributions to leasehold improvements and current bank financing. The Company
believes that these sources will be adequate to finance operations, purchase
shares of the Company's common stock, the additional restaurants and restaurant
conversions included in the Company's restaurant development plans for at least
through fiscal 1999, and finance the new corporate office
9
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construction subject to the factors described below in the section captioned
"Forward-looking Information." In order to remain prepared for further
significant growth in future years, the Company will continue to evaluate its
financing needs and seek additional funding if appropriate.
NON-PERFORMING RESTAURANTS
The Company continuously reviews its options regarding locations that
perform below Company expectations. Depending on the unique characteristics of a
particular location, and after taking into account the cost and appropriateness
of the various corrective actions, the options may include expanding
advertising, converting the restaurants to a different brand or concept, or
making other operational changes. In the event that the corrective actions do
not prove successful in improving store performance, the Company evaluates the
impairment of the affected restaurants; particularly when events or changes in
circumstances indicate the carrying amount of a restaurant may not be
recoverable. As of October 30, 1998, a number of the Company's restaurants were
being subjected to review related to impairment. If individual restaurant sales
at these units during the fourth quarter do not meet management's expectations,
it is reasonably possible although not currently quantifiable that the Company
will incur impairment charges.
YEAR 2000 UPDATE
The information contained in the following two Sections comprising the
"Year 2000 Update", is by necessity forward-looking in nature and is subject to
the cautions set forth below in the Section captioned "Forward Looking
Statements".
YEAR 2000 STATEMENT
The "Year 2000 Issue" is a term used to describe the inability of some
computer hardware and software to operate properly as the date January 1, 2000
approaches, and beyond. Year 2000 Issues can arise in unexpected areas.
Traditional computer equipment is not the only technology at risk. For example,
things such as employee time clocks, cash registers, and food ordering systems,
as well as many other technologies, could be impacted. For purposes of this Year
2000 Update, the term "System(s)" shall be interpreted as broadly as possible to
include every computer, hardware, software, process, system, application or
technology that has the potential of being adversely affected by the Year 2000
Issue.
The Year 2000 Issue is centered on whether Systems will properly recognize
date-sensitive information. Many Systems are coded to accept only two digit date
data. As the year 2000 nears, date information will need to accept four digit
entries to distinguish years beginning with "19" from those beginning with "20".
This inability to recognize or properly treat dates may cause Systems to
incorrectly process financial, operational, and other information.
10
<PAGE>
Because of the peculiarities of individual Systems, the Year 2000 Issue may
have an effect before and after January 1, 2000. It is not a problem unique to
the "snapshot" of time on New Year's Day 2000. To the contrary, merely because a
System works properly on January 1, 2000 does not mean that it is immune from
date related failures on other dates.
YEAR 2000 READINESS DISCLOSURE
The Company has taken, and will continue to take, actions intended to
minimize the impact of the Year 2000 Issue, although it is impossible to
eliminate these risks entirely. Unfortunately, there is no single test that can
be used to conclusively determine whether Systems are immune to the Year 2000
Issue. To the contrary, new Year 2000 risks are identified by the technology
community regularly. Also impeding Year 2000 testing is the high degree of
integration between various Systems and the difficulty in conducting full-scale
live testing. Consequently, interrelated Systems believed secure in a test
environment could conceivably fail when operating together under realistic
workloads.
The Company's major information Systems at its corporate office have been
largely upgraded or replaced in the ordinary course of business over the past
four years. The Year 2000 Issue was one of the many factors considered in the
selection and implementation of these Systems enhancements. The Company will
continue to invest in technology to accommodate the Company's future growth,
with such improvements intended to comply with Year 2000 Issues as a byproduct
of the upgrades. The existing corporate finance and accounting Systems utilize
date information independent of the computer's internal date system, and is
initially believed to be Year 2000 compliant.
In March of 1997, the Company engaged a consultant to review the status of
its various Systems. The review included an evaluation of possible risks
associated with the Year 2000 Issue. However, no direct System testing was
undertaken by the consultant. The Company is currently implementing a testing
program of its various Systems which it expects to substantially complete by the
second quarter of 1999. Testing will include, but not be limited to, corporate
information systems, restaurant point-of-sale systems, time clocks, credit card
equipment, environmental controls, security systems, and telephone systems.
Until the Company conducts System testing, it will be unable to quantify
the total expected cost associated with achieving Year 2000 Issue readiness.
Approximately $880,000 has been spent through October 7, 1998 specifically
related to the Year 2000 Issue readiness, principally with respect to personal
computer and timeclock upgrades at the Company's restaurants and corporate
headquarters. This replacement and upgrade program is being conducted in the
ordinary course of business but has the secondary benefit of bringing the
Company's personal computers and timeclocks into Year 2000 Issue readiness.
Approximately $1,455,000 will be spent over the following three quarters for the
remaining personal computers and timeclocks. This amount is included in the
operating budget for Fiscal Year 1999.
11
<PAGE>
The Company is dependent on computer processing in its business activities
and the Year 2000 Issue creates risk for the Company from unforseen problems in
the Company's Systems and from third parties with whom the Company does
business. The failure of the Company's Systems and/or third party Systems could
have a material adverse effect on the Company's results of operations,
liquidity, and financial condition. Due to the general uncertainty inherent in
the Year 2000 Issue problem, resulting in part from the uncertainty of the Year
2000 Issue readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 Issue
failures will have a material impact on the Company results of operations,
liquidity, or financial condition. The Company believes that some or all of its
restaurants may be temporarily closed if third-party suppliers of food produce
or energy are not Year 2000 Issue compliant.
The Company is revising its existing business interruption contingency
plans to address internal and external issues specific to the Year 2000 Issue
problem to the extent practicable. The Company believes, however, that due to
the widespread nature of potential Year 2000 Issues, the contingency planning
process is an ongoing one which will require modifications as the Company
obtains additional information regarding the Company's internal Systems and the
status of the third party Year 2000 Issue readiness.
ACCOUNTING PRONOUNCEMENT
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 is 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 adoption of SFAS No. 131
will result in the Company continuing to operate in one segment, the casual
dining restaurant segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. This Statement is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company has not yet determined the effects SFAS No. 133 will
have on its financial position or the results of its operations.
FORWARD-LOOKING INFORMATION
Certain statements in this quarterly report and in the Company's press
releases and oral statements made by or with the approval of the Company's
executive officers constitute or will constitute "forward-looking
12
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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 depends on a number of
factors, including its ability to find suitable locations and negotiate
acceptable leases and land purchases, its ability to attract and retain a
sufficient number of qualified restaurant managers and the availability of
capital. The proportion of new restaurants that will be free-standing units,
either owned or leased, rather than strip mall locations will depend upon the
availability of suitable mall locations. The costs of restaurant development and
conversion will depend upon the level of contributions from landlords for
leasehold improvements, the actual number of free-standing sites utilized in
such development, and whether such sites involve land purchases, the cost of
building supplies and general construction risks and costs.
The likelihood and extent of restaurant remodeling and concept changes will
depend on the cost of such projects, the expected return, and management's
perception of the need to make improvements or changes due to competitive,
operational and other considerations. With respect to changes in restaurant
concept, the Company continues to refine its Country Roadhouse Buffet and Grill
prototypes and is currently uncertain whether this, or other, trial concepts
will serve as a long term conversion or development vehicle.
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, purchase shares of the Company's
common stock, and finance the new corporate office construction for 1998 and
1999.
Other factors that could cause actual results of the Company to differ
materially from those contained in any such forward-looking statements include
the success and timing of the continuing integration of the operations of the
Company and HomeTown, the number, cost and success of restaurant conversions,
changes in the cost and supply of food and labor, the impact of menu changes,
the timing of television advertising planned for the remainder of 1998 and the
cost and effectiveness of such advertising as well as the Company's other
marketing programs, general economic conditions, the actions of existing and
future competitors, weather factors, adverse publicity associated with
unexpected food-borne illnesses, public health scores, or otherwise associated
with the Company's restaurants (or third party restaurants where inferences are
improperly drawn to the Company's units), other 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>
PART II. OTHER INFORMATION
Item 1. 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
Complaint.
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
14
<PAGE>
development activities. The Third Complaint alleges
that the defendants' conduct violated the Securities
Exchange Act of 1934 and seeks compensatory damages
in an unspecified amount, prejudgment interest, and
an award of attorneys' fees, costs and expenses.
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 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
3(a) Composite Amended and Restated Articles of
Incorporation (1)
3(b) By-laws of the Company (2)
4(a) Form of Rights Agreement, dated as of
October 24, 1995 between the Company and
the American Stock Transfer and Trust
Company, as Rights Agent (3)
10(b) Fourth Amendment dated October 1, 1998 to
Second Amended and Restated Credit
Agreement by and between the Company and
USBank National Association
27 Financial Data Schedule
b) Reports on 8-K
None
15
<PAGE>
(1) Incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-3 dated June 2, 1993 (Registration No.
33-63694).
(2) Incorporated by reference to Exhibit 3(b) to Annual Report on
Form 10-K for the fiscal year ended December 29, 1993.
(3) Incorporated by reference to Exhibit 1 to Report on Form 8-K dated
October 24, 1995.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUFFETS, INC.
(Registrant)
November 13, 1998
/s/ Roe H. Hatlen
-----------------------------
Roe H. Hatlen
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
/s/ Clark C. Grant
-----------------------------
Clark C. Grant
Senior Vice President of
Finance and Treasurer
(Principal Financial
Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibits Page
--------- ----
10(b) Fourth Amendment dated October 1,
1998 to Second Amended and Restated
Credit Agreement by and between the
Company and USBank National
Association.....................................Filed Electronically
27 Financial Data Schedule ........................Filed Electronically
FOURTH AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") is made and entered into as of October 1, 1998 by and between
BUFFETS, INC., a Minnesota corporation (the "Borrower"), the Banks as defined in
the Credit Agreement (as hereinafter defined) and U.S. BANK NATIONAL
ASSOCIATION, a national banking association f/k/a First Bank National
Association, one of the Banks, as agent for the Banks (in such capacity, the
"Agent").
RECITALS
1. The Borrower, the Banks and the Agent are parties to that certain Second
Amended and Restated Credit Agreement, dated as of April 30, 1996, as amended by
that certain First Amendment thereto dated as of September 20, 1996, that
certain Second Amendment thereto dated as of May 28, 1997 and that certain Third
Amendment thereto dated as of September 12, 1997 (as so amended and as the same
may be amended, supplemented, restated, or otherwise modified, the "Credit
Agreement").
2. The Borrower has requested that the Banks amend certain provisions
contained in the Credit Agreement, and the Banks have agreed to do so, subject
to the terms and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
Section 2. Capitalized Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.
Section 3. Amendments. The Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by deleting the
definition of "Unused Commitment" and by adding the following definitions in the
appropriate alphabetical order:
(i) "Aggregate Available Amount": As of any date, the sum of
the Available Amounts of all the Banks.
-1-
<PAGE>
(ii) "Aggregate Base Commitment Amount": As of any date, the
sum of the Base Commitment Amounts of all the Banks.
(iii) "Aggregate Activated Amount": As of any date, the sum
of the Activated Amounts of all of the Banks.
(iv) "Aggregate Reserve Commitment Amount": As of any date,
the sum of the Reserve Commitment Amounts of all of the
Banks.
(v) "Available Amount": With respect to a Bank, the sum of
such Bank's Base Commitment Amount and such Bank's Activated
Amount.
(vi) "Base Commitment Amount" With respect to a Bank, the
amount set forth opposite such Bank's name as its "Base
Commitment Amount" in Schedule 1.1(a), as the same may be
reduced from time to time pursuant to Section 2.14.
(vii) "Activated Amount": With respect to a Bank, such
Bank's Pro Rata Share of the Aggregate Reserve Commitment
Amount activated by the Borrower pursuant to Section 2.28.
(viii)"Reserve Commitment Amount": With respect to a Bank,
the amount set forth opposite such Bank's name as its
"Reserve Commitment Amount" in Schedule 1.1(a), as the same
may be reduced from time to time pursuant to Section 2.14.
(viv) "Unused Base Commitment Amount": At any time of
determination, if positive, the Aggregate Base Commitment
Amount less the Total Outstandings.
(x) "Unused Available Amount": At any time of determination,
the Aggregate Available Amount less the greater of the
Aggregate Base Commitment Amount or the Total Outstandings.
(xi) "Unused Reserve Commitment Amount": At any time of
determination, the Aggregate Reserve Commitment Amount not
activated by the Borrower pursuant to Section 2.28.
(b) Section 1.1 of the Credit Agreement is further amended by amending
the definition of "Commitment Amount" in its entirety to read as follows:
-2-
<PAGE>
"Commitment Amount": With respect to a Bank, initially the amount
set opposite such Bank's name as its "Total Commitment Amount" in
Schedule 1.1(a), as the same may be reduced from time to time pursuant
to Section 2.14.
(c) Section 2.1(a) of the Credit Agreement is hereby amended by
deleting the words "Aggregate Commitment Amounts" in the second sentence
thereof and inserting the words "Aggregate Available Amount" therefor.
(d) Section 2.8(a) of the Credit Agreement is hereby amended by
deleting the words "Aggregate Commitment Amounts" therein and inserting the
words "Aggregate Available Amount" therefor.
(e) Section 2.14 of the Credit Agreement is hereby amended in its
entirety to read as follows:
Section 2.14 Optional Reduction Of Commitment Amounts or
Termination of Commitments. The Borrower may, at any time during
the Revolving Period, upon not less than three Business Days
prior written notice to the Agent, reduce the Commitment Amounts,
ratably, with any such reduction in a minimum aggregate amount
for all the Banks of $1,000,000, or, if more, in an integral
multiple of $1,000,000; provided, however, that the Borrower may
not at any time reduce the Aggregate Commitment Amounts below the
Total Outstandings. Each such reduction in the Aggregate
Commitment Amounts shall be applied first, to the Aggregate
Reserve Commitment Amount, and second, to the Aggregate Base
Commitment Amount. The Borrower may, at any time when there are
no Letters of Credit outstanding, upon not less than three
Business Days prior written notice to the Agent, terminate the
Commitments in their entirety. Upon termination of the
Commitments pursuant to this Section, the Borrower shall pay to
the Agent for the account of the Banks the full amount of all
outstanding Loans, all accrued and unpaid interest thereon, all
unpaid Commitment Fees accrued to the date of such termination,
any indemnities payable with respect to Advances pursuant to
Section 2.25 and all other unpaid obligations of the Borrower to
the Agent and the Banks hereunder.
(f) Section 2.16 of the Credit Agreement is hereby amended in its
entirety to read as follows:
-3-
<PAGE>
Section 2.16 Commitment Fee. The Borrower shall pay to the Agent,
for the account of the Banks, for the period from October 1, 1998
until the Termination Date, fees (the "Commitment Fees") in an amount
determined by applying a rate of (a) .1875% per annum to the sum of
the average daily Unused Base Commitment Amount and the daily average
Aggregate Activated Amount, and (b) .05% per annum to the average
daily Unused Reserve Commitment Amount. Such Commitment Fees are
payable in arrears on each Quarterly Payment Date and on the
Termination Date.
(g) A new Section 2.28 is hereby added to the Credit Agreement to read
as follows:
Section 2.28 Activation of Reserve Commitments. Not less than
five days prior to the beginning of any month, the Company may by
written notice to the Agent activate the Aggregate Reserve Commitment
Amount. Until such time that the Company makes the activation, the
Activated Amount of each Bank shall be zero. The Agent shall notify
each Bank in writing, within one Business Day after its receipt of a
notice of activation. Once the Aggregate Reserve Commitment Amount has
been activated pursuant to this Section, it shall remain activated
until the Termination Date.
On the effective date of the activation of the Aggregate Reserve
Commitment Amount, the Company shall pay to the Agent, for the account
of the Banks (based on their respective Pro Rata Shares, determined
pursuant to clause (a) of the definition thereof), a fee in an amount
equal to $10,000.
(h) Schedule 1.1(a) to the Credit Agreement is hereby amended to read
as set forth on Schedule 1.1(a) hereto.
Section 4. Effectiveness of Amendments. This Amendment shall be
effective, upon delivery to the Agent, with sufficient counterparts for the
Banks, this Amendment, executed by the Borrower and the Majority Banks.
Section 5. Representations; No Default. The Borrower hereby represents
that on and as of the date hereof and after giving effect to this Amendment
(a) all of the representations and warranties contained in the Credit
Agreement are true, correct and complete in all material respects as of the
date hereof as though made on and as of such date, except to the extent
such representations and warranties specifically relate to an earlier date,
in which case they are true and correct as of
-4-
<PAGE>
such earlier date, and (b) there will exist no Default or Event of Default
on such date which has not been waived by the Banks. The Borrower
represents and warrants that the Borrower has the power and legal right and
authority to enter into the Amendment and has duly authorized as
appropriate the execution and delivery of the Amendment, and the Amendment
does not contravene or constitute a default under any agreement, instrument
or indenture to which the Borrower or any of its Subsidiaries is a party or
a signatory or a provision of the Borrower's or any such Subsidiary's
certificate of incorporation, bylaws or, to the best of the Borrower's
knowledge, any other agreement or requirement of law. The Borrower
represents and warrants that no consent, approval or authorization of or
registration or declaration with any Person, including but not limited to
any governmental authority, is required in connection with the execution
and delivery by the Borrower of the Amendment or the performance of
obligations of the Borrower herein described. The Borrower represents and
warrants that the Amendment is the legal, valid and binding obligation of
the Borrower enforceable in accordance with its terms. The Borrower
warrants that no events have taken place and no circumstance exists at the
date hereof which would give the Borrower or any of its Subsidiaries a
basis to assert a defense, offset or counterclaim to any claim of the Agent
or any Bank as to any obligations of the Borrower or any of its
Subsidiaries to the Agent or any Bank.
Section 6. Affirmation, Further References. The Banks, the Agent and
the Borrower each acknowledge and affirm that the Credit Agreement, as
hereby amended, is hereby ratified and confirmed in all respects and all
terms, conditions and provisions of the Credit Agreement, except as amended
by this Amendment, shall remain unmodified and in full force and effect.
All references in any document or instrument to the Credit Agreement are
hereby amended and shall refer to the Credit Agreement as amended by this
Amendment.
Section 7. Merger and Integration, Superseding Effect. This Amendment,
from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes and has merged into it all prior oral and written
agreements on the same subjects by and between the parties hereto with the
effect that this Amendment shall control with respect to the specific
subjects hereof.
Section 8. Legal Expenses. As provided in Section 9.2 of the Credit
Agreement, the Borrower agrees to reimburse the Agent upon demand for all
reasonable out-of-pocket expenses (including attorneys' fees and legal
expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in
connection with the
-5-
<PAGE>
negotiation or preparation of this Amendment and all other documents
negotiated and prepared in connection with this Amendment, and the Borrower
agrees to reimburse the Agent upon demand for all other reasonable
expenses, including attorneys' fees incurred as a result of or in
connection with the enforcement of the Credit Agreement as amended hereby,
and including, without limitation, all expenses of collection of any loans
made or to be made under the Credit Agreement as amended hereby.
Section 9. Severability. Each provision of this Amendment and any
other statement, instrument or transactions contemplated hereby or relating
hereto shall be interpreted in such manner as to be effective, valid and
enforceable under the applicable law of any jurisdiction, but, if any
provision of this Amendment or relating hereto or thereto shall be held to
be prohibited, invalid or unenforceable under the applicable law, such
provision shall be ineffective in such jurisdiction only to the extent of
such prohibition, invalidity or unenforceability, without invalidating or
rendering unenforceable the remainder of such provision or the remaining
provisions of this Amendment or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto in
such jurisdiction, or affecting the effectiveness, validity or
enforceability of such provision in any such jurisdiction.
Section 10. Successors. This Amendment shall be binding upon the
Borrower, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, the Banks and the
Agent and the successors and assigns of the Borrower, the Banks and the
Agent.
Section 11. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to
be a part of this Amendment.
Section 12. Counterparts. This Amendment may be executed in several
counterparts, all or any of which shall be regarded as one and the same
document and either party to such agreements may execute any such agreement
by executing a counterpart of such agreement.
Section 13. Governing Law. This Amendment shall be governed by the
internal laws of the State of Minnesota, without giving effect to conflict
of law principles thereof, but giving effect to federal laws applicable to
national banks.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.
BUFFETS, INC.
By __________________________
Its ______________________
Address for Borrower:
10260 Viking Drive
Suite 100
Eden Prairie, Minnesota 55344
Attention: Clark C. Grant
U.S. BANK NATIONAL ASSOCIATION
In its individual corporate
capacity and as Agent
By __________________________
Its ______________________
Address:
U.S. Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
Attention: Megan Mourning MPFP0601
[SIGNATURE PAGE TO FOURTH AMENDMENT]
<PAGE>
SCHEDULE 1.1(a)
TO FOURTH AMENDMENT
TO SECOND AMENDED AND
RESTATED CREDIT AGREEMENT
SCHEDULE 1.1(a)
TO CREDIT AGREEMENT
Base Reserve Total
Commitment Commitment Commitment
Bank Amount Amount Amount
- ---- ---------- ---------- ----------
U.S. Bank $20,000,000 $30,000,000 $50,000,000
National
Association
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 7, 1998 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE PERIOD ENDED OCTOBER 7, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-07-1998
<CASH> 86,468
<SECURITIES> 0
<RECEIVABLES> 1,310
<ALLOWANCES> 0
<INVENTORY> 3,959
<CURRENT-ASSETS> 115,589
<PP&E> 527,521
<DEPRECIATION> 195,984
<TOTAL-ASSETS> 457,832
<CURRENT-LIABILITIES> 93,245
<BONDS> 42,836
0
0
<COMMON> 450
<OTHER-SE> 291,421
<TOTAL-LIABILITY-AND-EQUITY> 457,832
<SALES> 668,536
<TOTAL-REVENUES> 668,536
<CGS> 571,605
<TOTAL-COSTS> 571,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,615
<INCOME-PRETAX> 51,654
<INCOME-TAX> 19,760
<INCOME-CONTINUING> 23,047
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,047
<EPS-PRIMARY> .70
<EPS-DILUTED> .67
</TABLE>
