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 6, 1999 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 8, 1999
----- ----------- -- -- ----------------
Common Stock, $.01 par value 45,058,597 shares
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BUFFETS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-
December 30, 1998 and October 6, 1999 ................... 3
Consolidated Statements of Operations-
Forty Weeks ended October 7, 1998 and October 6, 1999
and Twelve Weeks ended October 7, 1998 and
October 6, 1999 ......................................... 4
Consolidated Statements of Cash Flows-
Forty Weeks ended October 7, 1998
and October 6, 1999 ..................................... 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 ....................................... 25
2
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Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 30, OCTOBER 6,
1998 1999
------------ ----------
(in thousands, except par value amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................... $ 94,058 $ 92,359
Receivable from landlords ............................... 2,772 1,042
Inventory................................................ 4,645 4,159
Prepaid rents............................................ 1,321 2,472
Other current assets..................................... 2,789 5,844
Refundable income taxes.................................. 3,057
Deferred income taxes.................................... 13,302 14,849
-------- -------
TOTAL CURRENT ASSETS.................................. 121,944 120,725
PROPERTY AND EQUIPMENT:
Land..................................................... 15,688 19,528
Buildings................................................ 33,256 37,377
Equipment................................................ 265,230 277,147
Leasehold improvements................................... 225,764 239,330
-------- --------
539,938 573,382
Less accumulated depreciation and amortization........... 205,356 232,087
-------- --------
334,582 341,295
GOODWILL, net of accumulated amortization of $2,424 and
$2,902, respectively..................................... 8,507 9,091
OTHER ASSETS................................................. 1,816 6,401
-------- --------
$466,849 $477,512
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 32,436 $ 29,548
Accrued payroll and related benefits..................... 18,291 23,811
Accrued rents............................................ 18,076 18,967
Accrued sales taxes...................................... 3,835 5,003
Accrued insurance........................................ 6,592 6,549
Accrued store closing costs.............................. 6,197 5,526
Other accrued expenses................................... 6,168 9,216
Income taxes payable..................................... 2,487
Current portion of capital leases........................ 2,116 957
-------- --------
TOTAL CURRENT LIABILITIES............................. 93,711 102,064
LONG-TERM DEBT............................................... 41,465 41,465
LONG-TERM PORTION OF CAPITAL LEASES.......................... 824
MINORITY INTEREST............................................ 271
DEFERRED INCOME.............................................. 37
DEFERRED INCOME TAXES........................................ 31,124 30,797
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 45,021 and
42,058 shares, respectively............................. 450 421
Additional paid-in capital............................... 119,792 112,292
Retained earnings........................................ 179,483 190,165
-------- --------
TOTAL STOCKHOLDERS' EQUITY ........................... 299,725 302,878
-------- --------
$466,849 $477,512
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED TWELVE WEEKS ENDED
----------------------- -----------------------
OCTOBER 7, OCTOBER 6, OCTOBER 7, OCTOBER 6,
1998 1999 1998 1999
--------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
RESTAURANT SALES .................. $668,536 $723,595 $207,128 $222,720
RESTAURANT COSTS:
Food costs ..................... 215,511 228,503 65,482 68,970
Labor costs .................... 201,353 224,088 62,664 69,012
Direct and occupancy costs ..... 154,741 163,159 47,903 50,229
-------- -------- -------- --------
Total restaurant costs ....... 571,605 615,750 176,049 188,211
-------- -------- -------- --------
RESTAURANT PROFITS ................ 96,931 107,845 31,079 34,509
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........ 46,472 54,030 15,017 16,145
OTHER SITE CLOSING COSTS........... 200 1,966 818
-------- -------- -------- --------
50,259 51,849 16,062 17,546
OTHER INCOME....................... 1,395 2,539 698 856
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES....... 51,654 54,388 16,760 18,402
INCOME TAXES....................... 19,760 20,700 6,325 7,025
-------- -------- -------- --------
NET EARNINGS....................... $ 31,894 $ 33,688 $ 10,435 $ 11,377
======== ======== ======== ========
EARNINGS PER SHARE:
Basic........................... $.70 $.78 $.23 $.27
======== ======== ======== ========
Diluted......................... $.67 $.75 $.22 $.26
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic........................... 45,448 43,094 45,393 42,147
Diluted......................... 49,977 47,003 49,987 46,165
</TABLE>
See Notes to Consolidated Financial Statements.
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BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FORTY WEEKS ENDED
-----------------------
OCTOBER 7, OCTOBER 6,
1998 1999
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................... $31,894 $33,688
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization ...................... 32,198 33,296
Impairment of assets and site closing costs......... 200 1,966
Tax benefit from early disposition of common stock.. 841 25
Deferred income..................................... (212) 37
Deferred income taxes .............................. 21,566 (1,874)
Changes in assets and liabilities:
Inventory ....................................... 1,048 539
Other current assets ............................ (2,055) (4,126)
Refundable income taxes.......................... (4,461) 3,057
Other assets..................................... 432 (59)
Accounts payable ................................ (792) (3,187)
Accrued payroll and related benefits ............ 2,982 5,500
Accrued store closing costs...................... (1,473) (871)
Other accrued expenses .......................... 6,988 4,906
Income taxes payable ............................ 2,487
------- -------
Total adjustments ............................ 57,262 41,696
------- -------
Net cash provided by operating activities..... 89,156 75,384
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (32,530) (40,058)
Purchase of restaurants................................ (5,557) (6,742)
Cash received from landlords........................... 1,776 2,260
------- -------
Net cash used in investing activities ........ (36,311) (44,540)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock............................... (10,440) (31,096)
Proceeds from exercise of employee stock options....... 2,889 536
Payments on capital leases............................. (1,856) (1,983)
------- -------
Net cash used in financing activities......... (9,407) (32,543)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 43,438 (1,699)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........... 43,030 94,058
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $86,468 $92,359
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest of $222 and
$288 in 1998 and 1999, respectively).................. $ 1,838 $ 1,574
Income taxes .......................................... 1,803 17,005
See Notes to Consolidated Financial Statements.
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BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position
of Buffets, Inc. and subsidiaries as of October 6, 1999 and the results of
operations for the twelve weeks ended October 7, 1998 and October 6, 1999
and the results of operations and cash flows for the forty weeks ended
October 7, 1998 and October 6, 1999.
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 30, 1998 and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 7 through 25 of this quarterly report.
3. On April 7, 1999, the Company acquired an 80% interest in Tahoe Joe's,
Inc., an operator of two restaurants and the Tahoe Joe's Famous Steakhouse
concept, for approximately $6.7 million, net of liabilities and cash
acquired.
4. On July 14, 1999, the Company extended the expiration date of its $50
million unsecured revolving line of credit to June 30, 2002. On July 1,
2002, 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, 2005. 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 $90 million in any fiscal year, is required to meet various
financial performance criteria, and is restricted from declaring or paying
cash dividends to shareholders without lender's approval. Quarterly, the
Company is required to pay a commitment fee equal to 3/16 of 1% per annum
on the unused base commitment amount of the revolving line of credit, $20
million, and 1/20 of 1% per annum on the unused reserve commitment amount
of $30 million.
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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>
<CAPTION>
Forty Forty Twelve Twelve
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 7, October 6, October 7, October 6,
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings .................... $31,894 $33,688 $10,435 $11,377
Interest on convertible
subordinated notes (after tax).. 1,380 1,385 414 415
------- ------- ------- -------
Income available to common
shareholders and assumed
conversion ..................... $33,274 $35,073 $10,849 $11,792
======= ======= ======= =======
Weighted average common
shares outstanding.............. 45,448 43,094 45,393 42,147
Dilutive effect of:
Convertible subordinated notes.. 3,556 3,553 3,556 3,553
Stock options................... 973 356 1,038 465
------- ------- ------- -------
Common shares assuming dilution.. 49,977 47,003 49,987 46,165
======= ======= ======= =======
</TABLE>
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 6, 1999
- ----------------------------------
RESTAURANT SALES. Restaurant sales of $222.7 million during the third quarter of
1999 represented a 7.5% increase over sales of $207.1 million for the comparable
period of 1998. The increase in sales is primarily due to sales generated by new
restaurants and an increase in comparable restaurant sales of 2.5%. Two new
restaurants opened in the third quarter of 1999 compared to three during the
third quarter of 1998, bringing the total number of Company-owned restaurants to
387 at the end of the quarter, (250 Old Country Buffet(R), 123 HomeTown
Buffet(R), nine Original Roadhouse Grill(SM), three Country Roadhouse Buffet &
Grill(SM) and two Tahoe Joe's Famous Steakhouse(R)), compared to 379 restaurants
open at the end of the third quarter of 1998. Average weekly sales per
restaurant for the third quarter of 1999 increased 4.0% to $47,953 from $46,087
in
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the comparable period of 1998. The eight new restaurants opened during 1999
generated average weekly sales of $63,984 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 84.5% for the third quarter of 1999 from 85.0% for the third
quarter of 1998. Food costs as a percentage of restaurant sales decreased to
31.0% in 1999 from 31.6% for the comparable prior-year quarter, due primarily to
a reduction in the cost of various products; and labor costs increased to 31.0%
of sales in 1999 from 30.3% of sales for the comparable prior-year quarter,
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 22.5% in 1999 from 23.1% in 1998, due to decreases in various
restaurant costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of restaurant sales remained flat at
approximately 7.2% for both comparable quarters. Such expenses in absolute terms
increased 7.5% to $16.1 million for the third quarter in 1999 from $15.0 million
for the comparable period in 1998. The increase is primarily due to an increase
in advertising costs and additional costs associated with the Company's Y2K
tests and upgrades. Advertising costs as a percentage of sales were 2.3% for
both comparable quarters. The Company is anticipating increasing its marketing
spending in 1999 to approximately $22.7 million which included the development
of our new television commercials which started airing in March of 1999.
SITE CLOSING COSTS. The Company closed one underperforming restaurant during the
quarter which generated a charge of $818,000.
INCOME TAX EXPENSE. The Company's effective income tax rate was 38.2% for the
third quarter of 1999 compared to 37.7% in the comparable quarter of 1998.
FORTY WEEKS ENDED OCTOBER 6, 1999
- ---------------------------------
RESTAURANT SALES. For the first forty weeks of 1999, restaurant sales increased
8.2% to $723.6 million from $668.5 million in the comparable period in 1998. The
increase in sales is primarily due to sales generated by new restaurants and an
increase in comparable sales of 2.0%. Seven new restaurants opened in the first
three quarters of 1999, compared to ten new restaurants opened in the first
three quarters of 1998. The average weekly sales per restaurant in the 1999
period increased by 2.5% to $46,674 from $45,549 in 1998.
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RESTAURANT COSTS. Restaurant costs for the first forty weeks in 1999 increased
to $615.8 million from $571.6 million in the comparable period in 1998. As a
percentage of restaurant sales, the 1999 period costs were 85.1% and the 1998
period costs were 85.5%. Food costs as a percentage of restaurant sales
decreased to 31.6% in 1999 from 32.2% for the comparable periods in 1998; and
labor costs increased to 31.0% of sales from 30.1% of sales for the comparable
prior year period. Direct and occupancy costs decreased to 22.5% in the first
forty weeks of 1999 from 23.2% in the comparable period in 1998, due to
decreases in various restaurant costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first forty weeks of 1999,
selling, general and administrative expenses increased to $54.0 million from
$46.5 million in 1998, primarily due to an increase in advertising expense in
1999. As a percentage of sales, selling, general and administrative expenses
increased to 7.5% in the 1999 period from 7.0% in the 1998 period. Advertising
for the first forty weeks of 1999 was 2.4% of restaurant sales compared to 2.0%
in the comparable 1998 period.
SITE CLOSING COSTS. The Company closed six underperforming restaurants during
the first forty weeks of 1999 which generated a charge of $1,966,000.
INCOME TAXES. Income taxes were 38.1% of earnings before income taxes for the
1999 period compared to 38.3% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurants generate cash immediately through sales. The
majority of new restaurants are profitable within the first period 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, $20 million, and .05% per annum on the unused reserve
commitment amount, $30 million. On July 14, 1999, the Company extended the
agreement for three years. On July 1, 2002, providing no default or event of
default has occurred and is
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continuing, the line of credit is convertible, at the Company's option, to a
three-year term loan, maturing on July 1, 2005. As of and for the forty weeks
ended October 7, 1998 and October 6, 1999, the Company had no borrowings
outstanding under this credit line.
In 1995, HomeTown Buffet issued $41.5 million in aggregate principal amount
of 7.0% subordinated convertible notes due on December 1, 2002. 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 became redeemable in whole
or in part, at the option of the Company, at any time on or after December 2,
1998. During 1998, $35,000 of the notes were converted into 3,000 shares of
common stock at the discretion of the debtholder.
The Company continues to require substantial amounts of capital to fund its
growth. The Company currently expects to open a total of approximately 14 to 17
new restaurants in 1999 with five Original Roadhouse Grills and six buffet
restaurants already opened at October 28, 1999. The restaurants constructed in
1999 will primarily be freestanding restaurants, including six Original
Roadhouse Grills. In addition to new construction, the Company has converted one
prior Country Harvest Buffet Restaurant to an Original Roadhouse Grill, and
converted one Old Country Buffet restaurant to a Country Roadhouse Buffet and
Grill during 1999.
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. On June 3, 1999, the Company's Board of
Directors authorized the expenditure of up to an additional $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.
During the third quarter, the Company repurchased $2.8 million of its common
stock (240,000 shares at an average price of $11.65). As of October 28, 1999,
the Company had repurchased a total of 3,786,000 shares at an average of $10.97
per share or $41.7 million.
On April 7, 1999, the Company acquired an 80% interest in Tahoe Joe's Inc.,
an operator of two restaurants and the Tahoe Joe's Famous Steakhouse concept,
for approximately $6.7 million, net of liabilities and cash acquired.
The Company expects to spend $8 to $10 million in various remodeling and
improvement costs in 1999 at existing buffet restaurant facilities. In addition,
the Company periodically evaluates the purchase of existing restaurants and/or
restaurant concepts.
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The Company also expects to spend $9.0 to $10.0 million during 1999 on its
new corporate office location in Eagan, Minnesota with the completion date
scheduled for the first quarter of 2000.
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.
It is anticipated that essentially all the restaurants to be opened in 1999 will
be freestanding units. 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 1999 and
early 2000 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 restaurant
development plans for 1999 and early 2000. 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.
NON-PERFORMING RESTAURANTS
The Company evaluates impairment of individual restaurants whenever events
or changes in circumstances indicate the carrying amount of a restaurant may not
be recoverable. If individual restaurant sales during the year do not meet
management's expectations it is reasonably possible, although not currently
quantifiable, that the Company will incur impairment charges. The Company has
reviewed all underperforming locations and is considering options for these
locations including expanding advertising or conversion to a different brand or
concept.
FORWARD-LOOKING INFORMATION
This Form 10-Q, together with the Company's Form 10-K and other ongoing
securities filings, press releases, conference calls and discussions with
securities analysts, and other communications contains certain forward-looking
statements that involve risks and
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uncertainties. These statements relate to the Company's future plans,
objectives, expectations and intentions. These statements may be identified by
the Company through use of words such as "expects," "anticipates," "intends,"
"plans" and similar expressions. The Company's actual results could differ
materially from those disclosed in these statements, to various factors,
including the following "RISK FACTORS" and factors set forth elsewhere in this
Form 10-Q. The Company assumes no obligation to publicly release the results of
any revision or updates to forward-looking statements or these risk factors to
reflect future events or unanticipated occurrences.
RISK FACTORS
Current and prospective shareholders should carefully consider the
following risk factors before trading in the Company's securities. This list of
risk factors is not exclusive. If any of the following risks actually occur,
they could have a material negative effect on the Company's business, financial
condition, operating results or cash flows. This could cause the trading price
of the Company's securities to decline, and security holders may lose part or
all of their investment in the Company.
RISKS ASSOCIATED WITH NEW DEVELOPMENT
The Company has historically added restaurants each year either through new
construction, acquisition, or both. It currently expects that this practice will
continue in 1999 to the extent described above in the section captioned
"Liquidity and Capital Resources" and in the Company's 10K Report dated December
30, 1998 in the section captioned "Restaurant Development". However, a large
number of variables affect restaurant development and the Company can not
predict with certainty the ultimate level of restaurant additions, if any, in
any particular fiscal year. This is due to the unique aspects associated with
development transactions, such as the date sites become available, the speed
with which the Company can obtain required permits, the availability of
construction labor and materials, and how quickly the new restaurants can be
staffed. These factors also make it difficult to predict when new restaurants
will open and produce revenue.
Variables influencing new restaurant additions include the level of success
in identifying suitable locations and the negotiation of acceptable leases and
land purchases. This may become more difficult as competition heightens for
optimal sites. Other variables include, but are not limited to, general
competitive factors, land covenants restricting the Company's use of sites, and
signage restrictions imposed by land owners or governmental entities.
Traditionally, the Company has used cash flow from operations as its
primary funding for restaurant additions. The Company
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cannot guarantee that this source of capital will be sufficient to attain the
desired development levels if adverse changes occur affecting revenues,
profitability or cash flow from operations. Reductions in landlord contributions
towards construction costs would also reduce the capital available for
development. The Company's ability to purchase (rather than build) additional
restaurants also depends on the factors described in this section, as well as
other factors. These factors include the Company's ability to convert purchased
restaurants to one of the Company's existing restaurant concepts and to
integrate them into the Company's business or, alternatively, to successfully
operate the acquired business using its existing format.
Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of key
employees. No assurances can be given that any acquisition or investment by the
Company will not materially and adversely affect the Company or that any such
acquisition will enhance the Company's business. If the Company ever determines
to make major acquisitions of other businesses or assets, the Company may be
required to sell additional equity or debt securities or obtain additional
credit facilities. The sales, if any, of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
RESTAURANT OPERATIONAL RISKS
The Company's restaurant operations are affected by changes in the cost of
food and labor and its ability to anticipate such changes. Operations depend
upon the complete and timely delivery of food and non-food items to the
restaurants. Consequently, interruptions in the flow of such products,
variations in product specifications, changes in product costs and similar
factors can have a material impact on the Company's results.
In recent years, other reputable food service companies have been
materially and adversely impacted by food-borne illness incidents. Some of these
incidents involved third party food suppliers and transporters outside of their
reasonable control. The Company has rigorous internal standards, training and
other programs to attempt to minimize the risk of these occurrences. However,
the Company cannot guarantee that these efforts will be fully effective in
preventing all food-borne illnesses. New illnesses resistant to current
precautions may also develop in the future.
The Company also shares a risk common to all multi-unit foodservice
businesses. Specifically, one or more instances of food-borne illness in a
Company or franchised restaurant, poor health inspection scores, or negative
publicity can have a material
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negative impact extending far beyond the restaurant involved to affect some or
all of the Company's other foodservice operations. This risk exists even if it
is later determined that the incidents were wrongly attributed to the Company's
restaurants, or that the negative publicity was false or misleading.
The Company's buffet restaurants utilize a service format that is heavily
dependent upon self-service by its customers. Any development that would
materially impede or prohibit the Company's continued use of a self service food
service approach would have a material adverse impact on the Company's primary
business.
The Company has from time to time pursued various research and development
concepts. These have related to its core buffet restaurant business as well as
its non-buffet restaurant business. These are undertaken on a trial basis only
and the opening of such restaurants does not necessarily indicate that the
Company will expand the concepts.
The Company believes it has achieved considerable success with television
marketing programs in recent years. Marketing programs are generally most
effective in the period immediately following their introduction when they
initiate trial usage by new customers. The Company's current television
marketing programs have been active in certain markets for over a year. It is
therefore possible that future advertising in these markets will be less
successful than when the programs were first aired. The final level of
television advertising expenditures in 1999 will depend on the effectiveness of
the commercials, the availability and cost of advertising air time, and changes
in the Company's marketing priorities.
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. Impairment
charges reduce the profits of the Company. They are required by accounting
principles when an asset, such as a restaurant, performs so poorly that the
Company determines that the asset is worth less than its value as stated in the
Company's accounting records.
The Company's sales volumes fluctuate seasonally, and are generally higher
in the summer months and lower in the winter months overall.
The Company has not experienced a significant overall impact from
inflation. If operating or labor expenses increase due to inflation, the Company
recovers increased costs by increasing menu prices. However, competition may
limit or prohibit such increases, as discussed in the section below entitled
"COMPETITIVE RISKS."
Previous results at the Company's restaurants and at the Company overall
may not be indicative of future performance, as a
14
<PAGE>
result of any or all of the risk factors discussed in the various sections in
this report 10-K incorporating the words "RISK FACTORS."
HUMAN RESOURCE RELATED RISKS
The Company operates in the service industry and is extremely dependent
upon the availability of qualified restaurant personnel. Availability of staff
varies widely from location to location. Difficulty in recruiting and retaining
personnel can increase the cost of restaurant operations and temporarily delay
the openings of new restaurants. It can also cause higher employee turnover in
the affected restaurants. Additionally, competition for qualified employees
exerts pressure on wages paid to attract qualified personnel, resulting in
higher labor costs, together with greater expense to recruit and train them.
The operation of buffet style restaurants is materially different than
certain other restaurant concepts. Consequently, the retention of executive
management that is familiar with the Company's core business is important to the
Company's continuing success. The departure of multiple executives in a short
period of time could have an adverse impact on the Company's business.
Various employment related legal risks also exist, which are discussed
in more detail in the sections below entitled "REGULATORY FACTORS" and
"LITIGATION RISKS."
RISKS ASSOCIATED WITH NON-COMPANY OWNED RESTAURANT OPERATIONS
The Company is limited in the manner in which it can regulate its
franchised restaurants, especially in real-time. If a franchised restaurant
fails to meet the Company's franchisor operating standards, the Company's own
restaurants could be adversely affected due to customer confusion or negative
publicity. A similar risk exists with respect to totally unrelated foodservice
businesses if customers mistakenly associate such unrelated businesses with the
Company's own operations.
RISKS ASSOCIATED WITH GENERAL CONDITIONS
The confidence of consumers generally, together with changes in consumer
preferences, can have a significant impact on the Company's results. Positive or
negative trends in weather condition can have an exceptionally strong influence
on the Company's business. This effect is heightened by the fact that most of
the Company's restaurants are in geographic areas experiencing extremes in
weather. The Company's success also depends to a significant extent on factors
affecting discretionary consumer spending, including economic conditions,
disposable consumer income and consumer confidence. Adverse changes in these
factors could reduce guest traffic or impose practical limits on pricing, either
of which could materially adversely affect the
15
<PAGE>
Company's business, financial condition, operating results or cash flows.
COMPETITIVE RISKS
The Company operates in a highly competitive industry. Competitive
pressures may have the affect of limiting the Company's ability to increase
prices, with consequent pressure on operating earnings. This environment makes
it more difficult for the Company to continue to provide high service levels
while maintaining the Company's reputation for superior value, without adversely
affecting operating margins.
REGULATORY FACTORS
The Company is subject to extensive government regulation at a federal,
state and local government level. These include, but are not limited to,
regulations relating to the sale of food (and alcoholic beverages in the
Company's full service restaurants). In the past, the Company has been able to
obtain and maintain necessary governmental licenses, permits and approvals.
However, difficulty or failure in obtaining them in the future could result in
delaying or canceling the opening of new restaurants. Local authorities may
suspend or deny renewal of the Company's governmental licenses if they determine
that the Company's conduct does not meet the standards for initial grant or
renewal. Although the Company has satisfied governmental licensing requirements
for its existing restaurants, the Company cannot be sure that these approvals
will be forthcoming at future locations. This risk would be even higher if there
was a major change in the licensing requirements affecting the Company's types
of restaurants.
The Company is also subject to certain states' "dram shop" statutes with
respect to its restaurants that serve alcohol. These statutes generally provide
a person injured by an intoxicated person the right to recover damages from an
establishment that served alcoholic beverages to the intoxicated person. The
Company carries liquor liability coverage as part of its existing comprehensive
general liability insurance. If the Company were to significantly expand the
number of restaurants serving alcohol, an adverse trend in alcohol related
judgments in excess of the Company's insurance coverage, or the Company's
failure to obtain and maintain insurance coverage, could materially and
adversely affect the Company.
Various federal and state labor laws govern the Company's relationship with
its employees and affect operating costs. These laws include minimum wage
requirements, overtime, unemployment tax rates, workers' compensation rates,
citizenship requirements and sales taxes. Significant additional
government-imposed increases in the following areas could materially adversely
affect the Company's business, financial condition, operating results or cash
flow:
16
<PAGE>
* minimum wages
* mandated health benefits
* paid leaves of absence
* increased tax reporting
* revisions in the tax payment requirements for employees who receive
gratuities
The Federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company
believes that its restaurants are designed to be accessible to the disabled.
However, mandated modifications to the Company's facilities to make different
accommodations for disabled persons could result in material unanticipated
expense.
The Company is subject to federal, state and local laws, regulations and
ordinances that (I) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials resulting from, sites
of past spills, disposals or other releases of hazardous materials (together,
"Environmental Laws"). In particular under applicable Environmental Laws, the
Company may be responsible for remediation of environmental conditions and may
be subject to associated liabilities (including liabilities resulting from
lawsuits brought by private litigants) relating to its restaurants and the land
on which its restaurants are located, regardless of whether the Company leases
or owns the restaurants or land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant. There can be no assurance that environmental conditions relating to
prior, existing or future restaurants or restaurant sites will not have a
material adverse affect on the Company.
LITIGATION RISKS
The Company is from time to time the subject of complaints or litigation
from guests alleging illness, injury or other loss associated with the Company's
restaurants. Adverse publicity resulting from these allegations may materially
adversely affect the Company and the Company's restaurants. This may be true
whether or not the allegations are valid or the Company is liable. In addition,
employee claims against the Company based on, among other things,
discrimination, harassment or wrongful termination may divert the Company's
financial and management resources that would otherwise be used to benefit the
future performance of the Company's operations. The Company has been subject to
these employee claims from time to time, and a significant increase in the
number of these claims or successful claims could materially adversely affect
the Company's business, financial condition, operating results or cash flows.
The Company is currently
17
<PAGE>
defending a lawsuit based on alleged violations of the securities laws by the
Company. See "LEGAL PROCEEDINGS" below for a discussion of this lawsuit and the
related risks.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
YEAR 2000 ISSUE OVERVIEW
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 hardware and software and information technology ("IT") 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 sometimes referred to as non-IT systems ("non-IT"), could be
impacted. Unless stated to the contrary, for purposes of this Year 2000 Update,
the term "System(s)" shall be interpreted as broadly as possible to include
every IT and non-IT system, including 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, Systems processing date information will need to
accept four digit entries to distinguish years beginning with "19" from those
beginning with "20." The inability to recognize or properly treat dates may
cause Systems to be unable to process financial, operational, and other
information, or may generate inaccurate results.
Because of the peculiarities of individual Systems, the Year 2000 Issue may
have an effect both 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 including, for example, leap
year's day and others.
Recent press treatment of the Year 2000 Issue has suggested that the
general population may dramatically change their buying practices and lifestyle
as the new millennium approaches. Significant negative changes in consumer
buying patterns could materially adversely affect the Company's business and
financial results, whether related to the Year 2000 Issue or otherwise, and
regardless of whether such patterns have any bearing on the Company's
assessments and efforts with respect to the Year 2000 Issue. Conversely, if
consumers choose to dine away from home more frequently as a consequence of the
Year 2000 Issue or otherwise, the Company's business could be enhanced. It is
presently impossible to assess how, and when, the public will respond to the
18
<PAGE>
Year 2000 Issue or the extent, if any, that consumer reactions will impact the
Company's business.
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 regularly identified by the
technology community. Also impeding Year 2000 Issue testing is the high degree
of integration between various Systems and the impracticality or impossibility
of conducting full-scale live testing. Consequently, interrelated Systems
believed secure in a test environment could conceivably fail when operating
together under realistic workloads.
PREEXISTING SYSTEMS UPGRADES
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.
Following the Company's merger with HomeTown Buffet, Inc. in September
1996, the Finance, Accounting, and Information Services Departments evaluated
the adequacy of their existing Systems in the context of current and future
needs. A subsequent upgrade program was undertaken to increase processing speed
of these systems as well as improve capacity for growth. This program eventually
entailed the replacement of the central computers running the Company's
accounting software, as well as changes in those computers' operating system,
including extensive revisions to the financial accounting software. These
upgrades were conducted in the ordinary course of business and are not included
in the costs discussed below. However, the improvements had the incidental
benefit of assisting with Year 2000 Issue readiness. The accounting Systems
upgrade project was finalized in November, 1998.
The Company also undertook a program to replace all of its existing
corporate personal computers in response to a broad-based independent consulting
study of the Information Services Department. Although the personal computer
upgrade was motivated by the desire to bring the equipment to a uniform standard
and to enhance performance, a number of the older computers were not Year 2000
Issue compliant. Consequently, the cost of the personal computer upgrade
program, including associated software, installation contractor costs, and
end-user training, is included in the "Y2K Project Cost" table. Substantially
all of the corporate office personal computers were upgraded or replaced in
1998, while personal computer upgrades at the Company's restaurants were 100%
complete as of June, 1999.
19
<PAGE>
THE COMPANY'S Y2K PROJECT
The Company's project to address the Year 2000 Issue involves three phases;
inventory, assessment, and remediation/testing (collectively, the "Y2K
Project"). The status of these three phases, and best current estimates of
completion, are shown in the table below captioned "Y2K PROJECT SCHEDULING".
The previously described upgrades to the Company's accounting Systems
delayed the implementation of the second two phases of the Y2K Project since
such efforts would have been needlessly expended on Systems bound for
replacement. Following the late 1998 completion of the accounting Systems
upgrade, the Company engaged a full time on-site consultant to act as project
manager overseeing the Y2K Project in conjunction with a Y2K Steering Committee
acting under the direction of the Executive Committee. The use of a third party
for this purpose is also intended to maintain an independent perspective on the
Company's efforts relative to Year 2000 Issue readiness.
Y2K PROJECT SCHEDULING AS OF OCTOBER 16, 1999
---------------------------------------------
Activity Start Date End Date % Complete
-------- ---------- ---------- ----------
Inventory phase 03/13/1997 05/02/1998 100%
Assessment phase 02/05/1999 07/15/1999 100%
Remediation/testing phase 03/30/1999 10/16/1999 95%
During the course of the remediation/testing phase of the Y2K Project, the
Company attempted to utilize a bottom-to-top approach of entering data through
simulated store level Systems, pass the data to the headquarters financial
accounting Systems, manipulate that data at headquarters and enter other
financial information through the Accounting, Human Resources, and other
departments, and generate reports through the Information Services Department.
All computer users in critical applications participated in a four month major
test, referred to as "User Validation Testing" from June 1999 to September 1999.
During the user validation testing the users conducted three kinds of tests, the
century rollover test (December 1999 to January 2000), leap year rollover test
(February 2000 to March 2000) and post century rollover test (December 2000 to
January 2001). In each of the above testing cycles, more than 100 tasks were
executed. Three date related problems were identified and the date problems were
corrected. The remediation/testing program will test many non-IT Systems
including restaurant point-of-sale systems, time clocks, credit card equipment,
environmental controls, security systems, and telephone systems. It is presently
anticipated that at least ten restaurants will be utilized in the user test in a
simulated setting. Although the Company believes that the simulation will yield
sufficient information to gauge Year 2000 Issue readiness, full load testing in
a real environment (which is presently deemed impractical without materially
disrupting or degrading current operations) could reveal unexpected problems.
20
<PAGE>
During the course of the remediation and testing phase it was determined
that certain additional upgrades to the Company's accounting software were
necessary to maintain vendor support and to block the entry of incomplete date
information. The implementation of this upgrade has had a cost and timing
consequence that is reflected in the tables included in this section for testing
purposes. Actual implementation of these upgrades and the Year 2000 issue tested
systems is currently expected in December, 1999.
Since unanticipated expenses may arise over the course of the Y2K Project,
the Company is unable to project with accuracy the total expected costs to
achieve Year 2000 Issue readiness. With this caution, however, the Company has
attempted to estimate such costs in the following table. The Company does not
allocate the value of time expended by corporate office personnel when
considering Y2K Project costs, and no special account has been established to
track Y2K Project costs generally. The estimated costs during 1999 to complete
the assessment and the testing phases are estimated to be 18% of the Company's
1999 Information Services $5.2 million projected expenses. The costs of the
Company's Y2K Project are being funded with cash flows from operations. The
Company's expenditures for the Y2K Project during the preceding two fiscal
years, and project cash expenditures for 1999, are shown for comparison purposes
in the following table.
Y2K PROJECT COSTS*
------------------
Through
Cash October 6, Remaining
Expenditures 1997 1998 1999 1999 1997-99
- ------------ ------- ------- ---------- --------- ---------
Consultant Fees** $183,000 $ 19,000 $ 831,000 $114,000 $1,147,000
Hardware Upgrades 0 419,000 1,057,000 4,000 1,480,000
Software Upgrades 0 269,000 280,000 549,000
----------
Currently Expected Total Y2K Project Costs, 1997-2000: $3,176,000
==========
Notes:
* Of the $3,176,000 total expected Y2K Project costs, $2,196,000 or 64%
relates to personal computer upgrades conducted in the ordinary course
of business that are included in the table merely because of their
ancillary benefit of assisting with Year 2000 Issue readiness
(consisting of $722,000 for installation, training and related
consulting fees, $911,000 for hardware upgrades, and $563,000 for
software).
** Various consultants have been engaged to supplement the Company's
internal efforts on the Y2K Project. The first was engaged in 1997 to
address the inventory phase. The costs shown for 1997 were principally
related to a general overview of the Company's Information Services
Department rather than the Year 2000 issue specifically, but are shown
lacking further cost segregation.
21
<PAGE>
YEAR 2000 ISSUE RISKS AND CONTINGENCY PLANS
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.
INTERNAL YEAR 2000 RISKS
Risks of Systems failure at the restaurant level include, but are not
limited to, the following examples. The failure of automated environmental
controls at a Company restaurant could result in inhospitable conditions
requiring temporary closure. The failure of cash register systems or credit card
processing terminals would force reversion to manual sales tracking methods that
could slow both the throughput of guests, and in the instance of credit cards,
the recognition of income. The failure of personal computers in a restaurant
could prevent the daily polling of store financial information by the corporate
headquarters, to account for store results, cash deposits, and payroll
processing. Since these computers are also used to order food from suppliers and
analyze food and labor costs, store management could be forced to revert to
manual methods that are less effective or efficient and which could increase the
cost of food and labor. Telecommunication failures could result in loss of sales
due to customer inability to reach the stores, as well as make the communication
of store results impossible.
Risks of Systems failure at the corporate level include, but are not
limited to, the following examples. There may be temporary inability to conduct
normal accounting and financial functions due to incomplete store data or due to
System aberrations or failures at the Company headquarters. The absence of data
normally utilized by management in the supervision of the Company's restaurants
could make such oversight difficult and less effective, increasing costs until
the data is restored. Telecommunications risks would parallel those at the store
level. A coordinated computer, software and telecommunication System is used to
sweep cash from local depositories into central accounts. The failure of any
element of this System could cause interruptions in the availability of cash to
meet Company liabilities. Similar risks exist with respect to an integrated
payroll System consolidating store and corporate data and passing it on to a
third party payroll contractor. The Y2K Project is very labor dependent, both in
terms of internal human resources in the Information Services Department as well
as with key outside vendors. Recent staffing shortages in the Information
Services Department may impede completion of the remediation/testing phases of
the Y2K plan although the Company currently believes that these resource
requirements can be filled by outside consultants. The Y2K Project has resulted
in the rescheduling of certain IT projects of lesser priority, although it is
not anticipated that this re-prioritization will alone adversely affect the
Company's financial condition or results of operations.
22
<PAGE>
At this time, the Company does not anticipate that there will be significant
Information Services Department resources allocated to the Year 2000 Issue after
January 1, 2000, subject to the various contingencies described in this report
10-Q. It instead expects that substantially all of those resources will be
directed at pending and new technology related projects, including the move of
the Company's headquarters to Eagan, Minnesota which will involve significant
technology enhancements, and the possible replacement of the existing corporate
accounting and financial Systems in the ordinary course of business.
EXTERNAL YEAR 2000 RISKS
It is conceivable that the Company's Year 2000 Issue risks arise more from
external factors than they do from internal sources. This is because of the
Company's heavy reliance on vendors to supply the key items necessary to run its
restaurants. Unfortunately, the Company has little, if any, control over many of
these external parties and is unlikely to obtain adequate levels of assurance
that they have prepared sufficiently to be ready for the Year 2000 Issue. For a
restaurant to be able to generate revenue, it must be open for business during
its normal operating hours, staffed, lit, heated, and supplied with foodstuffs
and other supplies necessary to serve its guests. External factors that could
prevent these things from occurring include, by example: the inability to open
due to lack of power or utilities; lack of food and other supplies due to
service interruptions involving suppliers or distributors; and inability to
access the restaurants due to malfunctioning security systems controlled by
others or other facilities related impediments.
At a corporate level, third parties are relied upon extensively for certain
services, particularly in the Payroll and Information Services Departments. For
example, a failure of the payroll vendor to supply payroll checks would
interrupt the flow of compensation to employees which could jeopardize staffing
throughout the organization. It currently appears unlikely that the Company's
external payroll services vendor will have undertaken significant testing prior
to January 1, 2000 utilizing data and systems unique to the Company.
Common external risks to both the Company's corporate and restaurant
operations include interruptions in utilities to the Company's facilities,
whether related to electrical, natural gas, water, sewer, waste removal, or
telephone or data transmission services.
The Company has sent 70 letters to vendors of critical IT services,
significant food and material vendors, and utilities, among others, in an
attempt to obtain certifications of their readiness with respect to the Year
2000 Issue. To date, seven of the letters, or 10%, have been returned.
Substantially complete certifications have been received from only three of the
19 most
23
<PAGE>
significant suppliers of key software and hardware at the corporate office. The
utility and telecommunication firms have been quite conditional in their
expressions of Year 2000 Issue readiness, typically linking their readiness to
the preparedness of unrelated parties (for example, other contributors to the
national power grid). Consequently, the responses are given little weight. Of
the Company's primary food distributors, it has received 20 certifications out
of 52 initial requests sent to date. The Company has forwarded a letter to five
primary distributors, requesting them to furnish their contingency plan for the
January 2000 New Year weekend.
While the Company will continue to seek vendor readiness certifications
relative to the Year 2000 Issue, it is expected that most of the companies will
fail to provide such documentation, whether due to liability concerns or
otherwise. Consequently, the Company is taking this factor into account wherever
possible when formulating its various contingency plans.
MAGNITUDE OF YEAR 2000 ISSUE RISKS
Any individual risk listed above, if experienced on a broad enough scale
and of lengthy duration, could have a material adverse effect on the Company's
results of operations, liquidity, and financial condition. This makes it very
difficult to accurately anticipate a worst case scenario resulting from Year
2000 Issue Risks since more than one risk factor could exist. Subject to this
proviso, the Company anticipates that the worst case Year 2000 Issue scenario
would involve the closure for a material period of time of most or all of the
Company's restaurants due to national utility interruptions, coupled with
adverse changes in customer spending patterns. The most likely risk scenario may
instead be more localized closures of individual restaurants, or groups of
restaurants in a particular city, due to utility interruption or failure to
receive necessary food and other supplies. The Company believes that its core
business - the operation of principally buffet style restaurants, may be
somewhat less vulnerable to Year 2000 Issues than entities more dependent on IT
and non-IT systems, such as processor dependent manufacturers or technology
driven firms. So long as the restaurants can be kept open to the public in the
manner they are accustomed, the failure of Systems associated with "back of the
house" activities, such as administrative and corporate office functions, should
have modest effects on "front of the house" revenue producing activities.
CONTINGENCY PLANS
Contingency Plans for the Year 2000 Issue have been developed and are being
implemented as part of the third phase of the Y2K Project, remediation/testing.
These plans cover every affected department in the Company and address both
internal and external Year 2000 Issue risks. The most critical of these plans,
related to restaurant operations, was completed on May 31, 1999 and
24
<PAGE>
drafts of all other contingency plans were prepared in June, 1999. For sake of
illustration, the restaurant operations contingency plan includes procedures for
manually recording and reporting sales transactions, it addresses supply
shortages from key distributors, and delineates various other contingency items.
It is anticipated that the remainder of the contingency plans will be finalized
in early November, 1999. Due to the evolving nature of the Year 2000 Issue
risks, it is expected that the Company's contingency plans will be revised over
time.
The Company's risk assessment of the Year 2000 Issue is based on the
Company's current knowledge, and could in hindsight prove incomplete and
possibly overstate or understate the actual risk's faced by the Company.
Similarly, the ability of the Company to address the Year 2000 Issue in the
manner and within the cost estimates described above could be adversely affected
by negative findings arising during the course of testing systems and
implementing solutions or contingency plans.
RISKS ASSOCIATED WITH PURCHASING, OWNING, OR SELLING THE COMPANY'S
SECURITIES
The Company's securities currently trade publicly on the NASDAQ National
Market. The market price of the Company's securities fluctuate significantly.
These price changes do not necessarily correlate to movements in the overall
stock market. The stock market has from time to time experienced extreme price
and volume fluctuations, which has often been unrelated or disproportionate to
the operating performance of particular companies. Fluctuations or decreases in
the trading price of the Company's securities may adversely affect the ability
of security holders to trade in the Company's securities. In addition, such
fluctuations could adversely affect the Company's ability to raise capital
through future equity financings should the Company determine at some point that
it is in its best interest to do so.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions arising in
the normal course of business. Management is of the opinion
that their outcome will not have a significant effect on the
Company's consolidated financial statements.
The Company and seven of its present and/or former directors
and executive officers have been named as defendants in a
Corrected, Third Amended, Consolidated Class Action Complaint
(the "third complaint") brought on behalf of a class of all
purchasers of common stock of the Company from October 26,
1993 through October 25,
25
<PAGE>
1994 (the "class period") in the United States District Court
for the District of Minnesota. 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.
Plaintiffs allege that the defendants' conduct violated the
Securities Exchange Act of 1934 and seek damages of
approximately $90 million and an award of attorneys fees,
costs and expenses.
The defendants have answered the third complaint, denying all
liability and raising various affirmative defenses. Discovery
has been taken and was substantially completed as of February
26, 1999. By Order entered on June 17, 1999, as amended by
Order dated August 18, 1999, the District Court certified the
proposed plaintiff class.
Management of the Company continues to believe that the action
is without merit and is vigorously defending it. On May 28,
1999, the defendants served their motion for summary judgment
on all claims. Plaintiffs also moved for partial summary
judgement against the Company and Mr. Hatlen for a portion of
class period. The respective motions have been scheduled for
hearing on December 10, 1999. The defendants have given notice
of the plaintiffs' claim to its insurance carrier. The
insurance company is reimbursing the defendants for a portion
of the costs of defense under a reservation of rights.
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 probability of a material effect on the
financial condition of the Company, not covered by insurance,
is slight.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
26
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
3(a) Composite Amended and Restated Articles of
Incorporation (1)
3(b) By-laws of the Company (2)
4(a) Form of Rights Agreement, dated as of October 24,
1995 between the Company and the American Stock
Transfer and Trust Company, as Rights Agent (3)
27 Financial Data Schedule
b) Reports on 8-K
None
(1) Incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-3 dated June 2, 1993 (Registration No. 33- 63694).
(2) Incorporated by reference to Exhibit 3(b) to Annual Report on Form 10-K for
the fiscal year ended December 29, 1993.
(3) Incorporated by reference to Exhibit 1 to Report on Form 8-K dated October
24, 1995.
27
<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 12, 1999
/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)
28
<PAGE>
EXHIBIT INDEX
Exhibits Page
-------- ----
27 Financial Data Schedule .................. Filed Electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 30, 1998 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE PERIOD ENDED OCTOBER 6, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000750274
<NAME> Buffets, Inc.
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