BUFFETS INC, 10-Q, 1999-08-30

BUFFETS INC
10-Q, 1999-08-30
EATING PLACES

Previous: GE INVESTMENT FUNDS INC, NSAR-A/A, 1999-08-30

Next: FPL GROUP INC, 424B5, 1999-08-30

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
July 14, 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 August 27,1999
----- ----------- -- -- --------------
Common Stock, $.01 par value 42,120,329 shares

<PAGE>

BUFFETS, INC. AND SUBSIDIARIES

INDEX

Page No.
--------

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets-
December 30, 1998 and July 14, 1999........................... 3

Consolidated Statements of Operations- Twenty-Eight Weeks
ended July 15, 1998 and July 14, 1999 and Twelve Weeks ended
July 15, 1998 and July 14, 1999 .............................. 4

Consolidated Statements of Cash Flows-
Twenty-Eight Weeks ended July 15, 1998
and July 14, 1999............................................. 5

Notes to Consolidated Financial
Statement .................................................... 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 7

PART II. OTHER INFORMATION ............................................26

<PAGE>

Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS

BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>

DECEMBER 30, JULY 14,
1998 1999
----------- -------
(in thousands, except par value amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ..................................... $ 94,058 $ 97,350
Receivable from landlords ..................................... 2,772 1,125
Inventory...................................................... 4,645 4,163
Prepaid rents................................................... 1,321 1,770
Other current assets ........................................... 2,789 3,043
Refundable income taxes........................................ 3,057
Deferred income taxes .......................................... 13,302 14,593
-------- -------
TOTAL CURRENT ASSETS ....................................... 121,944 122,044

PROPERTY AND EQUIPMENT:
Land........................................................... 15,688 16,590
Building....................................................... 33,256 34,590
Equipment ..................................................... 265,230 273,481
Leasehold improvements ........................................ 225,764 232,500
-------- --------
539,938 557,161
Less accumulated depreciation and amortization ................ 205,356 223,476
-------- --------
334,582 333,685

GOODWILL, net of accumulated amortization of $2,424 and
$2,828, respectively .......................................... 8,507 9,148
OTHER ASSETS ..................................................... 1,816 6,584
-------- --------
$466,849 $471,461
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 32,436 $ 31,369
Accrued payroll and related benefits .......................... 18,291 21,183
Accrued rents ................................................. 18,076 18,091
Accrued sales taxes ........................................... 3,835 5,660
Accrued insurance.............................................. 6,592 6,375
Accrued store closing costs.................................... 6,197 5,752
Other accrued expenses ........................................ 6,168 7,986
Income taxes payable........................................... 4,002
Current portion of capital leases.............................. 2,116 1,661
-------- -------
TOTAL CURRENT LIABILITIES .................................. 93,711 102,079

LONG-TERM DEBT ................................................... 41,465 41,465
LONG-TERM PORTION OF CAPITAL LEASES............................... 824
MINORITY INTEREST................................................. 271
DEFERRED INCOME .................................................. 73
DEFERRED INCOME TAXES ............................................ 31,124 33,554

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
42,266 shares, respectively ................................ 450 423
Additional paid-in capital .................................... 119,792 112,652
Retained earnings ............................................. 179,483 180,944
-------- --------
TOTAL STOCKHOLDERS' EQUITY ................................. 299,725 294,019
-------- --------
$466,849 $471,461
======== ========
See Notes to Consolidated Financial Statements.

</TABLE>
3

<PAGE>

BUFFETS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

<TABLE>
TWENTY-EIGHT WEEKS ENDED TWELVE WEEKS ENDED
------------------------ ------------------
JULY 15, JULY 14, JULY 15, JULY 14,
1998 1999 1998 1999
------- ------- ------- -------
(in thousands, except per share amount)

<S> <C> <C> <C> <C>
RESTAURANT SALES........................ $461,408 $500,875 $204,579 $223,037

RESTAURANT COSTS:
Food costs .................... 150,029 159,533 65,473 69,492
Labor costs ................... 138,689 155,076 60,178 68,050
Direct and occupancy costs 106,838 112,930 46,966 49,763
-------- -------- -------- --------
Total restaurant costs ........ 395,556 427,539 172,617 187,305
-------- -------- -------- --------

RESTAURANT PROFITS ..................... 65,852 73,336 31,962 35,732

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 31,455 37,885 13,562 16,141
OTHER SITE CLOSING COSTS 200 1,148 819
-------- -------- -------- --------
34,197 34,303 18,400 18,772

OTHER INCOME ........................... 697 1,683 453 744
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES ........... 34,894 35,986 18,853 19,516

INCOME TAXES ........................... 13,435 13,675 7,259 7,415
-------- -------- -------- --------

NET EARNINGS ........................... $ 21,459 $ 22,311 $ 11,594 $ 12,101
======== ======== ======== ========

EARNINGS PER SHARE:
Basic.......................... $.47 $.51 $.25 $.28
======== ======== ======== ========
Diluted........................ $.45 $.49 $.24 $.27
======== ======== ======== ========

WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic.......................... 45,471 43,499 45,567 42,514
Diluted........................ 49,972 47,362 50,506 46,437

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Twenty-Eight Weeks Ended
------------------------
JULY 15, JULY 14,
1998 1999
------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings .................................................. $21,459 $22,311
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization ............................... 22,499 23,429
Impairment of assets and site closing costs................. 200 1,148
Tax benefit from early disposition of
common stock.............................................. 557 29
Deferred income.............................................. (212) 73
Deferred income taxes ....................................... (517) 1,139
Changes in assets and liabilities net of acquisitions:
Inventory ................................................ 1,036 535
Other current assets ..................................... (1,940) (623)
Refundable income taxes................................... 1,313 3,057
Other assets ............................................. 95 (14)
Accounts payable ......................................... (1,669) (1,366)
Accrued payroll and related benefits ..................... 2,170 2,872
Accrued store closing costs............................... (291) (645)
Other accrued expenses ................................... 5,106 3,283
Income taxes payable ..................................... 10,729 4,002
------- -------

Total adjustments ........................................ 39,076 36,919
------- -------

Net cash provided by operating activities................. 60,535 59,230

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements ...................... (20,358) (22,037)
Purchase of eleven restaurants................................. (5,557)
Purchase of restaurant concepts and two locations.............. (6,742)
Cash received from landlords .................................. 1,127 2,166
------- -------

Net cash used in investing activities .................... (24,788) (26,613)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options............... 2,534 253
Repurchase of common stock..................................... (28,299)
Payments on capital leases..................................... (1,334) (1,279)
------- -------

Net cash provided by (used in)
financing activities .................................... 1,200 (29,325)
------- --------

NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 36,947 3,292

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 43,030 94,058
------- -------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $79,977 $97,350
======= =======

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest (net of capitalized interest of $149
and $167 in 1998 and 1999, respectively).................... $ 1,846 $ 1,583
Income taxes .................................................. 1,353 5,448
</TABLE>
See Notes to Consolidated Financial Statements.

<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 July 14, 1999 and the results of
operations for the twelve weeks ended July 15, 1998 and July 14, 1999 and
the results of operations and cash flows for the twenty-eight weeks ended
July 15, 1998 and July 14, 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 26 of this quarterly report.

3. On April 7, 1999, the Company acquired a 80% interest in Tahoe Joe's, Inc.,
an operator of the two restaurant 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 at 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.

5. Basic earnings per share are computed by dividing net income 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>
Twenty-Eight Twenty-Eight Twelve Twelve
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 15, July 14, July 15, July 14,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings ....................... $21,459 $22,311 $11,594 $12,101
Interest on convertible
subordinated notes (after tax)..... 962 970 412 415
------- ------- ------- -------

Income available to common
shareholders and assumed
conversion ........................ $22,421 $23,281 $12,006 $12,516
======= ======= ======= =======

Weighted average common
shares outstanding................. 45,471 43,499 45,567 42,514
Dilutive effect of:
Convertible subordinated notes..... 3,556 3,553 3,556 3,553
Stock options...................... 945 310 1,383 370
------- ------- ------- -------
Common shares assuming dilution..... 49,972 47,362 50,506 46,437
======= ======= ======= =======
</TABLE>

<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 JULY 14, 1999
- --------------------------------

RESTAURANT SALES. Restaurant sales of $223.0 million during the second quarter
of 1999 represented a 9.0% increase over sales of $204.6 million for the
comparable period of 1998, primarily due to sales generated by new restaurants,
and a comparable restaurant sales increase of 1.9%. One new restaurants opened
in the second quarter of 1999 and 1998. The total number of Company-owned
restaurants at the end of the quarter was 387, (253 Old Country Buffet, 121
HomeTown Buffet, 8 Original Roadhouse Grill, 2 Tahoe Joe's Steakhouse and 3
Country Roadhouse Buffet & Grill), compared to 376 restaurants open at the end
of the second quarter of 1998. Average weekly sales per restaurant for the
second quarter of 1999 increased 2.9% to $47,902 from $46,532 in the comparable
period of 1998. The five new restaurants opened during 1999 generated average
weekly sales of $66,570 during the second quarter. The Company's price increases
have been close to the inflation rate.

RESTAURANT COSTS. As a percentage of restaurant sales, total restaurant costs
decreased to 84.0% for the second quarter of 1999 from 84.4% for the second
quarter of 1998. Food costs as a percentage of restaurant sales decreased to
31.2% from 32.0%, due primarily to a reduction in the cost of various products;
and labor costs increased to 30.5% from 29.4%, due primarily to increases in
hourly employee labor. Direct and occupancy costs decreased as a percentage of
restaurant sales to 22.3% in 1999 from 23.0% 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 increased to 7.2% in
the second quarter of 1999 from 6.6% in the second quarter of 1998. Such
expenses in absolute terms increased 19.0% to $16.1 million for the second
quarter of 1999 from $13.6 million for the comparable period of 1998, primarily
due to a increase in advertising expense in the 1999 quarter. Advertising costs
as a percentage of sales were 2.4% in 1999 compared to 2.1%

<PAGE>

in 1998. The Company is anticipating increasing its marketing spending in 1999
to approximately $23.3 million which included the development of four new
television commercials which started airing in March of 1999.

SITE CLOSING COSTS. The Company closed four underperforming restaurants during
the quarter, including our PIZZAPLAY joint venture, which generated a charge of
$819,000 for the quarter.

INCOME TAXES. Income taxes were 38.0% of earnings before income taxes for the
1999 quarter and 38.5% in the 1998 quarter.

TWENTY-EIGHT WEEKS ENDED JULY 14, 1999
- --------------------------------------

RESTAURANT SALES. For the first twenty-eight weeks of 1999, restaurant sales
increased 8.6% to $500.9 million from $461.4 million in 1998, primarily due to
sales generated by new restaurants, and comparable sales increased by 1.5%. Five
new restaurants opened in the first half of 1999, compared to seven new
restaurants opened in the first half of 1998. The average weekly sales per
restaurant in the 1999 period increased by 1.8% to $46,128 from $45,312 in 1998.

RESTAURANT COSTS. Restaurant costs for the first twenty-eight weeks in 1999
increased to $427.5 million from $395.6 million in 1998. As a percentage of
restaurant sales, the 1999 period costs were 85.4% and the 1998 period costs
were 85.7%. Food costs decreased to 31.9% from 32.5% for the comparable periods;
and labor costs increased to 31.0% from 30.1% for the comparable periods. Direct
and occupancy costs decreased to 22.5% in the first twenty-eight weeks of 1999
from 23.1% in the comparable period in 1998, due to decreases in various
restaurant costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first twenty-eight weeks
of 1999, selling, general and administrative expenses increased to $37.9 million
from $31.5 million in 1998. This increase was primarily due to a 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 6.8% in the
1998 period. This increase was primarily attributable to higher advertising
costs, which for the first twenty-eight weeks of 1999 were 2.4% of restaurant
sales compared to 1.9% in the comparable 1998 period.

INCOME TAXES. Income taxes were 38.0% of earnings before income taxes for the
1999 period and 38.5% for the 1998 period.

<PAGE>

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 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 twenty-eight weeks ended July 15, 1998 and July 14, 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 15 to 16
new restaurants in 1999 with three new Original Roadhouse Grills and three
buffet restaurants already opened at August 25, 1999. The restaurants
constructed in

<PAGE>

1999 will primarily be freestanding restaurants, including five to 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 second quarter, the Company repurchased $6.3 million of its common
stock (620,000 shares at an average price of $10.24). As of July 14, 1999, the
Company had repurchased a total of 3,546,000 shares at an average of $10.92 per
share or $38.7 million. Since July 14, 1999 the Company has purchased a total of
$2.8 million of its common stock (240,000 shares at an average price of $11.65).

On April 7, 1999, the Company acquired an 80% interest in Tahoe Joe's Inc.,
an operator of the two restaurant 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.

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 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

<PAGE>

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 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-

<PAGE>

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 10-K 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 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

<PAGE>

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

<PAGE>

health inspection scores, or negative publicity can have a material 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 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 expenses increase due to inflation,

<PAGE>

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 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

<PAGE>

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 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

<PAGE>

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:
* 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

<PAGE>

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 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

<PAGE>

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
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.

<PAGE>

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 and to handle capacity to handle future Company 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 restaurant were 100%
complete as of June, 1999.

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.

<PAGE>
Y2K PROJECT SCHEDULING AS OF AUGUST 30, 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 30%

During the course of the remediation/testing phase of the Y2K Project, the
Company is attempting 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.
In this way, the Company intends to exercise many representative System
components to test overall Year 2000 Issue readiness. 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.

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 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 $4.8 million budget. The costs of the Company's Y2K
Project are being funded with cash flows from operations. The Company's

<PAGE>

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 August 25, Remaining
Expenditures 1997 1998 1999 1999 1997-99
- ------------ ------- ------- --------- --------- ---------

Consultant Fees** $183,000 $ 19,000 $ 572,000 $287,000 $1,061,000
Hardware Upgrades 0 419,000 1,044,000 22,000 1,485,000
Software Upgrades 0 269,000 280,000 24,000 573,000
-----------

Currently Expected Total Y2K Project Costs, 1997-1999: $3,119,000
==========

Notes:
* Of the $3,119,000 total expected Y2K Project costs, $2,196,000 or 70%
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.

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

<PAGE>

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.

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.

<PAGE>

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 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.

While the Company will continue to seek vendor readiness certifications
relative to the Year 2000 Issue, it is expected that many 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.

<PAGE>

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 are being developed as part of
the third phase of the Y2K Project, remediation/testing. These plans are being
developed for every 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 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
September, 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

<PAGE>

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, 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

<PAGE>

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 motions have
not yet been scheduled for hearing. 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

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of the Company was held on May 11,
1999. At the meeting the number of directors of the Company was set at
six, six directors were elected and the appointment of Deloitte &
Touche LLP as the Company's independent auditors for the current year
was approved, by the following votes:

<PAGE>

Election of Directors FOR WITHHOLD NONVOTES
--------------------- ---------- -------- --------
Walter R. Barry, Jr. 33,119,243 523,599 0
Marvin W. Goldstein 33,119,543 523,299 0
Roe H. Hatlen 33,119,343 523,499 0
Alan S. McDowell 33,114,278 528,564 0
C. Dennis Scott 33,112,704 530,138 0
Michael T. Sweeney 33,119,543 523,299 0

FOR AGAINST ABSTAIN NONVOTES
---------- ------- ------- --------
Approval of auditors 33,192,662 19,334 430,846 0

Item 5. Other Information

None

Item 6. Exhibits and reports on Form 8-K

a) Exhibits
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(a) Fifth Amendment dated April 30, 1999 to Second
Amended and Restated Credit Agreement by and
between the Company and USBank National
Association
10(b) Sixth Amendment dated July 14, 1999 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

(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.

<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)

August 30, 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)

<PAGE>

EXHIBIT INDEX

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

3(a) Composite Amended and Restated
Articles of Incorporation................ Incorporated by Reference

3(b) By-laws of the Company................... Incorporated by Reference

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................. Incorporated by Reference

10(a) Fifth Amendment dated April 30, 1999 to
Second Amended and Restated Credit
Agreement by and between the Company
and USBank National Association.......... Filed Electronically

10(b) Sixth Amendment dated July 14, 1999 to
Second Amended and Restated Credit
Agreement by and between the Company
and USBank National Association.......... Filed Electronically

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

- -------------------

<PAGE>

FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT
AGREEMENT (the "Amendment") is made and entered into as of June 30, 1999 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, that
certain Third Amendment thereto dated as of September 12, 1997, and that certain
Fourth Amendment thereto dated October 1, 1998 (as so amended and as the same
may be amended, supplemented, restated, or otherwise modified, the "Credit
Agreement").

2. The Borrower has requested that the Banks amend certain
provisions contained in the Credit Agreement, and the Banks have agreed to do
so, subject to the terms and conditions set forth in this Amendment.

AGREEMENT
---------

NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
covenant and agree to be bound as follows:

SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.

SECTION 2. AMENDMENT. Section 1.1 of the Credit Agreement is hereby amended
by amending the definition of "Termination Date" in its entirety to read as
follows:

"Termination Date": The earliest of (a) July 14, 1999, (b) the
date on which the Commitments are terminated pursuant to Section
7.2 hereof, or (c) the date on which the Commitment Amounts are
reduced to zero pursuant to Section 2.14 hereof.

-1-

<PAGE>

SECTION 3. 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 4. REPRESENTATIONS; NO DEFAULT. The Borrower hereby represents that
on and as of the date hereof and after giving effect to this Amendment (a) all
of the representations and warranties contained in the Credit Agreement are
true, correct and complete in all material respects as of the date hereof as
though made on and as of such date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they are
true and correct as of such earlier date, and (b) there will exist no Default or
Event of Default on such date which has not been waived by the Banks. The
Borrower represents and warrants that the Borrower has the power and legal right
and authority to enter into the Amendment and has duly authorized as appropriate
the execution and delivery of the Amendment, and the Amendment does not
contravene or constitute a default under any agreement, instrument or indenture
to which the Borrower or any of its Subsidiaries is a party or a signatory or a
provision of the Borrower's or any such Subsidiary's certificate of
incorporation, bylaws or, to the best of the Borrower's knowledge, any other
agreement or requirement of law. The Borrower represents and warrants that no
consent, approval or authorization of or registration or declaration with any
Person, including but not limited to any governmental authority, is required in
connection with the execution and delivery by the Borrower of the Amendment or
the performance of obligations of the Borrower herein described. The Borrower
represents and warrants that the Amendment is the legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms. The
Borrower warrants that no events have taken place and no circumstance exists at
the date hereof which would give the Borrower or any of its Subsidiaries a basis
to assert a defense, offset or counterclaim to any claim of the Agent or any
Bank as to any obligations of the Borrower or any of its Subsidiaries to the
Agent or any Bank.

SECTION 5. AFFIRMATION, FURTHER REFERENCES. The Banks, the Agent and the
Borrower each acknowledge and affirm that the Credit Agreement, as hereby
amended, is hereby ratified and confirmed in all respects and all terms,
conditions and provisions of the Credit Agreement, except as amended by this
Amendment, shall remain unmodified and in full force and effect. All references
in any document or instrument to the Credit Agreement are hereby amended and
shall refer to the Credit Agreement as amended by this Amendment.

-2-

<PAGE>

SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment, from
and after the date hereof, embodies the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes and has merged into it all prior oral and written agreements on the
same subjects by and between the parties hereto with the effect that this
Amendment shall control with respect to the specific subjects hereof.

SECTION 7. LEGAL EXPENSES. As provided in Section 9.2 of the Credit
Agreement, the Borrower agrees to reimburse the Agent upon demand for all
reasonable out-of-pocket expenses (including attorneys' fees and legal expenses
of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the
negotiation or preparation of this Amendment and all other documents negotiated
and prepared in connection with this Amendment, and the Borrower agrees to
reimburse the Agent upon demand for all other reasonable expenses, including
attorneys' fees incurred as a result of or in connection with the enforcement of
the Credit Agreement as amended hereby, and including, without limitation, all
expenses of collection of any loans made or to be made under the Credit
Agreement as amended hereby.

SECTION 8. SEVERABILITY. Each provision of this Amendment and any other
statement, instrument or transactions contemplated hereby or relating hereto
shall be interpreted in such manner as to be effective, valid and enforceable
under the applicable law of any jurisdiction, but, if any provision of this
Amendment or relating hereto or thereto shall be held to be prohibited, invalid
or unenforceable under the applicable law, such provision shall be ineffective
in such jurisdiction only to the extent of such prohibition, invalidity or
unenforceability, without invalidating or rendering unenforceable the remainder
of such provision or the remaining provisions of this Amendment or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness, validity
or enforceability of such provision in any such jurisdiction.

SECTION 9. SUCCESSORS. This Amendment shall be binding upon the Borrower,
the Banks and the Agent and their respective successors and assigns, and shall
inure to the benefit of the Borrower, the Banks and the Agent and the successors
and assigns of the Borrower, the Banks and the Agent.

-3-

<PAGE>

SECTION 10. HEADINGS. The headings of various sections of this Amendment
have been inserted for reference only and shall not be deemed to be a part of
this Amendment.

SECTION 11. COUNTERPARTS. This Amendment may be executed in several
counterparts, all or any of which shall be regarded as one and the same document
and either party to such agreements may execute any such agreement by executing
a counterpart of such agreement.

SECTION 12. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW
PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL
BANKS.

-4-

<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 /s/ Clark C. Grant
---------------------------------
Its Sr. Vice President of Finance
-----------------------------

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 /s/ Megan G. Mourning
------------------------
Its Vice President
--------------------

Address:
U.S. Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302

Attention: Megan Mourning MPFP0601

SIXTH AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT

THIS SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT
AGREEMENT (the "Amendment") is made and entered into as of July 14, 1999 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, that
certain Third Amendment thereto dated as of September 12, 1997, that certain
Fourth Amendment thereto dated October 1, 1998, and that certain Fifth Amendment
thereto dated June 30, 1999 (as so amended and as the same may be amended,
supplemented, restated, or otherwise modified, the "Credit Agreement").

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. AMENDMENTS. The Credit Agreement is hereby amended as follows:

(a) Section 1.1 of the Credit Agreement is hereby amended by amending the
definition of "Termination Date" in its entirety to read as follows:

"Termination Date": The earliest of (a) June 30, 2002, (b)
the date on which the Commitments are terminated pursuant to
Section 7.2 hereof or (c) the date on

-1-

<PAGE>

which the Commitment Amounts are reduced to zero pursuant to
Section 2.14 hereof.

(b) Section 1.1 of the Credit Agreement is further amended by amending the
definition of "Transformation Date" in its entirety to read as follows:

"Transformation Date": July 1, 2002.
-------------------

Section 2.17 Letter of Credit Fees. For each Letter of Credit issued,
the Borrower shall pay to the Agent for the account of the Banks, in
advance payable on the date of issuance, a fee (a "Letter of Credit
Fee") in an amount determined by applying a per annum rate of (a) in
the case of each Letter of Credit with an expiration date less than
six months after its issuance date, three-quarters of one percent
(0.75%), (b) in the case of each Letter of Credit with an expiration
date less than twelve months after its issuance date, one and
one-quarter percent (1.25%), and (c) in the case of any other Letter
of Credit, one and one-half percent (1.50%), to the original face
amount of the Letter of Credit for the period from the date of
issuance to the scheduled expiration date of such Letter of Credit. In
addition to the Letter of Credit Fee, the Borrower shall pay to the
Agent, on demand, all issuance, amendment, drawing and other fees
regularly charged by the Agent to its letter of credit customers and
all out-of-pocket expenses incurred by the Agent in connection with
the issuance, amendment, administration or payment of any Letter of
Credit.

(d) A new Section 4.23 is hereby added to the Credit Agreement to read as
follows:

Section 4.23 Year 2000. With respect to the year 2000 issue, the
Borrower shall diligently pursue to completion its year 2000 readiness
program that is currently underway and shall accurately describe the
status of that program in its periodic reporting to shareholders
pursuant to its reports 10-Q and 10-K, so long as the year 2000 issue
remains a material consideration for its shareholders. Borrower shall
provide the Bank with copies of these reports when filed with the
Securities and Exchange Commission.

(e) Section 6.7 of the Credit Agreement is hereby amended in its entirety
to read follows:

Section 6.7 Restricted Payments. The Borrower will not make any
Restricted Payments, except that, to the extent no Default or Event of
Default has

-2-

<PAGE>

occurred, is continuing or would occur as a result thereof, (a) the
Borrower may issue Series A Junior Participation Preferred Shares in
accordance with the terms of its Rights Agreement dated as of October
24, 1995, as now in effect or as amended from time to time, and (b)
the Borrower shall be permitted to make Restricted Payments for the
sole purpose of redeeming common stock of the Borrower, in an
aggregate amount not to exceed the amount of cash shown on the balance
sheet of the Borrower at the end of the most recently completed
Quarterly Period.

(f) Section 6.10 of the Credit Agreement is hereby amended in its entirety
to read as follows:

Section 6.10 Capital Expenditures. The Borrower will not, and will not
permit any Subsidiary to (a) make Capital Expenditures (other than
Capitalized Restaurant Lease Obligations), net of any landlord
contribution, in an amount greater than $90,000,000 in any fiscal
year; or (b) enter into Capitalized Restaurant Lease Obligations,
except Capitalized Restaurant Lease Obligations of the Borrower, any
Real Estate Subsidiary and, to the extent permitted pursuant to
Section 6.18, other Subsidiaries, in any fiscal year which exceed
$15,000,000.

(g) Section 6.12(f) of the Credit Agreement is hereby amended in its
entirety to read as follows:

(f) loans to and investments in (in addition to those permitted by
clause (d)) entities other than wholly-owned Subsidiaries or
Guarantors that are primarily engaged in the type of business engaged
in by the Borrower, not to exceed at any one time an aggregate of
$25,000,000.

(h) Section 6.15 of the Credit Agreement is hereby amended in its entirety
to read as follows:

Section 6.15 Leverage Ratio. The Borrower will not permit its
consolidated Leverage Ratio at any time to be more than 2.30 to 1.00.

(i) Section 6.20 of the Credit Agreement is hereby deleted in its
entirety.

(j) Section 6.21 of the Credit Agreement is hereby renumbered as Section
6.20.

-3-

<PAGE>

-4-

<PAGE>

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 10. HEADINGS. The headings of various sections of this Amendment
have been inserted for reference only and shall not be deemed to be a part of
this Amendment.

[The Remainder of this Page is Intentionally Left Blank]

-5-

<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 /c/ Clark C. Grant
----------------------------------
Its Sr. Vice President of Finance
------------------------------

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 Megan G. Mourning
--------------------
Its Vice President
----------------

Address:
U.S. Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302

Attention: Megan Mourning MPFP0601

S-1

<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 JULY 14, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000750274
<NAME> Buffets, Inc.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> JUL-14-1999
<CASH> 97,350
<SECURITIES> 0
<RECEIVABLES> 1,125
<ALLOWANCES> 0
<INVENTORY> 4,163
<CURRENT-ASSETS> 122,044
<PP&E> 557,161
<DEPRECIATION> 223,476
<TOTAL-ASSETS> 471,461
<CURRENT-LIABILITIES> 102,079
<BONDS> 41,465
0
0
<COMMON> 423
<OTHER-SE> 293,596
<TOTAL-LIABILITY-AND-EQUITY> 471,461
<SALES> 500,875
<TOTAL-REVENUES> 500,875
<CGS> 427,539
<TOTAL-COSTS> 427,539
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,583
<INCOME-PRETAX> 35,986
<INCOME-TAX> 13,675
<INCOME-CONTINUING> 22,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,311
<EPS-BASIC> .51
<EPS-DILUTED> .49

</TABLE>