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 12, 2000 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.)
1460 Buffet Way, Eagan, MN 55121
(Address of principal executive offices)
(651) 994-8608
(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 23, 2000
----- ----------- -- -- ---------------
Common Stock, $.01 par value 41,612,949 shares
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BUFFETS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Statements of Earnings-
Twenty-Eight Weeks ended July 14, 1999 and
July 12, 2000 and Twelve Weeks ended
July 14, 1999 and July 12, 2000 (Unaudited)........................ 3
Condensed Consolidated Balance Sheets-
December 29, 1999 and July 12, 2000 (Unaudited).................... 4
Condensed Consolidated Statements of Cash Flows-
Twenty-Eight Weeks ended July 14, 1999
and July 12, 2000 (Unaudited)...................................... 5
Notes to Condensed Consolidated
Financial Statements .............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 8
PART II. OTHER INFORMATION .................................................19
2
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BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
TWENTY-EIGHT WEEKS ENDED TWELVE WEEKS ENDED
------------------------ ------------------
JULY 14, JULY 12, JULY 14, JULY 12,
1999 2000 1999 2000
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
RESTAURANT SALES..................... $500,875 $542,941 $223,037 $240,201
RESTAURANT COSTS:
Food ....................... 159,533 172,326 69,492 75,649
Labor ...................... 155,076 166,908 68,050 73,275
Direct and occupancy ....... 112,930 117,742 49,763 52,000
-------- -------- -------- --------
Total restaurant ........... 427,539 456,976 187,305 200,924
-------- -------- -------- --------
RESTAURANT PROFITS .................. 73,336 85,965 35,732 39,277
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES..... 37,885 42,249 16,141 17,157
IMPAIRMENT OF ASSETS AND
SITE CLOSING COSTS.......... 1,148 1,808 819 669
-------- -------- -------- --------
34,303 41,908 18,772 21,451
OTHER INCOME ........................ 1,683 2,272 744 1,188
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES ........ 35,986 44,180 19,516 22,639
INCOME TAXES ........................ 13,675 16,790 7,415 8,605
-------- -------- -------- --------
NET EARNINGS ........................ $ 22,311 $ 27,390 $ 12,101 $ 14,034
======== ======== ======== ========
EARNINGS PER SHARE:
Basic....................... $.51 $.66 $.28 $.34
======== ======== ======== ========
Diluted..................... $.49 $.62 $.27 $.32
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic....................... 43,499 41,563 42,514 41,585
Diluted..................... 47,362 45,482 46,437 45,771
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 29, JULY 12,
1999 2000
----------- ------
(in thousands, except par value amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 72,260 $108,611
Receivable from landlords ........................... 1,092 1,001
Inventory .......................................... 4,705 4,645
Prepaid and other current assets .................... 8,946 9,859
Deferred income taxes ................................ 14,448 16,223
-------- --------
TOTAL CURRENT ASSETS ............................. 101,451 140,339
PROPERTY AND EQUIPMENT:
Land................................................. 21,652 23,394
Building............................................. 41,855 48,903
Equipment ........................................... 279,317 282,971
Leasehold improvements .............................. 247,141 253,737
-------- --------
589,965 609,005
Less accumulated depreciation and amortization ...... 236,308 247,439
-------- --------
353,657 361,566
GOODWILL ............................................... 16,393 15,782
OTHER ASSETS ........................................... 6,134 8,065
-------- --------
$477,635 $525,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 34,209 $ 34,762
Accrued payroll and related benefits ................ 23,777 28,793
Accrued rents ....................................... 19,757 19,238
Accrued sales taxes ................................. 4,033 5,588
Accrued insurance.................................... 5,945 7,729
Accrued store closing costs.......................... 4,401 5,294
Other accrued expenses .............................. 7,848 10,086
Income taxes payable................................. - 8,553
Current portion of capital leases.................... 686 -
-------- --------
TOTAL CURRENT LIABILITIES ........................ 100,656 120,043
LONG-TERM DEBT ......................................... 41,465 41,465
MINORITY INTEREST....................................... 265 318
DEFERRED INCOME TAXES .................................. 28,866 29,637
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 41,545 and
41,604 shares, respectively ...................... 415 416
Additional paid-in capital .......................... 111,152 111,667
Retained earnings ................................... 194,816 222,206
-------- --------
TOTAL STOCKHOLDERS' EQUITY ....................... 306,383 334,289
-------- --------
$477,635 $525,752
======== ========
See Notes to Condensed Consolidated Financial Statements.
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BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Twenty-Eight Weeks Ended
------------------------
JULY 14, JULY 12,
1999 2000
------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings ........................................... $22,311 $ 27,390
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization ....................... 23,429 22,824
Impairment of assets and site closing costs.......... 1,148 1,808
Deferred income taxes ............................... 1,139 (1,004)
Other (net).......................................... 102 117
Changes in assets and liabilities net of
acquisitions:
Inventory ........................................ 535 60
Prepaid and other current assets ................. 2,434 (913)
Other assets ..................................... (14) 124
Accounts payable ................................. (1,366) 553
Accrued payroll and related benefits ............. 2,872 5,016
Accrued store closing costs....................... (645) 893
Other accrued expenses ........................... 3,283 4,943
Income taxes payable ............................. 4,002 8,553
------- --------
Total adjustments ................................ 36,919 42,974
------- --------
Net cash provided by operating activities......... 59,230 70,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements ............... (22,037) (34,142)
Purchase of restaurants, less cash acquired ............ (6,742) -
Cash received from landlords ........................... 2,166 340
------- --------
Net cash used in investing activities ............ (26,613) (33,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options........ 253 475
Repurchase of common stock.............................. (28,299) -
Payments on capital leases.............................. (1,279) (686)
------- --------
Net cash used in financing activities ............ (29,325) (211)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 3,292 36,351
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 94,058 72,260
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $97,350 $108,611
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest of $167
and $252 in 1999 and 2000, respectively)............ $ 1,583 $ 1,451
Income taxes ........................................... 5,448 9,086
</TABLE>
See Notes to Condensed 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 July 12, 2000 and the results of
operations for the twelve weeks ended July 14, 1999 and July 12, 2000 and
the results of operations and cash flows for the twenty-eight weeks ended
July 14, 1999 and July 12, 2000.
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 29, 1999 and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this quarterly report.
3. Restaurant sales are recorded when meals are served to customers. Franchise
fees and royalties as earned.
4. 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 14, July 12, July 14, July 12,
1999 2000 1999 2000
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net earnings ................................. $22,311 $27,390 $12,101 $14,034
Interest on convertible
subordinated notes (after tax)............... 970 984 415 408
------- ------- ------- -------
Income available to common
shareholders and assumed
conversion .................................. $23,281 $28,374 $12,516 $14,442
======= ======= ======= =======
Weighted average common
shares outstanding........................... 43,499 41,563 42,514 41,585
Dilutive effect of:
Convertible subordinated notes............... 3,553 3,553 3,553 3,553
Stock options ............................ 310 366 370 633
------- ------- ------- -------
Common shares assuming dilution............... 47,362 45,482 46,437 45,771
======= ======= ======= =======
</TABLE>
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5. On June 4, 2000, the Company entered into an Agreement and Plan of Merger
with an affiliate of Caxton-Iseman Capital, Inc. and a wholly-owned
subsidiary of that affiliate, providing for the merger of the subsidiary
into the Company. Following completion of the merger, the Company will
operate as a private company. It is expected that, after completion of the
merger, members of the Company's existing senior management will own
approximately 16% of the surviving company. Upon completion of the merger,
shareholders of the Company will receive $13.85 per share of common stock
that they hold. The completion of the merger is subject to various
conditions, including the availability of financing and approval by the
Company's shareholders.
6. Six purported class actions have been commenced on behalf of putative
classes of the Company's public shareholders seeking, among other things,
to enjoin the proposed merger. A Court Order on August 7, 2000, provided
that the six actions will be consolidated under one name, certain law firms
be appointed as co-lead counsel and liaison counsel for the plaintiffs, and
the plaintiffs serve and file a consolidated and amended complaint within
30 days. The Company's management believes the claims alleged in the six
original complaints are without merit.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company operates on a fifty-two or fifty-three week fiscal year, which
ends on the Wednesday nearest December 31. The Company's first quarter consists
of sixteen weeks; all other quarters are comprised of twelve weeks. When a
fifty-three week year occurs, the Company's fourth quarter consists of thirteen
weeks.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED JULY 12, 2000
--------------------------------
RESTAURANT SALES. Restaurant sales of $240.2 million during the second quarter
of 2000 represented a 7.7% increase over sales of $223.0 million for the
comparable period of 1999, primarily due to sales generated by new restaurants,
and a comparable restaurant sales increase of 2.7%. Three new restaurants opened
in the second quarter of 2000. The total number of Company-owned restaurants at
July 12, 2000 was 403, (252 Old Country Buffet, 127 HomeTown Buffet, 12 Original
Roadhouse Grill, six Granny's Buffet, three Tahoe Joe's Steakhouse, two Country
Roadhouse Buffet & Grill and one Soup `N Salad), compared to 387 restaurants
open at the end of the second quarter of 1999. Average weekly sales per
restaurant for the second quarter of 2000 increased 3.7% to $49,650.
RESTAURANT COSTS. As a percentage of restaurant sales, total restaurant costs
decreased to 83.6% for the second quarter of 2000 from 84.0% for the second
quarter of 1999. Food costs as a percentage of restaurant sales increased
modestly to 31.5% from 31.2%, reflecting overall stability in food costs. Labor
costs were flat, at 30.5% for both comparable periods. Direct and occupancy
costs decreased as a percentage of restaurant sales to 21.6% in 2000 from 22.3%
in 1999, due primarily to better fixed cost absorption associated with stronger
unit volumes in existing units and higher than system average volumes obtained
in new units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of restaurant sales were slightly above
seven percent of sales in both comparable quarters. Such expenses in absolute
terms increased 6.3% to $17.2 million for the second quarter of 2000 from $16.1
million for the comparable period of 1999, primarily due to an increase in
advertising expense in the most recent quarter. Advertising costs as a
percentage of sales were 2.6% in 2000 compared to 2.4% in 1999.
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IMPAIRMENT OF ASSETS AND SITE CLOSING COSTS. The Company closed one
underperforming restaurant during the second quarter of 2000, generating a
charge of $669,000.
INCOME TAXES. Income taxes were 38.0% of earnings before income taxes for both
the 2000 quarter and the 1999 quarter.
TWENTY-EIGHT WEEKS ENDED JULY 12, 2000
--------------------------------------
RESTAURANT SALES. For the first twenty-eight weeks of 2000, restaurant sales
increased 8.4% to $542.9 million from $500.9 million in 1999, primarily due to
sales generated by new restaurants, and comparable store sales gains. Comparable
store sales were up 3.1%. Five new restaurants opened in the first half of both
2000 and 1999. The average weekly sales per restaurant in the 2000 period
increased by 4.3% to $48,119.
RESTAURANT COSTS. Restaurant costs for the first twenty-eight weeks in 2000
increased to $457.0 million from $427.5 million in 1999. As a percentage of
restaurant sales, 2000 restaurant costs were 84.2% of sales versus 1999 costs of
85.4%. Food costs decreased to 31.7% in the 2000 period from 31.9% for the
comparable period in 1999. Labor costs decreased to 30.7% from 31.0% for the
comparable periods. Direct and occupancy costs decreased to 21.7% in the first
twenty-eight weeks of 2000 from 22.5% in the comparable period in 1999, due
primarily to better fixed cost absorption with stronger sales volumes in new and
existing units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first twenty-eight weeks
of 2000, selling, general and administrative expenses increased to $42.2 million
from $37.9 million in 1999. This increase was primarily due to a increase in
advertising expense in 2000. As a percentage of sales, selling, general and
administrative expenses increased to 7.8% in the 2000 period from 7.6% in the
1999 period. This increase was primarily attributable to higher advertising
costs, which for the first twenty-eight weeks of 2000 were 2.7% of restaurant
sales compared to 2.4% in the comparable 1999 period.
IMPAIRMENT OF ASSETS AND SITE CLOSING COSTS. The Company has sold five
underperforming restaurants and closed one underperforming restaurant to date in
2000, resulting in a charge of $1,808,000 for the twenty-eight week period. The
Company recorded a loss of approximately $1.1 million on the sale of the five
restaurants and expenses of approximately $700,000 on the closure of one
restaurant.
INCOME TAXES. Income taxes were 38% of earnings before income taxes for both the
2000 and 1999 period.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurants generate cash immediately through sales. The
majority of new restaurants are generally profitable within the eight weeks (the
end of the second accounting period of 13 such periods in our fiscal year) 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.
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 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 period ended July 12, 2000 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.
The Company's Board of Directors has authorized the expenditure of up to
$80 million for the purchase of outstanding shares of the Company's common
stock, to be effected from time to time in transactions on the Nasdaq National
Market or otherwise. As of July 12, 2000 the Company had repurchased $47.1
million of its common stock (4,326,000 shares at an average price of $10.88)
since the repurchase program was commenced in 1998.
The Company requires significant amounts of capital to fund its growth.
During 2000, the Company expects to open approximately 14 to 16 restaurants,
approximately 8 to 10 buffet restaurants and 4 to 6 non-core buffet restaurants.
The Company expects to spend approximately $30 to $35 million in aggregate on
these new restaurants, principally for leasehold improvements depending upon the
level of contributions obtained from landlords. The Company also expects to
spend $12 to $15 million in various remodeling and improvement costs at existing
facilities. In addition, the Company
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periodically evaluates the purchase of existing restaurants and/or restaurant
concepts.
The Company also spent approximately $6.0 million during the first half of
2000 on its new corporate office facility. This facility in Eagan, Minnesota,
was completed in March 2000.
The Company has traditionally located its restaurants within or adjacent to
strip or neighborhood shopping centers in principally leased facilities. 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 substantially all of the restaurants to be opened in 2000
will be freestanding units. The capital expenditure required for a freestanding
location can be over 100% greater than that requires 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. The Company is also finding that new,
particularly full service, restaurant concepts have had the impact of increasing
pre-opening costs for each location.
Restaurants to be opened or converted in 2000 and early 2001 are
anticipated to be funded from existing cash and cash equivalents, cash provided
by operations, credit received from trade suppliers, landlord contributions for
leasehold improvements and current and expected future 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 2000 and early 2001. However, in order to remain prepared
for further significant growth in future years, the Company will continue to
evaluate its financing needs and seek additional funding if appropriate. The
Company has not paid any cash dividends on its common stock and, pursuant to its
credit agreement, is restricted from declaring or paying cash dividends without
the approval of the Company's lender. The agreement and plan of merger with
Caxton-Iseman Capital, Inc. and its affiliate precludes major payment of cash
dividends by the Company prior to the closing date.
ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101 which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
Companies are required to modify their revenue recognition policy to comply with
SAB No. 101 by the fourth quarter of fiscal 2000, retroactive to the
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first quarter of fiscal 2000. While the Company does not believe the adoption of
SAB No. 101 will have a material impact on its recognition of revenue, it
continues to evaluate the potential impact.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. In July 1999, the FASB issues
SFAS No. 137 delaying the effective date of SFAS No. 133 for one year to fiscal
years beginning after June 15, 2000, with earlier adoption encouraged. The
Company has not yet determined the effects SFAS No. 133 will have on its
financial position or the results of its operations.
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, the Company's Form 10-K and other ongoing securities
filings, press releases, conference calls and discussions with securities
analysts, and other communications contain 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-looking statements or these risk factors to
reflect future events or unanticipated occurrences.
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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.
MERGER
On June 4, 2000, the Company entered into an Agreement and Plan of Merger
with an affiliate of Caxton-Iseman Capital, Inc. and a wholly-owned subsidiary
of that affiliate, providing for the merger of the subsidiary into the Company.
Following completion of the merger, the Company will operate as a private
company. It is expected that, after completion of the merger, members of the
Company's existing senior management will own approximately 16% of the surviving
company. Upon completion of the merger, shareholders of the Company will receive
$13.85 per share of common stock that they hold. The completion of the merger is
subject to various conditions, including the availability of financing and
approval by the Company's shareholders. If the merger were not to be
consummated, such failure could have a material adverse effect upon 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 2000 to the extent described above in the section captioned
"Liquidity and Capital Resources." 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
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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. 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
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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 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 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, 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."
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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-Q 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
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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 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
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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
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.
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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 and a lawsuit challenging the proposed merger.
See "LEGAL PROCEEDINGS" below for a discussion of this lawsuit and the related
risks.
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 financing 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.
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Securities Litigation
---------------------
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 putative class of all purchasers of common
stock of the Company from October 26, 1993 through October 25, 1994
(the "class period") in the United States District Court for the
District of Minnesota. The 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 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.
On May 28, 1999, the defendants moved for summary judgment on all
claims. Plaintiffs also moved for partial summary judgement against
the Company and Mr. Hatlen for a portion of the class period. The
District Court heard oral argument on the respective motions on
December 10, 1999, and denied both the Plaintiffs and Defendants
summary judgement motions on May 11, 2000. Management of the Company
continues to believe that the action is without merit and is
vigorously defending it.
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
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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.
Litigation Challenging the Merger
---------------------------------
Six purported class actions (BROWN V. HATLEN, ET AL.; BURTON V.
HATLEN, ET AL.; PIORKOWSKI V. HATLEN, ET AL.; SHEREN V. HATLEN, ET
AL., KINGSBERG V. HATLEN, ET AL.; AND BLECH V. HATLEN, ET AL.) have
been commenced on behalf of putative classes of the public
shareholders of Buffets in Dakota County (Minnesota) District Court
(the "Court") seeking, among other things, to enjoin the proposed
merger of Buffets with Caxton-Iseman Capital. The complaints name as
defendants Buffets and each member of Buffets' board of directors. The
complaints allege, among other things, that Buffets' directors
breached their fiduciary duties by approving the merger and not
maximizing value for Buffets' shareholders. In addition, the
complaints allege that certain of the directors have conflicts of
interest that prevented them from acting in the best interests of
Buffets' shareholders. By Order filed on August 7, 2000, the Court
ordered that the six actions be consolidated under the name IN RE
BUFFETS, INC. SHAREHOLDER LITIGATION, that certain law firms be
appointed as co-lead counsel and liason counsel for the plaintiffs,
and that the plaintiffs serve and file a consolidated and amended
complaint within 30 days. Defendants have not yet received any
consolidated or amended complaint. However, Buffets believes that the
claims alleged in the six original complaints are without merit.
Item 2. Changes in Securities
Pursuant to the June 4, 2000 Agreement and Plan of Merger with an
affiliate of Caxton-Iseman Capital, Inc. and a wholly-owned subsidiary
of that affiliate, the Company agreed that Buffets, Inc.'s board of
directors would take all necessary action to exempt the merger and the
merger agreement from the operation of Buffets' share rights agreement
and to terminate the outstanding preferred stock purchase rights under
the rights agreement immediately before the completion of the merger.
In furtherance of this requirement, as of June 4, 2000, the Company's
board of directors approved an amendment to the Company's rights
agreement to effect the foregoing.
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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 9,
2000. At the meeting the number of directors of the Company was set at
seven, seven 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:
Election of Directors FOR WITHHOLD NONVOTES
--------------------- ---------- -------- --------
Walter R. Barry, Jr. 35,896,376 2,041,410
Marvin W. Goldstein 35,896,676 2,041,110
Roe H. Hatlen 35,896,676 2.041,110
Alan S. McDowell 35,896,676 2,041,110
Kerry A. Kramp 35,896,376 2,041,410
C. Dennis Scott 35,896,676 2,041,110
Michael T. Sweeney 35,896,676 2,041,110
FOR AGAINST ABSTAIN NONVOTES
---------- --------- --------- --------
Approval of the 2000
Omnibus Stock Plan 29,443,839 7,404,520 1,089,426 1
FOR AGAINST ABSTAIN NONVOTES
---------- ------- ------- --------
Approval of auditors 37,888,430 22,238
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
a) Exhibits
2 Agreement and Plan of Merger, dated as of June 4, 2000, among
Buffets, Inc., Big Boy Holdings, Inc., and Big Boy Merger
Corporation (1)
3(a) Composite Amended and Restated Articles of Incorporation (2)
3(b) By-laws of the Company (3)
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 (4)
27 Financial Data Schedule
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b) Reports on 8-K
Form 8-K filed on June 6, 2000, with respect to the proposed
acquisition of the Company by an affiliate of Caxton-Iseman
Capital, Inc.
(1) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K filed June 6, 2000 (File No. 0-14370).
(2) Incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-3 dated June 2, 1993 (Registration No. 33-63694).
(3) Incorporated by reference to Exhibit 3(b) to Annual Report on Form 10-K for
the fiscal year ended December 29, 1993.
(4) Incorporated by reference to Exhibit 1 to Report on Form 8-K dated October
24, 1995.
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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 25, 2000
/s/ Kerry A. Kramp
--------------------------------
Kerry A. Kramp
Chief Executive Officer &
President
(Principal Executive Officer)
/s/ Richard Michael Andrews, Jr.
--------------------------------
Richard Michael Andrews, Jr.
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibits Page
-------- ----
2 Agreement and Plan of Merger, dated as of
June 4, 2000, among Buffets, Inc., Big Boy
Holdings Inc., and Big Boy Merger
Corporation................................ Incorporated by Reference
3(a) Composite Amended and Restated
Articles of Incorporation.................. Incorporated by Reference
3(b) By-laws of the Company..................... Incorporated by Reference
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
27 Financial Data Schedule.................... Filed Electronically
