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
April 19, 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 June 1, 2000
----- ----------- -- -- ------------
Common Stock, $.01 par value 41,577,129 shares
1
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Statements of Earnings
Sixteen Weeks Ended April 21, 1999
and April 19, 2000 (Unaudited).......................3
Condensed Consolidated Balance Sheets -
December 29, 1999 and April 19, 2000 (Unaudited).....4
Condensed Consolidated Statements of Cash Flows-
Sixteen Weeks Ended April 21, 1999 and
April 19, 2000 (Unaudited)...........................5
Notes to Condensed Consolidated Financial
Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................7
PART II. OTHER INFORMATION....................................17
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
SIXTEEN WEEKS ENDED
------------------------
APRIL 21, APRIL 19,
1999 2000
-------- --------
(in thousands, except per share amounts)
RESTAURANT SALES .................... $277,838 $302,740
RESTAURANT COSTS:
Food costs ...................... 90,041 96,677
Labor costs ..................... 87,026 93,633
Direct and occupancy costs ...... 63,167 65,742
-------- --------
Total restaurant costs ........ 240,234 256,052
-------- --------
RESTAURANT PROFITS .................. 37,604 46,688
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............ 21,744 25,092
IMPAIRMENT OF ASSETS AND
SITE CLOSING COSTS.................. 329 1,139
-------- --------
15,531 20,457
OTHER INCOME ........................ 939 1,084
-------- --------
EARNINGS BEFORE INCOME TAXES ........ 16,470 21,541
INCOME TAXES ........................ 6,260 8,185
-------- --------
NET EARNINGS ........................ $ 10,210 $13,356
======== ========
EARNINGS PER SHARE:
Basic............................ $.23 $.32
======== ========
Diluted.......................... $.22 $.31
======== ========
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic............................ 44,238 41,547
Diluted.......................... 48,056 45,265
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
DECEMBER 29, APRIL 19,
1999 2000
------------ ---------
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents................................ $ 72,260 $ 92,604
Receivable from landlords................................ 1,092 1,162
Inventory................................................ 4,705 4,435
Prepaid rents............................................ 1,891 1,023
Other current assets..................................... 7,055 7,999
Deferred income taxes.................................... 14,448 14,919
-------- --------
TOTAL CURRENT ASSETS.................................. 101,451 122,142
PROPERTY AND EQUIPMENT:
Land..................................................... 21,652 22,634
Buildings................................................ 41,855 47,351
Equipment................................................ 279,317 281,020
Leasehold improvements................................... 247,141 248,719
-------- --------
589,965 599,724
Less accumulated depreciation and amortization........... 236,308 241,717
-------- --------
353,657 358,007
GOODWILL.................................................... 16,393 16,071
OTHER ASSETS................................................ 6,134 7,238
-------- --------
$477,635 $503,458
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 34,209 $33,913
Accrued payroll and related benefits...................... 23,777 27,051
Accrued rents............................................. 19,757 18,466
Accrued sales taxes....................................... 4,033 5,533
Accrued insurance......................................... 5,945 7,148
Accrued store closing costs............................... 4,401 4,273
Other accrued expenses.................................... 7,848 10,879
Income taxes payable...................................... - 5,243
Current portion of capital leases......................... 686 26
------- --------
TOTAL CURRENT LIABILITIES.............................. 100,656 112,532
LONG-TERM DEBT............................................... 41,465 41,465
OTHER NON-CURRENT LIABILITIES................................ - 181
MINORITY INTEREST............................................ 265 290
DEFERRED INCOME TAXES........................................ 28,866 29,232
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
41,548 shares, respectively............................ 415 415
Additional paid-in capital................................ 111,152 111,171
Retained earnings......................................... 194,816 208,172
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 306,383 319,758
-------- --------
$477,635 $503,458
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
SIXTEEN WEEKS ENDED
-------------------------
APRIL 21, APRIL 19,
1999 2000
--------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings............................................. $10,210 $13,356
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization ................... 13,321 13,083
Impairment of assets and site closing costs...... 329 1,139
Deferred income taxes ........................... 978 (105)
Other, net....................................... 117 126
Changes in assets and liabilities:
Inventory ....................................... 496 270
Other current assets ............................ (67) (180)
Refundable income taxes.......................... 2,666 104
Other assets .................................... (1) 68
Accounts payable ................................ (1,443) (296)
Accrued payroll and related benefits ............ 2,187 3,274
Accrued store closing costs ..................... (471) (128)
Other accrued expenses .......................... 2,573 4,443
Income taxes currently payable .................. - 5,243
------- -------
Total adjustments............................. 20,685 27,041
------- -------
Net cash provided by operating activities..... 30,895 40,397
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (11,110) (19,594)
Purchase of restaurants, less cash acquired......... (6,742) -
Cash received from landlords ....................... 1,999 142
------- -------
Net cash used in investing activities......... (15,853) (19,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases.......................... (755) (660)
Proceeds from exercise of employees' stock options . 98 59
Repurchase of common stock.......................... (21,953) -
------- -------
Net cash used in financing activities......... (22,610) (601)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (7,568) 20,344
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ 94,058 72,260
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $86,490 $92,604
======= =======
Supplemental disclosures of cash flow information:
NON CASH INVESTING AND FINANCING ACTIVITIES:
Sale of restaurants in exchange for note receivable. - $ 1,242
Cash paid during the period for:
Interest (net of capitalized interest of $93 and
$119 in 1999 and 2000, respectively)................ $ 935 $ 0
Income taxes ....................................... 2,609 2,940
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position of Buffets, Inc. and subsidiaries as of April 19,
2000 and the results of operations and cash flows for the sixteen weeks
ended April 21, 1999 and April 19, 2000.
2. These statements should be read in conjunction with the Notes to 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 appearing on
pages 7 through 17 of this quarterly report.
3. 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:
Sixteen Sixteen
Weeks Ended Weeks Ended
April 21, April 19,
1999 2000
----------- -----------
Net earnings ..................... $10,210 $13,356
Interest on convertible
subordinated notes (after tax)... 555 530
------- -------
Income available to common
shareholders and assumed
conversion....................... $10,765 $13,886
======= =======
Weighted average common
shares outstanding............... 44,238 41,547
Dilutive effect of:
Convertible subordinated notes... 3,554 3,553
Stock options.................... 264 165
------- -------
Common shares assuming dilution... 48,056 45,265
======= =======
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company operates on a fifty-two or fifty-three week fiscal year, which
ends on the Wednesday nearest December 31. The Company's first quarter consists
of sixteen weeks; all other quarters are comprised of twelve weeks. When a
fifty-three week year occurs, the Company's fourth quarter consists of thirteen
weeks.
RESULTS OF OPERATIONS
SIXTEEN WEEKS ENDED APRIL 19, 2000
RESTAURANT SALES. Restaurant sales of $302.7 million during the first
sixteen weeks of 2000 represented a 9.0% increase over sales of $277.8 million
for the comparable period of 1999, due to sales generated by new restaurants and
a comparable restaurant sales increase of 3.4%. Two new restaurants opened, and
two restaurants were closed in the first quarter of 2000, bringing the total
number of Company-owned restaurants to 403 at the end of the quarter (253 Old
Country Buffet(R), 126 HomeTown Buffet(R), 11 The Original Roadhouse Grill(SM),
six Granny's Buffet(R), three Tahoe Joe's Famous Steakhouse(R), three Country
Roadhouse Buffet & Grill(SM), and one Soup 'N Salad Unlimited(SM)), compared to
391 restaurants open at the end of the comparable 1999 period. Average weekly
sales per restaurant for the first sixteen weeks of 2000 increased 4.8% to
$46,969 from $44,798 in the comparable period of 1999. New restaurants opened
during the quarter generated average weekly sales well above the Company's first
quarter average. 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 84.6% for the first sixteen weeks of 2000 from 86.5% for the
first sixteen weeks of 1999. Food costs as a percentage of restaurant sales
decreased to 32.0% from 32.4%. Labor costs decreased to 30.9% in 2000 from 31.3%
in 1999 primarily due to the improvement in employee efficiencies with the
increase in sales. Direct and occupancy costs decreased as a percentage of sales
to 21.7% in 2000 from 22.8% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of restaurant sales, inclusive of
marketing, increased to 8.3% in the first sixteen weeks of 2000 from 7.8% in the
first sixteen weeks of 1999. Such expenses in absolute terms were higher at
$25.1 million for the first sixteen weeks of 2000 from $21.7 million in the
comparable period of 1999, primarily as a result of increases in advertising in
2000 compared to the first quarter of 1999.
7
<PAGE>
Advertising costs as a percentage of restaurant sales were 2.8% in 2000 compared
to 2.5% in 1999. The Company is anticipating increasing its marketing spending
in 2000 to approximately $28.4 million.
SITE CLOSING COSTS. The Company sold five underperforming restaurants
during the quarter, three of which generated a charge of $1,139,000. Two
restaurants were closed in the first quarter and two restaurants closed
subsequent to the end of the quarter with the fifth restaurant to close by the
end of the second quarter.
INCOME TAXES. Income taxes were 38.0% of earnings before taxes for 2000 and
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurants generate cash immediately through sales. The
majority of new restaurants are profitable within the second 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 and the
repurchase of common stock 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 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 periods ended April 19, 2000 and April 21, 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. There were no conversions in
1999 and the first quarter of 2000.
8
<PAGE>
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. As
of April 19, 2000 and December 29, 1999, the Company had repurchased $47.1
million of its common stock (4,326,000 shares at an average price of $10.88).
The Company requires significant amounts of capital to fund its growth.
During 2000, the Company expects to open approximately 16 to 20 restaurants,
approximately 8 to 10 buffet restaurants and 8 to 10 non-core buffet
restaurants. The Company expects to spend approximately $38 to $43 million in
aggregate on these new restaurants, for leasehold improvements depending upon
the level of contributions obtained from landlords. The Company also expects to
spend $7 to $10 million in various remodeling and improvement costs at existing
facilities. In addition, the Company periodically evaluates the purchase of
existing restaurants and/or restaurant concepts.
The Company also expects to spend approximately $6.0 million during the
first half of 2000 on its new corporate office location in Eagan, Minnesota
which 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.
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 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 for a mall location. If the Company
further pursues development of freestanding locations, the cost per location and
related cash requirements will increase substantially over the Company's
historical costs of development and may not be offset by landlord contributions
that typically have been associated with in-line mall locations. The Company is
also finding that new, particularly full service, restaurant concepts have had
the impact of increasing pre-opening costs for each location.
Sources of capital for 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
9
<PAGE>
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.
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 sold
three underperforming restaurants during the quarter which generated a charge of
$1,139,000. The Company has reviewed the other 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-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
10
<PAGE>
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 2000. However, a large number of variables affect restaurant
development and the Company cannot 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
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
11
<PAGE>
assurances can be given that any acquisition or investment by the Company will
not materially and adversely affect the Company or that any such acquisition
will enhance the Company's business. If the Company ever determines to make
major acquisitions of other businesses or assets, the Company may be required to
sell additional equity or debt securities or obtain additional credit
facilities. The sales, if any, of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
RESTAURANT OPERATIONAL RISKS
The Company's restaurant operations are affected by changes in the cost of
food and labor and its ability to anticipate such changes. Operations depend
upon the complete and timely delivery of food and non-food items to the
restaurants. Consequently, interruptions in the flow of such products,
variations in product specifications, changes in product costs and similar
factors can have a material impact on the Company's results.
In recent years, other reputable food service companies have been
materially and adversely impacted by food-borne illness incidents. Some of these
incidents involved third party food suppliers and transporters outside of their
reasonable control. The Company has rigorous internal standards, training and
other programs to attempt to minimize the risk of these occurrences. However,
the Company cannot guarantee that these efforts will be fully effective in
preventing all food-borne illnesses. New illnesses resistant to current
precautions may also develop in the future.
The Company also shares a risk common to all multi-unit foodservice
businesses. Specifically, one or more instances of food-borne illness in a
Company or franchised restaurant, poor health inspection scores, or negative
publicity can have a material 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.
12
<PAGE>
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 2000 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, 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
13
<PAGE>
affected restaurants. Additionally, competition for qualified employees exerts
pressure on wages paid to attract qualified personnel, resulting in higher labor
costs, together with greater expense to recruit and train them.
The operation of buffet style restaurants is materially different than
certain other restaurant concepts. Consequently, the retention of executive
management that is familiar with the Company's core business is important to the
Company's continuing success. The departure of multiple executives in a short
period of time could have an adverse impact on the Company's business.
Various employment related legal risks also exist, which are discussed in
more detail in the sections below entitled "REGULATORY FACTORS" and "LITIGATION
RISKS."
RISKS ASSOCIATED WITH NON-COMPANY OWNED RESTAURANT OPERATIONS
The Company is limited in the manner in which it can regulate its
franchised restaurants, especially in real-time. If a franchised restaurant
fails to meet the Company's franchisor operating standards, the Company's own
restaurants could be adversely affected due to customer confusion or negative
publicity. A similar risk exists with respect to totally unrelated foodservice
businesses if customers mistakenly associate such unrelated businesses with the
Company's own operations.
RISKS ASSOCIATED WITH GENERAL CONDITIONS
The confidence of consumers generally, together with changes in consumer
preferences, can have a significant impact on the Company's results. Positive or
negative trends in weather condition can have an exceptionally strong influence
on the Company's business. This effect is heightened by the fact that most of
the Company's restaurants are in geographic areas experiencing extremes in
weather. The Company's success also depends to a significant extent on factors
affecting discretionary consumer spending, including economic conditions,
disposable consumer income and consumer confidence. Adverse changes in these
factors could reduce guest traffic or impose practical limits on pricing, either
of which could materially adversely affect the 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
14
<PAGE>
earnings. This environment makes it more difficult for the Company to continue
to provide high service levels while maintaining the Company's reputation for
superior value, without adversely affecting operating margins.
REGULATORY FACTORS
The Company is subject to extensive government regulation at a federal,
state and local government level. These include, but are not limited to,
regulations relating to the sale of food (and alcoholic beverages in the
Company's full service restaurants). In the past, the Company has been able to
obtain and maintain necessary governmental licenses, permits and approvals.
However, difficulty or failure in obtaining them in the future could result in
delaying or canceling the opening of new restaurants. Local authorities may
suspend or deny renewal of the Company's governmental licenses if they determine
that the Company's conduct does not meet the standards for initial grant or
renewal. Although the Company has satisfied governmental licensing requirements
for its existing restaurants, the Company cannot be sure that these approvals
will be forthcoming at future locations. This risk would be even higher if there
was a major change in the licensing requirements affecting the Company's types
of restaurants.
The Company is also subject to certain states' "dram shop" statutes with
respect to its restaurants that serve alcohol. These statutes generally provide
a person injured by an intoxicated person the right to recover damages from an
establishment that served alcoholic beverages to the intoxicated person. The
Company carries liquor liability coverage as part of its existing comprehensive
general liability insurance. If the Company were to significantly expand the
number of restaurants serving alcohol, an adverse trend in alcohol related
judgments in excess of the Company's insurance coverage, or the Company's
failure to obtain and maintain insurance coverage, could materially and
adversely affect the Company.
Various federal and state labor laws govern the Company's relationship with
its employees and affect operating costs. These laws include minimum wage
requirements, overtime, unemployment tax rates, workers' compensation rates,
citizenship requirements and sales taxes. Significant additional
government-imposed increases in the following areas could materially adversely
affect the Company's business, financial condition, operating results or cash
flow:
* minimum wages
* mandated health benefits
* paid leaves of absence
* increased tax reporting
* revisions in the tax payment requirements for employees
who receive gratuities
15
<PAGE>
The Federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company
believes that its restaurants are designed to be accessible to the disabled.
However, mandated modifications to the Company's facilities to make different
accommodations for disabled persons could result in material unanticipated
expense.
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials resulting from, sites
of past spills, disposals or other releases of hazardous materials (together,
"Environmental Laws"). In particular under applicable Environmental Laws, the
Company may be responsible for remediation of environmental conditions and may
be subject to associated liabilities (including liabilities resulting from
lawsuits brought by private litigants) relating to its restaurants and the land
on which its restaurants are located, regardless of whether the Company leases
or owns the restaurants or land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant. There can be no assurance that environmental conditions relating to
prior, existing or future restaurants or restaurant sites will not have a
material adverse affect on the Company.
LITIGATION RISKS
The Company is from time to time the subject of complaints or litigation
from guests alleging illness, injury or other loss associated with the Company's
restaurants. Adverse publicity resulting from these allegations may materially
adversely affect the Company and the Company's restaurants. This may be true
whether or not the allegations are valid or the Company is liable. In addition,
employee claims against the Company based on, among other things,
discrimination, harassment or wrongful termination may divert the Company's
financial and management resources that would otherwise be used to benefit the
future performance of the Company's operations. The Company has been subject to
these employee claims from time to time, and a significant increase in the
number of these claims or successful claims could materially adversely affect
the Company's business, financial condition, operating results or cash flows.
The Company is currently 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.
16
<PAGE>
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 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.
17
<PAGE>
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 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
None
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)
18
<PAGE>
4(a) Form of Rights Agreement, dated as of October 24,
1995 between the Company and the American Stock
Transfer and Trust Company, as Rights Agent (3)
27 Financial Data Schedule
(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.
19
<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)
Date: June 2, 2000
/s/ Roe H. Hatlen
--------------------------------
Roe H. Hatlen
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Richard Michael Andrews, Jr.
--------------------------------
Richard Michael Andrews, Jr.
Chief Financial Officer
(Principal Financial Officer)
20
<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
27 Financial Data Schedule ......................... Filed Electronically
21
