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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 9, 2003
Commission file number: 333-98301
BUFFETS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
- -------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1460 Buffet Way
Eagan, Minnesota 55121
- -------------------------------------- -------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (651) 994-8608
--------------
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 by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The number of shares of Buffets, Inc.'s common stock outstanding as of May 21,
2003 was 100.
BUFFETS, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of July 3, 2002 and April 9, 2003 3
Condensed Consolidated Income Statements
(Unaudited)-- 16 Weeks and 40 Weeks Ended
April 24, 2002 and April 9, 2003 4
Condensed Consolidated Statements of Cash Flows
(Unaudited)-- 40 Weeks Ended April 24, 2002
and April 9, 2003 5
Notes to the Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
Certification of Chief Executive Officer 26
Certification of Chief Financial Officer 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 3, APRIL 9,
2002 2003
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 8,304 $ 9,205
Receivables................................................ 8,682 6,559
Inventories................................................ 18,632 18,485
Prepaid expenses and other current assets.................. 10,086 7,926
Deferred income taxes...................................... 19,000 14,400
Due from parent............................................ 12 6
--------- ---------
Total current assets............................... 64,716 56,581
PROPERTY AND EQUIPMENT, net.................................. 198,350 165,724
GOODWILL..................................................... 312,163 312,163
ASSETS HELD FOR SALE......................................... 24,952 22,794
DEFERRED INCOME TAXES........................................ -- 3,425
OTHER ASSETS, net............................................ 15,445 15,088
--------- ---------
Total assets....................................... $ 615,626 $ 575,775
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable........................................... $ 37,419 $ 43,184
Accrued liabilities........................................ 92,442 80,421
Income taxes payable....................................... 2,804 2,707
Current maturities of long-term debt....................... 2,450 2,048
--------- ---------
Total current liabilities.......................... 135,115 128,360
LONG-TERM DEBT, net of current maturities.................... 463,767 423,021
DEFERRED INCOME TAXES........................................ 175 --
DEFERRED LEASE OBLIGATIONS................................... 18,829 19,385
OTHER LONG-TERM LIABILITIES.................................. 4,525 7,708
--------- ---------
Total liabilities.................................. 622,411 578,474
SHAREHOLDER'S DEFICIT:
Common stock; $.01 par value, 100 shares authorized; 100
shares issued and outstanding........................... -- --
Accumulated deficit........................................ (6,785) (2,699)
--------- ---------
Total shareholder's deficit........................ (6,785) (2,699)
--------- ---------
Total liabilities and shareholder's deficit........ $ 615,626 $ 575,775
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
SIXTEEN WEEKS ENDED FORTY WEEKS ENDED
--------------------------- ---------------------------
APRIL 24, APRIL 9, APRIL 24, APRIL 9,
2002 2003 2002 2003
------------ ------------ ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
RESTAURANT SALES................................. $320,755 $293,684 $797,668 $750,371
RESTAURANT COSTS:
Food........................................... 99,838 94,486 246,789 237,157
Labor.......................................... 100,527 95,153 250,342 241,062
Direct and occupancy........................... 71,819 69,239 180,028 174,209
-------- -------- -------- --------
Total restaurant costs................. 272,184 258,878 677,159 652,428
ADVERTISING EXPENSES............................. 8,721 6,726 19,915 20,778
GENERAL AND ADMINISTRATIVE EXPENSES.............. 15,980 13,682 39,734 35,208
LOSS ON SALE AND LEASEBACK TRANSACTION........... -- -- -- 5,434
GOODWILL AMORTIZATION............................ -- -- 4,967 --
-------- -------- -------- --------
OPERATING INCOME................................. 23,870 14,398 55,893 36,523
INTEREST EXPENSE................................. 10,569 12,339 29,142 32,231
INTEREST INCOME.................................. (180) (77) (609) (308)
OTHER INCOME..................................... (343) (320) (890) (913)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES....................... 13,824 2,456 28,250 5,513
INCOME TAX EXPENSE............................... 5,406 748 13,007 1,427
-------- -------- -------- --------
Net income............................. $ 8,418 $ 1,708 $ 15,243 $ 4,086
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FORTY WEEKS ENDED
--------------------------
APRIL 24, APRIL 9,
2002 2003
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income......................................... $ 15,243 $ 4,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 37,399 28,890
Amortization of debt issuance cost.............. 2,864 1,526
Deferred income taxes........................... (886) 1,000
Accretion of original issue discount............ 595 568
Deferred interest............................... 991 --
Loss on disposal of assets...................... 244 582
Loss on sale and leaseback transaction.......... -- 5,434
Changes in assets and liabilities:
Receivables................................... (4,552) 2,265
Inventories................................... 579 147
Prepaid expenses and other current assets..... (229) 2,160
Due from parent............................... (14) 6
Accounts payable.............................. 177 7,757
Accrued and other liabilities................. 6,145 (10,894)
Income taxes payable.......................... 2,583 (97)
-------- --------
Net cash provided by operating activities.. 61,139 43,430
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale and leaseback transaction....... 41,356 22,580
Purchase of fixed assets........................... (25,969) (20,828)
Proceeds from sale of other assets................. 1,651 747
Purchase of other assets........................... (970) (233)
-------- --------
Net cash provided by investing activities.. 16,068 2,266
-------- --------
FINANCING ACTIVITIES:
Repayment of debt.................................. (78,556) (41,716)
Debt issuance costs................................ (823) (3,079)
-------- --------
Net cash used in financing activities...... (79,379) (44,795)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............. (2,172) 901
CASH AND CASH EQUIVALENTS, beginning of period....... 16,066 8,304
-------- --------
CASH AND CASH EQUIVALENTS, end of period............. $ 13,894 $ 9,205
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of capitalized interest
of $230 and $247)............................. $ 23,110 $ 24,296
======== ========
Income taxes.................................... $ 11,270 $ 1,216
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF ORGANIZATION
DESCRIPTION OF BUSINESS
The Company owns and operates a chain of restaurants under the names of Old
Country Buffet, Country Buffet, HomeTown Buffet, Original Roadhouse Grill,
Granny's Buffet, Country Roadhouse Buffet & Grill, Tahoe Joe's Famous
Steakhouse, and Soup 'N Salad Unlimited in the United States. The Company
operates principally in the midscale family dining industry segment. The Company
operated 385 Company-owned restaurants (364 buffet restaurants, 13 Original
Roadhouse Grill restaurants and eight Tahoe Joe's Famous Steakhouse Restaurants)
and franchised 23 restaurants as of April 9, 2003.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all necessary adjustments, which are
of a normal recurring nature, to present fairly the Company's financial position
and the results of its operations and cash flows for the periods presented, in
conformity with accounting principles generally accepted in the United States of
America and with the regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures, normally included in
accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to such SEC rules and
regulations. Operating results for the forty weeks ended April 9, 2003 are not
necessarily indicative of results that may be expected for the year ending July
2, 2003.
The balance sheet as of July 3, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and the related notes contained in
the Company's registration statement filed with the Securities and Exchange
Commission on December 27, 2002 and with Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing on pages 15 through 22
of this report.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
FISCAL YEAR
Beginning July 3, 2002, the Company changed its fiscal year so that it ends
on the Wednesday nearest June 30 of each year. The Company's fiscal year is
comprised of fifty-two or fifty-three weeks divided into four fiscal quarters of
twelve, twelve, sixteen, and twelve or thirteen weeks. Prior to that, the
Company's fiscal year ended on the Wednesday nearest December 31 of each year
and was comprised of fifty-two or fifty-three weeks divided into four fiscal
quarters of sixteen, twelve, twelve, and twelve or thirteen weeks.
2. RECENT ACCOUNTING PRONOUNCEMENT
In July, 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement requires that the liability
for a cost associated with an exit or disposal activity be recognized when
incurred, rather than when a company
6
commits to an exit plan as was previously required. The Company adopted SFAS
No. 146 on January 1, 2003. Its adoption did not have a material impact on the
Company's results of operations or financial position.
3. GOODWILL
Goodwill, a result of a buyout from public shareholders on October 2, 2000,
represents the excess of cost over net assets acquired. Goodwill was amortized
on a straight-line basis over 30 years until we adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", on January 3, 2002. Goodwill is no longer
amortized, but is reviewed for impairment annually, or when events or changes in
circumstances indicate that goodwill may not be recoverable.
The effect of SFAS No. 142 on the results of operations was as follows (in
thousands):
FOR THE 16 FOR THE 16 FOR THE 40 FOR THE 40
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
APRIL 24, APRIL 9, APRIL 24, APRIL 9,
2002 2003 2002 2003
----------- ----------- ----------- -----------
Reported net income......... $ 8,418 $1,708 $15,243 $4,086
Add: goodwill amortization.. -- -- 4,967 --
Add: liquor license -- -- 13 --
amortization............... ------- ------ ------- ------
Adjusted net income.... $ 8,418 $1,708 $20,223 $4,086
======= ====== ======= ======
Based on the Company's initial and annual impairment assessments at January 3,
2002 and July 3, 2002, the fair value of its goodwill exceeded the carrying
amount at those dates and as a result no goodwill impairment charges were
recorded for any of the periods presented.
4. OTHER ASSETS
Other assets consist principally of debt issuance costs, notes receivable
and other intangibles net of accumulated amortization of $0.1 million as of July
3, 2002 and $1.6 million as of April 9, 2003. Debt issuance costs are the costs
incurred to enter into the senior credit agreement and issue the senior
subordinated notes. Debt issuance costs are being amortized over the terms of
the related financing arrangements using the effective interest method. Other
intangibles include trademarks, franchise fees and liquor licenses. Trademarks
and franchise fees are being amortized on a straight-line basis over 10 years.
Liquor licenses are no longer amortized, as they were determined to have
indefinite lives upon the adoption of SFAS No. 142. Notes receivable represent
the long-term portion of notes that arose from the sale of certain restaurant
facilities as well as a loan to an officer. The long-term and short-term notes
receivable collectively totaled $0.8 million as of July 3, 2002 and $0.9 million
as of April 9, 2003. The notes receivable have due dates between 2004 and 2010.
The gross carrying amount and accumulated amortization of each major class
of other intangible assets were as follows (in thousands):
FRANCHISE FEES TRADEMARKS LIQUOR LICENSES TOTAL
----------------------- ----------------------- ----------------------- -----------------------
GROSS GROSS GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------ -------- ------------ -------- ------------
BALANCE, July 3,
2002................. $ 69 $ (30) $ 34 $ (14) $ 457 $ (25) $ 560 $ (69)
FY 2003 Activity:
Other................ -- -- -- -- (14) -- (14) --
Amortization......... -- (11) -- (5) -- -- -- (16)
---- ------ ---- ----- ----- ----- ----- -----
BALANCE, April 9,
2003................. $ 69 $ (41) $ 34 $ (19) $ 443 $ (25) $ 546 $ (85)
==== ===== ==== ===== ===== ===== ===== =====
7
5. LONG-TERM DEBT
As of April 9, 2003, long-term debt outstanding was as follows (in
thousands):
Credit facility:
Revolver......................................... $ --
Term loan, interest at LIBOR plus 3.50%, due
quarterly through June 28, 2009 (interest
rate at 4.9%)................................. 203,284
---------
Total credit facility.................... 203,284
Senior subordinated notes, interest at 11.25%,
due July 15, 2010, net of discount of $8,125.. 221,785
---------
Total long term debt..................... 425,069
Less-- current maturities........................ 2,048
---------
$ 423,021
=========
CREDIT FACILITY
On June 28, 2002, the Company entered into a senior credit facility (the
Credit Facility) which provided for total borrowings of up to $295,000,000,
including (i) a $245,000,000 term loan, (ii) a $30,000,000 revolving credit
facility, of which up to $20,000,000 is available in the form of letters of
credit, and (iii) a separate $20,000,000 letter of credit facility. The terms of
the Credit Facility permit the Company to borrow, subject to availability and
certain conditions, incremental term loans or to issue additional notes in an
aggregate amount up to $25,000,000. The term loan matures on June 28, 2009,
while the revolving facility and the letter of credit facility mature on
June 28, 2007. The borrowings due under the term loan are payable in equal
quarterly installments in an annual amount equal to 1% of the term loan during
each of the first six years of the loan (beginning on September 30, 2002), with
the remaining balance payable due in equal quarterly installments during the
seventh year of the loan. The term loan is secured by substantially all of the
Company's assets other than those of our Tahoe Joe's Inc. subsidiary. Buffets
Holdings, Inc., the sole shareholder of the Company, has guaranteed the
repayment of the Credit Facility. Pursuant to the Credit Facility's requirement,
the Company purchased an interest rate cap with a notional value of $15,000,000
and a 5% LIBOR strike price that expires on June 30, 2004. The Credit
Facility requires the Company to maintain certain financial ratios including
leverage, interest coverage and fixed charge coverage. The Company was in
compliance with all covenants as of April 9, 2003.
As of April 9, 2003, the Company had $27,116,360 in outstanding letters of
credit, expiring through March 19, 2004. As of April 9, 2003, the total
borrowing availability under the revolving credit facility was $21,000,000 and
the total borrowing capacity under the letter of credit facility was $1,883,640.
The Company has the option of tying its borrowings to LIBOR or a base rate
when calculating the interest rate for the term loan. The base rate is the
greater of Credit Suisse First Boston's prime rate, or the federal funds
effective rate plus one-half of 1 percent.
11 1/4% SENIOR SUBORDINATED NOTES
On June 28, 2002, the Company issued 11 1/4% senior subordinated notes in
the principal amount of $230 million due July 15, 2010. Such notes were issued
at 96.181%. Interest is payable semi-annually on January 15 and July 15 of each
year through July 15, 2010. Except in the event of an initial public offering,
we are not entitled to redeem the notes at our option prior to July 15, 2006.
The redemption price during the first twelve-month period following July 15,
2006 is 105.625%. The redemption price declines by 1.875% per year until July
15, 2009 at which point there is no redemption price premium. In the event of an
initial public offering prior to July 15, 2006, the Company may redeem up to 35%
of the aggregate principal amount of the notes at a redemption price of 111.25%.
In addition, in the event of an initial public offering by either the Company or
Buffets Holdings, Inc. prior to July 15, 2005, the Company is required to offer
to purchase up to an aggregate principal amount of the notes as may be purchased
with funds equal in amount to 50% of the net cash proceeds from that initial
public offering at a price of 111.25% of the outstanding principal amount of the
notes, plus any accrued and unpaid interest to the date of repurchase, provided,
however, that, in no event will the Company be required to make an offer to
purchase more than $80.5 million aggregate principal amount of the notes.
8
6. SALE AND LEASEBACK TRANSACTION
On December 11, 2002, the Company entered into a sale and leaseback
transaction whereby the Company transferred its leasehold interests and
leasehold improvements with respect to 27 restaurants to a third party for net
proceeds of $22.6 million. The Company simultaneously entered into long-term
leases for those restaurants with an aggregate initial annual rent of
approximately $3.2 million. In connection with this sale and leaseback, the
Company recorded a loss of $5.4 million primarily to reflect the impairment of
certain of the properties for which the net proceeds were less than the book
value of the leasehold assets. Also included in the loss on the transaction were
payments that the Company made to Caxton-Iseman Capital, Inc., an entity related
to Caxton-Iseman Investments L.P. which held approximately 77.1% of Buffets
Holdings, Inc.'s outstanding common stock as of December 18, 2002, for advisory
fees equal to 1% of the gross proceeds of the transaction, or approximately $0.3
million. In addition, the net proceeds for certain of the properties were
greater than the book value of the leasehold assets resulting in a deferred gain
of $3.3 million. The deferred gain will be accreted over the life of the
respective restaurant leases, ranging from 17 to 25 years.
7. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company's senior subordinated notes issued in 2002 are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
unsecured basis by the following wholly owned subsidiaries of Buffets,
Inc., HomeTown Buffets, Inc., OCB Restaurant Co., OCB Purchasing Co.,
Restaurant Innovations, Inc., and Distinctive Dining, Inc. As a result,
the condensed consolidating financial statements for Buffets, Inc. and the
Subsidiary Guarantors are presented below. The guarantees by these
subsidiary guarantors will be senior to any of their existing and future
subordinated obligations, equal in right of payment with any of their
existing and future senior subordinated indebtedness, and subordinated
to any of their existing and future senior indebtedness. There are no
restrictions on our ability to obtain funds from our subsidiaries.
The only existing subsidiary of Buffets, Inc. that has not guaranteed the
senior subordinated notes is Tahoe Joe's Inc., which is minor (the subsidiary's
total assets, shareholder's equity, revenues, income from operations, and cash
flows are less than 3% of the Company's consolidated amounts) for purposes of
the Securities and Exchange Commission's rules regarding presentation of the
condensed consolidating financial statements below. As such, the financial
position, results of operations and cash flow information of Tahoe Joe's have
been included in the Subsidiary Guarantors column.
9
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 9, 2003
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 5,171 $ 4,034 $ -- $ 9,205
Receivables..................................... 16,122 340,214 (349,777) 6,559
Inventories..................................... 804 17,681 -- 18,485
Prepaid expenses and other current assets....... 3,877 4,049 -- 7,926
Deferred income taxes........................... 12,914 1,486 -- 14,400
Due from parent................................. 6 -- -- 6
----------- ---------- ---------- --------
Total current assets......................... 38,894 367,464 (349,777) 56,581
PROPERTY AND EQUIPMENT, net....................... 11,080 154,644 -- 165,724
GOODWILL, net..................................... 18,730 293,433 -- 312,163
ASSETS HELD FOR SALE.............................. -- 22,794 -- 22,794
DEFERRED INCOME TAXES............................. 3,425 -- -- 3,425
OTHER ASSETS, net................................. 411,757 5,833 (402,502) 15,088
----------- ---------- ---------- --------
Total assets................................. $ 483,886 $ 844,168 $ (752,279) $575,775
=========== ========== ========== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 391,322 $ 2,480 $ (350,618) $ 43,184
Accrued liabilities............................. 48,295 32,126 -- 80,421
Income taxes payable............................ 2,446 -- 261 2,707
Current maturities of long-term debt............ 123 1,925 -- 2,048
----------- ---------- ---------- --------
Total current liabilities.................... 442,186 36,531 (350,357) 128,360
LONG-TERM DEBT, net of current maturities......... 25,381 662,640 (265,000) 423,021
DEFERRED LEASE OBLIGATIONS........................ 434 18,951 -- 19,385
OTHER LONG-TERM LIABILITIES....................... 3,754 3,239 715 7,708
----------- ---------- ---------- --------
Total liabilities............................ 471,755 721,361 (614,642) 578,474
----------- ---------- ---------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock.................................... -- -- -- --
Additional paid in capital...................... 82,311 199,044 (281,355) --
Accumulated deficit............................. (70,180) (76,237) 143,718 (2,699)
----------- ---------- ---------- --------
Total shareholder's equity (deficit)......... 12,131 122,807 (137,637) (2,699)
----------- ---------- ---------- --------
Total liabilities and shareholder's equity
(deficit).................................. $ 483,886 $ 844,168 $ (752,279) $575,775
=========== ========== ========== ========
10
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIXTEEN WEEKS ENDED APRIL 24, 2002
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................ $12,300 $308,455 $ -- $320,755
RESTAURANT COSTS:
Food...................................... 4,083 95,755 -- 99,838
Labor..................................... 3,939 96,588 -- 100,527
Direct and occupancy...................... 1,545 70,274 -- 71,819
------- -------- ---- --------
Total restaurant costs................. 9,567 262,617 -- 272,184
ADVERTISING EXPENSES........................ 335 8,386 -- 8,721
GENERAL AND ADMINISTRATIVE EXPENSES......... 613 15,443 (76) 15,980
------- -------- ----- --------
OPERATING INCOME............................ 1,785 22,009 76 23,870
INTEREST EXPENSE............................ 635 9,934 -- 10,569
INTEREST INCOME............................. (544) 364 -- (180)
OTHER INCOME................................ (109) (234) -- (343)
------- -------- ---- --------
INCOME BEFORE INCOME TAXES.................. 1,803 11,945 76 13,824
INCOME TAX EXPENSE.......................... 705 4,671 30 5,406
------- -------- ---- --------
Net income............................. $ 1,098 $ 7,274 $ 46 $ 8,418
======= ======== ==== ========
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIXTEEN WEEKS ENDED APRIL 9, 2003
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................ $11,530 $282,154 $ -- $293,684
RESTAURANT COSTS:
Food...................................... 3,914 90,572 -- 94,486
Labor..................................... 3,783 91,370 -- 95,153
Direct and occupancy...................... 1,637 67,602 -- 69,239
------- -------- ------ --------
Total restaurant costs................. 9,334 249,544 -- 258,878
ADVERTISING EXPENSES........................ 263 6,463 -- 6,726
GENERAL AND ADMINISTRATIVE EXPENSES......... 537 13,145 -- 13,682
------- -------- ------ --------
OPERATING INCOME............................ 1,396 13,002 -- 14,398
INTEREST EXPENSE............................ 740 11,991 (392) 12,339
INTEREST INCOME............................. (77) -- -- (77)
OTHER INCOME................................ (320) -- -- (320)
-------- -------- ------ --------
INCOME BEFORE INCOME TAXES.................. 1,053 1,011 392 2,456
INCOME TAX EXPENSE.......................... 285 312 151 748
------- -------- ------ --------
Net income............................. $ 768 $ 699 $ 241 $ 1,708
======= ======== ====== ========
11
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE FORTY WEEKS ENDED APRIL 24, 2002
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................ $31,091 $766,577 $ -- $797,668
RESTAURANT COSTS:
Food...................................... 10,322 236,467 -- 246,789
Labor..................................... 9,972 240,370 -- 250,342
Direct and occupancy...................... 3,908 176,120 -- 180,028
------- -------- ---- --------
Total restaurant costs................. 24,202 652,957 -- 677,159
ADVERTISING EXPENSES........................ 776 19,139 -- 19,915
GENERAL AND ADMINISTRATIVE EXPENSES......... 1,549 38,376 (191) 39,734
GOODWILL AMORTIZATION....................... 298 4,669 -- 4,967
------- -------- ---- --------
OPERATING INCOME............................ 4,266 51,436 191 55,893
INTEREST EXPENSE............................ 1,749 27,393 -- 29,142
INTEREST INCOME............................. (973) 364 -- (609)
OTHER INCOME................................ (305) (585) -- (890)
------- -------- ---- --------
INCOME BEFORE INCOME TAXES.................. 3,795 24,264 191 28,250
INCOME TAX EXPENSE.......................... 1,603 11,330 74 13,007
------- -------- ---- --------
Net income............................. $ 2,192 $ 12,934 $117 $ 15,243
======= ======== ==== ========
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE FORTY WEEKS ENDED APRIL 9, 2003
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................ $29,896 $720,475 $ -- $750,371
RESTAURANT COSTS:
Food...................................... 9,952 227,205 -- 237,157
Labor..................................... 9,631 231,431 -- 241,062
Direct and occupancy...................... 3,991 170,218 -- 174,209
------- -------- ------ --------
Total restaurant costs................. 23,574 628,854 -- 652,428
ADVERTISING EXPENSES........................ 828 19,950 -- 20,778
GENERAL AND ADMINISTRATIVE EXPENSES......... 1,403 33,805 -- 35,208
LOSS ON SALE AND LEASEBACK TRANSACTION...... -- 5,434 -- 5,434
------- -------- ------ --------
OPERATING INCOME............................ 4,091 32,432 -- 36,523
INTEREST EXPENSE............................ 1,934 31,078 (781) 32,231
INTEREST INCOME............................. (308) -- -- (308)
OTHER INCOME................................ (913) -- -- (913)
-------- -------- ------ --------
INCOME BEFORE INCOME TAXES.................. 3,378 1,354 781 5,513
INCOME TAX EXPENSE.......................... 440 686 301 1,427
------- -------- ------ --------
Net income............................. $ 2,938 $ 668 $ 480 $ 4,086
======= ======== ====== ========
12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY WEEKS ENDED APRIL 24, 2002
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income...................................... $ 2,192 $ 12,934 $ 117 $ 15,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 2,254 35,145 -- 37,399
Amortization of debt issuance cost........... 172 2,692 -- 2,864
Deferred income taxes........................ (53) (833) -- (886)
Accretion of original issue discount......... 36 559 -- 595
Deferred interest............................ 59 932 -- 991
Loss on disposal of assets................... -- 244 -- 244
Changes in assets and liabilities:
Receivables................................ -- (4,189) (363) (4,552)
Inventories................................ 13 566 -- 579
Prepaid expenses and other assets.......... (2,259) 2,030 -- (229)
Due from parent............................ (14) -- -- (14)
Accounts payable........................... 2,178 (2,001) -- 177
Accrued and other liabilities.............. 7,582 (1,463) 26 6,145
Income taxes payable....................... 1,045 1,509 29 2,583
------- -------- ------ --------
Net cash provided by operating
activities............................ 13,205 48,125 (191) 61,139
------- -------- ------ --------
INVESTING ACTIVITIES:
Proceeds from sale and leaseback transaction.... -- 41,356 -- 41,356
Purchase of fixed assets........................ (6,737) (19,232) -- (25,969)
Corporate cash advances (payments).............. (11,396) 11,205 191 --
Purchase of other assets........................ -- 1,651 -- 1,651
Proceeds from sale of other assets.............. -- (970) -- (970)
------- -------- ------ --------
Net cash provided by (used in)
investing activities.................. (18,133) 34,010 191 16,068
------- -------- ------ --------
FINANCING ACTIVITIES:
Repayment of debt............................... (4,713) (73,843) -- (78,556)
Debt issuance costs............................. (49) (774) -- (823)
------- -------- ------ --------
Net cash used in financing activities... (4,762) (74,617) -- (79,379)
------- -------- ------ --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........... (9,690) 7,518 -- (2,172)
CASH AND CASH EQUIVALENTS, beginning of period.... 16,066 -- -- 16,066
------- -------- ------ --------
CASH AND CASH EQUIVALENTS, end of period.......... $ 6,376 $ 7,518 $ -- $ 13,894
======= ======== ====== ========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY WEEKS ENDED APRIL 9, 2003
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income...................................... $ 2,938 $ 668 $ 480 $ 4,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 2,669 26,221 -- 28,890
Amortization of debt issuance cost........... 92 1,434 -- 1,526
Deferred income taxes........................ 60 940 -- 1,000
Accretion of original issue discount......... 34 534 -- 568
Loss on disposal of assets................... -- 582 -- 582
Loss on sale and leaseback transaction....... -- 5,434 -- 5,434
Changes in assets and liabilities:
Receivables................................ (603) 3,705 (837) 2,265
Inventories................................ (83) 230 -- 147
Prepaid expenses and other assets.......... 1,561 599 -- 2,160
Due from parent............................ 6 -- -- 6
Accounts payable........................... 7,520 237 -- 7,757
Accrued and other liabilities.............. (7,307) (3,587) -- (10,894)
Income taxes payable....................... (454) -- 357 (97)
------- -------- ------ --------
Net cash provided by operating
activities............................ 6,433 36,997 -- 43,430
------- -------- ------ --------
INVESTING ACTIVITIES:
Proceeds from sale and leaseback transaction.... -- 22,580 -- 22,580
Purchase of fixed assets........................ (1,501) (19,327) -- (20,828)
Corporate cash advances (payments).............. 2,700 (2,700) -- --
Proceeds from sale of other assets.............. -- 747 -- 747
Purchase of other assets........................ -- (233) -- (233)
------- -------- ------ --------
Net cash provided by (used in)
investing activities.................. 1,199 1,067 -- 2,266
------- -------- ------ --------
FINANCING ACTIVITIES:
Repayment of debt............................... (2,503) (39,213) -- (41,716)
Debt issuance costs............................. (185) (2,894) -- (3,079)
------- -------- ------ --------
Net cash used in financing activities... (2,688) (42,107) -- (44,795)
------- -------- ------ --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........... 4,944 (4,043) -- 901
CASH AND CASH EQUIVALENTS, beginning of period.... 227 8,077 -- 8,304
------- -------- ------ --------
CASH AND CASH EQUIVALENTS, end of period.......... $ 5,171 $ 4,034 $ -- $ 9,205
======= ======== ====== ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT. UNLESS THE CONTEXT INDICATES OR REQUIRES OTHERWISE, (I) THE TERMS
"BUFFETS", "WE", "OUR" AND "COMPANY" REFER TO BUFFETS, INC. AND ITS SUBSIDIARIES
AND (II) THE TERMS "PARENT COMPANY" AND "BUFFETS HOLDINGS" REFER TO BUFFETS
HOLDINGS, INC., OUR SOLE SHAREHOLDER. SOME OF THE STATEMENTS IN THE FOLLOWING
DISCUSSION ARE FORWARD-LOOKING STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS AND
RISK FACTORS."
GENERAL
Our restaurants are principally operated as Old Country Buffet and HomeTown
Buffet. As of April 9, 2003, we operated 385 company-owned restaurant locations
and franchised 23 locations in a combined total of 38 states.
We were founded in 1983 to develop buffet-style restaurants under the name
Old Country Buffet. In October 1985, we completed our initial public offering
and were listed on the Nasdaq National Market. In September 1996, we merged with
HomeTown Buffet, Inc., which was developed by one of our co-founders and had 80
company-owned HomeTown Buffet restaurants in 11 states and 19 franchised
restaurants in eight states. In October 2000, Buffets was acquired by Buffets
Holdings, a company organized by Caxton-Iseman Capital, Inc., in a buyout from
public shareholders.
A significant portion of the Company's cost structure is fixed in nature,
particularly over shorter time horizons. Accordingly, changes in marginal sales
volume can have a more significant impact on our profitability than for a
business possessing a more variable cost structure.
Beginning July 3, 2002, we changed our fiscal year so that it ends on the
Wednesday nearest June 30 of each year. Our current fiscal year is comprised of
52 or 53 weeks divided into four fiscal quarters of 12, 12, 16 and 12 or 13
weeks. The twenty-six week transitional period ended July 3, 2002 consisted of
26 weeks and was divided into two periods of 16 and 10 weeks. Prior to that, our
fiscal year ended on the Wednesday nearest December 31 of each year and each
fiscal year was divided into periods of 16, 12, 12 and 12 or 13 weeks.
The following is a description of the line items from our income statements:
o We recognize as restaurant sales the proceeds from the sale of food and
beverages at our company-owned restaurants at the time of such sale. We
recognize the proceeds from the sale of gift certificates/cards when the
gift certificates/cards are redeemed at our restaurants. Until
redemption, the unearned revenue from the sale of gift
certificates/cards is included in accrued liabilities on our balance
sheet. Our franchise income includes royalty fees and initial franchise
fees received from our franchisees. Management recognizes royalty fees
as other income based on the sales reported at the franchise
restaurants.
o Restaurant costs reflect only direct restaurant operating costs,
including food, labor and direct and occupancy costs. Labor costs
include compensation and benefits for both hourly and restaurant
management employees. Direct and occupancy costs consist primarily of
costs of supplies, maintenance, utilities, rent, real estate taxes,
insurance, depreciation and amortization.
o Advertising expenses reflect all advertising and promotional costs.
o General and administrative expenses reflect all costs, other than
marketing expenses, not directly related to the operation of
restaurants. These expenses consist primarily of corporate
administrative compensation and overhead, district and regional
management compensation and related management expenses and the costs of
recruiting, training and supervising restaurant management personnel.
o Loss on sale and leaseback transaction reflects transaction costs and
impairment losses associated with the sale and
15
leaseback of the leasehold interests and leasehold improvements with
respect to 27 restaurants completed on December 11, 2002.
o Goodwill amortization reflects the amortization of the excess of cost
over fair market value of assets through January 2, 2002 and was being
recognized on a straight-line basis, over a 30-year life.
o Interest expense reflects interest costs incurred plus amortization of
debt issuance costs and accretion of original issuance discount on our
notes.
o Interest income reflects interest earned on our short-term investments.
o Other income primarily reflects franchise fees earned, less minority
interest associated with our Tahoe Joe's Inc. subsidiary.
o Provision for income taxes reflects the current and deferred tax
provision (benefit) determined in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared in
accordance with accounting policies generally accepted in the United States of
America. The preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates its
estimates and assumptions, including those related to recoverability of
long-lived assets, revenue recognition and goodwill. Management bases its
estimates and assumptions on historical experience and on various other factors
that are believed to be reasonable at the time the estimates and assumptions are
made. Actual results may differ from these estimates and assumptions under
different circumstances or conditions.
We believe the following critical accounting policies affect management's
significant estimates and assumptions used in the preparation of our condensed
consolidated financial statements.
RECOVERABILITY OF LONG-LIVED ASSETS
Management periodically evaluates long-lived assets and goodwill related to
those assets for impairment whenever events or changes in circumstances indicate
the carrying value amount of an asset or group of assets may not be recoverable.
Management evaluates groups of assets together at the individual restaurant
level, which is considered to be the lowest level for which there are
identifiable cash flows. A specific restaurant is deemed to be impaired if a
forecast of undiscounted future operating cash flows directly relating to that
restaurant, including disposal value, if any, is less than the carrying amount
of that restaurant. If a restaurant is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the restaurant exceeds
its fair value. Management determines fair value based on quoted market prices
in active markets, if available. If quoted market prices are not available,
management estimates the fair value of a restaurant based on either the best
external information available, including prices for similar assets, or the
results of valuation techniques, such as discounted estimated future cash flows,
as if the decision to continue to use the impaired restaurant was a new
investment decision. Considerable management judgment is necessary to estimate
the fair value of a restaurant. Accordingly, actual results could vary
significantly from such estimates. We expensed approximately $0.3 million during
the 16 weeks ended April 9, 2003 and approximately $1.4 million during the 40
weeks ended April 9, 2003 relating to the impairment of long-lived assets
associated with 1 and 14 restaurants, respectively. This amount was partially
offset by an approximate $0.8 million reduction in lease obligation accrual
assumptions in accrued store closing costs, based on the Company receiving
greater than planned sublease and other cash receipts. In addition, we also
recognized approximately $5.4 million in impairments on 15 restaurants as part
of the loss on the sale and leaseback transaction completed on December 11,
2002.
16
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of our acquisition cost over the fair market
value of the net assets acquired. We amortized that goodwill on a straight-line
basis over a 30-year life through the end of the fiscal year ended January 2,
2002. However, on January 3, 2002, we began applying the new rules on accounting
for goodwill and other intangible assets issued by the Financial Accounting
Standards Board in SFAS No. 142 "Goodwill and Other Intangible Assets." As a
result of the application of these new rules, amortization of goodwill was
reduced by approximately $5.0 million for the 40-week period ended April 9,
2003, because intangible assets with indefinite lives, such as goodwill, are no
longer amortized. There were no impairments to goodwill and other intangible
assets identified for the 16-week and 40-week periods ended April 9, 2003.
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION REFLECTS OUR HISTORICAL RESULTS FOR THE 16-WEEK AND
40-WEEK PERIODS ENDED APRIL 9, 2003 AND APRIL 24, 2002.
OUR FUTURE RESULTS MAY NOT BE CONSISTENT WITH OUR HISTORICAL RESULTS. THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
FOR THE 16 WEEKS ENDED APRIL 9, 2003 COMPARED TO THE 16 WEEKS ENDED APRIL 24,
2002
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
16 WEEKS ENDED 16 WEEKS ENDED
APRIL 24, 2002 APRIL 9, 2003
--------------------- ------------------
(DOLLARS IN THOUSANDS)
Restaurant sales..................... $ 320,755 100.0% $ 293,684 100.0%
Restaurant costs..................... 272,184 84.9 258,878 88.1
Advertising expenses................. 8,721 2.7 6,726 2.3
General and administrative expenses.. 15,980 5.0 13,682 4.7
--------- ---------
Operating income..................... 23,870 7.4 14,398 4.9
Interest expense..................... 10,569 3.3 12,339 4.2
Interest income...................... (180) (0.1) (77) --
Other income......................... (343) (0.1) (320) (0.1)
--------- ---------
Income before income taxes........... 13,824 4.3 2,456 0.8
Income tax expense................... 5,406 1.7 748 0.2
--------- ---------
Net income......................... $ 8,418 2.6 $ 1,708 0.6
========= =========
RESTAURANT SALES. Restaurant sales for the 16 weeks ended April 9, 2003
decreased $27.1 million, or 8.4%, compared with the 16 weeks ended April 24,
2002. The decline in sales for the quarter ended April 9, 2003 was primarily
attributable to a decline in same store sales of 6.4%. This same store sales
decline reflected a 1.4% increase in pricing and a 7.8% decline in guest
traffic. Guest traffic was adversely impacted by severe winter weather in
December, January and February, the Iraqi War and an Easter calendar shift.
Easter was celebrated in March in the comparable quarter in the prior year, but
occurs in the fourth quarter in this fiscal year. Additionally, operating weeks
were down in the most recent quarter by approximately 3.2% compared to the
comparable quarter in the prior year, primarily due to the closure of 18
under-performing units over the past 12 months. The impact of these closures was
partially offset by the opening of five units over the past 12 months. Average
weekly sales per unit of $47,645 for the quarter ended April 9, 2003 decreased
by 5.5% as compared to average weekly sales per unit during the comparable
quarter in the prior year.
RESTAURANT COSTS. Restaurant costs for the third quarter of fiscal 2003
increased by 3.2% as a percentage of sales compared with the comparable prior
year period. Food cost increased 1.1% as a percentage of sales primarily due to
increases associated with the roll-out of select "value-added" foods partially
prepared for us by our vendors according to our unique specifications, as well
as non-recurring food rebates recognized in the comparable quarter of the prior
year. Labor costs were 1.1% higher as a percentage of sales than those
experienced in the comparable quarter in the prior year, primarily due to lost
sales leverage on the predominantly fixed components of management salaries and
benefits,
17
as well as increased workers' compensation costs. Direct and occupancy costs
increased by 1.0% measured as a percentage of sales versus the comparable
quarter in the prior year. The increase was primarily attributable to an
increase in natural gas costs due to the unusually cold weather coupled with
significant rate increases, an increase in maintenance-related expenditures and
fixed cost leverage issues attributable to reasonably fixed costs on a declining
sales base.
ADVERTISING EXPENSES. Advertising costs decreased 0.4% as a percentage of
sales for the third quarter of fiscal 2003 versus the comparable quarter in the
prior year. A large portion of the decline was due to our decision to suspend
advertising at the onset of the Iraqi War for a period of three weeks, combined
with a decision to eliminate television advertising in select markets where
there was not a suitable return on investment. Approximately 63% of our buffet
restaurants received television-advertising support in the third quarter of
2003. Same store sales among units receiving television-advertising support
trended approximately two percentage points better than units not receiving
television-advertising support.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 0.3% as a percentage of sales during the third quarter of 2003 when
compared to the 16 weeks ended April 24, 2002. This reduction was largely due to
reduced bonus expense and a workforce reduction of approximately 50 non-store
employees accomplished largely through attrition.
INTEREST EXPENSE. Interest expense increased 0.9% as a percentage of sales
during the third quarter of fiscal 2003 versus the comparable prior year period
primarily due to higher weighted average outstanding debt balances.
INTEREST INCOME. Interest income decreased 0.1% as a percentage of sales
during the 16 weeks ended April 9, 2003 versus the comparable prior year period
primarily due to lower weighted average outstanding cash and cash equivalent
balances.
OTHER INCOME. Other income was flat as a percentage of sales between the
respective periods.
INCOME TAXES. Income taxes decreased 1.5% as a percentage of sales for the
16 weeks ended April 9, 2003 compared to the 16 weeks ended April 24, 2002
principally due to a decrease in income before income taxes coupled with certain
tax credits that resulted in an effective tax rate of 30.5% for the current
quarter compared with 39.1% for the comparable prior year period.
18
FOR THE 40 WEEKS ENDED APRIL 9, 2003 COMPARED TO THE 40 WEEKS ENDED
APRIL 24, 2002
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
40 WEEKS ENDED 40 WEEKS ENDED
APRIL 24, 2002 APRIL 9, 2003
--------------------- ------------------
(DOLLARS IN THOUSANDS)
Restaurant sales..................... $ 797,668 100.0% $ 750,371 100.0%
Restaurant costs..................... 677,159 84.9 652,428 86.9
Advertising expenses................. 19,915 2.5 20,778 2.8
General and administrative expenses.. 39,734 5.0 35,208 4.7
Loss on sale and leaseback
transaction...................... -- -- 5,434 0.7
Goodwill amortization.............. 4,967 0.6 -- --
--------- ---------
Operating income................... 55,893 7.0 36,523 4.9
Interest expense................... 29,142 3.7 32,231 4.3
Interest income.................... (609) (0.1) (308) --
Other income....................... (890) (0.1) (913) (0.1)
--------- ---------
Income before income taxes......... 28,250 3.5 5,513 0.7
Income tax expense................. 13,007 1.6 1,427 0.2
--------- ---------
Net income....................... $ 15,243 1.9 $ 4,086 0.5
========= =========
RESTAURANT SALES. Restaurant sales for the 40 weeks ended April 9, 2003
decreased $47.3 million, or 5.9%, compared with the 40 weeks ended April 24,
2002. Most of the decline in sales was due to a 4.4% decrease in same-store
sales. This decline in same-store sales was comprised of a 6.1% decline in guest
counts, partially offset by a 1.7% increase in pricing. Additionally, operating
weeks were down in the most recent year-to-date period by approximately 3.4%
compared to the comparable prior year period. Average weekly sales per unit of
$48,178 for the 40 weeks ended April 9, 2003 decreased by 2.6% as compared to
average weekly sales per unit during the comparable prior year period.
RESTAURANT COSTS. Restaurant costs for the 40 weeks ended April 9, 2003
increased by 2.0% as a percentage of sales compared with the comparable prior
year period. Food cost increased 0.7% as a percentage of sales primarily due to
non-recurring food rebates recognized during the 40 weeks ended April 24, 2002.
Labor costs were 0.7% higher as a percentage of sales than those experienced in
the comparable prior year period, primarily due to lost sales leverage on the
predominantly fixed components of management salaries and benefits, as well as
increases in workers' compensation costs. Direct and occupancy costs decreased
approximately $5.8 million during the 40 weeks ended April 9, 2003, but were
0.6% higher as a percentage of sales than the prior year period. The increase
was primarily attributable to fixed cost leverage issues attributable to
reasonably fixed costs on a declining sales base, partially offset by
approximately $1.2 million in net proceeds received as a partial settlement of
an insurance claim.
ADVERTISING EXPENSES. Advertising costs increased 0.3% as a percentage of
sales for the 40 weeks ended April 9, 2003 versus the comparable prior year
period primarily due to significantly heavier television advertising weights in
a number of markets during the second quarter ended December 18, 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 0.3% as a percentage of sales during the 40 weeks ended April 9, 2003
when compared to the 40 weeks ended April 24, 2002. This reduction was largely
due to reduced bonus expense and lower professional fees.
LOSS ON SALE AND LEASEBACK TRANSACTION. On December 11, 2002, we entered
into a sale and leaseback transaction whereby we transferred our leasehold
interests and leasehold improvements with respect to 27 restaurants to a third
party for net proceeds of $22.6 million. We simultaneously entered into
long-term leases for those restaurants with an aggregate initial annual rent of
approximately $3.2 million. In connection with this sale and leaseback, we
recorded a loss of $5.4 million primarily to reflect the impairment of certain
of the properties for which the net proceeds were less than the book value of
the leasehold assets. Also included in the loss on the transaction were payments
that we made to Caxton-Iseman Capital, Inc., an entity related to Caxton-Iseman
Investments L.P. which held approximately 77.1% of Buffets Holdings, Inc.'s
outstanding common stock as of December 18, 2002, for advisory fees equal to 1%
of the gross proceeds of the transaction, or approximately $0.3 million. In
addition, the net proceeds for certain of the properties
19
were greater than the book value of the leasehold assets resulting in a deferred
gain of $3.3 million. The deferred gain will be accreted over the life of the
respective restaurant leases, ranging from 17 to 25 years.
GOODWILL AMORTIZATION. Goodwill amortization expense decreased 0.6% as a
percentage of sales during the 40 weeks ended April 9, 2003 versus the
comparable prior year period due to the adoption on January 3, 2002 of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Intangible
Assets," and its non-amortization provisions for goodwill.
INTEREST EXPENSE. Interest expense increased 0.6% as a percentage of sales
during the 40 weeks ended April 9, 2003 versus the comparable prior year period
primarily due to higher weighted average outstanding debt balances.
INTEREST INCOME. Interest income decreased 0.1% as a percentage of sales
during the 40 weeks ended April 9, 2003 versus the comparable prior year period
primarily due to lower weighted average outstanding cash and cash equivalent
balances.
OTHER INCOME. Other income was flat as a percentage of sales between the
respective periods.
INCOME TAXES. Income taxes decreased 1.4% as a percentage of sales for the
40 weeks ended April 9, 2003 compared to the 40 weeks ended April 24, 2002
principally due to a decrease in income before income taxes coupled with a
decrease in non-deductible goodwill amortization associated with the buyout from
public shareholders and certain tax credits that resulted in an effective tax
rate of 25.9% for the 40 weeks ended April 9, 2003 compared with 46.0% for the
comparable prior year period.
TRENDS AND UNCERTAINTIES
The mid-scale sector of the restaurant business, of which we are a part, is
highly competitive with respect to food quality, concept, location, price and
service. We have experienced declining restaurant sales since June of last year,
primarily in the form of a decline in guest traffic. We believe this decline is
due in large part to the downturn in the economy and geo-political turmoil,
which has caused a reduction in restaurant visits by our target customers.
Additionally, price discounting by restaurants in the quick service restaurant
and casual dining sectors have put further pressure on restaurants in the
mid-scale sector. Our management is currently testing and introducing new
food-offering programs in response to the decline in sales. However, we expect
restaurant sales to continue to decline in the next quarter and believe that
future sales strength in general and guest traffic in particular will be
significantly influenced by general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide us with a significant
source of liquidity. Since most of our sales are for cash or credit with
settlement within a few days and most vendors are paid on typical terms ranging
from approximately 14 to 35 days, we operate on a significant working capital
deficit. In addition to cash flows from operations, a revolving credit facility
is available to us for general corporate purposes as revolving credit loans or
as swing-line loans. Letters of credit issued under the revolving loan facility
or the letter of credit facility are also available to us to support payment
obligations incurred for our general corporate purposes. Historically, our
capital requirements have been for the development and construction of new
restaurants, restaurant refurbishment, the installation of new corporate
financial systems and debt service obligations. We expect these requirements to
continue in the foreseeable future.
Net cash provided by operating activities was $43.4 million for the 40 weeks
ended April 9, 2003 and $61.1 million for the 40 weeks ended April 24, 2002. Net
cash provided by operating activities exceeded the net income for fiscal 2002
principally due to the effect of depreciation and amortization and an increase
in accrued and other liabilities. Net cash provided by operating activities
exceeded net income for fiscal 2003 primarily due to the effect of depreciation
and amortization, an increase in accounts payable and a loss on the sale and
leaseback transaction in fiscal 2003. Net cash provided by operating activities
in fiscal 2003 was partially reduced by a $17 million payment of accrued
redemption fees.
20
Net cash provided by investment activities was $2.3 million for the 40 weeks
ended April 9, 2003 and $16.1 million for the 40 weeks ended April 24, 2002. On
December 11, 2002, we completed a sale and leaseback of our leasehold interests
and our leasehold improvements with respect to 27 restaurants for net proceeds
of $22.6 million. We simultaneously entered into long-term leases for those
restaurants with an aggregate initial rent of approximately $3.2 million. The
sales and leaseback transaction also resulted in a deferred gain of
approximately $3.3 million. This deferred gain will be accreted over the life of
the respective restaurant leases, ranging from 17 to 25 years. In December 2001,
we committed to a sale and leaseback transaction with respect to 24 restaurant
properties and completed the sale and leaseback of 23 such properties on
December 28, 2001. That transaction generated net proceeds of $39.1 million,
excluding $0.8 million in capitalized debt issuance costs. In February 2002, we
completed the sale and leaseback with respect to the remaining restaurant
property for additional net proceeds of approximately $2.3 million. Capital
expenditures totaled $20.8 million for the 40 weeks ended April 9, 2003 and
$26.0 million for the 40 weeks ended April 24, 2002.
Net cash used in financing activities totaled $44.8 million for the 40 weeks
ended April 9, 2003 and $79.4 million for the 40 weeks ended April 24, 2002.
Financing activities consisted primarily of scheduled and accelerated repayments
of debt.
On June 28, 2002, we entered into new debt agreements to refinance our
existing debt, make a distribution to our parent, Buffets Holdings, Inc., and
repurchase our outstanding preferred stock warrants. We issued 11 1/4% senior
subordinated notes in the principal amount of $230 million, net of a discount of
$8.8 million, and borrowed $245 million under a $295 million senior credit
facility.
In connection with the redemption of our 14% senior subordinated notes and
Buffets Holdings' 16% senior subordinated notes on June 28, 2002, we agreed to
pay $18.0 million of redemption fees, of which $1.0 million was paid at closing
out of the net proceeds of the offering of the initial notes and was accounted
for as part of the transaction fees and expenses relating to the Refinancing
Transactions. An additional $5.0 million of redemption fees was paid on each of
September 30, 2002 and December 31, 2002. The final payment of $7.0 million was
made on February 4, 2003. The redemption fees were included in accrued
liabilities on our balance sheet until these periodic installment payments were
paid from our cash flow generated from operations. The redemption fees were
recognized as a loss related to refinancing in the 26-week transitional period
ended July 3, 2002.
As previously discussed, on June 28, 2002, we entered into a senior credit
facility which provided for total borrowings of up to $295 million, including
(i) a $245 million term loan, (ii) a $30 million revolving credit facility, of
which up to $20 million is available in the form of letters of credit, and (iii)
a separate $20 million letter of credit facility. The terms of the senior credit
facility permit us to borrow, subject to availability and certain conditions,
incremental term loans or to issue additional notes in an aggregate amount up to
$25 million. The Company has the option of tying its borrowings to LIBOR or a
base rate when calculating the interest rate for the term loan. The base rate is
the greater of Credit Suisse First Boston's prime rate, or the federal funds
effective rate plus one-half of 1 percent. The term loan matures on June 28,
2009 while the revolving facility and the letter of credit facility mature on
June 28, 2007. The borrowings due under the term loan are payable in equal
quarterly installments in an annual amount equal to 1% of the term loan during
each of the first six years of the loan (beginning on September 30, 2002), with
the remaining balance payable due in equal quarterly installments during the
seventh year of the loan. The term loan is secured by substantially all of our
assets other than those of our Tahoe Joe's Inc. subsidiary. Buffets Holdings,
Inc. has also guaranteed the repayment of the senior credit facility. The senior
credit facility requires us to maintain certain financial ratios including
leverage, interest coverage and fixed charge coverage. We were in compliance
with all covenants as of April 9, 2003.
As of April 9, 2003, we had approximately $27.1 million in outstanding
letters of credit, which expire through March 19, 2004. As of April 9, 2003, the
total borrowing availability under the revolving credit facility was $21 million
and the total borrowing capacity under the letter of credit facility was
approximately $1.9 million.
Also as discussed above, on June 28, 2002, we issued $230.0 aggregate
principal amount of our 11 1/4% senior subordinated notes due July 15, 2010.
Gross proceeds from the offering of the notes were approximately $221.2 million.
Interest is payable semi-annually on January 15 and July 15 of each year. Except
in the event of an initial public offering, we are not entitled to redeem the
notes prior to July 15, 2006, after which we can choose to redeem some or all
21
of the notes at specified redemption prices. The indenture governing the notes
contains covenants limiting our ability to (1) incur additional indebtedness,
(2) pay dividends on our capital stock or redeem, repurchase or retire our
capital stock or subordinated indebtedness, (3) make investments, (4) create
restrictions on the payment of dividends, (5) engage in transactions with
affiliates, (6) sell assets, and (7) consolidate, merge or transfer assets. The
payment of principal, premium and interest on the notes is fully and
unconditionally guaranteed, jointly and severally, by some of our wholly-owned
subsidiaries, namely Distinctive Dining, Inc., Hometown Buffet, Inc., OCB
Purchasing Co., OCB Restaurant Co. and Restaurant Innovations, Inc.
We are currently considering the sale of our 13 Original Roadhouse Grill
restaurants. On October 9, 2002, we entered into an exclusive purchase option
arrangement with a prospective purchaser for the Original Roadhouse Grill
restaurants. The prospective purchaser paid us $1 million in non-refundable fees
to obtain exclusive purchase rights for those restaurants through March 14,
2003. In April, we agreed to a postponement of the sale until approximately June
25, 2003, in exchange for an additional $1 million non-refundable extension fee.
The extension was granted in order for the prospective purchaser to obtain
necessary landlord consents, liquor license transfers and to satisfy other
precedents to closing.
During fiscal 2003, we plan to open six buffet restaurants. We estimate that
we will spend approximately $13 million in the aggregate on construction of new
restaurants, principally for leasehold improvements. We anticipate spending $10
million in remodeling, relocation and improvement costs for existing facilities
and an additional $2 million for corporate and system investments, including the
implementation of a new human resources information system.
We are not aware of any other event or trend that would potentially affect
our capital requirements or liquidity. For the next twelve months, we believe
that cash flow from operations, landlord contributions, credits received from
trade suppliers and available borrowing capacity will be adequate to finance our
development plans, on-going operations and debt service obligations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our sales are seasonal, with a lower percentage of annual sales occurring in
most of our current market areas during the winter months. Our restaurant sales
may also be affected by unusual weather patterns, major world events or matters
of public interest that compete for customers' attention. Generally, restaurant
sales per unit are lower in the winter months, our third fiscal quarter ending
in April of each year. The impact of these reduced average weekly sales will be
mitigated in our future quarterly data presentations through the inclusion of 16
weeks in the quarter ending in late April of each year, compared to only 12 or
13 weeks in each of the other fiscal quarters.
NEW ACCOUNTING STANDARD
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than when a company commits to an exit
plan as was previously required. We adopted SFAS No. 146 on January 1, 2003. Its
adoption did not have a material impact on our results of operations or
financial position.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The statements contained in this report which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in, or
implied by, forward-looking statements. Buffets has tried, whenever possible, to
identify these forward-looking statements using words such as "projects,"
"anticipates," "believes," "estimates," "expects," "plans," "intends," and
similar expressions. Similarly, statements herein that describe Buffets'
business strategy, outlook, objectives, plans, intentions or goals are also
forward-looking statements. The risks and uncertainties involving
forward-looking statements include, but are not limited to, general business and
economic conditions, negative publicity, the impact of competition, the
seasonality of Buffets' business, adverse weather conditions, future commodity
prices, fuel and utility costs, labor costs, employment and environmental laws,
governmental regulations, and inflation. For a detailed discussion of risks and
uncertainties that may cause our future performance to differ from that
projected in the forward-looking statements, please refer to the
22
"Risk Factors" section contained in Buffets' registration statement filed with
the Securities and Exchange Commission on December 27, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS. We have interest rate exposure relating to the variable
portion of our long-term obligations. Our 11 1/4% senior subordinated notes are
fixed and the interest rates on the term loans under our senior credit facility
are variable. A 1% change in interest rates on our variable rate debt would have
resulted in our interest rate expense fluctuating by approximately $1.8 million
for the 40 weeks ended April 9, 2003. Our interest rate risk is mitigated, in
part, by an interest rate cap purchased on November 25, 2002 with a notional
value of $15 million and a 5% LIBOR strike price that expires on June 30, 2004.
FOOD COMMODITY RISKS. Many of the food products purchased by us are affected
by commodity pricing and are, therefore, subject to price volatility caused by
weather, production problems, delivery difficulties and other factors that are
outside our control. To control this risk in part, we have fixed price purchase
commitments with terms of one year or less for some key food and supplies from
vendors who supply our national food distributor. In addition, we believe that
substantially all of our food and supplies are available from several sources,
which helps to control food commodity risks. We believe we have the ability to
increase menu prices, or vary the menu items offered, if needed, in response to
food product price increases within the range that has been experienced
historically. To compensate for a hypothetical price increase of 10% for food
and beverages, we would need to increase menu prices by an average of
approximately 3% percent. Our average price increases in our buffet operations
have been approximately 2% for the 40 weeks ended April 9, 2003. Accordingly, we
believe that a hypothetical 10% increase in food product costs would not have a
material effect on our operating results.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing
date of this quarterly report on Form 10-Q (the "Evaluation Date"), have
concluded that as of the Evaluation Date, our disclosure controls and procedures
were adequate and effective to ensure that material information relating to us
and our consolidated subsidiaries would be made known to them by others within
those entities, particularly during the period in which this quarterly report on
Form 10-Q was being prepared. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. In addition, the
design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of
control systems, there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation, nor any
significant deficiencies or material weaknesses in such internal controls
requiring corrective actions. As a result, no corrective actions were taken.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Kerry A. Kramp Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
99.2 Certification of R. Michael Andrews, Jr. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Buffets, Inc. filed no reports on Form 8-K in the quarter ended
April 9, 2003.
24
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.
Date: May 22, 2003 By: /s/ Kerry A. Kramp
------------------------------------
Kerry A. Kramp
Chief Executive Officer
By: /s/ R. Michael Andrews, Jr.
------------------------------------
R. Michael Andrews, Jr.
Chief Financial Officer
(Principal Financial and Accounting
Officer)
25
CERTIFICATION
-------------
I, Kerry A. Kramp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Buffets, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 22, 2003
/s/ Kerry A. Kramp
- -------------------------
Kerry A. Kramp
Chief Executive Officer
26
CERTIFICATION
-------------
I, R. Michael Andrews, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Buffets, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 22, 2003
/s/ R. Michael Andrews, Jr.
- ---------------------------
R. Michael Andrews, Jr.
Chief Financial Officer
27