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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
December 31, 1997 0-14370
BUFFETS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
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(State of incorporation) (IRS Employer Identification No.)
10260 Viking Drive, Eden Prairie, Minnesota 55344-4668
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(Address of principal executive offices) (Zip code)
(612) 942-9760
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
Preferred Share Purchase Rights
7% Convertible Subordinated Notes due 2002
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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the shares of voting stock held by
non-affiliates of the registrant was approximately $566,866,582 at March
23,1998, based on the closing sale price for that date as reported on The Nasdaq
National Market.
On March 23, 1998, there were 45,404,267 shares of common stock of the
Company, par value $.01 per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 1998 Annual Meeting to
be held May 12, 1998 are incorporated by reference in Part III. Portions of
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1997 (the "1997 Annual Report") are incorporated by reference in Parts II
and IV.
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PART I
ITEM 1. BUSINESS
GENERAL
Buffets, Inc., a Minnesota corporation ("Buffets" or the "Company"),
was organized in 1983. Its executive offices are located at 10260 Viking Drive,
Eden Prairie, Minnesota 55344-4668. In September 1996, Buffets acquired HomeTown
Buffet, Inc., a Delaware corporation ('HomeTown Buffet'), as discussed below.
References herein to the "Company" are to Buffets, Inc. and its subsidiaries,
Dinertainment, Inc., Evergreen Buffets Inc., HTB Ventures I, Inc., HTB Ventures
II, Inc., HomeTown Buffet, Inc., HomeTown Construction and Development, Inc.,
OCB Restaurant Co., OCB Realty Co., OCB Purchasing Co. and OCB Property Co.,
unless the context indicates otherwise.
On September 20, 1996, HomeTown Buffet merged with Country Delaware,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, with
HomeTown Buffet as the surviving corporation (the "Merger"). Under the Merger,
HomeTown Buffet became a wholly-owned subsidiary of the Company. In connection
with the Merger, which was accounted for as a pooling of interests, the Company
issued a total of 13,733,728 shares of its common stock in exchange for all
outstanding shares of HomeTown Buffet common stock (at an exchange ratio of 1.17
shares of Company common stock for each share of HomeTown Buffet common stock).
The Company also assumed options covering, in the aggregate, 1,967,167 shares of
the Company's common stock in substitution for previously outstanding options to
acquire shares of HomeTown Buffet's common stock. In addition, the Company
guaranteed the obligations of HomeTown Buffet under its outstanding 7%
Subordinated Convertible Notes, and the Company's common stock will be issued
upon any conversion thereof. Approximately $41.5 million in principal amount of
these notes were outstanding at the time of the Merger.
The Company is principally engaged in the development and operation of
buffet style restaurants under the names Old Country Buffet(R) ("OLD COUNTRY
BUFFET") ("Country Buffet" in the state of Colorado and Wyoming) and HomeTown
Buffet(R) ("HOMETOWN BUFFET"). The Company obtained a federal trademark
registration covering the words OLD COUNTRY BUFFET in June of 1985. Under the
Merger, the Company gained access to a perpetual license to the HOMETOWN BUFFET
mark, including a California state trademark registration, a U.S. trademark
registration for HOMETOWN BUFFET, and a U.S. trademark registration for "HTB"
in the restaurant field.
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As of March 24, 1998, the Company operated 364 Company-owned
restaurants (242 OLD COUNTRY BUFFET, 116 HOMETOWN BUFFET, one Country Roadhouse
Buffet & GrillSM ("COUNTRY ROADHOUSE BUFFET & GRILL") four Roadhouse GrillSM
("ROADHOUSE GRILL") and one PIZZAPLAYSM ("PIZZAPLAY")) in 34 states (including
five new openings, one closing, one relocaton and one OLD COUNTRY BUFFET
converted to a COUNTRY ROADHOUSE BUFFET & GRILL since fiscal year-end 1997). The
Company contemplates that approximately 25 (22 buffet and three ROADHOUSE GRILL)
Company-owned restaurants will be opened in 1998. In addition, the Company has
24 franchised restaurants (five OLD COUNTRY BUFFET and 19 HOMETOWN BUFFET) in
operation in ten states.
The Company's buffet restaurants offer a wide variety of freshly
prepared menu items, including soups, salads, entrees, vegetables, non-alcoholic
beverages and desserts, presented in a self-service buffet format in which
customers select the items and portions of their choice. The restaurants'
typical dinner entrees include chicken, carved roast beef and ham, and two or
three other hot entrees such as casseroles, shrimp and fish. Chicken, fish and
two or three other entrees usually are offered at lunch. The Company's
restaurants utilize uniform menus, recipes and ingredient specifications, except
for certain variations adopted in response to regional preferences.
The Company's buffet restaurants range in size from approximately 5,500
to 15,740 square feet, seat from 225 to 600 people, and generally include areas
that can be partitioned to accommodate private meetings and group outings. The
decor is attractive and informal. To date, the Company has located its
restaurants primarily within or adjacent to strip or neighborhood shopping
centers. The Company has 80 freestanding locations, 21 of which it owns. The
Company's buffet restaurants generally are open from 11:00 a.m. to 8:00 p.m. or
9:00 p.m. A majority of the Company's buffet restaurants also serve breakfast
from 8:00 a.m. to 11:30 a.m. on weekends.
FORWARD-LOOKING INFORMATION
Certain statements in this Annual Report on Form 10-K and in the
Company's press releases and oral statements made by or with the approval of the
Company's executive officers constitute or will constitute "forward-looking
statements." All forward-looking statements involve risks and uncertainties, and
actual results may be materially different. The following factors are among
those that could cause the Company's actual results to differ materially from
those set forth in such forward-looking statements.
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The ability of the Company to open new restaurants, and the allocation
of new restaurants among the Company's currently available and future concepts,
depends on a number of factors, including its ability to find suitable locations
and negotiate acceptable leases and land purchases, its ability to attract and
retain a sufficient number of qualified restaurant managers, the comparative
potential return and risk associated with the particular restaurant concept, and
the availability of capital. The proportion of new restaurants that will be
free-standing units, either owned or leased, rather than strip mall locations
will depend upon the availability and cost of suitable mall locations. The costs
of restaurant development and conversion will depend upon the level of
contributions from landlords for leasehold improvements, the actual number of
free-standing sites utilized in such development, and whether such sites involve
land purchases, the cost of building supplies and general construction risks and
costs. The ultimate level of television advertising expenditures in 1998 will be
contingent upon the effectiveness of the commercials, the availability and cost
of advertising air time, and changes in the Company's marketing priorities. The
Company's ability to generate revenue as currently expected, unexpected expenses
and the need for additional funds to react to changes in the marketplace,
including unexpected increases in personnel costs and food supply costs, may
impact whether the Company has sufficient cash resources to fund its restaurant
development and conversion plans for 1998 and early 1999. The prospect of future
restaurant conversions is contingent upon the costs of the conversions, the
financial return anticipated with such conversions, and the availability of
viable alternative concepts. The Company periodically reviews the operating
results of individual restaurants to determine if impairment charges on
underperforming assets are necessary, and the need for restaurant closings, and
it is reasonable to expect that such actions will be required from time to time
in the future. There is no certainty that currently available sources of cash
will remain available to the Company over time.
Other factors that could cause actual results of the Company to differ
materially from those contained in any such forward- looking statements include
the success and timing of the continuing integration of the operations of
Buffets and HomeTown Buffet, general economic conditions, the actions of
existing and future competitors, weather factors, the success of conversions,
health and safety developments regarding restaurant operations (including the
risks described below in the section entitled "FOOD QUALITY AND SAFETY"), and
regulatory constraints. The Company assumes no obligation to publicly release
the results of any revision or updates to forward-looking statements to reflect
future events or unanticipated occurrences.
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SCATTER SYSTEM FORMAT
Buffet items generally are presented to diners using a "scatter system"
rather than a conventional straight buffet serving line. Under the scatter
system, six to eight separate food islands or counters are used to present
various courses of each meal to diners (for example, salads on one island,
desserts on another), with diners able to proceed directly to those islands
presenting the menu items they desire at the time. The scatter system promotes
easier food access and has helped reduce the long lines that often occurred
during peak hours in the Company's restaurants utilizing the conventional
straight-line serving format.
SMALL BATCH PREPARATION
To ensure freshness, hot foods and bakery items are prepared repeatedly
throughout the day in relatively small batches. Restaurant managers closely
monitor the servicing area for the quality and availability of all items. The
Company believes the freshness achieved through small batch preparation
contributes significantly to the high quality of its food.
ALL-INCLUSIVE PRICE
Depending on the market area, the Company's buffet restaurants
currently charge an all-inclusive price of $4.99 to $6.59 for lunch, Monday
through Saturday, and $5.99 to $9.19 for dinner Monday through Sunday. On
Saturday and Sunday, certain restaurants serve breakfast at prices ranging from
$5.49 to $6.59. Reduced prices are available to senior citizens who purchase an
annual senior club card for $1.00 per year and to children under the age of ten
or twelve depending on the market area. Children's prices for all meals are $.40
to $.60 per year of their age from two through ten or twelve depending on the
market and in limited markets $3.49 to $4.99 depending on age. Customers pay
prior to entering the dining area and are assisted to tables by restaurant
employees. They may return for second helpings and additional beverages and
desserts without additional charge. This all-inclusive pricing approach exists
at virtually all of the Company's buffet restaurants, although alternative
pricing and service arrangements are occasionally implemented on a test basis.
BUFFET RESTAURANT OPERATIONS AND CONTROLS
GENERAL. In order to maintain a consistently high level of food quality and
service in all of its restaurants, the Company has established uniform
operational standards which are implemented by the managers of each restaurant.
All restaurants are required to be operated in accordance with rigorous
standards and
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specifications relating to the quality of ingredients, preparation of food,
maintenance of premises and employee conduct.
MENU SELECTION AND PURCHASING. Headquarter personnel prepare and
periodically revise standard recipes and menus and a list of approved
ingredients and supplies based upon the quality, availability, cost and customer
acceptance of various menu items. Food quality is maintained through centralized
coordination with suppliers and frequent restaurant visits by District
Representatives and other management personnel.
The Company purchases its food and beverage inventories and restaurant
supplies from independent suppliers approved by headquarter personnel, who
negotiate quality specifications, delivery schedules and pricing and payment
terms (typically 28 days) directly with the suppliers. Although all supplier
invoices are paid from Company headquarters, restaurant managers place orders
for inventories and supplies with, and receive shipments directly from,
suppliers. Restaurant managers approve invoices before forwarding them to
Company headquarters for payment. To date, the Company has not experienced any
difficulties in obtaining food and beverage inventories or restaurant supplies,
and the Company does not anticipate that any material difficulties will develop
in the foreseeable future.
RESTAURANT MANAGEMENT. Each buffet restaurant typically employs a
Senior General Manager or General Manager, Kitchen Manager, Service Manager, and
one to two assistant managers. Each of the Company's restaurant General Managers
has primary responsibility for day-to-day operations in one of the Company's
restaurants, including customer relations, food service, cost controls,
restaurant maintenance, personnel relations, implementation of Company policies
and the restaurant's profitability. A portion of each general manager's and
other restaurant manager's compensation depends directly on the restaurant's
profitability. In addition, restaurant managers receive stock options under the
Company's current stock option program entitling them to acquire an equity
interest in the Company. In 1997, the Company also implemented a "PRIDE" program
providing financial incentives to General Managers making a three year service
commitment in a single restaurant. The program was designed to enhance the
retention of restaurant managers and to build a sense of proprietorship. The
Company believes that its compensation policies have been important in
attracting, motivating and retaining qualified operating personnel.
Each restaurant general manager reports to a District Representative,
each of whom in turn reports to a Regional Director (currently 12 persons). Each
Regional Director reports to one of
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four divisional heads (one divisional Vice President and three Senior Regional
Directors), who in turn report to the Company's Executive Vice President of
Operations.
The Company maintains centralized financial and accounting controls for
its restaurants. On a daily basis, restaurant managers forward customer counts,
sales, labor costs and deposit information to Company headquarter. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, and supplier invoices. Payroll data is generally forwarded every two
weeks.
MANAGEMENT TRAINING. The Company has a series of training programs that
are designed to provide managers with the appropriate knowledge and skills
necessary to be successful in their current position. All new restaurant
managers hired from outside the Company and hourly employees considered for
promotion to restaurant management are required to complete ten days of
classroom training at the Buffets Training Center in Eden Prairie, Minnesota.
After their ten days at the Training Center, they continue their training for
four or five weeks in a Certified Training Restaurant in the field. This six to
eight week program provides the basic operating skills and management functions
necessary to shift-manage a Company restaurant. The information covered includes
basic management skills, food production, labor management, operating programs
and human resource management.
Advancement is tied to both current operational performance and
training. Individuals designated for promotion to the position of General
Manager attend a specialized one-week training program conducted at the Training
Center. This program focuses on advanced management skills with emphasis on team
building and performance accountability. General Managers being considered for
promotion to District Representative complete a one-week training program for
new District Representatives. This training is conducted at the Company's
Training Center and focuses on coaching and development, performance management,
advanced problem solving and action plans.
In addition to these programs, a series of field seminars are conducted
for all existing management covering topics from ServSafe, the Company's food
safety procedures, to management skills.
FOOD QUALITY AND SAFETY. The Company is dedicated to serving fresh,
appealing, highly varied and wholesome food to its guests. This has been pivotal
to maintaining high guest satisfaction and is a primary contributor to the
Company's past success.
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In recent years, other reputable food service companies have been
materially and adversely impacted by foodborne illness incidents, some of which
involved third party food suppliers and transporters outside of their reasonable
control. The Company has implemented rigorous internal standards, training and
other programs to attempt to minimize the risk of such occurrences in its
operations. There can be no assurance, however, that these efforts will be fully
effective in preventing all food-borne illness transmission, or that new
illnesses resistant to current precautions will not develop in the future.
The Company also shares a risk common to all multi-unit food service
businesses. Specifically, one or more instances of foodborne illness in a
Company-owned or franchised restaurant, poor health inspection scores, or
adverse publicity can have a material adverse impact extending far beyond the
vicinity of the originally impacted restaurant to affect some or all of the
Company's other foodservice operations. This material adverse risk to the
Company exists even if it is subsequently determined that the incidents were
improperly attributed to the Company's restaurants, or that the negative
publicity was false or misleading.
NON-BUFFET RESTAURANT CONCEPTS. The Company currently operates three
restaurant concepts, comprising six units, that differ from the core buffet
business. The Company's PIZZAPLAY restaurant combines buffet style Italian
entrees and pizza with non-food entertainment services including coin operated
gaming, movies, and a tube-type gymnasium equipment for children. One COUNTRY
ROADHOUSE BUFFET & GRILL is currently in operation, featuring many of the
elements of the Company's buffet restaurants, while adding display cooking of
grill offerings in a relaxed country atmosphere. The four Company operated
ROADHOUSE GRILL restaurants do not utilize buffet style food service, but
instead feature steaks, seafood and other entrees ordered from a menu and then
prepared using an "on display" grill. At the commencement of HomeTown's
development activities involving its ROADHOUSE GRILL restaurants, it engaged a
predecessor in interest to Roadhouse Grill, Inc. to provide certain consulting
services in exchange for the payment of defined consulting fees. That agreement
was terminated by the mutual agreement of the parties in March, 1998 and the
Company and Roadhouse Grill, Inc. are free to develop their respective variant
on the ROADHOUSE GRILL theme without restriction. The Company agreed, as part of
the termination understanding, to rename its existing and future ROADHOUSE GRILL
restaurants with an alternative name that adds one or more words before
"ROADHOUSE" or "ROADHOUSE GRILL." The Company is currently determining the
appropriate trade name for the concept and anticipates that the remarking will
occur in 1998. Any reference herein to current or future ROADHOUSE GRILL
restaurants operated by
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the Company shall be deemed to refer to the concept as it is to be renamed in
1998. The ROADHOUSE GRILL restaurants are the Company's only units serving
alcohol. The real estate leases for the buffet restaurants generally reserve the
right to serve alcohol although this privilege has not been exercised to date.
FRANCHISING AND JOINT VENTURES
OLD COUNTRY BUFFET FRANCHISES. There are currently five franchised OLD
COUNTRY BUFFET restaurants in Nebraska and Oklahoma, owned by two franchisees.
The Company's OLD COUNTRY BUFFET franchise agreements generally have initial
terms of 15 years and require the franchisee to pay an initial fee of $25,000
and continuing royalties equal to four percent of the franchisee's sales. The
Company has an agreement with each franchisee whereby the Company has options
exercisable at various times over the next several years to repurchase the Old
Country Buffet restaurants developed by such franchisee at a predetermined
formula price based principally on restaurant gross sales.
HOMETOWN BUFFET FRANCHISES. HomeTown Buffet has three franshisees:
HTB Restaurants, Inc. ("HTB Restaurants"), Chi-Chi's Inc. ("Chi-Chi's") and
Carlton A. Hargrave, Inc. ("Hargrave").
With respect to each franchised restaurant, HTB Restaurants and
HomeTown Buffet entered into a separate franchise agreement. HTB Restaurants
paid an initial franchise fee for each new HOMETOWN BUFFET restaurant opened and
a percentage royalty fee based on gross sales. Under its agreements with HTB
Restaurants, HomeTown Buffet has a right of first refusal with respect to the
sale of the HOMETOWN BUFFET restaurants operated by HTB Restaurants and any
transfer of franchise rights granted by HomeTown to HTB Restaurants would
require HomeTown Buffet's consent, which may not be unreasonably withheld.
In May 1993, Chi-Chi's opened a HOMETOWN BUFFET restaurant in Peabody,
Massachusetts. Chi-Chi's opened a second franchised unit in March 1994 in
Wichita, Kansas.
Hargrave operates a single franchised restaurant in Calexico,
California, which opened in December 1993. HomeTown Buffet served as general
contractor for the restaurant and in connection with the construction loaned
Hargrave approximately $150,000. The loan was fully paid in 1994. In April 1995
HomeTown Buffet made a loan to Hargrave in the principal amount of $100,000 and
an additional $100,000 in October 1995 under a promissory note that permits
Hargrave to borrow up to $200,000 in principal amount. The note provides for
interest to be paid at 1% above the announced reference rate of US Bank of
Oregon. All outstanding principal and
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interest on the note was due on December 31, 1995 and remains due and payable at
this time. HomeTown Buffet agreed to defer Hargrave's franchise royalty
payments, commencing April 1995. Hargrave resumed paying franchise royalty
payments starting July 17, 1997 with prior unpaid royalties still due and
payable.
HomeTown Buffet's standard franchise agreement has a 15-year term (with
two five-year renewal options) and provides for a one-time payment to HomeTown
Buffet of an initial franchise fee and a continuing royalty fee at a variable
rate of between 2% and 4% of gross sales. HomeTown Buffet collects weekly sales
reports from its franchisees as well as periodic and annual financial
statements.
Each HOMETOWN BUFFET franchisee is responsible for selecting the
location for its restaurant, subject to HomeTown Buffet approval. HomeTown
Buffet considers such factors as demographics, competition, traffic volume and
patterns, parking, site layout, size and other physical characteristics in
approving proposed sites. In addition, all site and building plans and
specifications must be approved by HomeTown Buffet.
Franchisees must operate their HOMETOWN BUFFET restaurants in
compliance with HomeTown Buffet's operating and recipe manuals. Franchisees are
not required to purchase food products or other supplies through HomeTown
Buffet's or the Company's suppliers. Each franchised restaurant is required at
all times to have a designated Manager and Assistant Manager who have completed
the required manager training program. For the opening of a restaurant, HomeTown
Buffet provides consultation and makes its personnel generally available to a
franchisee. In addition, HomeTown Buffet sends a team of personnel to the
restaurant for up to two weeks to assist the franchisee and its managers in the
opening, the initial marketing and training effort as well as the overall
operation of the restaurant.
The HOMETOWN BUFFET franchisees do not currently have any contractual
rights to develop additional HomeTown Buffet restaurants, and they and their
affiliates are constrained from certain development activities involving other
buffet restaurants.
HomeTown Buffet may terminate a franchise agreement for a number of
reasons, including a franchisee's failure to pay royalty fees when due, failure
to comply with applicable laws, or repeated failure to comply with one or more
requirements of the franchise agreement. Many state franchise laws limit the
ability of a franchisor to terminate or refuse to renew a franchise. Generally,
a franchisee may terminate a franchise agreement only if HomeTown Buffet
violates a material and substantial provision of the
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agreement and fails to remedy the violation within a specified period. The
Company does not anticipate that the termination of any or all of the franchise
agreements would have a materially adverse effect on its operations.
JOINT VENTURES. The Company has taken advantage of joint venture
opportunities from time to time, principally as a means of entering new
geographic markets.
On March 7, 1997, the Company used this approach to develop a new
restaurant concept. It established Dinertainment, Inc. at that time to develop
and operate restaurants that combine Italian-style buffet service with family
oriented games. One location opened December 2, 1997 in Columbus, Ohio. The
Company holds 80% of the outstanding capital stock of the subsidiary.
The Company at present is not actively seeking to grant additional
franchises or enter into additional joint ventures relating to its OLD COUNTRY
BUFFET, HOMETOWN BUFFET, or other restaurant concepts.
RISKS ASSOCIATED WITH NON-COMPANY RESTAURANT OPERATIONS. The Company is
constrained in the manner in which it can regulate its franchised restaurants,
at least in real-time. In the event that a franchised restaurant fails to meet
current franchisor operating standards, the Company's own restaurants could be
adversely affected due to customer confusion or adverse publicity. A similar
risk exists with totally unrelated foodservice businesses if customers draw an
improper correlation with the Company's own operations.
COMPETITION
The food service industry is highly competitive. Menu, price, service,
convenience, location and ambiance are all important competitive factors, with
the relative importance of many such factors varying among different segments of
the consuming public.
By providing a wide variety of food and beverages at reasonable prices
in an attractive and informal environment, the Company seeks to appeal to a
broad range of value-oriented consumers. The Company believes that its primary
competitors in this industry segment are other buffet and cafeteria restaurants,
and traditional family and casual dining restaurants with full menus and table
service. The Company believes that its success to date has been due to its
particular approach combining pleasant ambiance, high food quality, breadth of
menu, cleanliness and reasonable prices with satisfactory levels of service and
convenience.
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Sales are seasonal, with a lower percentage of annual sales occurring
in most of its current market areas during the winter months. Sales may also be
affected by unusual weather patterns or matters of public interest that compete
for the customers' attention.
ADVERTISING AND PROMOTION
In 1995, the Company's advertising spending was at .9% of restaurant
sales. Following a positive return on increased advertising, the Company
increased its advertising spending to 1.2% of restaurant sales during 1996.
Similarly in 1997 1.3% of restaurant sales was dedicated to advertising
spending. It is expected that the advertising spending will double to
approximately $18,000,000 in 1998.
REGULATION
The Company's restaurants must be constructed to meet federal, state
and local building and zoning requirements and must be operated in accordance
with state and local regulations relating to the preparation and serving of
food. The Company is also subject to various federal and state labor laws which
govern its relationships with its employees, including those relating to minimum
wages, overtime and other working conditions. Environmental regulations have not
had a material effect on the operations of the Company. The Company to date has
been successful in obtaining all necessary permits and licenses and complying
with applicable regulations, and does not expect to encounter any material
difficulties in the future with respect to these matters.
TRADEMARKS
In June 1985, the Company obtained a federal trademark registration
covering the words "Old Country Buffet." The Company has subsequently obtained
trademark protection for additional marks used in its business, including the
trademarks of HOMETOWN BUFFET in connection with the Merger. Generally, federal
registration of a trademark gives the registrant the exclusive use of the
trademark in the United States in connection with the goods or services
associated with the trademark, subject to the common law rights of any other
person who began using the trademark (or a confusingly similar mark) prior to
the date of federal registration. Because of the common law rights of such a
pre-existing restaurant in certain portions of Colorado and Wyoming, the
Company's restaurants in those states use the name "Country Buffet." In 1997,
the Company filed applications for federal registration of the trademarks
"COUNTRY ROADHOUSE BUFFET & GRILL" and "PIZZAPLAY." The Company intends to take
appropriate steps to develop and protect its various marks.
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EMPLOYEES
As of February 25, 1998, the Company employed approximately 24,830
persons, including 395 supervisory and administrative, 1,575 managerial, and
22,860 restaurant employees. Approximately 61% of the Company's restaurant
employees work part-time. Relations with employees have been satisfactory and no
work stoppages due to labor disputes have occurred. The Company anticipates that
its work force will increase by more than 7% by the end of 1998, subject to
unexpected turnover levels, availability of qualified personnel and changes in
restaurant development plans.
RESTAURANT DEVELOPMENT
GENERAL. The Company opened 18 restaurants and closed four in 1997 and
expects to open approximately 25 restaurants in 1998 (22 buffet and three
Roadhouse Grill), of which five were open as of March 24, 1998. As of March 24,
1998, the Company has converted one existing OLD COUNTRY BUFFET restaurant to a
COUNTRY ROADHOUSE BUFFET & GRILL, relocated one OLD COUNTRY BUFFET, and closed
one OLD COUNTRY BUFFET.
The ability of the Company to open new restaurants, and the allocation
of new restaurants among the Company's currently available and future concepts,
depends on a number of factors, including its ability to find suitable locations
and negotiate acceptable leases and land purchases, its ability to attract and
retain a sufficient number of qualified restaurant managers, the comparative
potential return and risk associated with the particular restaurant concept, and
the availability of capital. The Company actively and continuously attempts to
identify and negotiate leases and land purchases for additional new locations,
and expects that it will be able to achieve its intended development schedule
for 1998, though there is no assurance that this will be the case.
GEOGRAPHIC EXPANSION STRATEGY. The Company initially concentrated its
restaurant development in the Midwest, and then after several years expanded to
other regions of the country. The Merger strengthened the Company's presence in
California and other key markets. The Company currently operates in 34 states.
The Company attempts to cluster its restaurants in geographic areas to achieve
economies of scale in costs of supervision, marketing and purchasing.
SITE SELECTION CRITERIA. The primary criteria considered by the Company
in selecting new locations are a high level of customer traffic, convenience to
both lunch and dinner customers in
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demographic groups (such as families and senior citizens) that tend to favor the
Company's restaurants, and the occupancy cost of the proposed restaurant. The
Company has found that these criteria frequently are satisfied by well-located
strip shopping centers that benefit from cotenancy with strong national
retailers and visibility to high traffic roads. All but 116 of the Company's
current restaurants are located in such centers. Thirty-six of the other 116
restaurants are located in regional or other enclosed shopping malls and 80 are
located in free-standing structures. The Company will generally pursue
free-standing locations only if the projected return on investment falls within
acceptable ranges or unique market positioning objectives are involved. The
Company typically requires a population density of at least 100,000 within five
miles of each new location, and currently is concentrating its development
efforts on urban areas that can accommodate a number of Company restaurants. The
Company is developing a small market prototype for test in markets with a
population of at least 75,000. There is no certainty that the test will prove
successful or that the smaller prototype unit will be developed beyond the test
restaurant. Because OLD COUNTRY BUFFET or HOMETOWN BUFFET restaurants typically
draw a significant volume of customers, and because of the Company's financial
strength, the Company often has been able to negotiate favorable lease terms.
RESTAURANT CONSTRUCTION. In an effort to better control costs and
improve quality, the Company is closely involved in the construction of its
restaurants, and also in the acquisition and installation of fixtures and
equipment. The Company acts as its own general contractor, using restaurant
designs prepared by the Company's own staff with final documents completed by an
outside architectural firm. The Company normally satisfies the equipment and
other restaurant supply needs of its new restaurants by purchasing from
equipment suppliers. Restaurants located in shopping centers typically open
approximately 11 weeks after construction begins, while free-standing
restaurants typically open approximately 17 weeks after construction begins. The
average cost to develop a buffet restaurant located in a shopping center during
fiscal 1997 was approximately $818,000 for leasehold improvements (net of
landlord contributions) and approximately $672,000 for equipment and
furnishings. Free-standing leased buffet restaurants opened in 1997 cost an
average of approximately $1,210,000 for building and leasehold improvements and
approximately $701,000 for equipment and furnishings. Free-standing owned
restaurants developed in 1997 entailed an average land cost of $810,000 and an
average building cost of $1,535,000. It is expected the increased development of
free-standing restaurants will increase the average cost per unit and associated
capital requirements in 1998.
15
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 36,000
square feet of leased space in Eden Prairie, Minnesota, for a term ending April
30, 2000. The Company is negotiating an option to extend the lease while it
concurrently reviews other alternatives, including the potential development of
a corporate headquarters in Eagan, Minnesota on a parcel of land purchased in
1995 for this possible use. The Company also leases a 22,200 square foot
warehouse and training center in Eden Prairie, Minnesota for a term ending
January 31, 1999. The lease has three one-year options that the Company could
exercise to extend the lease through January 31, 2002. The Company owns a 72,000
square foot facility in Marshfield, Wisconsin that it utilizes for the
fabrication of cabinetry, fixtures and upholstery of chairs and booths for its
restaurants.
Until 2001, the Company remains obligated under certain leases related
to approximately 32,000 square feet of office space in San Diego, California,
previously utilized by HomeTown Buffet as its headquarters. All of that space
has been sublet to third parties. However, the amount of rent receivable by the
Company pursuant to such subleases is less than the rent payable by the Company
pursuant to the principal leases. In 1997, the Company entered into two separate
lease agreements for new down-sized regional and executive offices in San Diego
and La Jolla, California, respectively. The regional office is comprised of
approximately 1,800 square feet and the lease expires October 24, 1999, with one
two-year extension available. The La Jolla regional executive office constitutes
approximately 1,950 square feet and its lease expires October 24, 1999.
Most of the Company's restaurants are located in leased facilities,
although the Company will consider land purchases for free-standing restaurants
in instances where an acceptable return on investment, or market positioning,
justifies the additional investment. Eighty restaurants are located in
free-standing buildings, 36 are located in regional or other enclosed shopping
malls, and the rest are located in strip or neighborhood shopping centers. Most
of the leases provide for a minimum annual rent and additional rent calculated
as a percentage of restaurant sales, generally 3% to 5%, if the rents so
calculated exceed the minimum. The initial terms of the Company's leases
generally range from ten to fifteen years, and the leases usually have renewal
options for additional periods of five to ten years.
The Company owns substantially all of the equipment, furniture and
fixtures in its restaurants. Leasehold improvements made by the Company in
leased premises usually become the property of the
16
landlord upon expiration or termination of the lease. To date, most of the
Company's strip mall landlords have agreed to bear a portion of the cost of
leasehold improvements by way of either rent concessions or cash contributions.
ITEM 3. LEGAL PROCEEDINGS
IN RE BUFFETS, INC. SECURITIES LITIGATION, United States District Court
for the District of Minnesota, Master No. 3-94-1447. This action is a
consolidation of four separate lawsuits. The first lawsuit was commenced by ZSA
Asset Allocation Fund and ZSA Equity Fund on or about November 7, 1994. Three
other substantially similar actions were filed shortly thereafter by alleged
shareholders Marc Kushner, Trustee for Service Lamp Corp. Profit Sharing Plan,
Jerrine Fernandes, and John J. Nuttall. By Pretrial Order No. 1, entered in
early January 1995, the District Court ordered that the four lawsuits be
consolidated into the single pending action and that plaintiffs serve and file a
Consolidated Amended Class Action Complaint (the "Complaint"), which was served
on or about January 31, 1995. The Court ordered the dismissal of the Complaint
upon motion by the defendants, but granted plaintiffs leave to replead.
Plaintiffs filed their Second Amended, Consolidated Class Action Complaint (the
"Second Complaint") on December 11, 1995. Defendants moved to dismiss the Second
Complaint. On September 11, 1996, the District Court dismissed the Second
Complaint without prejudice, with leave to plaintiffs to replead. On November 8,
1996, plaintiffs filed their Third Amended, Consolidated Class Action Complaint
(the "Third Complaint"). Defendants moved to dismiss the Third Complaint. By
Memorandum Opinion and Order filed on January 6, 1998, the District Court denied
defendants' motion to dismiss the plaintiff's Corrected, Third Amended,
Consolidated Class Action Compaint.
The Third Complaint is against the Company and several of its current
and former officers and directors. In the Third Complaint, plaintiffs seek to
represent a putative class consisting of all persons and entities (excluding
defendants and certain others) who purchased shares of the Company's Common
Stock during the period commencing October 26, 1993 and ending October 25, 1994
(the "Class Period"). 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. The Third Complaint
alleges that the
17
defendants' conduct violated the Securities Exchange Act of 1934 and seeks
compensatory damages in an unspecified amount, prejudgment interest, and an
award of attorneys' fees, costs and expenses.
Management of the Company believes that the action is without merit and
intends to defend it vigorously. 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
outcome should not have a material effect on the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
18
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT. The officers of the
Company are elected annually by the Board of Directors to serve until the next
annual meeting of the Board. Sixteen officers were so elected by the Board of
Directors in 1997, including ten executive officers (currently, those
designated as Senior Vice President or higher) who serve on the Company's
"Executive Committee." The following table contains information regarding the
present executive officers, and all persons chosen to become executive officers,
of the Company.
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Glenn D. Drasher (46) 1997 Executive Vice President of
Marketing of the Company since
January 1997; Executive Vice
President of Country Kitchen
International, family dining
restaurants, June 1996 to
January 1997; Vice President of
Marketing of Country Kitchen,
September 1993 to June 1996;
Senior Vice President of
Marketing of Chi-Chi's, Inc.,
Mexican casual restaurants, 1983
to September 1993.
David Goronkin (35) 1996 Executive Vice President of
Operations for the Company since
September 1996; Vice President
of Operations of HomeTown
Buffet, May 1996 to September
1996; Director of Operations of
HomeTown Buffet, November 1994
to May 1996; various positions,
HomeTown Buffet, 1989 to
November 1994.
Clark C. Grant (46) 1986 Executive Vice President of
Finance and Administration since
December 1994 and Treasurer of
the Company since May 1986; Vice
President of Finance of the
Company, January 1991 to
December 1994.
19
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Roe H. Hatlen (54) 1983 Co-Founder of the Company;
Chairman and Chief Executive
Officer of the Company since
December 1983; President of the
Company, May 1989 to September
1992.
Thomas F. Hubbard (46) 1996 Executive Vice President of Real
Estate and Development of the
Company since September 1996;
President of HomeTown
Development and Construction,
Inc. since 1995; Vice President
of Construction and Development
for HomeTown Buffet since 1992;
Director of Construction for
HomeTown Buffet from 1991
through 1992.
Kerry A. Kramp (42) 1996 President of the Company since
September 1996; President of
HomeTown Buffet from December
1995 to September 1996 and its
Chief Operating Officer since
May 1995; Vice President of
Operations of HomeTown Buffet
from February 1992 to December
1995; Director of Specialty
Foods for Geo. A. Hormel Company
from 1988 to February 1992.
Jean C. Rostollan (46) 1991 Executive Vice President of
Purchasing since September 1996;
Executive Vice President of
Development and Purchasing,
December 1994 to September 1996;
Assistant Secretary of the
Company since February 1992;
Vice President of Purchasing and
Distribution of the Company,
September 1992 to December 1994;
Vice President of Purchasing and
Marketing of the Company,
January 1991 to August 1992.
20
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
C. Dennis Scott (51) 1996 Co-Founder of the Company; Vice
Chairman and Chief Operating
Officer of the Company since
September 1996; Co-Founder of
HomeTown Buffet; Director and
Chief Executive Officer of
HomeTown Buffet since 1989.
K. Michael Shrader (54) 1996 Executive Vice President of
Human Resources and Training of
the Company since March 1997;
Vice President of Human
Resources of the Company,
September 1996 to March 1997;
Vice President of Human
Resources of HomeTown Buffet,
January 1996 to September 1996;
Director of Human Resources of
HomeTown Buffet, August 1995 to
January 1996; Selection Analyst,
the Gallup Organization,
February 1995 to August 1995;
Self-employed business
consultant, March 1993 to
February 1995; Vice President of
Human Resources of Red Robin
International, Inc., September
1987 to March 1993.
Neal L. Wichard (55) 1996 Senior Vice President of Real
Estate of the Company since
September 1996; Co-Founder of
HomeTown Buffet; Vice Chairman
of HomeTown Buffet, October 1995
to September 1996; Secretary and
Director of HomeTown Buffet,
July 1990 to September 1996.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTER
The information set forth under the caption "Market for the Company's
Common Stock and Related Stockholder Matters" on page 23 of the 1997 Annual
Report is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth under the caption, "Selected Consolidated
Financial Data" on page 4 of the 1997 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 5
through 9 of the Company's 1997 Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Except for KPMG Peat Marwick LLP's opinion relating to the consolidated
statements of income, stockholders' equity (deficit), and cash flows of HomeTown
Buffet, Inc. and its subsidiaries for the year ended January 3, 1996, the
information required under this Item 8 is incorporated herein by reference to
pages 10 through 23 of the Company's 1997 Annual Report. KPMG Peat Marwick LLP's
opinion appears at page 30 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the sections captioned "Number and
Election of Directors," "Certain Information Regarding Board of Directors of the
Company" and "Compliance With Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement for the Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended December 31, 1997. For information concerning executive
officers, see Item 4A of this Annual Report on Form 10-K.
22
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the section captioned "Compensation
of Executive Officers" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 1997; provided, however,
that the subsection thereof entitled "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated herein by reference to the similarly captioned section in
the Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the fiscal
year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the section captioned "Certain
Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this Report.
1. Financial Statements
Consolidated Balance Sheets at January 1, 1997 and
December 31, 1997*
Consolidated Statements of Operations for the Years
Ended January 3, 1996, January 1, 1997 and December
31, 1997*
Consolidated Statements of Stockholders' Equity for
the Years Ended January 3, 1996, January 1, 1997, and
December 31, 1997*
23
Consolidated Statements of Cash Flows for the Years
Ended January 3, 1996, January 1, 1997, and December
31, 1997*
Notes to Consolidated Financial Statements*
Independent Auditors' Report of Deloitte & Touche LLP*
Independent Auditor's Report of KPMG Peat Marwick LLP
(See page 30 of this Annual Report on Form 10-K)
*Incorporated herein by reference to pages 10 through 23 of the
Company's 1997 Annual Report
2. Supplemental Financial Schedules
None
3. Exhibits
2 Agreement and Plan of Merger by and among
the Company, Country Delaware, Inc., and
HomeTown Buffet (1)
3(a) Composite Amended and Restated Articles of
Incorporation. (2)
3(b) By-laws of the Company. (3)
3(c) Form of Rights Agreement, dated as of
October 24, 1995 between the Company and
the American Stock Transfer & Trust
Company, as Rights Agent. (4)
4(a) Indenture dated as of November 27, 1995
related to 7% Convertible Subordinated
Notes of HomeTown Buffet due 2002. (5)
4(b) First Supplemental Indenture dated as of
September 20, 1996 among the Company,
HomeTown Buffet and Wells Fargo Bank,
N.A.(6)
10(a) 1985 Stock Option Plan. (7)*
10(b) 1988 Stock Option Plan. (8)*
24
10(c) 1995 Stock Option Plan. (9)*
10(d) 1997 Non-Employee Director Stock Option Plan.*
10(e) Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association. (10)
10(f) Amendment No. 1 dated as of September 20,
1996 to Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association. (11)
10(g) Amendment No. 2 dated as of May 28, 1997 to
Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association. (12)
10(h) Amendment No. 3 dated as of September 12,
1997 to Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association. (13)
10(i) Letter dated as of January 14, 1998 to
Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association.
10(j) Management Bonus Program.*
10(k) 1991 HomeTown Buffet Stock Option Plan, as
amended. (14)*
10(l) Consolidating Promissory Note issued by
Kerry A. Kramp to the Company and related
Stock Pledge Agreement, each dated December
31, 1996. (15)*
10(m) Promissory Note issued by Thomas E.
Hubbard to HomeTown Buffet and related
Pledge Agreement, each dated November 9,
1993. (16)*
10(n) Promissory Note issued by Thomas E. Hubbard
to HomeTown Buffet and related Pledge
Agreement, each dated August 13, 1996. (17)*
25
10(o) Promissory Note issued by Michael Shrader to
HomeTown Buffet and related Pledge Agreement,
each dated August 7, 1996. (18)*
10(p) Employment Agreement with Kerry A. Kramp
dated September 20, 1996. (19)*
10(q) Form of Franchise Agreement. (20)
10(r) Nonstatutory Stock Option Agreement with Roe
H. Hatlen dated May 19, 1997.
10(s) Nonstatutory Stock Option Agreement with C.
Dennis Scott dated May 19, 1997.
10(t) Nonstatutory Stock Option Agreement with
Kerry A. Kramp dated May 19, 1997.
11 Statement Regarding Computation of Per Share
Earnings (Loss).
13 Annual Report to Shareholders for the
fiscal year ended December 31, 1997.
21 Subsidiaries of the Company.
23.(a) Consent of Deloitte & Touche LLP.
23.(b) Consent of KPMG Peat Marwick LLP.
27.(a) Financial Data Schedule.
27.(b) Financial Data Schedule.
27.(c) Financial Date Schedule.
* Management or Director contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
(1) Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K
dated June 3, 1996.
(2) Incorporated by reference to Exhibits to Registration Statement on Form
S-3 dated June 2, 1993 (Registration No. 33-63694).
(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 29, 1993.
26
(4) Incorporated by reference to Exhibits to Report on Form 8-K, dated
October 24, 1995.
(5) Incorporated by reference to Exhibit 4.6 to Registration Statement on
Form 8-A dated November 7, 1996.
(6) Incorporated by reference to Exhibit 4.7 to Registration Statement on
Form 8-A dated November 7, 1996.
(7) Incorporated by reference to Exhibits to Registration Statement on Form
S-1 dated October 25, 1985 (Registration No. 33-171).
(8) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 30, 1992.
(9) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q
for the quarter ended October 4, 1995.
(10) Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q for the quarter ended April 24, 1996.
(11) Incorporated by reference to Exhibit 4.5 to Registration Statement on
Form 8-A dated November 7, 1996.
(12) Incorporated by reference to Exhibit 10.1 to Exhibit 10.1 to
Registration Statement on Form 8-A dated April 23, 1997.
(13) Incorporated by reference to Exhibit 10(b) to the Company's quarterly
Report on Form 10Q for the period ended October 8, 1997.
(14) Incorporated by reference to Exhibit 10.1 to HomeTown Buffet's
Quarterly Report on Form 10-Q for the period ended April 24, 1996 (File
No. 0-22402).
(15) Incorporated by reference to Exhibit 10(h) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(16) Incorporated by reference to Exhibits to HomeTown Buffet's Registration
Statement on Form S-1, as amended, effective March 23, 1994
(Registration No. 33-75810).
(17) Incorporated by reference to Exhibit (10)j to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(18) Incorporated by reference to Exhibit 10(k) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
27
(19) Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the period ended October 9, 1996.
(20) Incorporated by reference from Exhibits to HomeTown Buffet's
Registration Statement on Form S-1, as amended, effective September 22,
1993 (Registration No. 33-67326).
(b) Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
28
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically incorporated herein by
reference to the Company's 1997 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 12, 1998, no other portions of the 1997 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-K.
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HomeTown Buffet, Inc.:
We have audited the consolidated statements of income, stockholders'
equity (deficit), and cash flows of HomeTown Buffet, Inc. and
subsidiaries for the year ended January 3, 1996 (not presented herein).
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
the cash flows of HomeTown Buffet, Inc. and subsidiaries for the year
ended January 3,1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Diego, California
February 16, 1996, except as to Note 6
to the consolidated financial statements
which is as of March 8, 1996
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 1998 By /s/ Roe H. Hatlen
- ------------------- ---------------------------
Date Roe H. Hatlen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
- ----------- ---------- -------
/s/ Roe H. Hatlen Chairman of the Board March 27, 1998
- ------------------------ and Chief Executive
Roe H. Hatlen Officer (Principal
Executive Officer)
/s/ Clark C. Grant Executive Vice March 27, 1998
- ------------------------ President of Finance
Clark C. Grant and Administration and
Treasurer (Principal
Financial Officer)
/s/ Marguerite C. Nesset Vice President of March 27, 1998
- ------------------------ Accounting and
Marguerite C. Nesset Controller (Principal
Accounting Officer)
/s/ C. Dennis Scott Vice Chairman of March 27, 1998
- ------------------------ the Board, Chief
C. Dennis Scott Operating Officer
and Director
/s/ Walter R. Barry, Jr. Director March 27, 1998
- ------------------------
Walter R. Barry, Jr.
/s/ Marvin W. Goldstein Director March 27, 1998
- ------------------------
Marvin W. Goldstein
/s/ Alan S. McDowell Director March 27, 1998
- ------------------------
Alan S. McDowell
/s/ Michael T. Sweeney Director March 27, 1998
- ------------------------
Michael T. Sweeney
31
EXHIBIT INDEX
EXHIBITS
2 Agreement and Plan of Merger by and among the
Company, Country Delaware, Inc., and HomeTown
Buffet, Inc......................................Incorporated by Reference
3(a) Composite Amended and Restated Articles
of Incorporation.................................Incorporated by Reference
3(b) By-laws of the Company...........................Incorporated by Reference
3(c) Form of Rights Agreement, dated as of October
24, 1995 between the Company and the American
Stock Transfer & Trust Company, as Rights Agent..Incorporated by Reference
4(a) Indenture dated as of November 27, 1995
related to 7% Convertible Subordinated Notes
of HomeTown Buffet due 2002......................Incorporated by Reference
4(b) First Supplemental Indenture dated as of
September 20, 1996 among the Company,
HomeTown Buffet and Wells Fargo Bank, N.A........Incorporated by Reference
10(a) 1985 Stock Option Plan...........................Incorporated by Reference
10(b) 1988 Stock Option Plan...........................Incorporated by Reference
10(c) 1995 Stock Option Plan...........................Incorporated by Reference
10(d) 1997 Non-Employee Director Stock Option Plan..........Filed Electronically
10(e) Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(f) Amendment No. 1 dated as of September 20, 1996
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(g) Amendment No. 2 dated as of May 28, 1997
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(h) Amendment No. 3 dated as of September 12, 1997
to Second Amended and Restated Credit Agreement
by and between the Company and First Bank
National Association.............................Incorporated by Reference
10(i) Letter dated as of January 14, 1998 to Second
Amended and Restated Credit Agreement by and
between the Company and First Bank National
Association...........................................Filed Electronically
32
10(j) Management Bonus Program..............................Filed Electronically
10(k) 1991 HomeTown Buffet Stock Option Plan,
as amended.......................................Incorporated by Reference
10(l) Promissory Note issued by Kerry A. Kramp to the
Company and related Stock Pledge Agreement,
each dated December 31, 1996.....................Incorporated by Reference
10(m) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated November 9, 1993......................Incorporated by Reference
10(n) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated August 13, 1996.......................Incorporated by Reference
10(o) Promissory Note issued by Michael Shrader to
HomeTown Buffet and related Pledge Agreement,
each dated August 7, 1996........................Incorporated by Reference
10(p) Employment Agreement with Kerry A. Kramp
dated September 20, 1996.........................Incorporated by Reference
10(q) Form of Franchise Agreement......................Incorporated by Reference
10(r) Nonstatutory Stock Option Agreement with
Roe H. Hatlen dated May 19, 1997......................Filed Electronically
10(s) Nonstatutory Stock Option Agreement with
C. Dennis Scott dated May 19, 1997....................Filed Electronically
10(t) Nonstatutory Stock Option Agreement with
Kerry A. Kramp dated May 19, 1997.....................Filed Electronically
11 Statement Regarding Computation of Per
Share Earnings (Loss).................................Filed Electronically
13 Annual Report to Shareholders for the
fiscal year ended December 31, 1997...................Filed Electronically
21 Subsidiaries of the Company...........................Filed Electronically
23(a) Consent of Deloitte & Touche LLP......................Filed Electronically
23(b) Consent of KPMG Peat Marwick LLP......................Filed Electronically
27(a) Financial Data Schedule...............................Filed Electronically
27(b) Financial Data Schedule...............................Filed Electronically
27(c) Financial Data Schedule...............................Filed Electronically
33