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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 30, 1998 0-14370
BUFFETS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1462294
(State of incorporation) (IRS Employer Identification No.)
10260 Viking Drive, Eden Prairie, Minnesota 55344-7229
(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. / /
The aggregate market value of the shares of voting stock held by
non-affiliates of the registrant was approximately $424,316,000 at March 24,
1999, based on the closing sale price for that date as reported on The NASDAQ
National Market.
On March 19, 1999, there were 43,898,284 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 1999 Annual Meeting to be
held May 11, 1999 are incorporated by reference in Part III. Portions of
Registrant's Annual Report to Shareholders for the fiscal year ended December
30, 1998 (the "1998 Annual Report") are incorporated by reference in Parts I, 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 55344-7229. 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., Distinctive Dining, Inc., HomeTown Buffet, Inc., HomeTown
Development and Construction, Inc., OCB Restaurant Co., OCB Realty Co., OCB
Purchasing Co., OCB Property Co. and Restaurant Innovations, Inc. 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 states 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
application pending to register HOMETOWN BUFFET, and a U.S. trademark
registration for "HTB" in the restaurant field. The Company filed an application
for federal trademark registration of the name "ORIGINAL ROADHOUSE GRILL" on
April 6, 1998. The trademark Country Harvest Buffet(R) is licensed to the
Company by Country Harvest Buffet Restaurants, Inc. for possible use at certain
restaurants acquired from that company.
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As of March 12, 1999, the Company operated 389 Company-owned restaurants
(258 OLD COUNTRY BUFFET, 120 HOMETOWN BUFFET, seven Original Roadhouse Grill(SM)
("ORIGINAL ROADHOUSE GRILL"), two Country Roadhouse Buffet & Grill(SM) ("COUNTRY
ROADHOUSE BUFFET & GRILL"), one Country Harvest Buffet restaurant currently
being converted to an Original Roadhouse Grill and one PIZZAPLAY(SM)
("PIZZAPLAY")) in 35 states (including three new openings since fiscal year-end
1998). The Company contemplates that approximately 15 to 20 (10 to 13 buffet
style and five to seven ORIGINAL ROADHOUSE GRILL) primarily freestanding
Company-owned restaurants will be opened in 1999. 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, currently 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 currently 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 7,555 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 and, to a lesser extent, regional malls. The Company has 90 freestanding
locations, 19 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.
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 typically 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 originally utilizing the
conventional straight-line serving format.
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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 $5.29 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 $5.89 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
$.70 per year of their age from two through ten or twelve depending on the
market and in limited markets $2.29 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 specifications relating to the quality of ingredients, preparation
of food, maintenance of premises and employee conduct.
MENU SELECTION AND PURCHASING. Headquarters 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
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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 currently 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 four divisional heads (two divisional Vice
Presidents and two 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 headquarters. 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 nine days of classroom training
at the Buffets Training Center in Eden Prairie, Minnesota. After their initial
instruction at the Training Center, they continue their training for four or
five weeks in a Certified Training
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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 and human resource skills.
OTHER (NON-BUFFET) RESTAURANT CONCEPTS.
The Company currently operates three restaurant concepts, comprising ten
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. Two COUNTRY ROADHOUSE BUFFET & GRILLs are
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 seven Company operated ORIGINAL 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 ORIGINAL 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" and subsequently adopted the ORIGINAL ROADHOUSE
GRILL tradename. The ORIGINAL ROADHOUSE GRILL restaurants are currently 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.
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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 franchisees: 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 USBank. All
outstanding principal and 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
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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 agreement and fails to
remedy the violation within a specified period. HomeTown Buffet is currently in
arbitration with HTB Restaurants, Inc. related to the franchisee's compliance
with the franchise agreements governing its 16 franchised HomeTown restaurants.
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 or testing new restaurant concepts.
On March 7, 1997, the Company used this approach to test a new restaurant
concept under the tradename PIZZAPLAY. The PIZZAPLAY
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concept combines 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 Dinertainment, Inc., the subsidiary operating the
one PIZZAPLAY restaurant.
The Company at present is not actively seeking to grant additional
franchises or enter into additional joint ventures relating to its OLD COUNTRY
BUFFET or HOMETOWN BUFFET concepts. It may, however, continue to utilize joint
ventures from time to time to test new restaurant concepts.
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. Secondary competition arises from many other sources including but not
limited to home meal replacement, fast food, and others. 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.
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
The Company's advertising spending was 1.2% and 1.3% of restaurant sales
during 1996 and 1997, respectively. In 1998, the Company increased its
advertising to 2.0% of restaurant sales and expects to increase to 2.5% of
restaurant sales in 1999.
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
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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, subject to the
discussion in the section below captioned "RISK FACTORS ASSOCIATED WITH
REGULATION."
TRADEMARKS
In June 1985, the Company obtained a federal trademark registration
covering the words "Old Country Buffet." As previously stated, the Company has
subsequently obtained trademark protection for additional marks used in its
business, including exclusive license rights to 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." The Company filed applications for federal
registration of the trademarks "ORIGINAL ROADHOUSE GRILL," "COUNTRY ROADHOUSE
BUFFET & GRILL," "HTB" and "PIZZAPLAY." The Company intends to take appropriate
steps to develop and protect its various marks.
EMPLOYEES
As of February 24, 1999, the Company employed approximately 24,350 persons,
including 410 supervisory and administrative, 1,670 managerial, and 22,270
restaurant employees. Approximately 71% 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 5% by the end of 1999, subject to
unexpected turnover levels, availability of qualified personnel and changes in
restaurant development plans.
RESTAURANT DEVELOPMENT
GENERAL. The Company opened or acquired 28 restaurants and closed two in
1998 and expects to open or acquire approximately 15 to 20 primarily
freestanding restaurants in 1999 (approximately 10 to 13 buffet and five to
seven ORIGINAL ROADHOUSE GRILL), of which three were open as of March 12, 1999.
When freestanding units predominate the overall new unit development, such as is
expected in 1999, the Company can expect to realize higher development costs
associated with the cost of land, greater expense for constructing
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the building shell, and incrementally higher expenditures for labor, materials,
and general construction risks.
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 1999, 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 35 states,
38 states including franchised restaurants. The Company generally 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 typically considered by the
Company in selecting new locations are a high level of customer traffic,
convenience to both lunch and dinner customers in 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 historically
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 131 of the Company's current
restaurants are located in such centers. Forty-one of the other 131 restaurants
are located in regional or other enclosed shopping malls and 90 are located in
freestanding structures. The Company will generally pursue freestanding
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.
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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, through its subsidiary OCB Realty Co., generally 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 freestanding restaurants typically open approximately 17 weeks
after construction begins. The average cost to develop a buffet restaurant
located in a shopping center during fiscal 1998 was approximately $709,000 for
leasehold improvements (net of landlord contributions) and approximately
$711,000 for equipment and furnishings. Freestanding leased buffet restaurants
opened in 1998 cost an average of approximately $1,362,000 for building and
leasehold improvements and approximately $724,000 for equipment and furnishings.
The one freestanding owned restaurant developed in 1998 entailed a land cost of
$617,000 and a building cost of $1,487,000. It is expected the increased
development of freestanding restaurants will increase the average cost per unit
and associated capital requirements in 1999.
FORWARD-LOOKING INFORMATION
This Form 10-K, together with the Company's other ongoing securities
filings, press releases, conference calls and discussions with securities
analysts and other communications contains certain forward-looking statements
that involve risks and uncertainties. These statements relate to the Company's
future plans, objectives, expectations and intentions. These statements may be
identified by the Company using words such as "expects," "anticipates,"
"intends," "plans" and similar expressions. The Company's actual results could
differ materially from those disclosed in these statements, to various factors,
including the following "RISK FACTORS" and factors set forth elsewhere in this
From 10-K. The Company assumes no obligation to publicly release the results of
any revision or updates to forward-looking statements or these risk factors to
reflect future events or unanticipated occurrences.
RISK FACTORS
Current and prospective shareholders should carefully consider the
following risk factors before trading in the Company's securities. This list of
risk factors is not exclusive. If any of the following risks actually occur,
they could have a material negative effect on the Company's business, financial
condition, operating results or cash flows. This could cause the trading price
of the Company's securities to decline, and security holders may lose part or
all of their investment in the Company.
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RISKS ASSOCIATED WITH NEW DEVELOPMENT
The Company has historically added restaurants each year either through new
construction, acquisition, or both. It currently expects that this practice will
continue in 1999 to the extent described above in the section captioned
"Restaurant Development." However, a large number of variables affect restaurant
development and the Company can not predict with certainty the ultimate level of
restaurant additions, if any, in any particular fiscal year. This is due to the
unique aspects associated with development transactions, such as the date sites
become available, the speed with which the Company can obtain required permits,
the availability of construction labor and materials, and how quickly the new
restaurants can be staffed. These factors also make it difficult to predict when
new restaurants will open and produce revenue.
Variables influencing new restaurant additions include the level of success
in identifying suitable locations and the negotiation of acceptable leases and
land purchases. This may become more difficult as competition heightens for
optimal sites. Other variables include, but are not limited to, general
competitive factors, land covenants restricting the Company's use of sites, and
signage restrictions imposed by land owners or governmental entities.
Traditionally, the Company has used cash flow from operations as its
primary funding for restaurant additions. The Company cannot guarantee that this
source of capital will be sufficient to attain the desired development levels if
adverse changes occur affecting revenues, profitability or cash flow from
operations. Reductions in landlord contributions towards construction costs
would also reduce the capital available for development. The Company's ability
to purchase (rather than build) additional restaurants also depends on the
factors described in this section, as well as other factors. These factors
include the Company's ability to convert purchased restaurants to one of the
Company's existing restaurant concepts and to integrate them into the Company's
business or, alternatively, to successfully operate the acquired business using
its existing format.
Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of key
employees. No assurances can be given that any acquisition or investment by the
Company will not materially and adversely affect the Company or that any such
acquisition will enhance the Company's business. If the Company ever determines
to make major acquisitions of other businesses or assets, the Company may be
required to sell additional equity or debt securities or obtain additional
credit
14
facilities. The sales, if any, of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
RESTAURANT OPERATIONAL RISKS
The Company's restaurant operations are affected by changes in the cost of
food and labor and its ability to anticipate such changes. Operations depend
upon the complete and timely delivery of food and non-food items to the
restaurants. Consequently, interruptions in the flow of such products,
variations in product specifications, changes in product costs and similar
factors can have a material impact on the Company's results.
In recent years, other reputable food service companies have been
materially and adversely impacted by food-borne illness incidents. Some of these
incidents involved third party food suppliers and transporters outside of their
reasonable control. The Company has rigorous internal standards, training and
other programs to attempt to minimize the risk of these occurrences. However,
the Company cannot guarantee that these efforts will be fully effective in
preventing all food-borne illnesses. New illnesses resistant to current
precautions may also develop in the future.
The Company also shares a risk common to all multi-unit food service
businesses. Specifically, one or more instances of food- borne illness in a
Company or franchised restaurant, poor health inspection scores, or negative
publicity can have a material negative impact extending far beyond the
restaurant involved to affect some or all of the Company's other foodservice
operations. This risk exists even if it is later determined that the incidents
were wrongly attributed to the Company's restaurants, or that the negative
publicity was false or misleading.
The Company's buffet restaurants utilize a service format that is heavily
dependent upon self-service by its customers. Any development that would
materially impede or prohibit the Company's continued use of a self service food
service approach would have a material adverse impact on the Company's primary
business.
The Company has an active Research and Development Department. The R&D
function exists to enhance the food offerings, food preparation systems, and
general service delivery of the Company's existing restaurant concepts. It is
also utilized to create new restaurant concepts for test. Innovations may also
arise as the result of acquisitions or joint ventures. New restaurant concepts
share a common characteristic due to their lack of a track record, that of
unpredictable long term potential. Consequently, during the early period of a
new restaurant concept's life it is often unclear whether it will turn into a
major expansion vehicle or merely be a limited-unit test of short duration.
15
The Company has achieved considerable success with television marketing
programs in recent years. Marketing programs are generally most effective in the
period immediately following their introduction when they initiate trial usage
by new customers. The Company's current television marketing programs have been
active in certain markets for over a year. It is therefore possible that future
advertising in these markets will be less successful than when the programs were
first aired. The final level of television advertising expenditures in 1999 will
depend on the effectiveness of the commercials, the availability and cost of
advertising air time, and changes in the Company's marketing priorities.
The Company periodically reviews the operating results of individual
restaurants to determine if impairment charges on underperforming assets are
necessary, and the need for restaurant closings, and it is reasonable to expect
that such actions will be required from time to time in the future. Impairment
charges reduce the profits of the Company. They are required by accounting
principles when an asset, such as a restaurant, performs so poorly that the
Company determines that the asset is worth less than its value as stated in the
Company's accounting records.
The Company's sales volumes fluctuate seasonally, and are generally higher
in the summer months and lower in the winter months overall.
The Company has not experienced a significant overall impact from
inflation. If operating expenses increase due to inflation, the Company recovers
increased costs by increasing menu prices. However, competition may limit or
prohibit future such increases, as discussed in the section below entitled
"COMPETITIVE RISKS."
Previous results at the Company's restaurants and at the Company overall
may not be indicative of future performance, as a result of any or all of the
risk factors discussed in the various sections in this report 10-K incorporating
the words "RISK FACTORS."
HUMAN RESOURCE RELATED RISKS
The Company operates in the service sector and is extremely dependent upon
the availability of qualified restaurant personnel. Availability of staff varies
widely from location to location. Difficulty in recruiting and retaining
personnel can increase the cost of restaurant operations and temporarily delay
the openings of new restaurants. It can also cause higher employee turnover in
the affected restaurants. Additionally, competition for qualified employees
exerts pressure on wages paid to attract qualified personnel, resulting in
higher labor costs, together with greater expense to recruit and train them.
The operation of buffet style restaurants is materially different than
certain other restaurant concepts. Consequently, the retention of executive
management that is familiar with the
16
Company's core business is important to the Company's continuing success. The
departure of multiple executives in a short period of time could have an adverse
impact on the Company's business.
The Company strives to maintain favorable relations with its employees
through various programs and initiatives. It believes that these efforts have
contributed to the organization's historical success as well as having
contributed to the absence of any collective bargaining. Adverse developments in
these areas could negatively affect the Company's business.
Various employment related legal risks also exist, which are discussed in
more detail in the sections below entitled "REGULATORY FACTORS" and "LITIGATION
RISKS."
RISKS ASSOCIATED WITH NON-COMPANY OWNED RESTAURANT OPERATIONS
The Company is limited in the manner in which it can regulate its
franchised restaurants, especially in real-time. If a franchised restaurant
fails to meet the Company's franchisor operating standards, the Company's own
restaurants could be adversely affected due to customer confusion or negative
publicity. A similar risk exists with respect to totally unrelated foodservice
businesses if customers mistakenly associate such unrelated businesses with the
Company's own operations.
RISKS ASSOCIATED WITH GENERAL CONDITIONS
The confidence of consumers generally, together with changes in consumer
preferences, can have a significant impact on the Company's results. Positive or
negative trends in weather condition can have an exceptionally strong influence
on the Company's business. This effect is heightened by the fact that most of
the Company's restaurants are in geographic areas experiencing extremes in
weather. The Company's success also depends to a significant extent on factors
affecting discretionary consumer spending, including economic conditions,
disposable consumer income and consumer confidence. Adverse changes in these
factors could reduce guest traffic or impose practical limits on pricing, either
of which could materially adversely affect the Company's business, financial
condition, operating results or cash flows.
COMPETITIVE RISKS
The Company operates in a highly competitive industry. Competitive
pressures may have the affect of limiting the Company's ability to increase
prices, with consequent pressure on operating earnings. This environment makes
it more difficult for the Company to continue to provide high service levels
while maintaining the Company's reputation for superior value, without adversely
affecting operating margins.
17
REGULATORY FACTORS
The Company is subject to extensive government regulation at a federal,
state and local government level. These include, but are not limited to,
regulations relating to the sale of food (and alcoholic beverages in the
Company's full service restaurants). In the past, the Company has been able to
obtain and maintain necessary governmental licenses, permits and approvals.
However, difficulty or failure in obtaining them in the future could result in
delaying or canceling the opening of new restaurants. Local authorities may
suspend or deny renewal of the Company's governmental licenses if they determine
that the Company's conduct does not meet the standards for initial grant or
renewal. Although the Company has satisfied governmental licensing requirements
for its existing restaurants, the Company cannot be sure that these approvals
will be forthcoming at future locations. This risk would be even higher if there
was a major change in the licensing requirements affecting the Company's types
of restaurants.
The Company is also subject to certain states' "dram shop" statutes with
respect to its restaurants that serve alcohol. These statutes generally provide
a person injured by an intoxicated person the right to recover damages from an
establishment that served alcoholic beverages to the intoxicated person. The
Company carries liquor liability coverage as part of its existing comprehensive
general liability insurance. If the Company were to significantly expand the
number of restaurants serving alcohol, an adverse trend in alcohol related
judgments in excess of the Company's insurance coverage, or the Company's
failure to obtain and maintain insurance coverage, could materially and
adversely affect the Company.
Various federal and state labor laws govern the Company's relationship with
its employees and affect operating costs. These laws include minimum wage
requirements, overtime, unemployment tax rates, workers' compensation rates,
citizenship requirements and sales taxes. Significant additional
government-imposed increases in the following areas could materially adversely
affect the Company's business, financial condition, operating results or cash
flow:
* minimum wages
* mandated health benefits
* paid leaves of absence
* increased tax reporting
* revisions in the tax payment requirements for employees
who receive gratuities
The Federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company
believes that its restaurants are designed to be accessible to the disabled.
However, mandated modifications to the Company's facilities to make different
18
accommodations for disabled persons could result in material unanticipated
expense.
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials resulting from, sites
of past spills, disposals or other releases of hazardous materials (together,
"Environmental Laws"). In particular under applicable Environmental Laws, the
Company may be responsible for remediation of environmental conditions and may
be subject to associated liabilities (including liabilities resulting from
lawsuits brought by private litigants) relating to its restaurants and the land
on which its restaurants are located, regardless of whether the Company leases
or owns the restaurants or land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant. There can be no assurance that environmental conditions relating to
prior, existing or future restaurants or restaurant sites will not have a
material adverse affect on the Company.
LITIGATION RISKS
The Company is from time to time the subject of complaints or litigation
from guests alleging illness, injury or other loss associated with the Company's
restaurants. Adverse publicity resulting from these allegations may materially
adversely affect the Company and the Company's restaurants. This may be true
whether or not the allegations are valid or the Company is liable. In addition,
employee claims against the Company based on, among other things,
discrimination, harassment or wrongful termination may divert the Company's
financial and management resources that would otherwise be used to benefit the
future performance of the Company's operations. The Company has been subject to
these employee claims from time to time, and a significant increase in the
number of these claims or successful claims could materially adversely affect
the Company's business, financial condition, operating results or cash flows.
The Company is currently defending a lawsuit based on alleged violations of the
securities laws by the Company. See "LEGAL PROCEEDINGS" below for a discussion
of this lawsuit and the related risks.
YEAR 2000 ISSUE RISKS
The information set forth under the captions "Year 2000 Compliance" and
"Year 2000 Statement and Year 2000 Readiness Disclosures" on pages 8 through 10
of the Company's 1998 Annual Report (collectively referred to herein as the
"Year 2000 Discussion") is incorporated into this Risk Factors section by
reference. This paragraph and the three that follow are merely
19
meant as a brief overview of the Year 2000 issue. Consequently, THE ANNUAL
REPORT'S YEAR 2000 DISCUSSION MUST BE REFERENCED IN ORDER TO OBTAIN A COMPLETE
DESCRIPTION OF THE "YEAR 2000 ISSUE" AND THE COMPANY'S RESPONSES THERETO. The
Year 2000 Discussion provides an assessment of the risks faced by the Company
regarding the Year 2000 Issue as well as a discussion of the procedures being
undertaken to analyze, test, and develop corrective actions on this subject,
together with a summary of the Company's expenditures related to the Year 2000
Issue.
The Year 2000 Issue is a term used to describe the inability of some
computer hardware and software to operate properly as the date January 1, 2000
approaches, and beyond. It affects more than what most people think of as
"computers". The Year 2000 Issue can negatively impact technology or procedures
reliant upon embedded computer and software processes, such as employee time
clocks and cash registers, for example.
The Company has been identifying the various systems that may be affected
by the Year 2000 Issue. When systems are detected that could be impacted by the
Year 2000 Issue, the Company develops testing programs to evaluate their
vulnerability and identifies the corrective action necessary. A contingency plan
will be developed for those systems in which corrective action may be impossible
or only partly effective, or where the systems are beyond the Company's control.
On this latter point, it should be noted that Year 2000 Issues affecting third
party systems, particularly those on which the restaurants rely, could have
significant negative impacts on the Company's business. For example, the Company
believes that some or all of its restaurants may be temporarily closed if third
party suppliers of food products or energy are adversely affected by the Year
2000 Issue. The failure of the Company's and/or third party's systems could have
a material adverse effect on the Company's results of operations, liquidity and
financial condition. Furthermore, any change in spending habits by the Company's
customers, or negative societal responses in anticipation of the Year 2000
Issue, could be very detrimental to the Company.
The Company's risk assessment of the Year 2000 Issue as set forth above and
in greater detail in the Annual Report's Year 2000 Discussion, could be
incomplete and possibly overstate or understate the actual risk's faced by the
Company based upon the Company's current knowledge. Similarly, the ability of
the Company to address the Year 2000 Issue in the manner and within the cost
estimates described in the Annual Report could be adversely affected by negative
findings arising during the course of testing systems and implementing solutions
or contingency plans.
20
RISKS ASSOCIATED WITH PURCHASING, OWNING, OR SELLING THE COMPANY'S SECURITIES
The Company's securities currently trade publicly on the NASDAQ National
Market. The market price of the Company's securities fluctuate significantly.
These price changes do not necessarily correlate to movements in the overall
stock market. The stock market has from time to time experienced extreme price
and volume fluctuations, which has often been unrelated or disproportionate to
the operating performance of particular companies. Fluctuations or decreases in
the trading price of the Company's securities may adversely affect the ability
of security holders to trade in the Company's securities. In addition, such
fluctuations could adversely affect the Company's ability to raise capital
through future equity financings should the Company determine at some point that
it is in its best interest to do so.
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 lease has one one-year extension option that the Company could
exercise to extend the lease through April 30, 2001. The Company also leases a
22,200 square foot warehouse and training center in Eden Prairie, Minnesota for
a term ending April 30, 2000. The lease has two approximately 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. In 1997, the Company entered into two separate lease
agreements for two 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.
The Company is developing a corporate headquarters in Eagan, Minnesota on a
parcel of land purchased in 1995, for completion in the first quarter of 2000.
The facility is expected to occupy approximately 100,000 square feet of floor
space and will consolidate the existing Eden Prairie offices, training facility
and warehouse. Approximately $1,480,000 has been expended on the Eagan facility,
in addition to the cost of land, with remaining expenditures expected to total
another $12,400,000 to complete the project.
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.
21
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.
Most of the Company's restaurants are located in leased facilities,
although the Company will consider land purchases for freestanding restaurants
in instances where an acceptable return or market positioning justifies the
additional investment. Ninety restaurants are located in freestanding buildings,
131 are located in regional or other enclosed shopping malls, and 258 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 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
The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a significant effect on the Company's consolidated financial statements.
The Company and seven of its present and/or former directors and executive
officers have been named as defendants in a Corrected, Third, Amended
Consolidated Class Action Complaint (the "third complaint") brought on behalf of
a putative class of all purchasers of common stock of the Company from October
26, 1993 through October 25, 1994 (the "class period") in the United States
District Court for the District of Minnesota. The third complaint alleges that
the defendants made misrepresentations and omissions of material fact during the
class period with respect to the Company's operations and restaurant development
activities, as a result of which the price of the Company's stock allegedly was
artificially inflated during the class period. The third complaint further
alleges that certain defendants made sales of common stock of the Company during
the class period while in possession of material undisclosed information about
the Company's operations and restaurant development activities. The Plaintiff
alleges that the defendants' conduct violated the Securities Exchange Act of
1934 and seeks damages of approximately $90 million and an award of attorneys
fees, costs and expenses.
22
By Memorandum Opinion and Order filed on January 6, 1998, the District
Court denied the defendants' motion to dismiss the third complaint.
The defendants have answered the third complaint, denying all liability and
raising various affirmative defenses. Discovery has been taken and was
substantially completed as of February 26, 1999. Plaintiffs have moved for class
certification, but the District Court has taken plaintiffs' motion under
advisement and no plaintiff class has been certified.
Management of the Company continues to believe that the action is without
merit and is vigorously defending it. The defendants intend to move for summary
judgment on all claims. The defendants have given notice of the plaintiffs'
claim to its insurance carrier. The insurance company is reimbursing the
defendants for a portion of the costs of defense under a reservation of rights.
Although the outcome of this proceeding cannot be predicted with certainty, the
Company's management believes that while the outcome may have a material effect
on earnings in a particular period, the probability of a material effect on the
financial condition of the Company, not covered by insurance, is slight.
ITEM 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.
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. Seventeen officers were so elected by the Board of
Directors in 1998, including eleven executive officers (currently, those
designated as Senior Vice President or higher) who serve on the Company's
"Executive Committee." One of such executive officers ceased to be an officer of
the Company at the end of fiscal 1998. The following table contains information
regarding the 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 (47) 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.
23
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
David Goronkin (36) 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 (47) 1986 Senior Vice President of Finance
since March 1998; Treasurer of
the Company since May 1986;
Executive Vice President of
Finance and Administration,
December 1994 to March 1998;
Vice President of Finance of the
Company, January 1991 to
December 1994.
Roe H. Hatlen (55) 1983 Co-Founder of the Company;
Chairman and Chief Executive
Officer of the Company since
December 1983.
Thomas F. Hubbard (47) 1996 Formerly Executive Vice
President of Real Estate and
Development of the Company from
September 1996 to December 1998;
Vice President of Construction
and Development for HomeTown
Buffet from 1992 to September
1996.
Kerry A. Kramp (43) 1996 President of the Company since
September 1996 and Chief
Operating Officer since August
1998; President of HomeTown
Buffet from December 1995 to
September 1996 and its Chief
Operating Officer from May 1995
to September 1996; Vice
President of Operations of
HomeTown Buffet from February
1992 to December 1995.
24
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
H. Thomas Mitchell (42) 1998 Executive Vice President and
Chief Administrative Officer
since March 1998; General
Counsel and Secretary of the
Company since June 1995; Vice
President from June 1995 to
March 1998; Corporate Counsel
from June 1994 to June 1995;
General Counsel of Lend Lease
Trucks, Inc. from 1992 to 1994.
Jean C. Rostollan (47) 1991 Executive Vice President of
Purchasing since September 1996;
Assistant Secretary of the
Company since February 1992;
Executive Vice President of
Development and Purchasing,
December 1994 to September 1996;
Vice President of Purchasing and
Distribution of the Company,
September 1992 to December 1994.
C. Dennis Scott (52) 1996 Co-Founder and Vice Chairman
since September 1996; Chief
Operating Officer of the Company
from September 1996 to August
1998; Co-Founder of HomeTown
Buffet; Director and Chief
Executive Officer of HomeTown
Buffet or its predecessor
companies since 1989.
K. Michael Shrader (55) 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.
25
Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Neal L. Wichard (56) 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;
Executive Vice President of
HomeTown Buffet, July 1990 to
October 1995.
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 26 of the Company's 1998
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 Company's 1998 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 11
of the Company's 1998 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Quantitative and Qualitative
Disclosure About Market Risk" on page 11 of the Company's 1998 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item 8 is incorporated herein by
reference to pages 12 through 26 of the Company's 1998 Annual Report.
26
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 the 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 30, 1998. For information concerning executive
officers, see Item 4A of this Annual Report on Form 10-K.
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 30, 1998; 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 30, 1998.
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 30, 1998.
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
27
Consolidated Balance Sheets at December 31, 1997 and December 30,
1998*
Consolidated Statements of Operations for the Years Ended January
1, 1997, December 31, 1997 and December 30, 1998*
Consolidated Statements of Stockholders' Equity for the Years
Ended January 1, 1997, December 31, 1997, and December 30, 1998*
Consolidated Statements of Cash Flows for the Years Ended January
1, 1997, December 31, 1997, and December 30, 1998*
Notes to Consolidated Financial Statements*
Independent Auditors' Report of Deloitte & Touche LLP*
*Incorporated herein by reference to pages 12 through 26 of the Company's 1998
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)*
28
10(b) 1988 Stock Option Plan. (8)*
10(c) 1995 Stock Option Plan. (9) The number of shares available
for grant was increased to 2,500,000 on May 12, 1998. (10)*
10(d) 1997 Non-Employee Director Stock Option Plan. (10)*
10(e) Second Amended and Restated Credit Agreement by and between
the Company and First Bank National Association, now USBank
National Association. (11)
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, now USBank
National Association. (12)
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, now USBank National
Association. (13)
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, now USBank
National Association. (14)
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, now USBank National
Association. (15)
10(j) Amendment No. 4 dated as of October 1, 1998 to Second
Amended and Restated Credit Agreement by and between the
Company and USBank National Association. (16)
10(k) Management Bonus Program. (17)
10(l) 1991 HomeTown Buffet Stock Option Plan, as amended. (18)
10(m) Consolidating Promissory Note issued by Kerry A. Kramp to
the Company and related Stock Pledge Agreement, each dated
December 31, 1996. (19)*
29
10(n) Promissory Note issued by Thomas E. Hubbard to HomeTown
Buffet and related Pledge Agreement, each dated November 9,
1993. (20)*
10(o) Promissory Note issued by Thomas E. Hubbard to HomeTown
Buffet and related Pledge Agreement, each dated August 13,
1996. (21)*
10(p) Promissory Note issued by Michael Shrader to HomeTown
Buffet and related Pledge Agreement, each dated August 7,
1996. (22)*
10(q) Employment Agreement with Kerry A. Kramp dated September
20, 1996. (23)*
10(r) Form of Franchise Agreement. (24)*
11 Statement Regarding Computation of Per Share Earnings
(Loss).
13 Annual Report to Shareholders for the fiscal year ended
December 30, 1998.
21 Subsidiaries of the Company.
23(a) Consent of Deloitte & Touche LLP.
27(a) Financial Data Schedule.
* Management 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.
(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.
30
(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 the Proxy Statement for the May 12, 1998
Annual Meeting of Shareholders.
(11) Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q for the quarter ended April 24, 1996.
(12) Incorporated by reference to Exhibit 4.5 to Registration Statement on
Form 8-A dated November 7, 1996.
(13) Incorporated by reference to Exhibit 10.1 to Registration Statement on
Form 8-A dated April 23, 1997.
(14) Incorporated by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the period ended October 8, 1997.
(15) Incorporated by reference to Exhibit 10(i) to Annual Report on Form
10-K for fiscal year ended December 31, 1997.
(16) Incorporated by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the period ended October 7, 1998.
(17) Incorporated by reference to Exhibit 10(j) to Annual Report on Form
10-K for fiscal year ended December 31, 1997.
(18) 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).
(19) Incorporated by reference to Exhibit 10(h) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(20) 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).
(21) Incorporated by reference to Exhibit 10(j) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
(22) Incorporated by reference to Exhibit 10(k) to Annual Report on Form
10-K for fiscal year ended January 1, 1997.
31
(23) Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the period ended October 9, 1996.
(24) 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 30, 1998.
32
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically incorporated herein by
reference to the Company's 1998 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 11, 1999, no other portions of the 1998 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-K.
33
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 29, 1999 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 29, 1999
- ------------------------ and Chief Executive
Roe H. Hatlen Officer (Principal
Executive Officer)
/s/ Clark C. Grant Senior Vice President March 29, 1999
- ------------------------ of Finance and Treasurer
Clark C. Grant (Principal Financial
Officer)
/s/ Marguerite C. Nesset Vice President of March 29, 1999
- ------------------------ Accounting and
Marguerite C. Nesset Controller (Principal
Accounting Officer)
/s/ C. Dennis Scott Vice Chairman of March 29, 1999
- ------------------------ the Board and Director
C. Dennis Scott
/s/ Walter R. Barry, Jr. Director March 29, 1999
- ------------------------
Walter R. Barry, Jr.
/s/ Marvin W. Goldstein Director March 29, 1999
- ------------------------
Marvin W. Goldstein
/s/ Alan S. McDowell Director March 29, 1999
- ------------------------
Alan S. McDowell
/s/ Michael T. Sweeney Director March 29, 1999
- ------------------------
Michael T. Sweeney
34
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 ..................................Incorporated by Reference
10(e) Second Amended and Restated Credit
Agreement by and between the Company
and First Bank National Association,
now USBank 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
First Bank National Association, now
USBank 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,
now USBank 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, now
USBank 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,
now USBank National Association...............Incorporated by Reference
10(j) Amendment No. 4 dated as of October 1,
1998 to Second Amended and Restated Credit
Agreement by and between the Company and
USBank National Association...................Incorporated by Reference
10(k) Management Bonus Program......................Incorporated by Reference
10(l) 1991 HomeTown Buffet Stock Option Plan,
as amended....................................Incorporated by Reference
10(m) Promissory Note issued by Kerry A. Kramp
to the consolidating Company and related
Stock Pledge Agreement, each dated
December 31, 1996.............................Incorporated by Reference
10(n) Promissory Note issued by Thomas E. Hubbard
to HomeTown Buffet and related Pledge
Agreement, each dated November 9, 1993........Incorporated by Reference
10(o) Promissory Note issued by Thomas E. Hubbard
to HomeTown Buffet and related Pledge
Agreement, each dated August 13, 1996.........Incorporated by Reference
10(p) Promissory Note issued by Michael Shrader
to HomeTown Buffet and related Pledge
Agreement, each dated August 7, 1996..........Incorporated by Reference
10(q) Employment Agreement with Kerry A. Kramp
dated September 20, 1996......................Incorporated by Reference
10(r) Form of Franchise Agreement...................Incorporated by Reference
11 Statement Regarding Computation of Per
Share Earnings (Loss).........................Filed Electronically
13 Annual Report to Shareholders for the
fiscal year ended December 30, 1998...........Filed Electronically
21 Subsidiaries of the Company...................Filed Electronically
23(a) Consent of Deloitte & Touche LLP..............Filed Electronically
27(a) Financial Data Schedule.......................Filed Electronically