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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 333-116897
BUFFETS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3754018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1460 BUFFET WAY, EAGAN, MINNESOTA 55121
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(651) 994-8608
__________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
The number of shares of Buffets Holdings, Inc. common stock outstanding as of
September 28, 2004 was 3,185,672.
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 [_] No [X]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business 1
2. Properties 10
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
7A. Quantitative and Qualitative Disclosures About Market Risks 29
8. Financial Statements and Supplementary Data 31
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 70
9A. Controls and Procedures 70
PART III
10. Directors and Executive Officers of the Registrant 71
11. Executive Compensation 73
12. Security Ownership of Certain Beneficial Owners and Management 75
13. Certain Relationships and Related Transactions 75
14. Principal Accountant Fees and Services 78
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 79
PART I
ITEM 1. BUSINESS
UNLESS THE CONTEXT INDICATES OR REQUIRES OTHERWISE, (I) THE TERM "BUFFETS
HOLDINGS" REFERS TO BUFFETS HOLDINGS, INC.; (II) THE TERM "BUFFETS" REFERS TO
BUFFETS, INC., OUR PRINCIPAL OPERATING SUBSIDIARY; AND (III) THE TERMS "WE,"
"OUR," "OURS," "US" AND THE "COMPANY" REFER COLLECTIVELY TO BUFFETS HOLDINGS AND
ITS SUBSIDIARIES. THE USE OF THESE TERMS IS NOT INTENDED TO IMPLY THAT BUFFETS
HOLDINGS AND BUFFETS ARE NOT SEPARATE AND DISTINCT LEGAL ENTITIES.
OUR COMPANY
Founded in 1983, Buffets is the twentieth largest restaurant operator in the
United States and is the largest operator of company-owned stores in the
buffet/grill segment, as measured in both sales and number of restaurants. Our
restaurants are principally operated under the names Old Country Buffet and
HomeTown Buffet. As of June 30, 2004, we had 360 company-owned restaurants and
20 franchised locations in 38 states.
Our restaurants provide a high level of food quality and service through
uniform operational standards developed at the corporate level. Freshness is
ensured by preparing food in small batches of six to eight servings at a time,
with preparations and production adapted to current customer traffic patterns.
Our buffet restaurants utilize uniform menus, recipes and ingredient
specifications, with certain discretion to adapt menus for regional preferences.
We offer approximately 100 menu items at each meal, including entrees, soups,
salads, fresh vegetables, non-alcoholic beverages and desserts. Typical entrees
include chicken, carved roast beef, ham, shrimp, fish and casseroles.
Our buffet restaurants use an all-inclusive pricing strategy designed to
provide dining value to our customers. As of June 30, 2004, the meal price at
our buffet restaurants for dinner ranged from $8.59 to $9.59 and for lunch from
$6.49 to $7.19, with discounts offered to senior citizens and children. The
average guest check in our restaurants, including our Tahoe Joe's Famous
Steakhouses, for fiscal 2002 was $7.22. In order to further enhance our guests'
dining experience, we have focused on providing a level of customer service
designed to supplement the self-service buffet format, including such features
as limited table-side service and our scatter bar format.
Our buffet restaurants average approximately 9,900 square feet in size and
can generally seat between 225 and 400 people. On average, our buffet
restaurants served approximately 7,000 customers per week in fiscal 2004. While
we attract a broad variety of customers, including singles, families and senior
citizens, our customer surveys indicate that approximately two-thirds of our
guests are married and over half are between the ages of 25 and 54 years old
(the largest segment of the population within the United States).
We have a national footprint of restaurant locations, which are
strategically concentrated in particular regions to maximize penetration within
those markets and achieve operating and advertising synergies. For example, our
television advertising program in 38 designated market areas provided media
coverage for 62% of our buffet restaurants in fiscal 2004. In addition, our
restaurants are located in high customer traffic venues and include both
freestanding units and units located in strip shopping centers and malls. As of
June 30, 2004, 69% of our restaurants were located in strip shopping centers or
malls and 31% were freestanding units.
1
OUR BACKGROUND
Buffets was founded in 1983 to develop buffet-style restaurants under the
name Old Country Buffet. In October 1985, Buffets successfully completed an
initial public offering with seven restaurants, and by 1988 had 47 company-owned
units and nine franchised units. In September 1996, Buffets merged with Hometown
Buffets, Inc., a similar publicly-held scatter-bar, buffet-style restaurant
company established and developed by one of our co-founders. The merger provided
us with additional management expertise and depth, and increased purchasing
power and marketing efficiencies. The merger also added 80 company-owned
restaurants in 11 states and 19 franchised restaurants in eight states, bringing
the total number of restaurants to 346 company-owned restaurants and 24
franchised restaurants in 36 states at December 31, 1996.
Buffets Holdings was formed by Caxton-Iseman Capital, Inc. in 2000. On
October 2, 2000, we acquired Buffets in a buyout from its public shareholders.
Caxton-Iseman Investments L.P. and other investors, including members of
management, made an equity investment in us and became the beneficial owners of
100% of our existing common stock. Buffets Holdings is a holding company whose
assets consist substantially of the capital stock of Buffets.
RESTAURANT OPERATIONS AND CONTROLS
In order to maintain a consistently high level of food quality and service
in all of our restaurants, we have established uniform operational standards.
These standards are implemented and enforced by the managers of each restaurant.
We require all restaurants 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.
Each buffet restaurant typically employs a Senior General Manager or General
Manager, Kitchen Manager, Service Manager and one or two assistant managers.
Each of our restaurant General Managers has primary responsibility for
day-to-day operations in one of our restaurants, including customer relations,
food service, cost controls, restaurant maintenance, personnel relations,
implementation of our policies and the restaurant's profitability. A portion of
each general manager's and other restaurant managers' compensation depends
directly on the restaurant's profitability. Bonuses are paid to buffet
restaurant managers each period based on a formula percentage of controllable
restaurant profit. We believe that our compensation policies have been important
in attracting, motivating and retaining qualified operating personnel.
Each buffet restaurant general manager reports to an Area Manager or a
District Representative, each of whom in turn reports to a Regional Vice
President. Each Regional Vice President reports to one of two Vice Presidents of
Operations, who in turn report to our executive team. Our Tahoe Joe's Famous
Steakhouse restaurants are supervised by a Chief Operating Officer, who reports
to our Chief Executive Officer.
We maintain centralized financial and accounting controls for all of our
restaurants. On a daily basis, restaurant managers forward customer counts,
sales, labor costs and deposit information to our headquarters. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, supplier invoices and payroll data.
MANAGEMENT TRAINING
We have a series of training programs that are designed to provide managers
with the appropriate knowledge and skills necessary to be successful in their
current positions. All new restaurant managers hired from outside our
2
organization and hourly employees considered for promotion to restaurant
management are required to complete nine days of classroom training at our
corporate headquarters in Eagan, Minnesota. After their initial instruction, new
management candidates continue their training for four weeks in one of our
certified training restaurants. The information covered in manager training
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 eight-day training program conducted at our corporate headquarters.
This program focuses on advanced management skills with emphasis on team
building and performance accountability.
In addition to these programs, we conduct a variety of field training
efforts for store management covering topics such as new product procedures,
food safety and management development.
RESEARCH AND DEVELOPMENT, MENU SELECTION AND PURCHASING
The processes of developing new food offerings and establishing standard
recipes and product specifications are handled at our headquarters. Specialists
drawn from the Research and Development, Marketing, Operations and Purchasing
Departments lead this effort. Before new items are introduced or existing
products are modified, a program of testing within limited markets is undertaken
to assess customer acceptance and operational feasibility. Food quality is
maintained through centralized supplier coordination suppliers and frequent
restaurant visits by Area Directors, District Representatives and other
management personnel.
New product activity includes an ongoing roll-out of new items to keep the
guest experience fresh. Additionally, we have periodic theme promotions, wherein
a specific cuisine, such as Italian, Asian, Seafood or Mexican, is highlighted
on a given night. Each spring and fall, a seasonal menu is introduced to provide
variety and more seasonally appropriate food. Furthermore, although most of the
menu is similar for all buffet restaurants, individual restaurants have the
option to customize a portion of the menu to satisfy local preferences.
Headquarters personnel negotiate major product purchases directly with
manufacturers on behalf of all of our restaurants for all food, beverage and
supply purchasing, including quality specifications, delivery schedules and
pricing and payment terms. Each restaurant manager places orders for inventories
and supplies with, and receives shipments directly from, distributors and local
suppliers approved by us. Restaurant managers approve all invoices before
forwarding them to our headquarters for payment. To date, we have not
experienced any material difficulties in obtaining food and beverage inventories
or restaurant supplies.
FRANCHISING AND JOINT VENTURES
We currently franchise 20 buffet restaurants under the Old Country Buffet
and HomeTown Buffet names. One large franchisee comprises approximately 75% of
the franchise base with small operators holding the remaining units. Franchisees
must operate their restaurants in compliance with our operating and recipe
manuals. Franchisees are not required to purchase food products or other
supplies through us or our 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.
3
ADVERTISING AND PROMOTION
We market our buffet restaurants through a two-tiered marketing approach
including mass media advertising and community based marketing. Mass media
advertising, predominantly television, is used when we can receive a profitable
return on expenditures. Our mass media mix includes television advertisements
and the limited use of print advertisements, radio advertisements and tour bus
marketing. Approximately 62% of our buffet restaurants are in markets supported
by television advertisements.
We have instituted a disciplined approach to advertising expenditures,
designed to increase the efficiency of our marketing dollars by focusing on
high-return markets and specific theme promotions. Our theme promotions where a
specific cuisine, such as BBQ, Italian, Asian, Seafood or Mexican is highlighted
on a given night, is designed to keep the guest experience fresh and capitalize
local market preferences.
Community based marketing is the responsibility of each individual store.
Our local marketing efforts are designed to build relationships with the
community. Most restaurants employ a dedicated community marketing
representative who participates in an array of local events.
COMPETITION
The food service industry is highly competitive. Menu, price, service,
convenience, location and ambiance are all important competitive factors. The
relative importance of many such factors varies 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, we seek to appeal
to a broad range of value-oriented consumers. We believe that our primary
competitors in this industry segment are other buffet and grill restaurants, as
well as traditional family and casual dining restaurants with full menus and
table service. Secondary competition arises from many other sources, including
home meal replacement and fast food. We believe that our success to date has
been due to our particular approach combining pleasant ambiance, high food
quality, wide menu breadth, cleanliness, reasonable prices, and satisfactory
levels of service and convenience.
REGULATION
Each of our restaurants is subject to licensing and regulation by the
health, sanitation, safety, building and fire agencies of the respective states
and municipalities in which they are located. A failure to comply with one or
more regulations could result in the imposition of sanctions, including the
closing of facilities for an indeterminate period of time or third-party
litigation, any of which could have a material adverse effect on us and our
results of operations. Additionally, our restaurants must be constructed to meet
federal, state and local building and zoning requirements.
We are also subject to laws and regulations governing our relationships with
employees, including minimum wage requirements, overtime, reporting of tip
income, work and safety conditions and regulations governing employment. Because
a significant number of our employees are paid at rates tied to the federal
minimum wage, an increase in such minimum wage would increase our labor costs.
An increase in the federal minimum wage , state-specific minimum wages, or
employee benefits costs could have a material adverse effect on us and our
results of operations.
Additionally, our operations are regulated pursuant to state and local
sanitation and public health laws. Operating restaurants utilize electricity and
natural gas, which are subject to various federal and state regulations
concerning
4
the allocation and pricing of energy. Our operating costs have been and will
continue to be affected by increases in the cost of energy. These energy costs
have undergone large cyclical swings in recent years and have had a
disproportionate impact in our most favorable markets.
Each of our Tahoe Joe's Famous Steakhouse restaurants is further subject to
licensing and regulation by a number of governmental authorities, including
alcoholic beverage control agencies, in the state, county and municipality in
which the restaurant is located. Difficulties or failures in obtaining the
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area. Alcoholic beverage control regulations require
restaurants to apply to a state authority and, in some locations, to county or
municipal authorities for a license or permit to sell alcoholic beverages on the
premises and to provide service for extended hours and on Sundays. Typically,
licenses or permits must be renewed annually and may be revoked or suspended for
cause at any time. Alcoholic beverage control regulations relate to numerous
aspects of a restaurant's operations, including the minimum age of patrons and
employees, the hours of operation, advertising, and the wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
In California, we may be subject to "dram-shop" statutes, which generally
provide a person injured by an intoxicated patron the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance.
ENVIRONMENTAL MATTERS
Our operations are also subject to federal, state and local laws and
regulations relating to environmental protection, including regulation of
discharges into the air and water. Under various federal, state and local laws,
an owner or operator of real estate may be liable for the costs of removal or
remediation of hazardous or toxic substances on or in such property. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such hazardous or toxic substances.
Although we are not aware of any material environmental conditions on our
properties that require remediation under federal, state or local law, we have
not conducted a comprehensive environmental review of our properties or
operations. No assurance can be given that we have identified all of the
potential environmental liabilities at our properties or that such liabilities
would not have a material adverse effect on our financial condition.
EMPLOYEES
As of June 30, 2004, we had approximately 23,000 employees. Except for
approximately 370 corporate employees who primarily worked at our corporate
headquarters, our employees worked at our 360 company-owned restaurants.
Generally, each buffet restaurant operates with three to five salaried managers
and assistant managers and approximately 59 hourly employees. Our employees are
not unionized. We have never experienced any significant work stoppages and
believe that our employee relations are good.
Our average wage costs have been reasonably stable for the past two fiscal
years largely due to macro-economic conditions. Historically, in times of
increasing average wage costs, we have been able to offset wage cost increases
through increased efficiencies in operations and, as necessary, through retail
price increases. There can be no assurance that we will continue to be able to
offset wage cost increases in the future.
5
RISK FACTORS/FORWARD-LOOKING STATEMENTS
This report, together with our 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 our future plans, objectives,
expectations and intentions. These statements may be identified by us using
words such as "expects," "anticipates," "intends," "plans" and similar
expressions. Our actual results could differ materially from those disclosed in
these statements, due to various factors, including the following risk factors.
We assume 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.
OUR CORE BUFFET RESTAURANTS ARE A MATURING RESTAURANT CONCEPT AND FACE INTENSE
COMPETITION.
Our restaurants operate in a highly competitive industry comprising a large
number of restaurants, including national and regional restaurant chains and
franchised restaurant operations, as well as locally-owned, independent
restaurants. Price, restaurant location, food quality, service and
attractiveness of facilities are important aspects of competition, and the
competitive environment is often affected by factors beyond a particular
restaurant management's control, including changes in the public's taste and
eating habits, population and traffic patterns and economic conditions. Many of
our competitors have greater financial resources than we have and there are few
non-economic barriers to entry. Therefore, new competitors may emerge at any
time. We cannot assure you that we will be able to compete successfully against
our competitors in the future or that competition will not have a material
adverse effect on our operations or earnings.
We have been operating our core buffet restaurant concept for 20 years, and
our restaurant locations have a median age of approximately 10 years. As a
result, we are exposed to vulnerabilities associated with being a mature
concept. These include vulnerability to innovations by competitors and
out-positioning in markets where the demographics or customer preferences have
changed. Mature units require greater expenditures for repair, maintenance,
refurbishments and re-concepting, and we will be required to continue making
such expenditures in the future in order to preserve traffic at many of our
restaurants. We cannot assure you, however, that these expenditures,
particularly for remodeling and refurbishing, will be successful in preserving
or building guest counts, as proved to be the case with a number of units
recently upgraded as part of a two year re-imaging program.
We are required to respond to changing consumer preferences and dining
frequency. Our profits are dependent upon discretionary spending by consumers,
which is markedly influenced by variations in the economy. Our average weekly
sales declined 2.0% during fiscal 2003 due in large part to weak economic
conditions. Furthermore, if our competitors in the casual dining, mid-scale and
quick-service segments respond to economic changes through menu engineering or
by adopting discount pricing strategies, it could have the effect of drawing
customers away from companies such as ours that do not routinely engage in
discount pricing, thereby reducing sales and pressuring margins. Because certain
elements of our cost structure are fixed in nature, particularly over shorter
time horizons, changes in marginal sales volume can have a more significant
impact on our profitability than for a business possessing a more variable cost
structure.
WE ARE DEPENDENT ON ATTRACTING AND RETAINING QUALIFIED EMPLOYEES WHILE
CONTROLLING LABOR COSTS.
We operate in the service sector and are therefore extremely dependent upon
the availability of qualified restaurant personnel. Availability of staff varies
widely from location to location. If restaurant management and staff turnover
trends increase, we would suffer higher direct costs associated with recruiting
and retaining replacement personnel. Moreover, we could suffer from significant
indirect costs, including restaurant disruptions
6
due to management changeover, increased above-store management staffing and
potential delays in new store openings due to staff shortages. 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.
Many of our employees are hourly workers whose wages may be impacted by an
increase in the federal or state minimum wage. Proposals have been made at
federal and state levels to increase minimum wage levels. An increase in the
minimum wage may create pressure to increase the pay scale for our employees. A
shortage in the labor pool or other general inflationary pressures or changes
could also increase our labor costs. Furthermore, the operation of buffet-style
restaurants is materially different from other restaurant concepts.
Consequently, the retention of executive management familiar with our core
buffet business is important to our continuing success. The departure of one or
more key operations executives or the departure of multiple executives in a
short time period could have an adverse impact on our business. Our former
Executive Vice President of Purchasing separated from the company in 2004. We
are currently considering the addition of one position to our executive
management group.
Our workers' compensation and employee benefit expenses are
disproportionately concentrated in states with adverse legislative climates. Our
highest per-employee workers' compensation insurance costs are in the State of
California, where we retain a large employment presence. California also enacted
legislation in October 2003 that would require large employers to provide health
insurance or equivalent funding for workers who have traditionally not been
covered by employer health plans. While this law is currently being challenged,
other states have proposed similar legislation. Other state and federal
mandates, such as compulsory paid absences, increases in overtime wages and
unemployment tax rates, stricter citizenship requirements and revisions in the
tax treatment of employee gratuities, could also adversely affect our business.
Any increases in labor costs could have a material adverse effect on our results
of operations and could decrease our profitability and cash available to service
our debt obligations, if we were unable to compensate for such increased labor
costs by raising the prices we charge our customers or realizing additional
operational efficiencies.
WE ARE DEPENDENT ON TIMELY DELIVERY OF FRESH INGREDIENTS BY OUR SUPPLIERS.
Our restaurant operations are dependent on timely deliveries of fresh
ingredients, including fresh produce, dairy products and meat. The cost,
availability and quality of the ingredients we use to prepare our food are
subject to a range of factors, many of which are beyond our control.
Fluctuations in weather, supply and demand and economic and political conditions
could adversely affect the cost, availability and quality of our ingredients.
Historically, when operating expenses increased due to inflation or increases in
food costs, we recovered increased costs by increasing our menu prices. However,
we may not be able to recover increased costs in the future because competition
may limit or prohibit such future increases. If our food quality declines due to
the lack of, or lower quality of, our ingredients or due to interruptions in the
flow of fresh ingredients and similar factors, customer traffic may decline and
negatively affect our restaurants' results. We rely exclusively on third-party
distributors and suppliers for such deliveries. The number of companies capable
of servicing our distribution needs on a national basis has declined over time,
reducing our bargaining leverage and increasing vulnerability to distributor
interruptions.
OUR RESTAURANT SALES ARE SUBJECT TO SEASONALITY AND MAJOR WORLD EVENTS.
Our restaurant sales volume fluctuates seasonally. Overall, restaurant sales
are generally higher in the summer months and lower in the winter months.
Positive or negative trends in weather conditions can have a strong influence on
our business. This effect is heightened because many of our restaurants are in
geographic areas that
7
experience extremes in weather, including severe winter conditions and tropical
storm patterns. Additionally, major world events may adversely affect our
business.
WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATIONS.
In addition to wage and benefit regulatory risks, we are subject to other
extensive government regulation at a federal, state and local level. These
include, but are not limited to, regulations relating to the sale of food in all
of our restaurants and of alcoholic beverages in our Tahoe Joe's Famous
Steakhouse restaurants. We are required to obtain and maintain governmental
licenses, permits and approvals. Difficulty or failure in obtaining or
maintaining them in the future could result in delaying or canceling the opening
of new restaurants or the closing of current ones. Local authorities may suspend
or deny renewal of our governmental licenses if they determine that our
operations do not meet the standards for initial grant or renewal. This risk
would be even higher if there were a major change in the licensing requirements
affecting our types of restaurants.
The Federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. Mandated
modifications to our facilities in the future to make different accommodations
for disabled persons could result in material, unanticipated expense.
Application of state "Dram Shop" statutes, which generally provide a person
injured by an intoxicated patron the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person, to our operations, or liabilities otherwise associated with liquor
service in our Tahoe Joe's Famous Steakhouse restaurants, could negatively
affect our financial condition if not otherwise insured under our general
liability insurance policy.
NEGATIVE PUBLICITY RELATING TO ONE OF OUR RESTAURANTS, INCLUDING OUR FRANCHISED
RESTAURANTS, COULD REDUCE SALES AT SOME OR ALL OF OUR OTHER RESTAURANTS.
We are, from time to time, faced with negative publicity relating to food
quality, restaurant facilities, health inspection scores, employee relationships
or other matters at one of our restaurants or those of our franchisees. Adverse
publicity may negatively affect us, regardless of whether the allegations are
valid or whether we are liable. In addition, the negative impact of adverse
publicity relating to one restaurant may extend beyond the restaurant involved
to affect some or all of our other restaurants. If a franchised restaurant fails
to meet our franchise operating standards, our own restaurants could be
adversely affected due to customer confusion or negative publicity. A similar
risk exists with respect to totally unrelated food service businesses, if
customers mistakenly associate such unrelated businesses with our own
operations.
FOOD-BORNE ILLNESS INCIDENTS COULD RESULT IN LIABILITY TO US AND COULD REDUCE
OUR RESTAURANT SALES.
We cannot guarantee that our internal controls and training will be fully
effective in preventing all food-borne illnesses. Furthermore, our reliance on
third-party food processors makes it difficult to monitor food safety compliance
and increases the risk that food-borne illness would affect multiple locations
rather than single restaurants. Some food-borne illness incidents could be
caused by third-party food suppliers and transporters outside of our control.
New illnesses resistant to our current precautions may develop in the future, or
diseases with long incubation periods could arise, such as bovine spongiform
encephalopathy ("BSE"), sometimes referred to as "mad cow disease," that could
give rise to claims or allegations on a retroactive basis. In addition, the
levels of chemicals or other contaminants that are currently considered safe in
certain foods may be regulated more restrictively in the future or become the
subject of public concern.
8
The reach of food-related public health concerns can be considerable given
the attention given these matters by the media. Local public health developments
could have a national adverse impact on our sales, whether or not specifically
attributable to our restaurants or those of our franchisees or competitors.
ANY NEGATIVE DEVELOPMENT RELATING TO OUR SELF-SERVICE FOOD SERVICE APPROACH
WOULD HAVE A MATERIAL ADVERSE IMPACT ON OUR PRIMARY BUSINESS.
Our buffet restaurants utilize a service format that is heavily dependent
upon self-service by our customers. Food tampering by customers or other events
affecting the self-service format could cause regulatory changes or changes in
our business pattern or customer perception. Any development that would
materially impede or prohibit our continued use of a self-service food service
approach, or reduce the appeal of self-service to our guests, would have a
material adverse impact on our primary business.
WE FACE RISKS ASSOCIATED WITH ENVIRONMENTAL LAWS.
We are subject to federal, state and local laws, regulations and ordinances
that 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. These may impose liability for the
costs of cleaning up, and damage resulting from, sites of past spills, disposals
or other releases of hazardous materials, both from governmental and private
claimants. We could incur such liabilities regardless of whether we lease or own
the restaurants or land in question and regardless of whether such environmental
conditions were created by us or by a prior owner or tenant. We cannot assure
you that environmental conditions relating to our prior, existing or future
restaurants or restaurant sites will not have a material adverse affect on us.
WE FACE RISKS BECAUSE OF THE NUMBER OF RESTAURANTS THAT WE LEASE.
Our success depends in part on our ability to secure leases in desired
locations at rental rates we believe to be reasonable. We currently lease all of
our restaurants located in shopping centers and malls, and we lease the land for
all but one of our freestanding restaurants. By December 2007, approximately 85
of our current leases will have expiring base lease terms and be subject to
renewal consideration. Each lease agreement provides that the lessor may
terminate the lease for a number of reasons, including our default in any
payment of rent or taxes or our breach of any covenant or agreement in the
lease. Termination of any of our leases could harm our results of operations
and, as with a default under any of our indebtedness, could have a material
adverse impact on our liquidity. Although we believe that we will be able to
renew the existing leases that we wish to extend, we cannot assure you that we
will succeed in obtaining extensions in the future at rental rates that we
believe to be reasonable or at all. Moreover, if some locations should prove to
be unprofitable, we could remain obligated for lease payments even if we decided
to withdraw from those locations. See "Item 2. Properties." We will incur
special charges relating to the closing of such restaurants, including lease
termination costs. Impairment charges and other special charges will reduce our
profits.
WE MAY NOT BE ABLE TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS.
We believe that our trademarks and other proprietary rights are important to
our success and our competitive position. Accordingly, we devote substantial
resources to the establishment and protection of our trademarks and proprietary
rights. However, the actions taken by us may be inadequate to prevent imitation
of our brands, proprietary rights and concepts by others, which may thereby
dilute our brands in the marketplace or diminish
9
the value of such proprietary rights, or to prevent others from claiming
violations of their trademarks and proprietary rights by us. In addition, others
may assert rights in our trademarks and other proprietary rights. Our exclusive
rights to our trademarks are subject to the common law rights of any other
person who began using the trademark (or a confusingly similar mark) prior to
both the date of our registration and our first use of such trademarks in the
relevant territory. For example, because of the common law rights of such a
preexisting restaurant in portions of Colorado and Wyoming, our restaurants in
those states use the name "Country Buffet." We cannot assure you that third
parties will not assert claims against our intellectual property or that we will
be able to successfully resolve such claims. Future actions by third parties may
diminish the strength of our restaurant concepts' trademarks or other
proprietary rights and decrease our competitive strength and performance. We
could also incur substantial costs to defend or pursue legal actions relating to
the use of our intellectual property, which could have a material adverse affect
on our business, results of operation or financial condition.
ITEM 2. PROPERTIES
RESTAURANT LOCATIONS
Our restaurants are located in both urban and suburban areas in a variety of
strip shopping centers, malls and freestanding buildings. We lease all of our
restaurant locations located in strip shopping centers and malls. Of the 118
restaurants located in freestanding buildings, we own the building and land for
one of the restaurants. The remaining 117 restaurants are operated in
company-funded leasehold improvements located on leased land or in facilities
where we lease both the underlying land and the leasehold improvements.
Our leases are generally for 10- or 15-year terms, with two to four options
exercisable at our discretion to renew for a period of five years each. The
leases provide for rent to be paid on a monthly basis.
10
As of June 30, 2004, we and our franchisees operated 380 locations as
follows:
NUMBER OF NUMBER OF
COMPANY-OPERATED FRANCHISED TOTAL NUMBER OF
STATE RESTAURANTS RESTAURANTS RESTAURANTS
----- ----------- ----------- -----------
Arizona............. 4 8 12
California.......... 95 1 96
Colorado............ 12 2 14
Connecticut......... 6 -- 6
Delaware............ 1 -- 1
Florida............. 2 -- 2
Georgia............. 1 -- 1
Idaho............... 1 -- 1
Illinois............ 32 -- 32
Indiana............. 11 -- 11
Iowa................ 5 -- 5
Kansas.............. 2 -- 2
Kentucky............ 3 -- 3
Maine............... 1 -- 1
Maryland............ 7 -- 7
Massachusetts....... 9 -- 9
Michigan............ 20 -- 20
Minnesota........... 15 -- 15
Missouri............ 11 -- 11
Montana............. 1 -- 1
Nebraska............ -- 3 3
New Jersey.......... 8 -- 8
New Mexico.......... -- 2 2
New York............ 16 -- 16
North Carolina...... 1 -- 1
Ohio................ 20 -- 20
Oklahoma............ 2 -- 2
Oregon.............. 7 -- 7
Pennsylvania........ 20 -- 20
Rhode Island........ 1 -- 1
South Carolina...... 2 -- 2
Tennessee........... 1 -- 1
Texas............... 5 -- 5
Utah................ -- 3 3
Virginia............ 9 -- 9
Washington.......... 16 -- 16
Wisconsin........... 12 -- 12
Wyoming............. 1 1 2
------- ------- -------
Total............... 360 20 380
Our corporate headquarters is located in leased facilities in Eagan,
Minnesota.
11
The following table sets forth information concerning our owned property as
follows:
LOCATION ACRES USE AND OWNERSHIP
-------- ----- -----------------
Coon Rapids, Minnesota....... 2.49 Buffet restaurant property owned by OCB
Restaurant Co.
Marshfield, Wisconsin........ 5.04 Cabinet shop owned by OCB Restaurant Co.
Mankato, Minnesota........... 1.60 Undeveloped OCB Restaurant Co. property
NEW RESTAURANT DEVELOPMENT
We plan to expand our restaurants in a disciplined manner by continuing to
improve our restaurant base through strategically adding a limited number of
restaurants in markets where we have advertising and operational efficiencies
and closing a limited number of restaurants which do not meet our profitability
goals. We will continue to focus on adding new restaurants in sites that offer
high levels of traffic and are convenient to both lunch and dinner customers in
our target demographic groups. Our new locations should offer low occupancy
costs and upfront capital investments. We plan to lease new units through
build-to-suit arrangements, whereby a landlord develops a free-standing building
shell for long-term single tenant rental to us, to the extent possible. This
strategy should significantly reduce our initial capital outlay for new store
construction. Additionally, we will continue to employ a sale and leaseback
program on free-standing units not developed through a build-to-suit program.
Through this sale and leaseback process, in which the land and/or building shell
of a unit is sold to a third party and leased back on a single tenant basis,
much of the construction cost associated with a new unit can be deferred and
recognized over a long-term rental period (generally 15 to 20 years).
IMPROVEMENT OF EXISTING RESTAURANTS
We remain committed to maintaining and upgrading our restaurants to expand
our guest base and maintain our appeal among repeat customers. Our interior
remodeling program takes advantage of scheduled maintenance capital expenditures
to update our restaurants to reflect a more contemporary interior design that
provides a more visually appealing and comfortable restaurant interior. We plan
on upgrading our units with a new interior decor package over the next five to
seven years as they become due for a recurring refurbishment. Through this
phased approach, we can minimize incremental capital expenditures, while
providing a better and more contemporary dining environment for our guests. Our
planned remodeling effort will focus on interior decor elements that have
resonated well with guests. We will conduct limited testing on the development
of display cooking facilities, or "action stations," in a few of our
restaurants. These action stations provide a more interactive and exciting
dining experience for our guests through display cooking and limited "cook to
order" items, such as omelets and panini sandwiches. We will be focused on
improving the rate of return on these action stations, which will govern the
extent of future deployment.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
As of June 30, 2004, we had restaurants operating under the following
trademarks or service marks that we have registered with the United States
Patent and Trademark Office. The number within parentheses below represents the
number of restaurants:
o Old Country Buffet(R) (180),
o HomeTown Buffet(R) (168),
12
o Country Roadhouse Buffet & Grill(R) (1), and
o Soup 'N Salad Unlimited(R) (2).
In addition, as of June 30, 2004, we had company-owned restaurants operating
under the following trademarks or service marks: Granny's Buffet(SM)(1) and
Tahoe Joe's Famous Steakhouse(SM)(8) for which we have federal registrations for
Tahoe Joe's(R). As far as we are aware, our trademarks and registered service
marks are generally valid and enforceable as long as the marks are used in
connection with our restaurants and services. We regard our service marks and
trademarks as having significant value and being an important factor in the
development of our buffet and other restaurant concepts. Our policy is to pursue
and maintain registration of our service marks and trademarks whenever
practicable and to oppose vigorously any infringement or dilution of our service
marks and trademarks.
We also have a proprietary interest in many of our recipes.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to and do not have any property that is the subject of
any legal proceedings pending or, to our knowledge, threatened, other than
ordinary routine litigation incidental to our business and proceedings which are
not material or as to which we believe we have adequate insurance.
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 fiscal year covered by this report.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of June 30, 2004, we had approximately 20 holders of our 3,185,672 shares
of our common stock. There is no established public trading market for our
common stock.
We have had four dividend transactions over the past two fiscal years
totaling approximately $88.7 million in cash payments.
The terms of our credit facility place restrictions on Buffets' ability to
pay dividends and otherwise transfer assets to us. Further, the terms of the
indenture governing Buffets' senior subordinated notes place restrictions on the
ability of Buffets and our other subsidiaries to pay dividends and otherwise
transfer assets to us.
During fiscal 2004, we issued and sold the following unregistered
securities:
(a) On July 3, 2003, we granted options to purchase an aggregate of 9,206
shares of our common stock to certain of our employees, each at an exercise
price of $8.91 per share.
(b) On February 4, 2004, we granted options to purchase an aggregate of
5,141 shares of our common stock to certain of our employees, each at an
exercise price of $11.34 per share.
(c) On April 7, 2004, we granted options to purchase an aggregate of
10,000 shares of our common stock to one of our employees, each at an
exercise price of $11.34 per share.
(d) On April 7, 2004 we issued an aggregate of 21,250 shares of our
common stock to certain of our employees.
(e) On April 8, 2004, we granted options to purchase an aggregate of
19,958 shares of our common stock to certain of our employees, each at an
exercise price of $16.33 per share.
The grants of options to purchase our common stock disclosed in paragraphs
(a), (b), (c) and (e) were made under our Equity Participation Plan. Each of the
above-described transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering and/or Rule 701 under the Securities Act as exempt offers and sales of
securities under a written compensatory benefit plan. Appropriate legends were
or will be affixed to the share certificates and other instruments issued in
such transactions. All recipients either have received or will receive adequate
information about us or had or have access, through director or employment
relationships, to such information.
The issuances disclosed in paragraph (d) were exempt from registration in
reliance upon Section 4(2) of the Securities Act or promulgated thereunder as
transactions by an issuer not involving a public offering. All recipients were
accredited or sophisticated investors. Appropriate legends were affixed to the
share certificates issued in such transactions. All recipients have received
adequate information about us or had access, through director or employment
relationships, to such information.
14
ITEM 6. SELECTED FINANCIAL DATA
PREDECESSOR SUCCESSOR
------------ ------------------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM 26-WEEK
DECEMBER 30, OCTOBER 2, TRANSITIONAL
1999 2000 FISCAL YEAR 28 WEEKS PERIOD 50 WEEKS FISCAL YEAR FISCAL YEAR
THROUGH THROUGH ENDED ENDED ENDED ENDED ENDED ENDED
OCTOBER 1, JANUARY 3, JANUARY 2, JULY 18, JULY 3, JULY 3, JULY 2, JUNE 30,
2000 2001 2002 2001 2002 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE GUEST CHECK AND AVERAGE WEEKLY SALES)
OPERATING DATA:
Restaurant sales......... $ 781,153 $ 239,370 $1,044,734 $ 567,821 $527,084 $1,003,997 $ 985,286 $ 942,831
Restaurant costs......... 656,843 204,379 886,069 481,832 444,917 849,154 850,840 812,662
Advertising expenses..... 21,888 5,726 27,640 15,708 14,349 26,281 28,589 25,854
General and
administrative
expenses................ 39,217 12,204 50,569 26,700 25,687 49,556 45,382 42,722
Goodwill amortization.... 878 2,543 10,942 5,975 -- 4,967 -- --
Impairment of assets..... -- -- -- -- -- -- 4,803 1,878
Gain on sale of
Original Roadhouse
Grill restaurants....... -- -- -- -- -- -- (7,088) (7,088)
Loss on sale
leaseback
transactions............ -- -- -- -- -- -- 5,856 5,856
Financing-related
compensation expenses... -- -- -- -- -- -- -- 2,240
Acquisition-related
costs................... 14,902 -- -- -- -- -- -- --
--------- --------- ---------- --------- -------- ---------- --------- ---------
Operating income......... $ 47,425 $ 14,518 $ 69,514 $ 37,606 $ 42,131 $ 74,039 $ 56,904 $ 57,475
--------- --------- ---------- --------- -------- ---------- --------- ---------
Net income (loss)........ $ 31,245 $ 579 $ 12,555 $ 5,801 $ (7,517) $ (763) $ 11,927 $ 7,970
========= ========= ========== ========= ======== ========== ========= =========
CASH FLOW AND OTHER
FINANCIAL DATA:
Capital expenditures..... $ 35,596 $ 14,389 $ 38,096 $ 20,352 $ 14,280 $ 32,318 $ 25,722 $ 33,007
Depreciation and
amortization............ 32,368 11,311 53,404 29,007 20,409 44,808 36,885 33,807
Cash flow from
operating activities.... 87,822 25,401 68,835 35,521 39,250 72,564 57,656 50,490
Cash flow from (used
in) investing
activities.............. (37,013) 4,540 2,575 (21,190) (11,337) 12,428 26,662 (28,383)
Cash flow from (used
in) financing
activities.............. 1,534 (138,751) (59,590) (14,000) (47,164) (92,754) (76,825) 4,338
BALANCE SHEET DATA (AT
END OF PERIOD)
Total assets............. $ 530,846 $ 683,866 $ 637,701 $ 670,268 $615,672 $ 615,672 $ 552,986 $ 567,531
Total debt(1)............ 41,133 405,074 348,220 392,172 493,981 493,981 421,122 498,339
SUPPLEMENTAL DATA(2):
Number of
company-owned
restaurants (at end
of period).............. 404 406 401 408 393 393 372 360
Average guest check...... $ 6.61 $ 6.73 $ 6.89 $ 6.84 $ 7.03 $ 7.00 $ 7.13 $ 7.22
Average weekly sales..... $ 48,540 $ 45,464 $ 49,368 $ 49,822 $ 51,044 $ 49,973 $ 48,953 $ 49,949
Same store sales
change.................. 3.1% 0.2% 2.1% 2.4% 0.2% (0.9)% (4.2)% 1.3%
- -----------
(1) Total debt represents the amount of our long-term debt and capital
lease obligations, including current maturities.
(2) Reflects data relating to all of our company-owned restaurants.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH "SELECTED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED ELSEWHERE IN THIS REPORT. SOME OF THE STATEMENTS IN THE FOLLOWING
DISCUSSION ARE FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS/FORWARD-LOOKING
STATEMENTS."
OVERVIEW
We are the twentieth largest restaurant operator in the United States and
the largest operator of company-owned stores in the buffet/grill sector (through
Buffets and its subsidiaries), as measured in both sales and number of
restaurants. We accounted for approximately 32% of total sales in this estimated
$3.0 billion sector. Our restaurants are principally operated under the names
Old Country Buffet and HomeTown Buffet. As of June 30, 2004, we had 360
company-owned restaurants and 20 franchised locations in 38 states.
Buffets was founded in 1983 to develop buffet-style restaurants under the
name Old Country Buffet. In October 1985, Buffets completed its initial public
offering and was listed on The NASDAQ National Market. In September 1996,
Buffets merged with HomeTown Buffet, Inc., which was developed by one of
Buffets' co-founders and had 80 company-owned HomeTown Buffet restaurants in 11
states and 19 franchised restaurants in eight states. In October 2000, Buffets
was acquired by Buffets Holdings, a company organized by Caxton-Iseman Capital,
Inc., in a buyout from public shareholders.
Our financial results are significantly impacted by changes in sales at our
company-owned restaurants. Changes in sales are largely driven by changes in
average weekly guest counts and average guest check. We monitor average weekly
guest counts very closely, as they directly impact our revenues and profits, and
focus substantial efforts on growing these numbers on a same-store basis.
Same-store average weekly sales and guest counts are affected by our ability to
consistently deliver a high-quality, value-priced selection of home-style cooked
meals in a clean and pleasant self-service buffet format, the success of our
marketing promotions and other business strategies.
Our business model is characterized by a relatively fixed cost structure,
particularly in the short term. Accordingly, changes in marginal average weekly
sales volume can have a more significant impact on our profitability than for a
business possessing a more variable cost structure. Over a longer time horizon,
by virtue of our diversified food offerings, we are able to address the
semi-fixed element of food cost by modifying our offerings or by highlighting
other foods on the menu in order to reduce consumption on the higher cost items.
In addition, we monitor our labor costs and hourly employee productivity, as
measured by the number of guests served per labor hour, on a weekly basis to
ensure that restaurants are responsive in scheduling and managing our labor to
varying levels of guest traffic.
We devote significant resources and attention to our marketing efforts which
is evident in the level of our advertising expenditures over the past five
years. In the past year, we adopted a more stringent, return on investment based
approach to advertising placement which has resulted in more efficient and
effective returns on our marketing investments.
16
Since we acquired Buffets in a buyout from its public shareholders in
October 2000, we have focused on improving asset management and optimizing our
capital structure. As a result, we have had net closures of 44 restaurants in
less attractive locations either through early termination, or non-renewal at
lease end, since October 2000. We expect the number of closures to abate in
2005, and reach an equilibrium point at which new openings and select
relocations will approximate the number of restaurants which we close because
they do not meet our profitability goals.
Our fiscal year comprises 52 or 53 weeks divided into four Fiscal quarters
of 12, 12, 16 and 12 or 13 weeks. Beginning with the transitional period ended
July 3, 2002, we changed our Fiscal year so that it ends on the Wednesday
nearest June 30 of each year. The Fiscal year 2002 transition period consisted
of 26 weeks and was divided into two periods of 16 and 10 weeks. Prior to that,
our Fiscal year ended on the Wednesday nearest December 31 of each year and each
Fiscal year was divided into periods of 16, 12, 12 and 12 or 13 weeks.
The following is a description of the line items from our consolidated
statements of operations:
o We recognize as restaurant sales the proceeds from the sale of food
and beverages at our company owned restaurants at the time of such
sale. We recognize the proceeds from the sale of gift
certificates/cards when the gift certificates/cards are redeemed at
our restaurants. Until redemption, the unearned revenue from the sale
of gift certificates/cards is included in accrued liabilities on our
consolidated balance sheets. Our franchise income includes royalty
fees and initial franchise fees received from our franchisees. We
recognize royalty fees as other income based on the sales reported at
the franchise restaurants.
o Restaurant costs reflect only direct restaurant operating costs,
including food, labor and direct and occupancy costs. Labor costs
include compensation and benefits for both hourly and restaurant
management employees. Direct and occupancy costs consist primarily of
costs of supplies, maintenance, utilities, rent, real estate taxes,
insurance, depreciation and amortization.
o Advertising expenses reflect all advertising and promotional costs.
o General and administrative expenses reflect all costs, other than
advertising expenses, not directly related to the operation of
restaurants. These expenses consist primarily of corporate
administrative compensation and overhead, district and regional
management compensation and related management expenses and the costs
of recruiting, training and supervising restaurant management
personnel.
o Goodwill amortization reflects the amortization of the excess of cost
over fair market value of assets and was recognized on a straight
line basis over a 30-year life through January 2, 2002. Effective
January 3, 2002, we changed our method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
o Impairment of assets reflects fair market adjustments to the carrying
value of long-lived assets, primarily comprised of leasehold
improvements and equipment.
17
o Gain on sale of Original Roadhouse Grill restaurants reflects the net
proceeds from the sale of 13 Original Roadhouse Grill restaurants net
of the related carrying value of these restaurants.
o Loss on sale-leaseback transactions reflects transaction costs and
impairment losses associated with the sale and leaseback of the
leasehold interests and leasehold improvements.
o Financing-related compensation expenses reflect payments to holders
of stock options and cash incentive plan units in conjunction with
the issuance of our 13 7/8% senior discount notes in May 2004.
o Interest expense reflects interest costs associated with our debt,
amortization of debt issuance cost and accretion of original issuance
discount on our subordinated notes and bonds.
o Interest income reflects interest earned on our short-term
investments.
o Loss related to refinancing reflects transaction and other costs
associated with our recapitalization on June 28, 2002 and refinancing
on February 20, 2004.
o Loss related to the early extinguishment of debt reflects the costs
associated with redeeming a portion of Buffets' 11 1/4% senior
subordinated notes prior to their maturity during Fiscal 2004.
o Other income primarily reflects franchise fees earned, less minority
interest associated with our Tahoe Joe's subsidiary. During August
2003, we exercised our call option to acquire the remaining 20%
interest in Tahoe Joe's, Inc. from the minority holder.
o Income tax expense (benefit) reflects the current and deferred tax
provision (benefit) determined in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of our financial consolidated statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates its
estimates and assumptions, including those related to recoverability of
long-lived assets, revenue recognition and goodwill. Management bases its
estimates and assumptions on historical experience and on various other factors
that are believed to be reasonable at the time the estimates and assumptions are
made. Actual results may differ from these estimates and assumptions under
different circumstances or conditions.
We believe the following critical accounting policies affect management's
significant estimates and assumptions used in the preparation of our
consolidated financial statements.
18
RECOVERABILITY OF LONG-LIVED ASSETS
We periodically evaluate long-lived assets and goodwill related to those
assets for impairment whenever events or changes in circumstances indicate the
carrying value amount of an asset or group of assets may not be recoverable. We
consider a history of operating losses and the other factors described to be our
primary indicator of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows,
namely individual restaurants. A restaurant is deemed to be impaired if a
forecast of undiscounted future operating cash flows directly related to the
restaurant, including disposal value, if any, is less than its carrying amount.
If a restaurant is determined to be impaired, the loss is measured as the amount
by which the carrying amount of the restaurant exceeds its fair value. Fair
value is based on quoted market prices in active markets, if available. If
quoted market prices are not available, an estimate of fair value is based on
the best information available, including prices for similar assets or the
results of valuation techniques such as discounted estimated future cash flows
as if the decision to continue to use the impaired restaurant was a new
investment decision. We generally measure fair value by discounting estimated
future cash flows. Considerable management judgment is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. We had no impairment write-downs for the
fiscal year ended January 2, 2002. During the 26-week transitional period ended
July 3, 2002, we expensed approximately $1.1 million relating to the impairment
of long-lived assets associated with 12 restaurants. During fiscal 2003, we
expensed approximately $5.6 million relating to the impairment of long-lived
assets of 39 restaurants. This amount was partially offset by an approximate
$0.8 million reduction in lease obligation accrual assumptions in accrued store
closing costs, based on our receiving greater than planned sublease and other
cash receipts. In addition, we recognized approximately $5.9 million in
impairments relating to 18 of the 30 restaurants for which we completed
sale-leaseback transactions during 2003. During fiscal 2004, we expensed
approximately $1.9 million relating to the impairment of long-lived assets for
17 restaurants.
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION REFLECTS OUR HISTORICAL RESULTS FOR THE 28-WEEK
PERIOD ENDED JULY 18, 2001, THE 26-WEEK TRANSITIONAL PERIOD ENDED JULY 3, 2002,
THE 50-WEEK PERIOD ENDED JULY 3, 2002, AND THE FISCAL YEARS ENDED JULY 2, 2003
AND JUNE 30, 2004.
OUR FUTURE RESULTS MAY NOT BE CONSISTENT WITH OUR HISTORICAL RESULTS. OUR
FISCAL 2002 RESULTS INCLUDED A LOSS RELATING TO OUR REFINANCING WHICH WAS
COMPLETED IN JUNE 2002. OUR FISCAL 2003 RESULTS INCLUDED THE OPERATING RESULTS
FOR 13 ORIGINAL ROADHOUSE GRILL RESTAURANTS THAT WERE SOLD IN JUNE 2003, AS WELL
AS THE IMPACT OF SALE AND LEASEBACK TRANSACTIONS WITH RESPECT TO 30 RESTAURANTS
COMPLETED DURING THE YEAR. OUR FISCAL 2004 RESULTS INCLUDED THE IMPACT OF A SALE
AND LEASEBACK TRANSACTION WITH RESPECT TO ONE RESTAURANT COMPLETED IN DECEMBER
2003, A LOSS RELATED TO A REFINANCING THAT WE POSTPONED DUE TO MARKET CONDITIONS
AND THE AMENDMENT AND RESTATEMENT OF OUR SENIOR CREDIT AGREEMENT IN FEBRUARY
2004, THE ISSUANCE OF OUR 13 7/8% SENIOR DISCOUNT NOTES DUE 2010 IN MAY 2004 AND
THE REDEMPTION OF APPROXIMATELY $29.6 MILLION OF 11 1/4% SENIOR SUBORDINATED
NOTES DUE 2010. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE
IN THIS REPORT.
19
FOR THE YEAR ENDED JUNE 30, 2004 COMPARED TO THE YEAR ENDED JULY 2, 2003
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
YEAR ENDED
YEAR ENDED -------------
JULY 2, 2003 JUNE 30, 2004
------------ -------------
(DOLLARS IN THOUSANDS)
---------------------------------------------
Restaurant sales........................................ $ 985,286 100.0% $ 942,831 100.0%
Restaurant costs........................................ 850,840 86.4 812,662 86.2
Advertising expenses.................................... 28,589 2.9 25,854 2.7
General and administrative expenses..................... 45,382 4.6 42,722 4.5
Impairment of assets.................................... 4,803 0.5 1,878 0.2
Gain on sale of Original Roadhouse Grill Restaurants.... (7,088) (0.7) -- --
Loss on sale leaseback transactions..................... 5,856 0.6 -- --
Financing-related compensation expenses................. -- -- 2,240 0.2
Operating income........................................ 56,904 5.8 57,475 6.1
Interest expense........................................ 41,235 4.2 39,609 4.2
Interest income......................................... (307) -- (424) --
Loss related to refinancing............................. -- -- 4,776 0.5
Loss related to early extinguishment of debt............ -- -- 5,275 0.6
Other (income).......................................... (1,270) (0.1) (1,379) (0.1)
Income before income taxes.............................. 17,246 1.8 9,618 1.0
Income tax expense...................................... 5,319 0.5 1,648 0.2
Net income.............................................. $ 11,927 1.2 $ 7,970 0.8
- ------------------
Certain percentage amounts do not sum to total due to rounding.
RESTAURANT SALES. Restaurant sales for the fiscal year ended June 30, 2004
decreased $42.5 million, or 4.3%, compared with the fiscal year ended July 2,
2003. The decline in sales was primarily attributable to the closure of 15
buffet restaurants and the sale of 13 Original Roadhouse Grill restaurants,
partially offset by the opening of 3 units, over the past year. Average weekly
sales for fiscal 2004 were $49,949, or 2.0% higher than the prior year.
Same-store sales for fiscal 2004 increased by 1.3% compared to the prior year,
reflecting a 1.6% decline in guest traffic and a 2.9% increase in average check.
The increase in average check comprised approximately a 2.0% price increase and
a 0.9% average check increase due to a reduction in free promotional and
employee meals. We currently expect same-store sales for the first quarter of
fiscal 2005 (the 12-week period ending September 22, 2004) to decline by
approximately zero to two percent versus the comparable period in fiscal 2004.
RESTAURANT COSTS. Restaurant costs for fiscal 2004 decreased by 0.2% as a
percentage of sales compared with the prior year. Food costs as a percentage of
sales increased 0.9% primarily due to our expanded and enriched menu offerings.
Labor costs as a percentage of sales were 1.3% lower than those experienced in
the prior year, primarily due to a reduction in our restaurant management
staffing levels substantially effected during the third quarter of fiscal 2003
and the improved productivity of our hourly employees. Direct and occupancy
costs as a percentage of sales increased by 0.2% versus the prior year. This
increase was primarily attributable to an increase in rent expense associated
with the sale leaseback transactions. We currently expect that restaurant costs
will run approximately 0.4% higher as a percentage of sales during the first
quarter of fiscal 2005, as
20
compared to those experienced in the most recently completed fiscal year. This
increase reflects commodity-pricing pressure, particularly on chicken, which we
expect to abate appreciably by the end of calendar year 2004.
ADVERTISING EXPENSES. Advertising expenses decreased 0.2% as a percentage of
sales during fiscal 2004 versus the prior year. The decrease reflected a
reduction in advertising weights during fiscal 2004 to more historic levels.
During the first half of fiscal 2003, we increased advertising weights in prime
time, late news and Hispanic television in a number of markets in an effort to
drive traffic, but these investments did not produce returns justifying their
continuation. Approximately 62% of our buffet restaurants received
television-advertising support during fiscal 2004 and fiscal 2003. We expect
advertising costs as a percentage of sales during the first quarter of fiscal
2005 to remain comparable with those for fiscal year 2004.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of sales decreased 0.1% during fiscal 2004 as compared to the prior
fiscal year. This decrease was largely due to a decrease in non-store employees
largely effected during the third quarter of fiscal 2003. We expect general and
administrative expenses during the first quarter of fiscal 2005, measured as a
percentage of sales, to remain approximately flat to those realized during
fiscal 2004.
IMPAIRMENT OF ASSETS. During fiscal 2004, we recognized approximately $1.9
million in fair market adjustments to the carrying value of our long-lived
assets for 17 restaurants. During fiscal 2003, we recorded approximately $4.8
million of impairments to the long-lived assets for 27 restaurants.
GAIN ON SALE OF ORIGINAL ROADHOUSE GRILL RESTAURANTS. On June 5, 2003, we
sold 13 Original Roadhouse Grill restaurants for approximately $28.4 million in
net proceeds. The gain associated with the sale of these restaurants
approximated $7.1 million.
LOSS ON SALE AND LEASEBACK TRANSACTIONS. During fiscal 2003, we entered into
three sale-leaseback transactions whereby we transferred our leasehold interests
and leasehold improvements with respect to 30 restaurants to a third party for
net proceeds of approximately $26.1 million. We simultaneously entered into
long-term leases for those restaurants with an aggregate initial annual rent of
approximately $3.7 million. In connection with these sale-leaseback
transactions, we recorded a loss of approximately $5.9 million primarily to
reflect the impairment of certain of the properties for which the net proceeds
were less than the book value of the leasehold assets. In addition, the net
proceeds for certain of the properties were greater than the book value of the
leasehold assets resulting in a deferred gain of approximately $3.6 million. The
deferred gain will be accreted over the life of the respective restaurant
leases, ranging from 17 to 25 years.
On December 19, 2003, we entered into a sale and leaseback transaction by
which we transferred our leasehold interests and leasehold improvements with
respect to one restaurant to a third party for net proceeds of $2.7 million. We
simultaneously entered into a long-term lease for that restaurant with an
aggregate initial annual rent of approximately $0.3 million. The net proceeds of
this sale and leaseback transaction exceeded the book value of the leasehold
assets resulting in a deferred gain of approximately $0.3 million, which will be
accreted over the 20-year life of the lease.
INTEREST EXPENSE. Interest expense was flat as a percentage of sales during
fiscal 2004 versus the prior year.
21
LOSS RELATED TO REFINANCING. On February 20, 2004, we entered into an
amended and restated Credit Facility. In connection with this bank refinancing,
we wrote off $4.2 million of debt issuance cost related to the predecessor
Credit Facility. In addition, we incurred $0.6 million in transaction fees
associated with an uncompleted senior discount note offering.
LOSS RELATED TO THE EARLY EXTINGUISHMENT OF DEBT. We repurchased
approximately $29.6 million of Buffets' 11 1/4% senior subordinated notes at an
average price of 110.4%. We recognized the difference between the premiUM
purchase price and the discounted carrying value of Buffets' 11 1/4% senior
subordinated notes, as well as AN associated write-off of debt issuance cost, as
a loss related to the early extinguishment of debt.
INCOME TAXES. Income taxes decreased 0.3% as a percentage of sales for
fiscal 2004 compared to the prior year. The effective tax rate of 17.1% for the
current year compared with 30.8% for the prior year reflected the impact of
stable tax credits on pre-tax income that was depressed by financing-related
expenses, as well as a more favorable than expected resolution to a state tax
audit.
FOR THE YEAR ENDED JULY 2, 2003 COMPARED TO THE 50-WEEK PERIOD ENDED JULY 3,
2002
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
50-WEEK PERIOD ENDED YEAR ENDED JULY 2,
JULY 3, 2002 2003
--------------------- --------------------
(DOLLARS IN THOUSANDS)
-------------------------------------------
Restaurant sales................................... $1,003,997 100.0% $ 985,286 100.0%
Restaurant costs................................... 849,154 84.6 850,840 86.4
Advertising expenses............................... 26,281 2.6 28,589 2.9
General and administrative expenses................ 49,556 4.9 45,382 4.6
Goodwill amortization.............................. 4,967 0.5 -- --
Impairment of assets............................... -- -- 4,803 0.5
Gain on sale of Original Roadhouse Grill........... -- -- (7,088) (0.7)
Loss on sale and leaseback transactions............ -- -- 5,856 0.6
Operating income................................... 74,039 7.4 56,904 5.8
Interest expense................................... 33,606 3.3 41,235 4.2
Interest income.................................... (586) (0.1) (307) --
Loss related to refinancing........................ 38,724 3.9 -- --
Other (income)..................................... (1,145) (0.1) (1,270) (0.1)
Income before income taxes......................... 3,440 0.3 17,246 1.8
Income tax expense................................. 4,203 0.4 5,319 0.5
Net income (loss).................................. $ (763) (0.1) $ 11,927 1.2
- ---------------------
Certain percentage amounts do not sum to total due to rounding.
RESTAURANT SALES. Restaurant sales for the fiscal year ended July 2, 2003
decreased $18.7 million, or 1.9%, compared with the 50 weeks ended July 3, 2002.
The decline was principally attributable to a 2.0% reduction in average weekly
sales between the respective periods coupled with a net capacity reduction of
291 operating weeks due to 14 unit closings and the sale of 13 Original
Roadhouse Grill units, partially offset by 6 unit openings. Same-store sales for
the 2003 fiscal year declined by 4.2%, reflecting a 1.5% increase in pricing and
a 5.7% decline in guest traffic. The decline in sales is due in part to the
general economic downturn, as well as increased competition partially from the
quick
22
service industry in the form of discounting.
RESTAURANT COSTS. Restaurant costs for 2003 increased by 1.8% as a
percentage of sales compared with the comparative prior year period primarily
due to expanded and enriched menu offerings, increased workers' compensation and
utility costs and leverage issues attributable to reasonably fixed costs on a
declining sales base.
ADVERTISING EXPENSES. Advertising expenses increased 0.3% as a percentage of
sales for fiscal 2003 versus the 50 weeks ended July 3, 2002. We increased
advertising weights in prime time, late news and Hispanic television in a number
of markets to provide greater media exposure.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 0.3% as a percentage of sales during fiscal 2003 compared to the 50
weeks ended July 3, 2002. The decrease was largely attributable to reduced bonus
expense and a workforce reduction of approximately 70 non-store employees.
GOODWILL AMORTIZATION. Goodwill amortization expense was no longer
recognized as of January 3, 2002 due to the adoption as of that date of SFAS No.
142, "Goodwill and Other Intangible Assets," and its non-amortization provisions
for goodwill.
IMPAIRMENT OF ASSETS. During fiscal 2003, we identified as impaired
approximately $4.8 million of long-lived assets for 27 restaurants.
GAIN ON SALE OF ORIGINAL ROADHOUSE GRILL RESTAURANTS. On June 5, 2003, we
sold 13 Original Roadhouse Grill restaurants for approximately $28.4 million in
net proceeds. The gain associated with the sale of these restaurants
approximated $7.1 million.
LOSS ON SALE AND LEASEBACK TRANSACTIONS. During fiscal 2003, we entered into
three sale-leaseback transactions whereby we transferred our leasehold interests
and leasehold improvements with respect to 30 restaurants to a third party for
net proceeds of approximately $26.1 million. We simultaneously entered into
long-term leases for those restaurants with an aggregate initial annual rent of
approximately $3.7 million. In connection with these sale-leaseback
transactions, we recorded a loss of approximately $5.9 million primarily to
reflect the impairment of certain of the properties for which the net proceeds
were less than the book value of the leasehold assets. In addition, the net
proceeds for certain of the properties were greater than the book value of the
leasehold assets resulting in a deferred gain of approximately $3.6 million. The
deferred gain will be accreted over the life of the respective restaurant
leases, ranging from 17 to 25 years.
INTEREST EXPENSE. Interest expense increased 0.9% as a percentage of sales
during fiscal 2003 versus the comparable prior year period primarily due to
higher weighted average outstanding debt balances.
LOSS RELATED TO REFINANCING. Loss related to refinancing consisted of $20.5
million for the prepayment and make-whole redemption fees, $11.0 million
write-off of financing costs related to the retired debt, $4.1 million of
unamortized debt discount related to our 16% and Buffets' 14% senior
subordinated notes due September 29, 2008, $2.1 million paid to the holders of
the common stock warrants and $1.0 million in expenses.
23
INCOME TAXES. Income taxes increased 0.1% as a percentage of sales for
fiscal 2003 compared to the 50 weeks ended July 3, 2002. The effective tax rate
of 30.8% for the current year compared with 122.2% for the prior year period was
largely attributable to the elimination of goodwill amortization due to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
FOR THE 26-WEEK TRANSITIONAL PERIOD ENDED JULY 3, 2002 COMPARED TO THE 28 WEEKS
ENDED JULY 18, 2001
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
26-WEEK
28-WEEK TRANSITIONAL
PERIOD ENDED PERIOD ENDED
JULY 18, 2001 JULY 3, 2002
-------------------- --------------------
(DOLLARS IN THOUSANDS)
Restaurant sales...................................$ 567,821 100.0% $ 527,084 100.0%
Restaurant costs................................... 481,832 84.9 444,917 84.4
Advertising expenses............................... 15,708 2.8 14,349 2.7
General and administrative expenses................ 26,700 4.7 25,687 4.9
Goodwill amortization.............................. 5,975 1.1 -- --
Operating income................................... 37,606 6.6 42,131 8.0
Interest expense................................... 24,887 4.4 15,088 2.9
Interest income.................................... (324) (0.1) (212) (0.1)
Loss related to refinancing........................ -- -- 38,724 7.3
Other income....................................... (493) (0.1) (598) (0.1)
Income (loss) before income taxes.................. 13,536 2.4 (10,871) (2.1)
Income tax expense (benefit)....................... 7,735 1.4 (3,354) (0.6)
Net income (loss)..................................$ 5,801 1.0 $ (7,517) (1.4)
- ------------------------------------
Certain percentage amounts do not sum to total due to rounding.
RESTAURANT SALES. Restaurant sales for the 26-week transitional period ended
July 3, 2002 declined $40.7 million, or 7.2%, compared with the 28 weeks ended
July 18, 2001. The decline in sales was mostly due to the reduced number of
operating weeks in 2002 versus the comparable period in 2001 associated with our
year-end change (two fewer weeks in 2002). Average weekly sales for fiscal 2002
of $51,044 were up 2.5% over average weekly sales for the comparable 28-week
period for 2001. Same-store sales for fiscal 2002 were up 0.2% over the
comparable period in 2001, reflecting a 2.1% increase in pricing and a 1.9%
decline in guest traffic.
RESTAURANT COSTS. Restaurant costs for fiscal 2002 improved by 0.5% as a
percentage of sales compared with the prior year period primarily due to a
decrease in food costs, partially offset by an increase in restaurant management
compensation and an increase in workers' compensation insurance. The food cost
reduction was primarily attributable to significant improvement in meat prices
experienced during fiscal 2002 as compared to large price spikes incurred in the
first half of 2001.
ADVERTISING EXPENSES. Advertising expenses ran relatively constant as a
percentage of sales, approximately 2.7% of sales in fiscal 2002 versus 2.8% in
the comparable period in 2001. Approximately 78% of our buffet units received
advertising support in fiscal 2002. Same store sales among units receiving
advertising support were up 1.9% for fiscal 2002, versus overall system results
of only a 0.2% increase.
24
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were 4.9% of sales for fiscal 2002 compared with a total of 4.7% for the
comparable prior year period primarily due to increased incentive compensation
costs and some severance arrangements.
GOODWILL AMORTIZATION. Goodwill amortization expense decreased 1.1% as a
percentage of sales in fiscal 2002 versus the prior year period due to the
adoption in January 2002 of SFAS No. 142, "Goodwill and Other Intangible
Assets," and its non-amortization provisions for goodwill.
INTEREST EXPENSE. Interest expense decreased 1.5% as a percentage of sales
during the 26 weeks ended July 3, 2002 versus the comparable prior year period
due to lower weighted average outstanding debt balances coupled with a decrease
in the senior credit facility's variable interest rates.
LOSS RELATED TO REFINANCING. Loss related to refinancing consisted of $20.5
million for the prepayment and make-whole redemption fees, $11.0 million
write-off of financing costs related to the retired debt, $4.1 million of
unamortized debt discount related to the 16% and 14% senior subordinated notes,
$2.1 million paid to the holders of the common stock warrants and $1.0 million
in expenses.
INCOME TAXES. Income taxes decreased 2.0% as a percentage of sales for the
26 weeks ended July 3, 2002 compared to the 28 weeks ended July 3, 2001
principally due to a $24.4 million decrease in pre-tax income. The effective tax
rate for the current period was 30.9% compared with 57.1% for the prior year
period, largely due to a decrease in goodwill amortization associated with the
buyout from public shareholders.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company with no operations or assets of our own other than
the capital stock of our subsidiaries. Operations are conducted through our
subsidiaries and our ability to make payments on the senior discount notes is
dependent on the earnings and the distribution of funds from our subsidiaries
through loans, dividends or otherwise. However, none of our subsidiaries is
obligated to make funds available to us for payment on the senior subordinated
notes. The terms of our credit facility place restrictions on Buffets' ability
to pay dividends and otherwise transfer assets to us. Further, the terms of the
indenture governing Buffets' senior subordinated notes place restrictions on the
ability of Buffets and our other subsidiaries to pay dividends and otherwise
transfer assets to us.
Cash flows generated from Buffets' operating activities provide us with a
significant source of liquidity. Because most of our sales are for cash or
credit with settlement within a few days and most vendors are paid on terms
ranging from 14 to 35 days, we operate on a significant working capital deficit.
In addition to cash flows from operations, revolving credit loans and swingline
loans are available to us under our credit facility. Letters of credit issued
under the letter of credit facility are also available to us to support payment
obligations incurred for our general corporate purposes.
Historically, our capital requirements have been for the development and
construction of new restaurants, restaurant refurbishment and the installation
of new information systems. We expect these requirements to continue in the
foreseeable future.
25
OPERATING ACTIVITIES. Net cash provided by operating activities was $50.5
million for fiscal 2004, $57.7 million for fiscal 2003, $39.3 million for the
26-week transitional period ended July 3, 2002 and $68.8 million for fiscal
2001. Net cash provided by operating activities exceeded the net income for the
periods due principally to the effect of depreciation and amortization, an
increase in accrued and other liabilities for 2001, losses related to
refinancing for 2002 and 2004, impairment of assets in 2003 and 2004, loss on
sale-leaseback transactions in 2003, and loss related to early extinguishment of
debt in 2004. Net cash provided by operating activities in 2003 was partially
reduced by a $17 million payment of accrued redemption fees associated with our
recapitalization in June 2002. The decrease in cash provided by operating
activities between fiscal 2004 and fiscal 2003 was largely attributable to the
timing of payments on our accounts payable.
INVESTING ACTIVITIES. Net cash provided by investing activities was $26.7
million for the year ended July 2, 2003 and $2.6 million for fiscal 2001. Net
cash used in investing activities was $28.4 million for the year ended June 30,
2004 and $11.3 million for the 26 weeks ended July 3, 2002. We completed the
sale and leaseback of certain leasehold interests and leasehold improvements
with respect to 23 restaurant locations in 2001, one location in 2002, 30
locations in 2003 and one in 2004. Net proceeds from the transactions were
approximately $39.1 million in 2001, $2.3 million in 2002 , $26.1 million in
2003 and $2.7 million in 2004. The aggregate initial annual rent associated with
the sale-leaseback transactions was $3.2 million in 2001, $0.2 million in 2002,
$3.7 million in 2003 and $0.3 million in 2004. We did not recognize a gain or
loss on these transactions in 2001, 2002 or 2004, but recorded a loss of $5.9
million in 2003. The losses primarily reflected the impairment of certain of the
properties for which the net proceeds were less than the book value of the
leasehold assets. In addition, the net proceeds for certain of the properties
were greater than the book value of the leasehold assets resulting in a deferred
gain of $3.6 million in 2003 and $0.3 million in 2004. This deferred gain is
being accreted over the life of the respective restaurant leases, ranging from
17 to 25 years. In addition, we completed the sale of 13 Original Roadhouse
Grill restaurants in 2003 for approximately $28.4 million in net proceeds, of
which $2.5 million represented a long-term note receivable. Capital expenditures
in fiscal 2004 largely comprised re-image expenditures for approximately 50
restaurants in the sum of $18.2 million, while capital expenditures for prior
periods primarily comprised new store outlays and minor restaurant remodels. The
re-imaging effort in 2004 primarily encompassed upgrades to the restaurant
interiors including new wall and floor coverings, extensive decor enhancements
and display cooking stations. While guest feedback on display cooking stations
was generally positive, overall returns on this component of the re-imaging
program did not meet our expectations. We intend to continue to remodel our
restaurants with many of the materials and decor items included in the 2004
re-imaging program, but will limit the development of display cooking in
existing restaurants. While the cost for the 2004 re-image campaign was
approximately $360,000 per unit, the expectation for future re-image
expenditures is between $125,000 and $200,000 per unit.
FINANCING ACTIVITIES. Net cash used in financing activities was $11.9
million for fiscal 2004, $76.8 million for fiscal 2003, $47.2 million for the 26
weeks ended July 3, 2002 and $59.6 million for fiscal 2001. On June 28, 2002,
Buffets entered into new debt agreements to refinance its then-existing debt,
make a distribution to Buffets Holdings and repurchase Buffets Holdings'
outstanding preferred stock warrants. In connection with the transactions, we
incurred a loss of $38.7 million. The loss related to refinancing consisted of
$20.5 million for the prepayment and make-whole redemption fees, $11.0 million
in write-offs of financing costs related to the retired debt, $4.1 million of
unamortized debt discount write-offs related to our 16% and Buffets' 14%
26
senior subordinated notes, $2.1 million paid to the holders of the common stock
warrants and $1.0 million in expenses.
FUTURE CAPITAL EXPENDITURES. During fiscal 2005, we plan to:
o Open between seven and eight new restaurants with an initial capital
outlay of approximately $14 million. We hope to arrange forward-funding
arrangements, or build-to-suit arrangements, to the extent possible on
prospective new store openings to reduce these capital requirements by
approximately $7 million. In those instances where we are unable to
arrange a forward-funding arrangement, we hope to enter into sale and
leaseback transactions to recover our initial capital outlay.
o Spend approximately $13 million on remodeling and improvement costs
that will be capitalized. Remodels incorporate design elements to
update the decor of our existing facilities including a lighter, more
contemporary interior design and expanded dessert displays. Other
improvement costs include a variety of outlays such as new carpet,
equipment and minor leasehold improvements.
o Spend approximately $20 million on the repair and maintenance of our
existing restaurant locations that will be expensed. This will
encompass expenditures to keep equipment in good working order and
leasehold improvements in good condition, without substantially
extending the economic lives of the underlying assets.
o Spend approximately $2 million on miscellaneous corporate and system
investments.
On August 27, 2004, we filed a prospectus with the Securities and Exchange
Commission outlining a planned initial public offering of an as yet undetermined
amount of Income Deposit Securities ("IDSs"), representing shares of our Class A
common stock and senior subordinated notes.
We intend to use the net proceeds from this planned offering, together with
cash on hand and the proceeds from any concurrent debt issuances, to repay,
repurchase or refinance all of our outstanding indebtedness and to repurchase
common stock, warrants and options from the existing holders.
We are not aware of any other event or trend that would potentially affect
our capital requirements or liquidity. For the next twelve months, we believe
that cash flow from operations, landlord contributions, credits received from
trade suppliers and available borrowing capacity will be adequate to finance our
development plans, on-going operations and debt service obligations.
CREDIT FACILITIES AND OTHER LONG TERM DEBT
On February 20, 2004, Buffets entered into an amended and restated senior
credit facility ("Credit Facility"). The Credit Facility provides for total
borrowings of up to $310,000,000, including (i) a $230,000,000 term loan, (ii) a
$30,000,000 revolving credit facility, (iii) a $20,000,000 letter of credit
facility, and (iv) a $30,000,000 synthetic letter of credit facility. The terms
of the Credit Facility permit us to borrow, subject to availability and certain
conditions, incremental term loans or to issue additional notes in an aggregate
amount up to $25,000,000.
As of June 30, 2004, we had $35.1 million in outstanding letters of credit,
which expire through
27
May 2, 2005. As of June 30, 2004, the total borrowing availability under the
revolving credit facility was $30.0 million and the total borrowing capacity
under the letter of credit facilities was $14.9 million.
On June 28, 2002, Buffets' issued $230.0 million aggregate principal amount
of its 11 1/4% senior subordinated notes due July 15, 2010 at 96.181%. Interest
is payable semi-annually on January 15 and July 15 of each year. Except in the
event of an initial public offering, we are not entitled to redeem Buffets 11
1/4% Notes prior to July 15, 2006, after which we can choose to redeem some or
all of Buffets 11 1/4% Notes at specified redemption prices.
On May 18, 2004, we issued $132 million aggregate principal amount at
maturity of our 13 7/8% senior discount notes due December 15, 2010. Our 13 7/8%
Notes were issued at a discount to their aggregate principal amount at maturity.
Prior to July 31, 2008, interest will accrue on our 13 7/8% Notes in the form of
an increase in the accreted value of those notes. The accreted value of each
13 7/8% Note will increase until July 31, 2008 at a rate of 13.875% per annum.
After this date, cash interest on the 13 7/8% Notes will accrue and be payable
on January 31 and July 31 of each year at a rate of 13.875% per annum. If we
fail to meet certain leverage ratio tests on or about July 31, 2006 or July 31,
2008, additional interest will accrue on our 13 7/8% Notes from that date at a
rate of 1% per annum, up to a maximum of 2% per annum.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our sales are seasonal, with a lower percentage of annual sales occurring in
most of our current market areas during the winter months. Our restaurant sales
may also be affected by unusual weather patterns, major world events or matters
of public interest that compete for customers' attention. Generally, restaurant
sales per unit are lower in the winter months, our third fiscal quarter ending
in April of each year. The impact of these reduced average weekly sales are
mitigated in our quarterly data presentations through the inclusion of 16 weeks
in the quarter ending in April of each year, compared to only 12 or 13 weeks in
each of the other fiscal quarters.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (variable interest entities, or VIEs) and
how to determine when and which business enterprise should consolidate the VIE
(the primary beneficiary). In December 2003, the FASB issued FIN 46 (R),
"Consolidation of Variable Interest Entities," which represents a revision to
FIN 46. The provisions of FIN 46 (R) are effective for interests in VIEs as of
the first interim, or annual, period ending after March 15, 2004. In addition,
FIN 46 (R) requires that both the primary beneficiary and all other enterprises
with a significant variable interest make additional disclosure in filings
issued after January 31, 2003. We adopted FIN 46 (R) as of December 17, 2003 and
its adoption had no impact on our consolidated results of operations, financial
position or cash flow.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
modifies the accounting for
28
certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS No. 150 requires that those instruments be
classified as liabilities in statements of financial position. Most of the
guidance in SFAS No. 150 is effective for all financial instruments entered into
or modified after May 31, 2003, or otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. We adopted SFAS No. 150
as of July 3, 2003 and its adoption had no impact on our consolidated results of
operations, financial position or cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS. We have interest rate exposure relating to the variable
portion of our long-term obligations. Buffets' 11 1/4% senior subordinated notes
and our 13 7/8% senior discount notes are fixed. The seniOR subordinated notes
being offered hereby and Buffets' Senior Notes being offered concurrently will
be fixed. The interest rates on the term loans under Buffets' Existing Credit
Facility are variable. Based on the terms of Buffets' Existing Credit Facility
and assuming that credit facility had been in effect from the beginning of
fiscal 2003, a 1% change in interest rates on our variable rate debt would have
resulted in our interest rate expense fluctuating by approximately $2.2 million
for fiscal 2003 and $1.9 million for fiscal 2004. Our interest rate risk under
our Existing Credit Facility was mitigated, in part, by an interest rate cap
purchased on November 25, 2002 with a notional value of $15 million and a 5%
LIBOR strike price that expired on June 30, 2004. We expect that our Amended
Credit Facility will have a variable interest rate, subject to any hedges we may
put in place.
FOOD COMMODITY RISKS. Many of the food products purchased by us are affected
by commodity pricing and are, therefore, subject to price volatility caused by
weather, production problems, delivery difficulties and other factors that are
outside our control. To control this risk in part, we have fixed price purchase
commitments with terms of one year or less for some key food and supplies from
vendors who supply our national food distributor. In addition, we believe that
substantially all of our food and supplies are available from several sources,
which helps to control food commodity risks. We believe we have the ability to
increase menu prices, or vary the menu items offered, if needed, in response to
food product price increases within the range that has been experienced
historically. To compensate for a hypothetical price increase of 10% for food
and beverages, we would need to increase menu prices by an average of
approximately 3%. Our average menu price increases were approximately 2% for
fiscal 2003 and 2% for fiscal 2004. Accordingly, we believe that a hypothetical
10% increase in food product costs would not have a material effect on our
operating results.
29
CONTRACTUAL OBLIGATIONS
The following table provides aggregate information about our material
contractual payment obligations and the fiscal year in which these payments are
due:
PAYMENTS DUE BY FISCAL YEAR
2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---------- -----
(IN THOUSANDS)
Long-term debt(1)........... $ 2,300 $ 2,300 $ 2,300 $ 2,300 $ 551,065 $ 560,265
Operating leases(2)......... 53,913 52,713 50,482 48,346 327,601 533,055
Advisory fees(3)............ 3,504 3,379 3,266 3,266 -- 13,415
--------- --------- -------- -------- ----------- ----------
Total contractual
cash obligations....... $ 59,717 $ 58,392 $ 56,048 $ 53,912 $ 878,666 $1,106,735
========= ========= ======== ======== =========== ==========
- -------------
(1) Long-term debt payments for fiscal 2005 and beyond represent the required
debt payments on our credit facility, Buffets' 11 1/4% senior subordinated
notes and our 13 7/8% senior discount notes.
(2) Operating leases is comprised of minimum rents and contingent rents.
Operating leases have not been reduced by minimum sublease rentals of
approximately $24,902,000. See Note 10 to our consolidated financial
statements included elsewhere in this report for details of our operating
lease obligations.
(3) The advisory fees comprise our contractual obligation to pay annual advisory
fees to each of Roe H. Hatlen, Sentinel Capital Partners, L.L.C. and
Caxton-Iseman Capital. See "Certain Relationships and Related Transactions."
Under the terms of these agreements, Mr. Hatlen and Sentinel Capital are
each paid a fixed-price annual fee. The fee of Caxton-Iseman is calculated
as a percentage of our earnings before interest, taxes, depreciation and
amortization, which in fiscal 2004 resulted in a payment of $3.1 million.
This figure has been used as an estimate for our obligations under that
agreement for fiscal 2005 and each fiscal year thereafter. The agreements
with Caxton-Iseman and Sentinel Capital are of perpetual duration, and hence
no estimate of the aggregate amount of future obligations (represented in
the "Thereafter" column, above) is provided.
OTHER COMMERCIAL COMMITMENTS
The following table provides aggregate information about our commercial
commitments and the fiscal year in which they expire:
AMOUNT OF COMMITMENT EXPIRATION BY FISCAL YEAR
2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---------- -----
(IN THOUSANDS)
Letters of credit(1)............. $ 35,102 $ -- $ -- $ -- $ -- $ 35,102
Management loan guarantees(2).... -- -- -- -- 125 125
--------- ------ -------- ------- ---------- --------
Total commercial commitments
$ 35,102 $ -- $ -- $ -- $ 125 $ 35,227
========= ====== ======== ======= ========== ========
- -----------
(1) Our outstanding letters of credit expire at various times with final
expirations May 2005. As of June 30, 2004, the total borrowing availability
under the revolving credit facility was $30.0 million and the total
borrowing capacity under the letter of credit facilities was $14.9 million.
(2) The management loan guarantees comprise our guarantee on loans provided by
U.S. Bank to certain members of management. See "Certain Relationships and
Related Transactions."
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
PAGE
----
Report of Independent Registered Public Accounting Firm.................. 32
Consolidated Balance Sheets as of July 3, 2002, July 2, 2003 and
June 30, 2004............................................................ 33
Consolidated Statements of Operations for the Year Ended January 2, 2002,
for the Twenty-Six Week Transitional Period Ended July 3, 2002, for the
Year Ended July 2, 2003 and for the Year Ended June 30, 2004............. 34
Consolidated Statements of Shareholders' Equity (Deficit) for the Year
Ended January 2, 2002, for the Twenty-Six Week Transitional Period Ended
July 3, 2002, for the Year Ended July 2, 2003 and for the Year Ended
June 30, 2004........................................................... 35
Consolidated Statements of Cash Flows for the Year Ended January 2, 2002,
for the Twenty-Six Week Transitional Period Ended July 3, 2002, for the
Year Ended July 2, 2003 and for the Year Ended June 30, 2004............. 36
Notes to Consolidated Financial Statements............................... 38
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Buffets Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Buffets
Holdings, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
July 3, 2002, July 2, 2003 and June 30, 2004, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
year ended January 2, 2002, the twenty-six week transitional period ended July
3, 2002, the year ended July 2, 2003 and the year ended June 30, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Buffets Holdings, Inc. and
Subsidiaries as of July 3, 2002, July 2, 2003 and June 30, 2004, and the results
of their operations and their cash flows for the year ended January 2, 2002, the
twenty-six week transitional period ended July 3, 2002, the year ended July 2,
2003 and the year ended June 30, 2004 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
January 3, 2002, the Company changed its method of accounting for goodwill and
intangible assets.
/s/ Deloitte & Touche
Minneapolis, Minnesota
August 27, 2004
32
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 3, JULY 2, JUNE 30,
2002 2003 2004
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 8,362 $ 15,855 $ 26,072
Restricted cash and cash equivalents..................... -- -- 16,228
Receivables.............................................. 8,682 6,478 6,963
Inventories.............................................. 18,632 18,462 18,673
Prepaid expenses and other current assets................ 10,086 8,039 5,244
Assets held for sale..................................... -- 1,390 --
Deferred income taxes.................................... 19,000 15,216 15,915
------------ ----------- ----------
Total current assets.................................. 64,762 65,440 89,095
PROPERTY AND EQUIPMENT, net............................... 198,350 154,140 149,618
GOODWILL, net............................................. 312,163 312,163 312,163
ASSETS HELD FOR SALE...................................... 24,952 -- --
DEFERRED INCOME TAXES..................................... -- 2,932 1,033
OTHER ASSETS, net......................................... 15,445 18,311 15,622
------------ ----------- ----------
Total assets.......................................... $ 615,672 $ 552,986 $ 567,531
============ =========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable......................................... $ 37,419 $ 43,777 $ 43,280
Accrued liabilities (Note 4)............................. 92,454 78,508 68,663
Income taxes payable..................................... 2,900 4,787 4,531
Current maturities of long-term debt..................... 2,450 1,735 2,300
------------ ----------- ----------
Total current liabilities............................. 135,223 128,807 118,774
LONG-TERM DEBT, net of current maturities................. 491,531 419,387 496,039
DEFERRED INCOME TAXES..................................... 175 -- --
DEFERRED LEASE OBLIGATIONS................................ 18,829 19,713 21,621
OTHER LONG-TERM LIABILITIES............................... 4,525 7,889 7,013
------------ ----------- ----------
Total liabilities..................................... 650,283 575,796 643,447
------------ ----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' DEFICIT:
Preferred stock, $.01 par value; 1,100,000 shares
authorized; none issued and outstanding as of July
3, 2002, July 2, 2003 and June 30, 2004............. -- -- --
Common stock, $.01 par value; 3,600,000 shares
authorized; 3,228,610 shares issued and outstanding
as of July 3, 2002, 3,187,985 as of July 2, 2003
and 3,185,672 as of June 30, 2004................... 32 32 32
Accumulated deficit...................................... (34,643) (22,842) (75,948)
------------ ----------- ----------
Total shareholders' deficit........................... (34,611) (22,810) (75,916)
------------ ----------- ----------
Total liabilities and shareholders' deficit........... $ 615,672 $ 552,986 $ 567,531
============ =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
33
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
FOR THE TWENTY-SIX WEEK FOR THE FOR THE
YEAR TRANSITIONAL YEAR YEAR
ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, JULY 3, JULY 2, JUNE 30,
2002 2002 2003 2004
------------ ------------ ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................... $ 1,044,734 $ 527,084 $ 985,286 $ 942,831
RESTAURANT COSTS:
Food.......................................... 326,271 163,649 311,891 307,807
Labor......................................... 326,423 164,264 313,532 287,467
Direct and occupancy.......................... 233,375 117,004 225,417 217,388
------------ ------------ ------------ ------------
Total restaurant costs......................... 886,069 444,917 850,840 812,662
ADVERTISING EXPENSES........................... 27,640 14,349 28,589 25,854
GENERAL AND ADMINISTRATIVE EXPENSES............ 50,569 25,687 45,382 42,722
GOODWILL AMORTIZATION.......................... 10,942 -- -- --
IMPAIRMENT OF ASSETS........................... -- -- 4,803 1,878
GAIN ON SALE OF ORIGINAL ROADHOUSE GRILL
RESTAURANTS............................... -- -- (7,088) --
LOSS ON SALE LEASEBACK TRANSACTIONS............ -- -- 5,856 --
FINANCING-RELATED COMPENSATION EXPENSES........ -- -- -- 2,240
------------ ------------ ------------ ------------
OPERATING INCOME............................... 69,514 42,131 56,904 57,475
INTEREST EXPENSE............................... 43,405 15,088 41,235 39,609
INTEREST INCOME................................ (698) (212) (307) (424)
LOSS RELATED TO REFINANCING.................... -- 38,724 -- 4,776
LOSS RELATED TO EARLY EXTINGUISHMENT OF DEBT... -- -- -- 5,275
OTHER INCOME................................... (1,040) (598) (1,270) (1,379)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.............. 27,847 (10,871) 17,246 9,618
INCOME TAX EXPENSE (BENEFIT)................... 15,292 (3,354) 5,319 1,648
------------ ------------ ------------ ------------
Net income (loss).......................... $ 12,555 $ (7,517) $ 11,927 $ 7,970
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
34
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
------------------ ----------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ------ ------ ------- -------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 4, 2001....... 975,000 $ 10 3,250,000 $ 33 $ 135,371 $ 579 $ 135,993
Issuance of stock............. 1,550 -- 4,610 -- 200 -- 200
Purchase of treasury stock.... -- -- (8,125) -- (71) -- (71)
Net income.................... -- -- -- -- -- 12,555 12,555
------- --------- --------- --------- --------- --------- ---------
BALANCE, JANUARY 2, 2002....... 976,550 10 3,246,485 33 135,500 13,134 148,677
Purchase of treasury stock.... -- -- (17,875) (1) (290) -- (291)
Redemption of preferred stock. (976,550) (10) -- -- (97,644) (10,573) (108,227)
Redemption of preferred stock
warrants................. -- -- -- -- (5,414) (1,786) (7,200)
Dividends..................... -- -- -- -- (32,152) (27,901) (60,053)
Net loss...................... -- -- -- -- -- (7,517) (7,517)
------- --------- --------- --------- --------- --------- ---------
BALANCE, JULY 3, 2002.......... -- -- 3,228,610 32 -- (34,643) (34,611)
Issuance of stock............. -- -- 14,625 -- 450 -- 450
Purchase of treasury stock.... -- -- (55,250) -- (450) (126) (576)
Net income.................... -- -- -- -- -- 11,927 11,927
------- --------- --------- --------- --------- --------- ---------
BALANCE, JULY 2, 2003.......... -- -- 3,187,985 32 -- (22,842) (22,810)
Issuance of stock............. -- -- 21,250 -- 241 -- 241
Purchase of treasury stock.... -- -- (23,563) -- (209) (171) (380)
Dividends..................... -- -- -- -- (32) (60,905) (60,937)
Net income.................... -- -- -- -- -- 7,970 7,970
------- --------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 2004......... -- $ -- 3,185,672 $ 32 $ -- $ (75,948) $ (75,916)
======= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
35
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
FOR THE TWENTY-SIX WEEK FOR THE FOR THE
YEAR TRANSITIONAL YEAR YEAR
ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, JULY 3, JULY 2, JUNE 30,
2002 2002 2003 2004
---- ---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 12,555 $ (7,517) $ 11,927 $ 7,970
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 53,404 20,409 36,885 33,807
Amortization of debt issuance costs................... 3,905 1,617 1,182 1,370
Net loss related to refinancing:
Write-off of debt issuance costs................... -- 11,022 -- 4,201
Accrued redemption fees............................ -- 17,000 -- --
Original issue discount expensed................... -- 4,107 -- --
Accretion of original issue discount.................. 773 357 739 2,049
Loss related to early extinguishment of debt.......... -- -- -- 5,275
Deferred interest..................................... 1,269 614 -- --
Impairment of assets.................................. -- -- 4,803 1,878
Asset write-downs..................................... 491 -- -- --
Deferred income taxes................................. 21 (2,798) 677 1,200
Gain on sale of Original Roadhouse Grill restaurants.. -- -- (7,088) --
Loss on disposal of assets............................ 361 89 565 305
Loss on sale leaseback transactions................... -- -- 5,856 --
Changes in assets and liabilities:
Receivables........................................ (1,069) (982) 2,346 (235)
Inventories........................................ 690 (193) 170 (674)
Prepaid expenses and other assets.................. (1,571) (1,557) 2,047 2,795
Accounts payable................................... (7,939) 6,399 8,350 (497)
Accrued and other liabilities...................... 2,837 (7,190) (12,690) (8,698)
Income taxes payable/refundable.................... 3,108 (2,127) 1,887 (256)
------- ------- ------- -------
Net cash provided by operating activities........ 68,835 39,250 57,656 50,490
------- ------- ------- -------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transactions................ 39,075 2,281 26,117 2,710
Proceeds from sale of Original Roadhouse Grill
restaurants......................................... -- -- 25,850 --
Purchase of fixed assets................................. (38,096) (14,280) (25,722) (33,007)
Acquisition of 20% minority interest in Tahoe Joe's Inc.. -- -- -- (370)
Proceeds from sale of other assets....................... 1,596 662 417 2,284
------- ------- ------- -------
Net cash provided (used in) investing activities...... 2,575 (11,337) 26,662 (28,383)
------- ------- ------- -------
36
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE
FOR THE TWENTY-SIX WEEK FOR THE FOR THE
YEAR TRANSITIONAL YEAR YEAR
ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, JULY 3, JULY 2, JUNE 30,
2002 2002 2003 2004
---- ---- ---- ----
(IN THOUSANDS)
FINANCING ACTIVITIES:
Repayment of debt......................................... $ (53,896) $ (353,298) $ (73,198) $ (172,953)
Redemption of subordinated notes.......................... -- -- (400) (27,364)
Redemption of preferred stock warrants.................... -- (7,200) -- --
Redemption of preferred stock............................. -- (108,227) -- --
Repurchase of common stock................................ (71) (291) (576) (380)
Proceeds from issuance of common stock.................... 200 -- 450 241
Repayment of revolving credit facility.................... (5,000) -- -- --
Proceeds from issuance of subordinated notes.............. -- 221,217 -- --
Proceeds from issuance of senior discount notes........... -- -- -- 75,073
Unrestricted cash proceeds from credit facility........... -- 245,000 -- 195,300
Initial restricted cash proceeds from credit facility..... -- -- -- 34,700
Restricted cash proceeds from credit facility available
as of year end....................................... -- -- -- (16,228)
Use of restricted cash for early extinguishment of debt... -- -- -- (18,472)
Use of unrestricted cash for early extinguishment of debt. -- -- -- (15,300)
Dividends................................................. -- (32,289) -- (60,937)
Debt issuance costs....................................... (823) (12,076) (3,101) (5,570)
------------ ------------ ------------ ------------
Net cash used in financing activities..................... (59,590) (47,164) (76,825) (11,890)
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................... 11,820 (19,251) 7,493 10,217
CASH AND CASH EQUIVALENTS, beginning of period............. 15,793 27,613 8,362 15,855
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period................... $ 27,613 $ 8,362 $ 15,855 $ 26,072
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized interest of $369, $158,
$288 and $280, respectively)....................... $ 35,546 $ 16,526 $ 26,956 $ 37,286
============ ============ ============ ============
Income taxes........................................... $ 11,725 $ 1,587 $ 3,351 $ 700
============ ============ ============ ============
Non-cash investing activities during the period for
Note receivable on sale of Original Roadhouse Grill
restaurants........................................ $ -- $ -- $ 2,500 $ --
============ ============ ============ ============
Non-cash financing activities during the period for-
Issuance of subordinated notes to stockholders in lieu
of cash payment.................................... $ -- $ 27,764 $ -- $ --
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
37
BUFFETS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 NATURE OF ORGANIZATION
COMPANY BACKGROUND
Buffets Holdings, Inc. and Subsidiaries (Buffets Holdings), a Delaware
corporation, was formed to acquire 100 percent of the common stock of Buffets,
Inc. and its subsidiaries in a buyout from public shareholders on October 2,
2000 (the Acquisition). Buffets Holdings, Inc. and Buffets, Inc. are
collectively referred to as the Company.
In December 2002, Buffets, Inc. filed a registration statement with the
Securities and Exchange Commission (SEC) to effect the exchange of $230.0
million of outstanding 11 1/4% senior subordinated notes which were issued in
June 2002 for registered 11 1/4% senior subordinated notes due 2010.
On February 20, 2004, Buffets, Inc. entered into an amended and restated senior
credit facility (the Credit Facility) to refinance its existing debt and to make
a distribution to Buffets Holdings. Buffets, Inc. used $230.0 million in
proceeds from term loan borrowings under the amended Credit Facility to
refinance $166.8 million in outstanding term loan indebtedness under the
predecessor Credit Facility, establish a $34.7 million restricted cash
collateral account to repurchase outstanding 11 1/4% senior subordinated notes,
make a $19.7 million distribution to Buffets Holdings, pay $2.7 million in
transaction fees related to the refinancing transaction, pay $1.1 million in
accrued term loan interest and use $5.0 million for general corporate purposes.
The amended Credit Facility allows Buffets, Inc. to use up to $50.0 million in
cash, comprised of the restricted cash collateral proceeds and unrestricted cash
on hand, toward the repurchase of its outstanding 11 1/4% senior subordinated
notes. Any unused portion of the restricted cash collateral account must be
applied within 180 days to repay indebtedness under the term loan portion of the
amended Credit Facility. As of June 30, 2004, Buffets, Inc. had expended $33.8
million to redeem $29.6 million of senior subordinated notes at an average price
of 110.4% and had $16.2 million of restricted cash and cash equivalents for
further repurchases. The Company recorded a $4.2 million write-off of debt
issuance cost associated with the amendment of the Credit Facility and $0.6
million of transaction fees associated with an uncompleted bond offering as a
loss related to refinancing. The Company also recognized a $5.3 million loss
related to the early extinguishment of debt. Buffets, Inc. completed its bond
repurchase program in August 2004, expending an additional $15.7 million to
redeem $14.3 million of senior subordinated notes at an average price of 106.7%
during fiscal 2005. The remaining $0.5 million was paid on the amended Credit
Facility in August 2004.
On May 18, 2004, Buffets Holdings issued 13 7/8% senior discount notes due
2010 in a Rule 144A offering with a stated aggregate principal amount at
maturity (including accreted amounts) of $132.0 million. Buffets Holdings used
the $75.1 million in gross proceeds from the offering and $0.1 million of cash
on hand to redeem its series B junior subordinated notes due 2011 plus accrued
and unpaid interest ($9.2 million), make a distribution to its stockholders
($60.9 million) and pay transaction fees and expenses related to the offering
($5.1 million). As part of the transaction fees and expenses related to the
offering, the Company recognized approximately $2.2 million of bonus payments to
certain restaurant and corporate employees as financing-related compensation
expenses. In July 2004, Buffets Holdings filed a registration statement with the
SEC to effect the exchange of
38
its outstanding 13 7/8% senior discount notes for registered 13 7/8% senior
discount notes due 2010.
DESCRIPTION OF BUSINESS
The Company owns and operates a chain of restaurants under the names of Old
Country Buffet, Country Buffet, HomeTown Buffet, Granny's Buffet, Country
Roadhouse Buffet & Grill, Tahoe Joe's Famous Steakhouse and Soup `N Salad
Unlimited in the United States. Until June 2003, the Company also operated 13
Original Roadhouse Grill restaurants. The Company, operating principally in the
mid-scale family dining industry segment, owned and operated 360 restaurants
(352 family buffet restaurants) and franchised 20 restaurants operating as of
June 30, 2004.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
FISCAL YEAR
Beginning July 3, 2002, the Company changed its fiscal year so that it ends
on the Wednesday nearest June 30 of each year. The Company's new fiscal year is
comprised of 52 or 53 weeks divided into four fiscal quarters of 12, 12, 16, and
12 or 13 weeks, respectively. Prior to July 3, 2002, its fiscal year ended on
the Wednesday nearest December 31 of each year and was comprised of 52 or 53
weeks divided into four fiscal quarters of 16, 12, 12, and 12 or 13 weeks,
respectively. All references herein to "2004" represent the 52-week period ended
June 30, 2004. All references herein to "2003" represent the 52-week period
ended July 3, 2003. All references herein to "2002" represent the 26-week period
ended July 3, 2002. All references herein to "2001" represent the 52-week period
ended January 2, 2002.
RECLASSIFICATIONS
Certain amounts shown in the prior-period consolidated financial statements
have been reclassified to conform with the current period consolidated financial
statement presentation. These reclassifications had no effect on net income
(loss) or shareholder's equity (deficit) as previously presented.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are considered
to be cash equivalents and are recorded at cost, which approximates market
value. Cash equivalents consist principally of commercial paper and money market
funds.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of money market funds. These
funds are restricted for the repurchase of Buffets, Inc.'s outstanding 11 1/4%
senior subordinated notes. Any unused portion of the restricted funds must be
applied to repay indebtedness under the term loan portion of
39
the Credit Facility by August 18, 2004.
RECEIVABLES
Receivables primarily consist of credit card receivables, landlord
receivables and vendor rebates. Landlord receivables represent the portion of
costs for leasehold improvements remaining to be reimbursed by landlords at
year-end. Vendor rebates result from discounts on purchases negotiated with the
vendors. Rebates are recorded as a reduction to food costs in the statement of
operations as the associated food cost is recognized.
INVENTORIES
Inventories, consisting primarily of food, beverage, china and smallwares
for each restaurant location, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method for food and beverage inventories.
China and smallwares are stated at their original cost and subsequent additions
and replacements are expensed as purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax reporting purposes. Equipment is depreciated over
estimated useful lives, ranging from 3 to 10 years. Leasehold improvements are
amortized over the terms of the related leases, generally 10 to 15 years.
Buildings are depreciated over estimated useful lives, generally 39 1/2 years.
Maintenance and repairs are charged to expense as incurred. Major
improvements, which extend the useful life of an item, are capitalized and
depreciated. The cost and accumulated depreciation of property and equipment
retired or otherwise disposed of are removed from the related accounts, and any
residual values are charged or credited to income.
Property and equipment was as follows (in thousands):
JULY 3, JULY 2, JUNE 30,
2002 2003 2004
---- ---- ----
Land...................................... $ 1,662 $ 1,669 $ 1,137
Buildings................................. 174 2,696 2,999
Equipment................................. 111,611 117,928 130,938
Leasehold improvements.................... 148,210 121,140 134,215
Less- Accumulated depreciation and 63,307 89,293 119,671
amortization.......................... ---------- ---------- ---------
$ 198,350 $ 154,140 $ 149,618
========== ========== =========
The Company sold 23 restaurant locations in 2001, one location in 2002, 30
locations in 2003 and one location in 2004. The Company leased the restaurants
back applying provisions of Statement of Financial Accounting Standards (SFAS)
No. 98, "Accounting for Leases." Net proceeds from the transactions were
approximately $39.1 million in 2001, $2.3 million in 2002, $26.1 million in 2003
and $2.7 million in 2004. The aggregate initial annual rent associated with the
sale and leaseback transactions was $3.2 million in 2001, $0.2 million in 2002,
$3.7 million in 2003 and $0.3 million in 2004. The Company did not recognize a
gain or loss on these transactions in 2001, 2002 or 2004,
40
but recorded a loss of $5.9 million in 2003. The losses primarily reflected the
impairment of certain of the properties for which the net proceeds were less
than the book value of the leasehold assets. In addition, the net proceeds for
certain of the properties were greater than the book value of the leasehold
assets resulting in a deferred gain of $3.6 million in 2003 and $0.3 million in
2004. These deferred gains are being accreted over the lives of the respective
restaurant leases, ranging from 17 to 25 years. The Company does not have any
continuing involvement with these sale and leaseback locations. These leases are
accounted for as operating leases.
GOODWILL
Goodwill, a result of the Acquisition, represents the excess of cost over
net assets acquired. Goodwill was amortized on a straight-line basis over 15 to
30 years until the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," on January 3, 2002. Accumulated amortization for goodwill was $13.5
million as of July 3, 2002. Since the adoption of SFAS No. 142, goodwill is no
longer amortized, but is tested at least annually for impairment. There were no
goodwill impairment charges for any of the periods presented.
The following table shows net income (loss) adjusted to reflect the adoption
of SFAS No. 142 as of the beginning of the respective periods (in thousands):
FOR THE 26-WEEK
FOR THE YEAR TRANSITIONAL FOR THE YEAR FOR THE YEAR
ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, 2002 JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
--------------- -------------- -------------- --------------
Reported net income (loss)...... $ 12,555 $ (7,517) $ 11,927 $ 7,970
Add: goodwill amortization...... 10,942 -- -- --
Add: liquor license amortization 23 -- -- --
-------------- -------------- -------------- --------------
Adjusted net income (loss)...... $ 23,520 $ (7,517) $ 11,927 $ 7,970
============== ============== ============== ==============
ASSETS HELD FOR SALE
Assets held for sale included net assets such as land, buildings and
equipment that were in the process of being sold and were recorded at the lower
of carrying value or fair market value less costs to sell based upon valuation
estimates from brokers and negotiations with prospective purchasers, as follows
(dollars in thousands):
CARRYING AMOUNTS AS OF
DESCRIPTION OF ASSETS FACTS AND CIRCUMSTANCES LEADING JULY 3, JULY 2, JUNE 30,
TO BE DISPOSED TO EXPECTED DISPOSAL 2002 2003 2004
-------------- -------------------- ---- ---- ----
Undeveloped properties Decision not to develop; sold two properties
in 2003; sold one property in 2004 $ 1,843 $ 698 $ --
Non-restaurant property Decision to reduce fixed overhead; changed
decision in 2003 due to increased utilization 929 -- --
Restaurant in Texas Decision to sell underperforming restaurant;
sold in 2004 692 692 --
Original Roadhouse Grill Decision to sell brand to reduce debt burden;
restaurants sold in 2003 21,488 -- --
---------- ---------- --------
$ 24,952 $ 1,390 $ --
========== ========== ========
41
The expected disposal dates of the assets to be disposed were uncertain
prior to 2003, thereby resulting in their non-current classification for those
periods.
During 2003, the Company recorded an adjustment to direct and occupancy
costs to reduce the carrying amount of the non-restaurant property by
approximately $0.1 million upon the decision to retain the facility. The
restaurants held for sale had revenues of approximately $38.6 million and
operating income of approximately $3.2 million for 2003. The sale of the
Original Roadhouse Grill restaurants in June 2003 resulted in a gain of
approximately $7.1 million, which has been presented as a separate line item in
the accompanying consolidated statements of operations.
During 2004, the Company sold one undeveloped property and recognized a loss
of approximately $0.1 million in direct and occupancy costs in the consolidated
statements of operations. In addition, the Company sold one restaurant and
recorded a gain of approximately $0.6 million in direct and occupancy costs. The
restaurant held for sale had no revenues or operating profit for 2004.
OTHER ASSETS
Other assets consist principally of debt issuance costs, notes receivable
and other intangibles net of accumulated amortization of $0.1 million, $1.3
million and $1.1 million as of July 3, 2002, July 2, 2003, and June 30, 2004,
respectively. Debt issuance costs are the capitalized costs incurred in
conjunction with amending the Credit Facility and issuing senior subordinated,
and senior discount, notes. The debt issuance costs are being amortized over the
terms of the financing arrangements using the effective interest method. Other
intangibles include trademarks, franchise fees and liquor licenses. Trademarks
and franchise fees are being amortized on a straight-line basis over 10 years.
Liquor licenses are not amortized, as they have indefinite lives. Notes
receivable principally arose from the sale of certain restaurant facilities.
Long-term and short-term notes receivable collectively totaled $0.8 million as
of July 3, 2002, $3.4 million as of July 2, 2003 and $2.7 million as of June 30,
2004. The notes receivable had due dates between 2006 and 2008.
The gross carrying amount and accumulated amortization of each major
intangible asset class was as follows (in thousands):
FRANCHISE FEES TRADEMARKS LIQUOR LICENSES TOTAL
----------------------- ----------------------- ---------------------- ----------------------
GROSS GROSS GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------ ------ ------------ ------ ------------
BALANCE, July 3, 2002...... $ 69 $ (30) $ 34 $ (14) $ 457 $ (25) $ 560 $ (69)
FY 2003 Activity:
Amortization.............. -- (14) -- (7) -- -- -- (21)
Reductions................ -- -- -- -- (140) -- (140) --
------- ------- ------- ------- ------- -------- ------- -------
BALANCE, July 2, 2003...... 69 (44) 34 (21) 317 (25) 420 (90)
FY 2004 Activity:
Amortization.............. -- (12) -- (8) -- -- -- (20)
Additions................. -- -- -- -- 28 -- 28 --
------- ------- ------- ------- ------- -------- ------- -------
BALANCE, June 30, 2004..... $ 69 $ (56) $ 34 $ (29) $ 345 $ (25) $ 448 $ (110)
======= ======= ======== ======= ======== ======== ======= =======
The estimated amortization expense for next year is approximately $20,000
after which franchise fees and trademarks are expected to be fully amortized.
42
RECOVERABILITY OF LONG-LIVED ASSETS
The Company periodically evaluates long-lived assets and goodwill related to
those assets for impairment whenever events or changes in circumstances indicate
the carrying value amount of an asset or group of assets may not be recoverable.
The Company considers a history of operating losses and the other factors
described to be its primary indicator of potential impairment. Assets are
grouped and evaluated for impairment at the lowest level for which there are
identifiable cash flows, namely individual restaurants. A restaurant is deemed
to be impaired if a forecast of undiscounted future operating cash flows
directly related to the restaurant, including disposal value, if any, are less
than its carrying amount. If a restaurant is determined to be impaired, the loss
is measured as the amount by which the carrying amount of the restaurant exceeds
its fair value. Fair value is based on quoted market prices in active markets,
if available. If quoted market prices are not available, an estimate of fair
value is based on the best information available, including prices for similar
assets or the results of valuation techniques such as discounted estimated
future cash flows as if the decision to continue to use the impaired restaurant
was a new investment decision. The Company generally measures fair value by
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates. There were no impairment charges
in 2001. During 2002, the Company expensed approximately $1.1 million relating
to the impairment of assets associated with 12 restaurants (see Note 4). During
2003, the Company expensed approximately $4.8 million relating to the impairment
of long-lived assets for 27 restaurants, as well as an additional $0.8 million
related to the impairment of assets associated with 12 restaurants (see Note 4).
During 2004, the Company expensed approximately $1.9 million relating to the
impairment of long-lived assets for 17 restaurants.
PRE-OPENING COSTS
Costs incurred in connection with the opening of new restaurants are
expensed as incurred in accordance with Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." SOP 98-5 requires companies to
expense as incurred all start-up and pre-opening costs that are not otherwise
capitalized as long-lived assets.
ADVERTISING EXPENSES
Advertising costs are charged to expense as incurred.
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the deferred tax provision is determined under the liability method.
Under this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
JOINT VENTURES
During fiscal 2004, the Company paid $370,000 to purchase the remaining 20%
minority interest from its lone consolidated joint venture, Tahoe Joe's Inc.,
which owned and operated Tahoe Joe's Famous Steakhouses.
43
REVENUE RECOGNITION
The Company's restaurant sales include proceeds from the sale of food and
beverages at Company-owned restaurants.
The Company recognizes franchise income for royalty fees and initial
franchise fees received from franchisees. Initial fees are recognized as income
when required obligations under the terms of the franchise agreement are
fulfilled. Royalty fees are based on gross sales and are recognized in income as
sales are generated. Franchise income was $1.3 million for 2001, $0.7 million
for 2002, $1.2 million for 2003 and $1.0 million for 2004. Franchise income is
included in other income in the accompanying consolidated statements of
operations.
The Company sells gift cards at its restaurants. Revenues are recognized
upon the redemption of the gift cards. Unearned revenue represents gift cards
sold and not yet redeemed and is included in accrued liabilities in the
accompanying consolidated balance sheets.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
receivables, notes receivable, accounts payable and long-term debt for which
current carrying amounts are equal to or approximate fair market values. The
following methods were used in estimating the fair value of each class of
financial instrument:
For cash equivalents, receivables and accounts payable, the carrying amounts
approximate fair value because of the short duration of these financial
instruments. The fair value of notes receivable is estimated based on the
present value of expected future cash flows discounted at the interest rate
currently offered by the Company, which approximates rates currently being
offered by local lending institutions for loans of similar terms to companies of
comparable credit risk. The fair value of long-term debt is estimated by
discounting future cash flows for these instruments using the Company's expected
borrowing rate for debt of comparable risk and maturity.
SEGMENT REPORTING
The Company operates principally in the mid-scale family dining industry
segment in the United States, providing similar products to similar customers.
The Company's restaurants possess similar economic characteristics resulting in
similar long-term expected financial performance characteristics. Revenues are
derived principally from food and beverage sales. The Company does not rely on
any major customers as a source of revenue. Management believes that the Company
meets the criteria for aggregating its operations into a single reporting
segment.
44
STOCK-BASED COMPENSATION
The Company accounts for activity under its stock-based employee
compensation plans under the recognition and measurement principles of APB
(Accounting Principles Board) Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the Company does not recognize compensation expense in
connection with employee stock option grants because stock options are granted
at exercise prices not less than the fair value of the common stock on the date
of grant.
The following table shows the effect on net income (loss) had the Company
applied the fair value expense recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
(in thousands):
FOR THE
26-WEEK
FOR THE YEAR TRANSITIONAL FOR THE YEAR FOR THE YEAR
ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, 2002 JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
--------------- ------------ ------------ -------------
Net income (loss) as reported................ $ 12,555 $ (7,517) $ 11,927 $ 7,970
Compensation expense recorded in the
financial statements, net of tax effect. -- -- -- --
Pro forma compensation expense under the
provisions of SFAS No. 123, net of tax
effect.................................. (87) (38) (5) (9)
-------------- ----------- ----------- ------------
Pro forma.................................... $ 12,468 $ (7,555) $ 11,922 $ 7,961
-------------- ----------- ----------- ------------
Weighted-average fair value per share of
options granted......................... $ 2.64 $ 5.75 $ 0.81 $ 0.32
============== =========== =========== ============
Information on the Company's stock-based compensation plans and data used to
calculate compensation expense in the table above are described in more detail
in Note 6.
3 RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (variable interest entities, or VIEs) and
how to determine when and which business enterprise should consolidate the VIE
(the primary beneficiary). In December 2003, the FASB issued FIN 46 (R),
"Consolidation of Variable Interest Entities," which represents a revision to
FIN 46. The provisions of FIN 46 (R) are effective for interests in VIEs as of
the first interim, or annual, period ending after March 15, 2004. In addition,
FIN 46 (R) requires that both the primary beneficiary and all other enterprises
with a significant variable interest make additional disclosure in filings
issued after January 31, 2003. The Company adopted FIN 46 (R) as of December 17,
2003 and its adoption had no impact on the Company's consolidated results of
operations, financial position or cash flow.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
modifies the accounting for
45
certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS No. 150 requires that those instruments be
classified as liabilities in statements of financial position. Most of the
guidance in SFAS No. 150 is effective for all financial instruments entered into
or modified after May 31, 2003, or otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted SFAS
No. 150 as of July 3, 2003 and its adoption had no impact on the Company's
consolidated results of operations, financial position or cash flow.
4 ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
JULY 3, JULY 2, JUNE 30,
2002 2003 2004
------- ------- -------
Accrued compensation...................................... $21,764 $20,599 $16,686
Redemption fee payable.................................... 17,000 -- --
Accrued workers' compensation............................. 13,468 16,894 16,916
Accrued interest.......................................... 564 13,152 10,282
Accrued insurance......................................... 10,203 8,513 7,771
Accrued store closing costs............................... 7,091 2,782 1,442
Unearned revenue.......................................... 5,306 4,521 4,378
Accrued sales taxes....................................... 4,454 3,921 3,315
Accrued other............................................. 12,604 8,126 7,873
------- ------- -------
$92,454 $78,508 $68,663
======= ======= =======
Virtually all the store closing activity recorded in the store closing cost
accrual as of June 30, 2004 relates to store closings identified and recognized
prior to December 31, 2002. The Company provided for these store closing costs,
specifically identified and approved for closure in the succeeding year, in
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," and EITF 95-3, "Recognition of Liabilities
in Connection with a Purchase Business Combination." Store closing costs
incurred subsequent to December 31, 2002 have been provided in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities."
The store closing costs are principally comprised of lease termination costs
and obligations, net of sublease and other cash receipts and employee
termination benefits as summarized below (in thousands):
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
------------ ------------ -------------
Lease termination costs and obligations, net of
sublease and other cash receipts................ $ 6,926 $ 2,782 $ 1,442
Employee termination benefits........................ 165 -- --
------------ ----------- ------------
Total accrued store closing costs.................... $ 7,091 $ 2,782 $ 1,442
============ =========== ============
46
The following table summarizes store closing reserve activity by type of
cost for the past three fiscal years (in thousands):
FOR THE
TWENTY-SIX WEEK
TRANSITIONAL FOR THE YEAR FOR THE YEAR
PERIOD ENDED ENDED JULY 2, ENDED JUNE 30,
JULY 3, 2002 2003 2004
------------ ---- ----
BALANCE, beginning of period.............................. $ 9,378 $7,091 $2,782
Additions:
Lease obligations charged to earnings (as direct and
occupancy costs).................................. 450 167 467
Employee termination benefits charged to earnings (as
direct and occupancy costs)....................... 112 83 16
Reductions:
Cash payments:
Lease termination costs and obligations............ 1,630 3,471 1,807
Employee severance benefits........................ 127 248 16
Change in lease obligation accrual assumptions........ 1,092 840 --
------------- ------ ------
BALANCE, end of period.................................... $ 7,091 $2,782 $1,442
============= ====== ======
The change in accrual assumptions is based on the Company receiving greater
than planned sublease and other cash receipts during 2002 and 2003. The expense
recovery was included in the same line item in the statement of operations as
the Company's impairment of underperforming restaurant properties.
The following table summarizes planned and actual store closing activity for
the past three fiscal years:
FOR THE
TWENTY-SIX
WEEK
TRANSITIONAL FOR THE YEAR FOR THE YEAR
PERIOD ENDED YEAR ENDED ENDED
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
------------ ------------ -------------
Number of stores:
Expected to close as of the beginning of the period... 12 13 3
Closed during the period........................... 9 14 15
Identified for closure during the period........... 10 4 19
------------ ------------ -------------
Expected to close as of the end of the period......... 13 3 7
============ ============ =============
Number of employees:
Expected to be terminated as of the beginning of the
period........................................... 420 455 105
Terminated during the period.......................... 310 490 455
Identified for termination during the period.......... 350 140 595
Expected to be terminated as of the end of the period. 455 105 245
47
The remaining store closing reserves are expected to be paid, or incurred,
by year as follows (in thousands):
2005...................... $ 378
2006...................... 293
2007...................... 229
2008...................... 229
2009...................... 195
Thereafter................ 118
------------
$ 1,442
============
5 LONG-TERM DEBT
Long-term debt outstanding was as follows (in thousands):
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
BUFFETS, INC. ------------ ------------ -------------
-------------
Credit Facility:
Revolving credit facility................................ $ -- $ -- $ --
Term loan, interest at LIBOR plus 3.50%, due Quarterly
through June 28, 2009 (interest rate at 4.7% as of
June 30, 2004)...................................... 245,000 171,802 228,850
----------- ----------- ------------
Total Credit Facility............................. 245,000 171,802 228,850
Senior subordinated notes, interest at 11.25%, due
July 15, 2010, net of discount of $8,783 at
July 3, 2002, $8,044 at July 2, 2003 and
$6,226 at June 30, 2004............................. 221,217 221,956 193,189
----------- ----------- ------------
Total long-term debt at Buffets, Inc. ............ 466,217 393,758 422,039
BUFFETS HOLDINGS, INC.
----------------------
Series A senior subordinated notes, interest at 3%
through December 31, 2002 and 4.75% thereafter, due
June 25, 2011....................................... 7,764 7,764 --
Series B junior subordinated notes, interest at 3%
through December 31, 2002 and 4.75% thereafter, due
June 25, 2011....................................... 20,000 19,600 --
Senior discount notes, interest at 13.875%, due December
15, 2010, net of discount of $55,700................ -- -- 76,300
----------- ----------- ------------
Grand total long-term debt........................ 493,981 421,122 498,339
Less -- Current maturities................................ 2,450 1,735 2,300
----------- ----------- ------------
$ 491,531 $ 419,387 $ 496,039
=========== =========== ============
As of June 30, 2004, future maturities of long-term debt by year were as
follows (in thousands):
2005................... $ 2,300
2006................... 2,300
2007................... 2,300
2008................... 2,300
2009................... 219,650
Thereafter............. 331,415
----------
$ 560,265
==========
48
CREDIT FACILITY
On February 20, 2004, Buffets, Inc. amended and restated its Credit
Facility. The amended and restated Credit Facility provides for total borrowings
of up to $310,000,000, including (i) a $230,000,000 term loan, (ii) a
$30,000,000 revolving credit facility, (iii) a $20,000,000 letter of credit
facility, and (iv) a $30,000,000 synthetic letter of credit facility. The terms
of the Credit Facility permit Buffets, Inc. to borrow, subject to availability
and certain conditions, incremental term loans or to issue additional notes in
an aggregate amount up to $25,000,000. The borrowings under the term loan
facility bear interest, at Buffets, Inc.'s option, at either adjusted LIBOR plus
3.50% or at an alternate base rate plus 2.50%, subject to a leverage-based
pricing grid. The term loan and the synthetic letter of credit facility mature
on June 28, 2009, while the revolving facility and the letter of credit
facilities mature on June 28, 2007. The borrowings due under the term loan are
payable in equal quarterly installments in an annual amount equal to 1% of the
term loan during each of the first four and a half years of the loan, with the
remaining balance payable due in equal quarterly installments during the last
year of the loan. The Credit Facility is fully and unconditionally guaranteed by
Buffets Holdings, which has no independent assets or operations, and is secured
by substantially all of the Company's assets. Availability under the Credit
Facility depends upon our continued compliance with certain covenants and
financial ratios including leverage, interest coverage and fixed charge coverage
as specifically defined in the Credit Facility. Buffets, Inc. was in compliance
with all financial ratio covenants of the Credit Facility as of June 30, 2004.
The financial ratio covenant requirements increase over time, however, as set
forth in the senior credit agreement.
As of June 30, 2004, Buffets, Inc. had $35.1 million in outstanding letters
of credit, which expire through May 2, 2005. As of June 30, 2004, the total
borrowing availability under the revolving credit facility was $30.0 million and
the total borrowing capacity under the letter of credit facilities was $14.9
million.
Buffets, Inc. has the option of tying its borrowings to LIBOR or a base rate
when calculating the interest rate for the term loan. The base rate is the
greater of Credit Suisse First Boston's prime rate, or the federal funds
effective rate plus one-half of 1 percent.
11 1/4% SENIOR SUBORDINATED NOTES
On June 28, 2002, Buffets, Inc. issued 11 1/4% senior subordinated notes in
the principal amount of $230 million due July 15, 2010. Such notes were issued
at a 96.181% discount, resulting in an effective yield of 12% to the initial
principal amount. Interest is payable semi-annually on January 15 and July 15 of
each year through July 15, 2010. Accretion of the original issue discount was
approximately $10,000 during 2002, $0.7 million during 2003 and $0.8 million
during 2004 and is included in interest expense in the accompanying consolidated
statements of operations. Except in the event of an initial public offering,
Buffets, Inc. is not entitled to redeem the notes at its option prior to July
15, 2006. The redemption price during the first twelve-month period following
July 15, 2006 is 105.625%. The redemption price declines by 1.875% per year
until July 15, 2009, at which point there is no redemption price premium. In the
event of an initial public offering prior to July 15, 2006, Buffets, Inc. may
redeem up to 35% of the aggregate principal amount of the notes at a redemption
price of 111.25%. Furthermore, in the event of a change in control, as defined
in the indenture governing those notes, the holders of the notes may require the
Company to repurchase the notes at a purchase price of 101% of the outstanding
principal amount plus accrued and unpaid
49
interest.
SERIES A SENIOR SUBORDINATED NOTES
On June 28, 2002, Buffets Holdings issued Series A senior subordinated
notes, due June 25, 2011, in the principal amount of $7,764,219 to holders of
the Company's senior preferred stock to make a partial redemption of the
Company's senior preferred stock. Buffets Holdings repurchased all outstanding
notes in February 2004.
SERIES B JUNIOR SUBORDINATED NOTES
On June 28, 2002, Buffets Holdings issued Series B junior subordinated
notes, due June 25, 2011, in the principal amount of $20,000,000 as a dividend
to holders of the Company's common stock and holders of its warrants to purchase
common stock. Buffets Holdings repurchased $0.4 million of these notes in
January 2003, $10.5 million in February 2004 and the remaining $8.7 million in
May 2004.
13 7/8% SENIOR DISCOUNT NOTES
On May 18, 2004, we issued $132 million aggregate principal amount at
maturity of our 13 7/8% senior discount notes due December 15, 2010. The 13 7/8%
senior discount notes were issued at a discount to their aggregate principal
amount at maturity. Prior to July 31, 2008, interest will accrue on the 13 7/8%
senior discount notes in the form of an increase in the accreted value of those
notes. The accreted value of each note will increase until July 31, 2008 at a
rate of 13.875% per annum. After this date, cash interest on the notes will
accrue and be payable on January 31 and July 31 of each year at a rate of
13.875% per annum. Accretion of the discount was approximately $1.2 million
during 2004 and is included in interest expense in the accompanying consolidated
statements of operations. If we fail to meet certain leverage ratio tests on or
about July 31, 2006 or July 31, 2008, additional interest will accrue on the
notes from that date at a rate of 1% per annum, up to a maximum of 2% per annum.
6 SHAREHOLDER'S EQUITY (DEFICIT)
AUTHORIZED SHARES
The Company has 3,600,000 authorized shares of common stock and 1,100,000
authorized shares of preferred stock.
STOCK WARRANTS
On October 2, 2000, Buffets Holdings issued $80 million principal amount of
14% senior subordinated notes due September 29, 2008, with detachable warrants
to purchase 173,218 shares of Buffets Holdings' common stock and 51,965 shares
of Buffets Holdings' preferred stock. Contemporaneously, Buffets Holdings issued
$15 million principal amount of 16% senior subordinated notes due September 29,
2008, with detachable warrants to purchase 32,478 shares of common stock and
9,744 shares of preferred stock. Such warrants were valued collectively at $5.4
million. On June 28, 2002, all preferred stock warrants were redeemed in
conjunction with the refinancing transactions, leaving 205,696 common stock
warrants outstanding. The common stock
50
warrants have an exercise price of $.01 per share and expire September 29, 2010.
CALL RIGHTS AND PUT RIGHTS
The Company has a call right to repurchase stock held by the Company's
management at any time following the termination of a management stockholder's
employment with the Company. In the event of the death or disability of a
management stockholder, the management stockholder's estate has a put right, for
a period of one year following the date of termination of employment, whereby
the Company may be required to repurchase the stock of the management
stockholder at a price that would be paid by the Company if it were exercising
its call rights. The Company may defer payment of the put right in excess of
$4.0 million per fiscal year per stockholder and in excess of $8.0 million per
fiscal year for all stockholders.
STOCK OPTION PLAN
In October 2000, Buffets Holdings adopted the Equity Participation Plan, a
non-qualified stock option plan under which up to 113,750 shares of common stock
are reserved for issuance to certain employees. The option exercise price for
each option, as determined at the date of grant, is based on the four full
fiscal quarters immediately preceding the date of the award using the amount by
which the sum of 4.5 times earnings before interest, taxes, depreciation and
amortization, as defined in the Credit Facility, and the proceeds payable to the
Company upon the exercise of the options, exceeds the consolidated indebtedness
of the Company as of the date of the award. Options are fully vested upon
issuance and generally expire 15 years from the date of the grant or at an
earlier date, as determined by the Board of Directors. However, options are only
exercisable in the event of a liquidity event, as defined in the Stockholders'
Agreement. The Company reserves the right to pay the plan participant the
appreciated value of the shares rather than actually issue equity. Activity
under the stock option plan is summarized as follows:
FOR THE 26-WEEK
TRANSITIONAL PERIOD ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
------------------------- --------------------- ---------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year. 51,367 $ 14.29 59,310 $ 19.08 65,822 $ 17.93
Granted............ 10,793 40.01 10,218 11.64 44,305 13.08
Exercised.......... -- -- -- -- -- --
Canceled........... (2,850) 12.42 (3,706) 19.10 (11,985) 12.14
Outstanding at end of
year.............. 59,310 $ 19.08 65,822 $ 17.93 98,142 $ 16.42
51
The following table summarizes the Company's outstanding stock options as of
June 30, 2004:
OPTIONS OUTSTANDING
WEIGHTED-AVG
REMAINING OPTION
TERM WEIGHTED-AVG
RANGE OF EXERCISE PRICE NUMBER OUTSTANDING (IN YEARS) EXERCISE PRICE
----------------------- ------------------ ---------- --------------
$ 0 - $10.............................. 41,749 12.04 $ 9.86
$11 - $20............................... 35,251 14.53 14.69
$21 - $30............................... 11,380 12.35 25.51
$31 - $40............................... 1,037 12.52 32.09
$41 - $50............................... 8,725 12.83 41.07
$ 0 - $50.............................. 98,142 13.05 $16.42
To determine compensation expense under the fair value method, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The principal assumptions we used in
applying the Black-Scholes model were as follows:
FOR THE TWENTY-SIX FOR THE YEAR FOR THE YEAR
WEEK TRANSITIONAL ENDED ENDED
PERIOD ENDED ------------ ------------
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2003
------------ ------------ -------------
Risk-free interest rate................. 4.24% 2.07% 1.32%
Expected volatility..................... 0.0% 0.0% 0.0%
Expected dividend yield................. 0.0% 0.0% 0.0%
Expected life in years.................. 3.7 2.8 1.8
Information regarding the effect on net income had we applied the fair value
expense recognition provisions of SFAS No. 123 is included in Note 2.
7 RETIREMENT PLAN
The Company has a 401(k) plan covering all employees with one year of
service, age 21 or older, who worked at least 1,000 hours in the prior year. The
Company's discretionary contributions to the plan are determined annually, on a
calendar year basis, by the Board of Directors and are used to match a portion
of employees' voluntary contributions. Participants are 100% vested in their own
contributions immediately and are vested in the Company's contributions 20% per
year of service with the Company, such that they are fully vested at the end of
five years of service with the Company. The Board of Directors authorized and
recognized matching contributions of $0.9 million for 2001 and $0.1 million for
the calendar year ended December 31, 2003. These contributions were paid during
the first quarter of the succeeding calendar year. There were no matching
contributions for calendar year 2002. The 2004 matching contribution will not be
authorized until the end of the 2004 calendar year. The Company has an accrual
of $0.4 million as of June 30, 2004 for estimated 2004 matching contributions
related to the first half of calendar year 2004.
52
8 INCOME TAXES
The income tax expense (benefit) consisted of the following (in thousands):
FOR THE
TWENTY-SIX WEEK
FOR THE YEAR TRANSITIONAL FOR THE YEAR FOR THE YEAR
ENDED PERIOD ENDED ENDED ENDED
--------------- --------------- ------------ -------------
JANUARY 2, 2002 JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
Federal:
Current............................ $ 11,870 $ (950) $ 3,209 $ (710)
Deferred........................... 18 (2,448) 1,130 1,050
------------- ----------- ----------- -----------
11,888 (3,398) 4,339 340
State:
Current............................ 3,401 394 1,433 1,158
Deferred........................... 3 (350) (453) 150
------------- ----------- ----------- -----------
3,404 44 980 1,308
------------- ----------- ----------- -----------
Income tax expense (benefit)....... $ 15,292 $ (3,354) $ 5,319 $ 1,648
=============== ============= ============= =============
Deferred income taxes are provided to record the income tax effect of
temporary differences that occur when transactions are reported in one period
for financial statement purposes and in another period for tax purposes. The tax
effect of the temporary differences giving rise to the Company's deferred tax
assets and liabilities was as follows (in thousands):
JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
----------------------- ------------------------ ------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT CURRENT NON-CURRENT
ASSET LIABILITY ASSET ASSET ASSET ASSET
----- --------- ----- ----- ----- -----
Property and equipment......... $ -- $ (9,091) $ -- $ (5,476) $ -- $ (6,336)
Deferred rent.................. -- 7,227 -- 7,586 -- 8,325
Self-insurance reserve......... 2,975 -- 1,832 -- 2,986 --
Accrued workers' compensation.. 4,929 -- 6,341 -- 6,223 --
Accrued payroll and related
benefits.................. 3,034 -- 3,303 -- 1,943 --
Accrued store closing costs.... 2,729 -- 1,120 -- 555 --
Net operating loss and tax
credit carryforwards...... 4,564 -- 1,934 -- 3,719 --
Deferred gain on sale
leaseback transaction..... -- 1,576 -- 1,495 -- 1,298
Goodwill....................... -- (112) -- (569) -- (1,348)
Other.......................... 769 225 686 (104) 489 (906)
-------- ------- -------- -------- -------- --------
Total.................. $ 19,000 $ (175) $ 15,216 $ 2,932 $ 15,915 $ 1,033
======== ======= ======== ======== ======== ========
53
A reconciliation of the Company's income tax expense (benefit) at the
federal statutory rate to the reported income tax expense (benefit) was as
follows (in thousands):
FOR THE TWENTY-SIX
WEEK TRANSITIONAL
FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JANUARY 2, 2002 JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
--------------- ------------ ------------ -------------
Federal income tax expense
(benefit) at
statutory rate of 35%. $ 9,834 $ (3,667) $ 6,417 $ 3,367
State income taxes, net of
federal benefit....... 2,204 29 666 850
General business credits... (932) (656) (1,769) (1,396)
Goodwill amortization...... 3,767 -- -- --
Other...................... 419 940 5 (1,173)
------------- ------------- ------------- ------------
Income tax expense
(benefit)............ $ 15,292 $ (3,354) $ 5,319 $ 1,648
============= ============= ============= ============
The $1.2 million other line item above in 2004 primarily represents a
favorable resolution to a state tax audit.
9 RELATED-PARTY TRANSACTIONS
The Company entered an advisory agreement with Caxton-Iseman, a majority
shareholder with approximately 78.5% of Buffets Holdings' outstanding common
stock under its control, under which Caxton-Iseman provides various advisory
services to the Company in exchange for an annual advisory fee equal to 2% of
the Company's annual consolidated earnings before interest, taxes, depreciation
and amortization. Caxton-Iseman receives an additional fee for advisory services
relating to particular financial transactions equal to 1% of the transaction
value. Under these agreements, the Company paid Caxton-Iseman $2.9 million for
2001, $1.2 million for 2002, $2.8 million for 2003 and $3.1 million for 2004.
The Company entered an advisory agreement with Sentinel Capital Partners,
L.L.C. a minority shareholder with approximately 7.1% of Buffets Holdings'
outstanding common stock under its control, under which Sentinel Capital
Partners, L.L.C. provides various advisory services to the Company for an annual
advisory fee of $200,000. Under this agreement, the Company paid $200,000 in
2001, approximately $108,000 in 2002, $200,000 in 2003 and $200,000 in 2004.
Roe H. Hatlen, a founder of the Company, former Chief Executive Officer and
Chairman of the Board of Directors, and a current member on Buffets Holdings'
Board of Directors, entered into an advisory arrangement with the Company and
Buffets Holdings that expires in December 2005. Under his advisory agreement,
Mr. Hatlen received $325,000 in 2001, $150,000 in 2002, $283,000 in 2003 and
$257,000 in 2004. He will receive $238,000 in fiscal 2005 and $113,000 in fiscal
2006. In addition, Mr. Hatlen will receive health, medical and other benefits
comparable to those made available to our management employees through the end
of calendar year 2005. Mr. Hatlen holds approximately 5.1% of Buffets Holdings'
outstanding common stock.
54
C. Dennis Scott, a founder of the Company and former Vice Chairman, entered
into an advisory arrangement with the Company and Buffets Holdings that expires
in 2005. Under Mr. Scott's advisory agreement, he received no cash compensation
after fiscal 2000. Mr. Scott purchased approximately 0.5% of the shares of
Buffets Holdings common stock. These shares are subject to Buffets Holdings'
right to repurchase these shares upon Mr. Scott's termination as an advisor to
Buffets Holdings at various prices depending on whether Mr. Scott is terminated
with or without cause. Mr. Scott retains an office in San Diego at the Company's
expense and receives health insurance benefits comparable to those made
available to Company management through the end of calendar year 2005. Mr. Scott
is required to provide services to the Company for no more than two days per
month.
Robert M. Rosenberg, a director of the Buffets Holdings' Board of Directors,
provided various advisory services to the Company for an advisory fee of $35,000
during fiscal 2003 and $3,500 during fiscal 2004.
Buffets Holdings has entered into stockholder agreements with certain
members of management. These agreements govern the five-year vesting of Buffets
Holdings common stock, transfer restrictions and agreements not to compete for
two years after their employment terminates. Some management investors obtained
recourse loans to purchase shares in Buffets Holdings which were guaranteed by
the Company. Each of the management investors pledged his or her respective
ownership interests in the shares of Buffets Holdings and executed a promissory
note in favor of Buffets Holdings, whereby each agreed to repay the
corresponding amount of the guaranty, together with interest at fixed rates
ranging between 6% and 7% per annum at the earliest of (1) seven years, (2)
termination of employment with the Company or (3) the sale, disposition or other
transfer of the management investor's ownership interest in the shares. The
guarantees totaled $0.5 million as of July 3, 2002, $0.5 million at July 2, 2003
and $0.1 million at June 30, 2004.
An officer was advanced $315,000 on February 20, 2002 for a homestead
purchase. Interest was payable annually at a rate equal to the Company's
interest rate on its senior secured borrowing, up to a maximum of 12% per annum.
The principal plus accrued but unpaid interest was repaid in 2003 upon the
officer's resignation.
10 COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or the results of operations.
OPERATING LEASES
The Company conducts most of its operations from leased restaurant
facilities, all of which are classified as operating leases.
55
The following is a schedule of future minimum lease payments required under
noncancelable operating leases as of June 30, 2004 (in thousands):
2005............................................. $ 53,913
2006............................................. 52,713
2007............................................. 50,482
2008............................................. 48,346
2009............................................. 44,707
Thereafter....................................... 282,894
------------
Total future minimum lease payments...... $ 533,055
============
Minimum payments have not been reduced by minimum sublease rentals of
approximately $24.9 million.
Certain of these leases require additional rent based on a percentage of net
sales and may require additional payments for real estate taxes and common area
maintenance on the properties. Many of these leases also contain renewal options
exercisable at the election of the Company. Under the provisions of certain
leases, there are certain escalations in payments over the base lease term as
well as renewal periods which have been reflected in rent expense on a
straight-line basis over the life of the anticipated terms. Differences between
minimum lease payments and straight-line rent expense are reflected as deferred
lease obligations in the accompanying consolidated balance sheets.
Rent expense was as follows (in thousands):
FOR THE TWENTY-
SIX WEEK
TRANSITIONAL FOR THE YEAR FOR THE YEAR
FOR THE YEAR ENDED PERIOD ENDED ENDED ENDED
JANUARY 2, 2002 JULY 3, 2002 JULY 2, 2003 JUNE 30, 2004
--------------- -------------- ------------- -------------
Minimum rents............... $ 43,732 $ 23,510 $ 49,315 $ 49,911
Contingent rents............ 1,343 943 2,207 2,983
Less: Sublease rents........ (721) (440) (1,388) (2,739)
Deferred rents.............. 835 890 1,530 2,381
Percentage rents............ 2,559 1,419 1,955 1,954
-------------- -------------- ------------- -------------
$ 47,748 $ 26,322 $ 53,619 $ 54,490
============== ============== ============= =============
56
11 TRANSITION PERIOD DISCLOSURE (UNAUDITED)
The following unaudited information for the twenty-eight week period ended
July 28, 2001 and the fifty-week period ended July 3, 2002 are included for
comparison purposes (in thousands).
FOR THEK
TWENTY-EIGHT WEEK FOR THE FIFTY-WEEK
PERIOD ENDED PERIOD ENDED
JULY 28, 2001 JULY 3, 2002
------------- ------------
RESTAURANT SALES....................... $ 567,821 $ 1,003,997
RESTAURANT COSTS:
Food.................................. 180,058 309,862
Labor................................. 176,608 314,079
Direct and occupancy.................. 125,166 225,213
------------ ------------
Total restaurant costs......... 481,832 849,154
ADVERTISING EXPENSES................... 15,708 26,281
GENERAL AND ADMINISTRATIVE EXPENSES.... 26,700 49,556
GOODWILL AMORTIZATION.................. 5,975 4,967
------------ ------------
OPERATING INCOME....................... 37,606 74,039
INTEREST EXPENSE....................... 24,887 33,606
INTEREST INCOME........................ (324) (586)
OTHER INCOME........................... (493) (1,145)
LOSS RELATED TO REFINANCING............ -- 38,724
------------ ------------
INCOME BEFORE INCOME TAXES............. 13,536 3,440
INCOME TAX EXPENSE..................... 7,735 4,203
------------ ------------
Net income (loss).................. $ 5,801 $ (763)
============ ============
12 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements are presented
pursuant to Rule 3-10 of Regulation S-X. Buffets, Inc. is a subsidiary issuer of
11 1/4% senior subordinated notes that are fully and unconditionally guaranteed
by its parent, Buffets Holdings, as well as each of its subsidiaries including
HomeTown Buffets, Inc., OCB Restaurant Co., OCB Purchasing Co., Restaurant
Innovations, Inc., Distinctive Dining, Inc., Tahoe Joe's, Inc., Buffets Leasing
Company, LLC, HomeTown Leasing Company, LLC, OCB Leasing Company, LLC, and Tahoe
Joe's Leasing Company, LLC. All guarantees are joint and several and the
subsidiary issuer and the subsidiary guarantors are 100% owned by the parent
company. There are certain restrictions on the ability of the Company to obtain
funds from its subsidiaries.
57
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 3, 2002
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 58 $ 227 $ 8,077 $ -- $ 8,362
Receivables................................... -- 26,837 337,871 (356,026) 8,682
Inventories................................... -- 721 17,911 -- 18,632
Prepaid expenses and other current assets..... -- 5,438 4,648 -- 10,086
Deferred income taxes......................... -- 17,514 1,486 -- 19,000
---------- ----------- ----------- ----------- -----------
Total current assets....................... 58 50,737 369,993 (356,026) 64,762
PROPERTY AND EQUIPMENT, net.................... -- 11,491 186,859 -- 198,350
GOODWILL, net.................................. -- 18,730 293,433 -- 312,163
ASSETS HELD FOR SALE........................... -- -- 24,952 -- 24,952
OTHER ASSETS, net.............................. -- 412,192 5,755 (402,502) 15,445
---------- ----------- ----------- ----------- -----------
Total assets............................... $ 58 $ 493,150 $ 880,992 $ (758,528) $ 615,672
========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ -- $ 391,901 $ 2,243 $ (356,725) $ 37,419
Accrued liabilities........................... 12 56,729 35,713 -- 92,454
Income taxes payable.......................... 96 2,900 -- (96) 2,900
Current maturities of long-term debt.......... -- 147 2,303 -- 2,450
---------- ----------- ----------- ----------- -----------
Total current liabilities.................. 108 451,677 40,259 (356,821) 135,223
LONG-TERM DEBT, net of current maturities...... 27,764 27,826 700,941 (265,000) 491,531
DEFERRED INCOME TAXES.......................... -- 175 -- -- 175
DEFERRED LEASE OBLIGATIONS..................... -- 387 18,442 -- 18,829
OTHER LONG-TERM LIABILITIES.................... -- 3,885 104 536 4,525
---------- ----------- ----------- ----------- -----------
Total liabilities.......................... 27,872 483,950 759,746 (621,285) 650,283
---------- ----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock.................................. 32 -- -- -- 32
Additional paid in capital.................... -- 82,311 199,494 (281,805) --
Retained earnings (accumulated deficit)....... (27,846) (73,111) (78,248) 144,562 (34,643)
---------- ----------- ----------- ----------- -----------
Total shareholders' equity (deficit)....... (27,814) 9,200 121,246 (137,243) (34,611)
---------- ----------- ----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)....................... $ 58 $ 493,150 $ 880,992 $ (758,528) $ 615,672
========== =========== =========== =========== ===========
58
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 2, 2003
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 108 $ 8,511 $ 7,236 $ -- $ 15,855
Receivables................................. -- 14,965 341,403 (349,890) 6,478
Inventories................................. -- 824 17,638 -- 18,462
Prepaid expenses and other current
assets................................. -- 2,981 5,058 -- 8,039
Assets held for sale........................ -- -- 1,390 -- 1,390
Deferred income taxes....................... -- 13,730 1,486 -- 15,216
---------- ---------- ---------- ---------- ----------
Total current assets..................... 108 41,011 374,211 (349,890) 65,440
PROPERTY AND EQUIPMENT, net.................. -- 10,427 143,713 -- 154,140
GOODWILL, net................................ -- 18,730 293,433 -- 312,163
DEFERRED INCOME TAXES........................ -- 2,932 -- -- 2,932
OTHER ASSETS, net............................ -- 415,127 5,686 (402,502) 18,311
---------- ---------- ---------- ---------- ----------
Total assets............................. $ 108 $ 488,227 $ 817,043 $ (752,392) $ 552,986
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ -- $ 391,486 $ 2,909 $ (350,618) $ 43,777
Accrued liabilities......................... 1,101 49,865 27,542 -- 78,508
Income taxes payable........................ -- 3,401 1,386 -- 4,787
Current maturities of long-term debt........ -- 104 1,631 -- 1,735
---------- ---------- ---------- ---------- ----------
Total current liabilities................ 1,101 444,856 33,468 (350,618) 128,807
LONG-TERM DEBT, net of current maturities.... 27,364 23,521 633,502 (265,000) 419,387
DEFERRED LEASE OBLIGATIONS................... -- 573 19,140 -- 19,713
OTHER LONG-TERM LIABILITIES.................. -- 3,687 3,101 1,101 7,889
---------- ---------- ---------- ---------- ----------
Total liabilities........................ 28,465 472,637 689,211 (614,517) 575,796
---------- ---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock................................ 32 -- -- -- 32
Additional paid in capital.................. -- 82,311 199,494 (281,805) --
Retained earnings (accumulated deficit)..... (28,389) (66,721) (71,662) 143,930 (22,842)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity (deficit)..... (28,357) 15,590 127,832 (137,875) (22,810)
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity (deficit)..................... $ 108 $ 488,227 $ 817,043 $ (752,392) $ 552,986
========== ========== ========== ========== ==========
59
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 96 $ 19,771 $ 6,205 $ -- $ 26,072
Restricted cash and cash equivalents.......... -- 16,228 -- -- 16,228
Receivables................................... -- 41,056 318,430 (352,523) 6,963
Inventories................................... -- 789 17,884 -- 18,673
Income taxes receivable....................... 1,619 -- -- (1,619) --
Prepaid expenses and other current assets..... -- 4,711 533 -- 5,244
Deferred income taxes......................... -- 14,429 1,486 -- 15,915
---------- ---------- ---------- ---------- ----------
Total current assets....................... 1,715 96,984 344,538 (354,142) 89,095
PROPERTY AND EQUIPMENT, net.................... -- 8,206 141,412 -- 149,618
GOODWILL, net.................................. -- 18,730 293,433 -- 312,163
DEFERRED INCOME TAXES.......................... -- 1,033 -- -- 1,033
OTHER ASSETS, net.............................. 2,847 410,013 5,264 (402,502) 15,622
---------- ---------- ---------- ---------- ----------
Total assets............................... $ 4,562 $ 534,966 $ 784,647 $ (756,644) $ 567,531
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. 180 395,799 2,519 (355,218) 43,280
Accrued liabilities........................... -- 44,126 24,537 -- 68,663
Income taxes payable.......................... -- 4,531 1,619 (1,619) 4,531
Current maturities of long-term debt.......... -- 138 2,162 -- 2,300
---------- ---------- ---------- ---------- ----------
Total current liabilities.................. 180 444,594 30,837 (356,837) 118,774
LONG-TERM DEBT, net of current maturities...... 76,300 25,184 659,555 (265,000) 496,039
DEFERRED LEASE OBLIGATIONS..................... -- 1,143 20,478 -- 21,621
OTHER LONG-TERM LIABILITIES.................... -- 3,476 3,537 -- 7,013
---------- ---------- ---------- ---------- ----------
Total liabilities.......................... 76,480 474,397 714,407 (621,837) 643,447
---------- ---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock.................................. 32 -- -- -- 32
Additional paid in capital.................... -- 82,311 199,494 (281,805) --
Retained earnings (accumulated deficit)....... (71,950) (21,742) (129,254) 146,998 (75,948)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity (deficit)....... (71,918) 60,569 70,240 (134,807) (75,916)
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity (deficit)....................... $ 4,562 $ 534,966 $ 784,647 $ (756,644) $ 567,531
========== ========== ========== ========== ==========
60
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 2, 2002
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES........................ $ -- $ 40,483 $ 1,004,251 $ -- $ 1,044,734
RESTAURANT COSTS:
Food................................... -- 13,487 312,784 -- 326,271
Labor.................................. -- 13,066 313,357 -- 326,423
Direct and occupancy................... -- 5,256 228,119 -- 233,375
----------- ----------- ------------- --------- -----------
Total restaurant costs.............. -- 31,809 854,260 -- 886,069
ADVERTISING EXPENSES.................... -- 1,017 26,623 -- 27,640
GENERAL AND ADMINISTRATIVE EXPENSES..... 249 1,949 48,672 (301) 50,569
GOODWILL AMORTIZATION................... -- 657 10,285 -- 10,942
----------- ----------- ------------- --------- -----------
OPERATING INCOME (LOSS)................. (249) 5,051 64,411 301 69,514
INTEREST EXPENSE........................ -- 2,604 40,801 -- 43,405
INTEREST INCOME......................... -- (42) (656) -- (698)
OTHER INCOME............................ -- (420) (638) 18 (1,040)
----------- ----------- ------------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... (249) 2,909 24,904 283 27,847
INCOME TAX EXPENSE (BENEFIT)............ (96) 1,406 13,982 -- 15,292
----------- ----------- ------------- --------- -----------
Net income (loss)................... $ (153) $ 1,503 $ 10,922 $ 283 $ 12,555
=========== =========== ============= ========= ===========
61
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEK TRANSITIONAL PERIOD ENDED JULY 3, 2002
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.......................... $ -- $ 20,196 $ 506,888 $ -- $ 527,084
RESTAURANT COSTS:
Food.................................. -- 6,669 156,980 -- 163,649
Labor................................. -- 6,414 157,850 -- 164,264
Direct and occupancy................ -- 2,517 114,487 -- 117,004
--------- --------- --------- ---------- ---------
Total restaurant costs................ -- 15,600 429,317 -- 444,917
ADVERTISING EXPENSES...................... -- 525 13,824 -- 14,349
GENERAL AND ADMINISTRATIVE EXPENSES....... 133 979 24,718 (143) 25,687
--------- --------- --------- ---------- ---------
OPERATING INCOME (LOSS)................... (133) 3,092 39,029 143 42,131
INTEREST EXPENSE.......................... 12 908 14,168 -- 15,088
INTEREST INCOME........................... -- (16) (196) -- (212)
LOSS RELATED TO REFINANCING............... 248 38,476 -- -- 38,724
OTHER INCOME.............................. -- (236) (559) 197 (598)
--------- --------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES......... (393) (36,040) 25,616 (54) (10,871)
INCOME TAX EXPENSE (BENEFIT).............. 96 (11,866) 8,416 -- (3,354)
--------- --------- --------- ---------- ---------
Net income (loss)..................... $ (489) $ (24,174) $ 17,200 $ (54) $ (7,517)
========= ========= ========= ========== =========
62
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 2003
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.......................... $ -- $ 38,983 $ 946,303 $ -- $ 985,286
RESTAURANT COSTS:
Food..................................... -- 13,122 298,769 -- 311,891
Labor.................................... -- 12,570 300,962 -- 313,532
Direct and occupancy..................... -- 5,189 220,228 -- 225,417
----------- ----------- --------- ---------- ---------
Total restaurant costs................ -- 30,881 819,959 -- 850,840
ADVERTISING EXPENSES...................... -- 1,131 27,458 -- 28,589
GENERAL AND ADMINISTRATIVE EXPENSES....... -- 1,796 43,586 -- 45,382
IMPAIRMENT OF ASSETS...................... -- -- 4,803 -- 4,803
GAIN ON SALE OF ORIGINAL ROADHOUSE GRILL
RESTAURANTS.......................... -- -- (7,088) -- (7,088)
LOSS ON SALE LEASEBACK TRANSACTIONS....... -- -- 5,856 -- 5,856
----------- ----------- --------- ---------- ---------
OPERATING INCOME.......................... -- 5,175 51,729 -- 56,904
INTEREST EXPENSE.......................... 1,089 2,409 37,737 -- 41,235
INTEREST INCOME........................... -- (307) -- -- (307)
OTHER INCOME.............................. -- (1,270) -- -- (1,270)
----------- ----------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES......... (1,089) 4,343 13,992 -- 17,246
INCOME TAX EXPENSE ....................... -- 955 4,364 -- 5,319
----------- ----------- --------- ---------- ---------
Net income (loss)..................... $ (1,089) $ 3,388 $ 9,628 $ -- $ 11,927
=========== =========== ========= ========== =========
63
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES........................ $ -- $ 39,851 $ 902,980 $ -- $ 942,831
RESTAURANT COSTS:
Food................................... -- 14,072 293,735 307,807
Labor.................................. -- 12,544 274,923 287,467
Direct and occupancy................... -- 5,393 211,995 -- 217,388
---------- ---------- ---------- ---------- ----------
Total restaurant costs.............. -- 32,009 780,653 -- 812,662
ADVERTISING EXPENSES.................... -- 1,093 24,761 -- 25,854
GENERAL AND ADMINISTRATIVE EXPENSES..... -- 1,806 40,916 -- 42,722
IMPAIRMENT OF ASSETS.................... -- -- 1,878 -- 1,878
FINANCING-RELATED COMPENSATION EXPENSES. 1,466 774 -- -- 2,240
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) ................ (1,466) 4,169 54,772 -- 57,475
INTEREST EXPENSE........................ 2,164 2,247 35,198 -- 39,609
INTEREST INCOME......................... -- (424) -- -- (424)
LOSS RELATED TO REFINANCING............. 575 4,201 -- -- 4,776
LOSS RELATED TO EARLY EXTINGUISHMENT OF
DEBT............................... -- 5,275 -- -- 5,275
OTHER INCOME............................ -- (1,379) -- -- (1,379)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (4,205) (5,751) 19,574 -- 9,618
INCOME TAX EXPENSE (BENEFIT) ........... (1,619) (1,359) 4,626 -- 1,648
---------- ---------- ---------- ---------- ----------
Net income (loss) .................. $ (2,586) $ (4,392) $ 14,948 $ -- $ 7,970
========== ========== ========== ========== ==========
64
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 2002
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).............................. $ (153) $ 1,503 $ 10,922 $ 283 $ 12,555
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. -- 3,113 50,291 -- 53,404
Amortization of debt issuance costs............ -- 234 3,671 -- 3,905
Accretion of original issue discount........... -- 46 727 -- 773
Deferred interest.............................. -- 76 1,193 -- 1,269
Asset write-downs.............................. -- -- 491 -- 491
Deferred income taxes.......................... -- 2 19 -- 21
Loss on disposal of assets..................... -- -- 361 -- 361
Changes in assets and liabilities:
Receivables................................. 81 2,071 (3,221) -- (1,069)
Inventories................................. -- 30 660 -- 690
Prepaid expenses and other assets........... -- (1,068) (503) -- (1,571)
Accounts payable............................ -- 22,141 (30,080) -- (7,939)
Accrued and other liabilities............... -- 3,181 (341) (3) 2,837
Income taxes payable/refundable............. (96) 3,204 -- -- 3,108
--------- --------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities................ (168) 34,533 34,190 280 68,835
--------- --------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transactions...... -- -- 39,075 -- 39,075
Purchase of fixed assets....................... -- (8,228) (29,868) -- (38,096)
Corporate cash advances (payments)............. -- (18,856) 19,136 (280) --
Proceeds from sale of other assets............. -- -- 1,596 -- 1,596
--------- --------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. -- (27,084) 29,939 (280) 2,575
--------- --------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Repayment of debt.............................. -- (3,234) (50,662) -- (53,896)
Repurchase of common stock..................... (71) -- -- -- (71)
Proceeds from issuance of common stock......... 200 -- -- -- 200
Repayment of revolving credit facility......... -- (300) (4,700) -- (5,000)
Debt issuance costs............................ -- (49) (774) -- (823)
--------- --------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. 129 (3,583) (56,136) -- (59,590)
--------- --------- ---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS......... (39) 3,866 7,993 -- 11,820
CASH AND CASH EQUIVALENTS, beginning of period.. 97 11,806 3,890 -- 15,793
--------- --------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period........ $ 58 $ 15,672 $ 11,883 $ -- $ 27,613
========= ========= ========== ========== ==========
65
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEK TRANSITIONAL PERIOD ENDED JULY 3, 2002
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).......................... $ (489) $ (24,174) $ 17,200 $ (54) $ (7,517)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization............ -- 1,726 18,683 -- 20,409
Amortization of debt issuance costs........ -- 97 1,520 -- 1,617
Net loss related to refinancing:
Write-off of debt issuance costs........ -- 11,022 -- -- 11,022
Accrued redemption fees................. -- 17,000 -- -- 17,000
Original issue discount expensed........ -- 4,107 -- -- 4,107
Accretion of original issue discount....... -- 21 336 -- 357
Loss related to early extinguishment of
debt.................................. -- 37 577 -- 614
Deferred income taxes...................... -- (168) (2,630) -- (2,798)
Loss on disposal of assets................. -- -- 89 -- 89
Changes in assets and liabilities:
Receivables............................. (123) 368 (1,377) 150 (982)
Inventories............................. -- (19) (174) -- (193)
Prepaid expenses and other assets....... -- (1,449) (108) -- (1,557)
Accounts payable........................ -- 8,493 (2,094) -- 6,399
Accrued and other liabilities........... 12 13,777 (20,979) -- (7,190)
Income taxes payable/refundable......... 192 (2,223) -- (96) (2,127)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities............ (408) 28,615 11,043 -- 39,250
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transactions.. -- 2,281 -- -- 2,281
Purchase of fixed assets................... -- (2,226) (12,054) -- (14,280)
Corporate cash advances (payments)......... -- 109,601 (109,601) -- --
Proceeds from sale of other assets......... -- -- 662 -- 662
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities................ -- 109,656 (120,993) -- (11,337)
---------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Repayment of debt.......................... -- (21,198) (332,100) -- (353,298)
Redemption of preferred stock warrants..... (7,200) -- -- -- (7,200)
Redemption of preferred stock.............. (108,227) -- -- -- (108,227)
Repurchase of common stock................. (291) -- -- -- (291)
Proceeds from issuance of subordinated
notes................................. -- 13,273 207,944 -- 221,217
Proceeds from credit facility.............. -- 14,700 230,300 -- 245,000
Dividends.................................. 116,126 (148,415) -- -- (32,289)
Debt issuance costs........................ -- (12,076) -- -- (12,076)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 408 (153,716) 106,144 -- (47,164)
---------- ---------- ---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..... -- (15,445) (3,806) -- (19,251)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 58 15,672 11,883 -- 27,613
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period.... $ 58 $ 227 $ 8,077 $ -- $ 8,362
========== ========== ========== ========== ==========
66
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 2, 2003
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)............................ $ (1,089) $ 3,388 $ 9,628 $ -- $ 11,927
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ -- 3,510 33,375 -- 36,885
Amortization of debt issuance costs.......... -- 71 1,111 -- 1,182
Accretion of original issue discount......... -- 44 695 -- 739
Impairment of assets......................... -- -- 4,803 -- 4,803
Deferred income taxes........................ -- 41 636 -- 677
Gain on sale of Original Roadhouse Grill
Restaurants............................... -- -- (7,088) -- (7,088)
Loss on disposal of assets................... -- -- 565 -- 565
Loss on sale leaseback transactions.......... -- -- 5,856 -- 5,856
Changes in assets and liabilities:
Receivables............................... 96 4,759 (2,509) -- 2,346
Inventories............................... -- (103) 273 -- 170
Prepaid expenses and other assets......... -- 2,457 (410) -- 2,047
Accounts payable.......................... -- 7,684 666 -- 8,350
Accrued and other liabilities............. 1,089 (5,608) (8,171) -- (12,690)
Income taxes payable/refundable........... (96) 501 1,482 -- 1,887
----------- ----------- ----------- ------------ -----------
Net cash provided by operating
activities........................ -- 16,744 40,912 -- 57,656
----------- ----------- ----------- ------------ -----------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transactions.... -- -- 26,117 -- 26,117
Proceeds from sale of Original Roadhouse
Grill
Restaurants............................... -- -- 25,850 -- 25,850
Purchase of fixed assets..................... -- (2,423) (23,299) -- (25,722)
Corporate cash advances (payments)........... -- (883) 883 -- --
Proceeds from sale of other assets........... -- -- 417 -- 417
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) investing
activities.............................. -- (3,306) 29,968 -- 26,662
----------- ----------- ----------- ------------ -----------
FINANCING ACTIVITIES:
Repayment of debt............................ -- (4,392) (68,806) -- (73,198)
Redemption of subordinated notes............. (400) -- -- -- (400)
Repurchase of common stock................... (576) -- -- -- (576)
Proceeds from issuance of common stock....... 450 -- -- -- 450
Dividends.................................... 576 (576) -- -- --
Debt issuance costs.......................... -- (186) (2,915) -- (3,101)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) investing
activities............................ 50 (5,154) (71,721) -- (76,825)
----------- ----------- ----------- ------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 50 8,284 (841) -- 7,493
CASH AND CASH EQUIVALENTS, beginning of period 58 227 8,077 -- 8,362
----------- ----------- ----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period...... $ 108 $ 8,511 $ 7,236 $ -- $ 15,855
=========== =========== =========== ============ ===========
67
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2004
SUBSIDIARY SUBSIDIARY
PARENT ISSUER GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)................................. $ (2,586) $ (4,392) $ 14,948 $ -- $ 7,970
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization..................... -- 3,655 30,152 -- 33,807
Amortization of debt issuance costs............... -- 82 1,288 -- 1,370
Net loss related to refinancing:
Write-off of debt issuance costs............... -- 4,201 -- -- 4,201
Accretion of original issue discount.............. 1,227 49 773 -- 2,049
Loss related to early extinguishment of debt...... -- 5,275 -- -- 5,275
Impairment of assets.............................. -- -- 1,878 -- 1,878
Deferred income taxes............................. -- 72 1,128 -- 1,200
Loss on disposal of assets........................ -- -- 305 -- 305
Changes in assets and liabilities:
Receivables.................................... -- 75,747 (74,123) (1,859) (235)
Inventories.................................... -- (428) (246) -- (674)
Prepaid expenses and other assets.............. -- (1,730) 4,525 -- 2,795
Accounts payable............................... 180 (287) (390) -- (497)
Accrued and other liabilities.................. (1,101) (4,592) (3,005) -- (8,698)
Income taxes payable/refundable................ (1,619) 1,130 233 -- (256)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities............................. (3,899) 78,782 (22,534) (1,859) 50,490
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transactions......... -- -- 2,710 -- 2,710
Purchase of fixed assets.......................... -- (1,432) (31,575) -- (33,007)
Corporate cash advances (payments)................ -- 1,623 (3,482) 1,859 --
Acquisition of 20% minority interest in Tahoe
Joe's Inc.................................... -- -- (370) -- (370)
Proceeds from sale of other assets................ -- -- 2,284 -- 2,284
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities................................. -- 191 (30,433) 1,859 (28,383)
---------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Repayment of debt................................. -- (10,377) (162,576) -- (172,953)
Redemption of subordinated notes.................. (27,364) -- -- -- (27,364)
Repurchase of common stock........................ (380) -- -- -- (380)
Proceeds from issuance of common stock............ 241 -- -- -- 241
Proceeds from issuance of senior discount notes 75,073 -- -- -- 75,073
Unrestricted cash proceeds from credit facility... -- 11,718 183,582 -- 195,300
Initial restricted cash proceeds from credit
facility..................................... -- 2,082 32,618 -- 34,700
Restricted cash proceeds from credit facility
available as of year end..................... -- (16,228) -- -- (16,228)
Use of restricted cash for early extinguishment
of debt...................................... -- (18,472) -- -- (18,472)
Use of unrestricted cash for early extinguishment
of debt...................................... -- (918) (14,382) -- (15,300)
Dividends......................................... (40,836) (20,101) -- -- (60,937)
Debt issuance costs............................... (2,847) (163) (2,560) -- (5,570)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities................................. 3,887 (52,459) 36,682 -- (11,890)
---------- ---------- ---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS............ (12) 26,514 (16,285) -- 10,217
CASH AND CASH EQUIVALENTS, beginning of period..... 108 8,511 7,236 -- 15,855
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period........... $ 96 $ 35,025 $ (9,049) $ -- $ 26,072
========== ========== ========== ========== ==========
68
13 SUBSEQUENT EVENT
On August 27, 2004, the Company filed a prospectus with the Securities and
Exchange Commission outlining a planned initial public offering of an as yet
undetermined amount of Income Deposit Securities ("IDSs"), common stock and
senior subordinated notes. In conjunction with this planned offering, Buffets,
Inc. plans to issue an as yet undetermined amount of senior notes as well as
borrow an as yet undetermined amount under its credit facility which will be
amended in connection with the offering.
The Company intends to use the net proceeds from this planned offering, net
proceeds from the planned offering of senior notes by Buffets, Inc., borrowings
under Buffets, Inc.'s amended credit facility and cash on hand among other
things to repay all outstanding borrowings under the existing credit facility,
repurchase Buffets, Inc.'s 11 1/4% senior subordinated notes and repurchase or
redeem Buffets Holdings' 13 7/8% senior discount notes.
14 INTERIM FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly information for
each of the eight fiscal quarters for the years ended July 2, 2003 and June 30,
2004 (in thousands). In management's opinion, this unaudited quarterly
information has been prepared on a consistent basis with the audited financial
statements and includes all necessary adjustments, consisting only of normal
recurring adjustments, that management considers necessary for a fair
presentation of the unaudited quarterly results when read in conjunction with
the Consolidated Financial Statements and Notes. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
indicative of future performance.
FOR THE YEAR ENDED JULY 2, 2003 FOR THE YEAR ENDED JUNE 30, 2004
------------------------------------------------ ------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Revenues.................. $ 235,498 $ 221,189 $ 293,684 $ 234,915 $ 219,608 $ 211,275 $ 287,573 $ 224,375
Operating income.......... 17,188 4,937 14,398 20,381 14,219 12,090 18,446 12,720
Income (loss) before
Income taxes........... 7,423 (4,755) 2,166 12,412 6,067 3,674 (590) 467
Net income (loss)......... 4,773 (2,634) 1,529 8,259 3,967 2,554 (70) 1,519
Quarterly operating income for the year ended July 2, 2003 was impacted by
certain unusual and infrequent transactions including: a $5.4 million loss on
sale and leaseback of restaurants during the second quarter, and a $4.8 million
asset impairment charge, a $7.1 million gain on the sale of 13 Original
Roadhouse Grill restaurants, and a $0.4 million loss on sale and leaseback of
restaurants that occurred during the fourth quarter.
Operating income for the fourth quarter of fiscal 2004 was impacted by a
$2.2 million of financing-related compensation expense and a $1.9 million asset
impairment charge.
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and regulations, and that the
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosures based closely on the definition
of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934.
We carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and our
chief financial officer of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2004. Based on this
evaluation, we concluded that our disclosure controls and procedures were
effective as of such date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the twelve weeks ended June 30, 2004, there were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934) that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
the stated goals under all potential future conditions.
70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and
executive officers:
NAME AGE POSITION
---- --- --------
Frederick J. Iseman....... 51 Chairman of the Board and Director of Buffets
Kerry A. Kramp............ 48 President, Chief Executive Officer and Director of Buffets
Glenn D. Drasher.......... 53 Executive Vice President of Marketing
R. Michael Andrews, Jr.... 40 Executive Vice President and Chief Financial Officer
H. Thomas Mitchell........ 47 Executive Vice President, General Counsel and Secretary
Roe H. Hatlen............. 60 Vice Chairman of the Board and Director of Buffets
Steven M. Lefkowitz....... 40 Director of Buffets
Robert A. Ferris.......... 62 Director of Buffets
David S. Lobel............ 51 Director of Buffets
Robert M. Rosenberg....... 66 Director of Buffets
FREDERICK ISEMAN has served as Chairman of the Board and as a director of
our company and as Chairman of the Board and as a director of Buffets since
October 2000. Mr. Iseman is currently Chairman and Managing Partner of
Caxton-Iseman Capital, a private investment firm, which was founded by Mr.
Iseman in 1993. Prior to establishing Caxton-Iseman Capital, Mr. Iseman founded
Hambro-Iseman Capital Partners, a merchant banking firm. From 1988 to 1990, Mr.
Iseman was a member of Hambro International Venture Fund. Mr. Iseman is Chairman
of the Board and a director of Anteon International Corporation and Ply Gem
Industries, Inc. and a member of the Advisory Board of Duke Street Capital and
the Advisory Board of STAR Capital Partners Limited.
KERRY A. KRAMP has served as our President and Chief Executive Officer since
February 2004 and of Buffets since May 2000, and as a director of our company
and as a director of Buffets since October 2000. Prior to that date, he had
served as our President and Chief Operating Officer since our merger with
HomeTown Buffet in 1996. Mr. Kramp was President and a director of HomeTown
Buffet from 1995 through our merger in 1996.
GLENN D. DRASHER has served as the Executive Vice President of Marketing for
Buffets since 1997. He has over 25 years of operational, marketing and executive
restaurant industry experience. From 1994 until he joined us, Mr. Drasher was
Executive Vice President for Country Kitchen International and Vice President of
Marketing for Country Hospitality Worldwide, both divisions of Carlson
Companies.
R. MICHAEL ANDREWS, JR. has served as our Executive Vice President and Chief
Financial Officer since February 2004 and of Buffets since April 2000. Prior to
joining us, Mr. Andrews served as Chief Financial Officer of Eerie World
Entertainment, the parent company to Jekyll & Hyde Clubs, from 1999 to 2000. He
was Chief Financial Officer of Don Pablo's Restaurants from 1998 to 1999.
Previously, Mr. Andrews was with KPMG Peat Marwick LLP for approximately 12
years, serving most recently as Senior Manager.
H. THOMAS MITCHELL has served as our Executive Vice President, General
Counsel and Secretary since February 2004 and of Buffets since 1998. He joined
our company in 1994 and has 13 years of
71
executive restaurant industry experience and 19 years of legal practice. Mr.
Mitchell served in the further capacity of Chief Administrative Officer from
1998 until 2000. ROE H. HATLEN co-founded our company and has served as the
Vice-Chairman of the Board and as a director of our company since October 2000
and as the Vice-Chairman of the Board and as a director of Buffets since June
2002. He served as our Chairman and Chief Executive Officer from our inception
in 1983 through May 2000 and as President from May 1989 to September 1992. He is
a member of the Board of Regents of Pacific Lutheran University.
STEVEN M. LEFKOWITZ has served as a director of our company and of Buffets
since October 2000. Mr. Lefkowitz is a Managing Director of Caxton-Iseman
Capital and has been employed by Caxton-Iseman Capital since 1993. From 1988 to
1993, Mr. Lefkowitz was employed by Mancuso & Company, a private investment
firm, and served in several positions including Vice President and as a Partner
of Mancuso Equity Partners. Mr. Lefkowitz is a director of Anteon International
Corporation and Ply Gem Industries, Inc.
ROBERT A. FERRIS has served as a director of our company since October 2000
and of Buffets since June 2002. Mr. Ferris is a Managing Director of
Caxton-Iseman Capital and has been employed by Caxton-Iseman Capital since March
1998. From 1981 to February 1998, Mr. Ferris was a General Partner of Sequoia
Associates, a private investment firm headquartered in Menlo Park, California.
Prior to founding Sequoia Associates, Mr. Ferris was a Vice President of Arcata
Corporation, a New York Stock Exchange-listed company. Mr. Ferris is a director
of Anteon International Corporation and Ply Gem Industries, Inc.
DAVID S. LOBEL has served as a director of our company since October 2000
and of Buffets since June 2002. Mr. Lobel is currently Managing Partner of
Sentinel Capital Partners, a private equity investment firm founded by Mr. Lobel
in 1995. Prior to establishing Sentinel Capital Partners, Mr. Lobel spent 15
years at First Century Partners, Smith Barney's venture capital affiliate. Mr.
Lobel joined First Century in 1981 and served as a general partner of funds
managed by First Century from 1983 until his departure in 1995. From 1979 to
1981, Mr. Lobel was a consultant at Bain & Company. Mr. Lobel is Chairman of the
Board and a director of Castle Dental, Inc.
ROBERT M. ROSENBERG has served as a director of our company since May 2001
and of Buffets since June 2002. He is the retired Chief Executive Officer of
Dunkin' Donuts, a position he held from 1963 until his retirement in 1998. He
has been a member of the Board of Directors of Sonic Corp. since 1993 and a
member of the Board of Directors of Domino's Pizza since 1999.
We have adopted a Code of Ethics that applies to our Chief Executive Officer
and all financial managers and executives.
BOARD OF DIRECTORS
Our seven-member Board of Directors is comprised of -- Frederick J. Iseman,
Kerry A. Kramp, Roe H. Hatlen, Steven M. Lefkowitz, Robert A. Ferris, David S.
Lobel and Robert M. Rosenberg. The board typically meets in joint session with
the Buffets Holdings' board of directors. Our Board of Directors has three
committees -- the audit committee, the compensation committee and the executive
committee.
Messrs. Hatlen, Lefkowitz and Rosenberg serve on the audit committee, which
meets with
72
financial management, the internal auditors and the independent auditors to
review internal accounting controls and accounting, auditing, and financial
reporting matters. Messrs. Ferris, Kramp, Lefkowitz and Lobel serve on the
compensation committee, which reviews the compensation of our executive
officers, executive bonus allocations and other compensation matters. Messrs.
Iseman and Kramp serve on the executive committee, which has been formed to take
action on matters relating to the general governance of our company when the
board is not otherwise meeting.
The directors, with the exception of Robert Rosenberg, receive no cash
compensation for serving on the board except for reimbursement of reasonable
expenses incurred in attending meetings. Mr. Rosenberg receives a $3,500 fee for
each board meeting attended.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that we have more than one audit
committee financial expert serving on the audit committee. Steven M. Leftkowitz
is an audit committee financial expert as defined in Regulation S-K promulgated
under the Securities Act. Mr. Leftkowitz is not independent as that term is used
in Schedule 14A of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation
awarded to, earned by or paid to our President and Chief Executive Officer,
Kerry A. Kramp, and each of the five other most highly compensated executive
officers whose individual compensation exceeded $100,000 during fiscal 2004,
2003 and for the 2002 transitional period for services rendered to us.
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ -------------------------
OTHER ANNUAL RESTRICTED
FISCAL COMPENSATION STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AWARDS COMPENSATION
- --------------------------- ---- --------- -------- ------------ ------ ------------
Kerry A. Kramp............... 2004 491,400 -- 22,487 -- --
President, Chief Executive 2003 472,500 50,000 20,023 -- --
Officer and Director 2002 253,558 114,071 4,743 -- --
David Goronkin................ 2004 -- -- -- -- --
Chief Operating Officer 2003 316,000 -- 8,063 -- --
And Director(1) 2002 169,593 72,656 2,799
Glenn D. Drasher.............. 2004 224,786 -- 1,756 -- --
Executive Vice President 2003 222,560 -- 8,626 -- --
of Marketing 2002 119,511 35,820 1,958 -- --
R. Michael Andrews, Jr........ 2004 224,640 -- 11,421 -- --
Executive Vice President 2003 216,000 75,000 18,104 -- --
And Chief Financial Officer 2002 115,692 34,765 5,165 -- --
H. Thomas Mitchell........... 2004 194,324 -- 1,761 -- --
Executive Vice President, 2003 192,400 50,000 7,937 -- --
General Counsel and Secretary 2002 103,315 17,695 138 -- --
Jean C. Rostollan............. 2004 135,279 -- 68,167(3) -- --
Executive Vice President 2003 192,400 -- 6,569 -- --
of Purchasing(2) 2002 84,730 17,530 4,862 -- --
- -----------------------------
(1) David Goronkin, former Chief Operating Officer and Director, resigned from
both positions in April 2003.
(2) Jean C. Rostollan, former Executive Vice President of Purchasing, separated
from the company in February 2004.
(3) Includes $66,518 of severance pay.
EMPLOYEE BENEFIT PLANS
We have a 401(k) plan covering all employees with one year of service, age
21 or older, who
73
worked at least 1,000 hours in the prior year. Our discretionary contributions
to the plan are determined annually, on a calendar year basis, by the Board of
Directors and are used to match a portion of our employees' voluntary
contributions. Participants are 100% vested in their own contributions
immediately and are vested in our partial matching contributions 20% per year of
service with the Company, such that they are fully vested at the end of five
years of service with the Company. The Board of Directors authorized and we
recognized matching contributions of $0.9 million for 2001 and $0.1 million for
the calendar year ended December 31, 2003. These contributions were paid during
the first quarter of the succeeding calendar year. There were no matching
contributions for calendar year 2002. The 2004 matching contribution will not be
authorized until the end of the 2004 calendar year. We have an accrual of $0.4
million as of June 30, 2004 for estimated 2004 matching contributions related to
the first half of calendar year 2004.
EMPLOYMENT AGREEMENTS
Kerry A. Kramp, Glenn D. Drasher, R. Michael Andrews, Jr., H. Thomas
Mitchell, K. Michael Shrader and Jean C. Rostollan each entered into a severance
protection agreement with us dated as of September 29, 2000. Each agreement
entitles the executive to continue to receive his or her salary, medical and
health benefits, group term life insurance and long term disability coverage on
the same basis as prior to termination of employment with us for 52 weeks
following termination of employment with us for any reason other than for cause,
disability or death and execution of a release attached to the agreements. The
executives have no duty to mitigate the amounts payable under the agreements. K.
Michael Shrader and Jean C. Rostollan are currently being compensated under the
terms of their respective severance protection agreements.
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
Buffets Holdings' common stock beneficially owned by (1) the named executive
officers and each director of Buffets individually, (2) all named executive
officers and directors as a group and (3) the stockholders of Buffets Holdings
known to us to be the beneficial owner of more than 5% of Buffets Holdings'
common stock as of June 30, 2004. Except as noted below, the address of each
principal stockholder of Buffets Holdings is c/o Buffets Holdings, Inc., 1460
Buffet Way, Eagan, Minnesota, 55121.
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE
------------------------ ------ ----------
Caxton-Iseman Investments L.P.(1)....................................... 2,501,438 78.5%
Sentinel Capital Partners II, L.P.(2)................................... 225,106 7.1
Frederick J. Iseman(1).................................................. 2,501,438 78.5
Kerry A. Kramp.......................................................... 130,000 4.1
R. Michael Andrews, Jr.................................................. 56,875 1.8
Roe H. Hatlen(3)........................................................ 162,952 5.1
Robert M. Rosenberg..................................................... 4,610 0.1
Steven M. Lefkowitz..................................................... -- --
Robert A. Ferris........................................................ -- --
David S. Lobel.......................................................... -- --
All named executive officers and directors as a group (8 persons)....... 3,080,981 96.7
- ---------------
(1) By virtue of Mr. Iseman's indirect control of Caxton-Iseman Investments
L.P., he is deemed to beneficially own the 2,501,438 shares of common stock
held by that entity. The address of Caxton-Iseman Investments L.P. and Mr.
Iseman is c/o Caxton-Iseman Capital, Inc., 667 Madison Avenue, New York, New
York, 10021.
(2) The address of Sentinel Capital Partners II, L.P. is 777 Third Avenue, 32nd
Floor, New York, New York, 10017.
(3) Mr. Hatlen has sole voting and dispositive power over 65,012 shares of
common stock. Mr. Hatlen may be deemed to be the beneficial owner of 67,518
shares of common stock held by the Lars C. Hatlen Trust, the Erik R. Hatlen
Trust and Kari E. Hatlen, each such entity or person owning 22,506 shares of
common stock. By virtue of Mr. Hatlen's control over Eventyr Investments, he
is deemed to beneficially own the 30,422 shares of common stock held by that
entity.
(4) Mr. Rosenberg also owned options to purchase 12,600 shares of common stock.
The following table provides information about the securities authorized for
issuance under our Equity Participation Plan as of June 30, 2004:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- ------------------- ------------------- ------------------------------
(A) (B) (C)
Equity compensation plans
approved by security
holders.................. 98,142 $16.42 15,608
Equity compensation
plans not approved by
security holders......... -- -- --
Total.............. 98,142 $16.42 15,608
75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FOUNDER ADVISORY AGREEMENTS
Roe H. Hatlen has entered into an advisory arrangement with us and Buffets
Holdings that expires in 2005. Under his advisory agreement, Mr. Hatlen received
$257,000 in fiscal 2004. He will receive $238,000 in fiscal 2005 and $113,000 in
fiscal 2006. In addition, Mr. Hatlen will receive health, medical and other
benefits comparable to those made available to our management employees through
calendar 2005. Mr. Hatlen holds approximately 5.1% of the shares of Buffets
Holdings common stock.
PURCHASE OF PROPERTY BY ROE HATLEN
In November 2001, Mr. Hatlen purchased a portion of the land adjoining our
headquarters for $1.02 million. The land was sold by the entity that had
purchased the parcel at the time of the buyout from public shareholders. Mr.
Hatlen's purchase resulted in a reduction of the rental amount payable by us
under the sale and leaseback transaction relating to our corporate headquarters.
CAXTON-ISEMAN CAPITAL ADVISORY AGREEMENT
We entered an advisory agreement with Caxton-Iseman Capital under which
Caxton-Iseman Capital provides various advisory services to us in exchange for
an annual advisory fee equal to 2% of our annual consolidated earnings before
interest, taxes, depreciation and amortization and an additional 1% fee for
advisory services relating to particular transactions. Under this agreement, we
paid $3.1 million in fiscal 2004, $2.8 million in fiscal 2003, $1.2 million in
the 2002 transitional period and $2.9 million in fiscal 2001.
BOARD OF DIRECTORS ADVISORY AGREEMENT
In October 2002, we entered into an advisory agreement with Robert M.
Rosenberg, under which he provided various advisory services to us for an
advisory fee of $35,000 during fiscal 2003 and $3,500 during fiscal 2004.
SENTINEL CAPITAL ADVISORY AGREEMENT
We entered into an advisory agreement with Sentinel Capital Partners,
L.L.C., under which Sentinel Capital provides various advisory services to us
for an annual advisory fee of $200,000. Under this agreement, we paid $200,000
in fiscal 2004.
GUARANTEES, PROMISSORY NOTES AND PLEDGE AGREEMENTS
As part of the buyout from public shareholders on October 2, 2000, some of
our management investors obtained recourse loans from U.S. Bank, which allowed
them to purchase shares in Buffets Holdings. In connection with these management
investor loans, we provided guarantees of these loans to U.S. Bank and we paid
interest to U.S. Bank at prime plus 1% on these loans. Concurrently, each of the
management investors pledged his, or her, respective ownership interests in the
shares of Buffets Holdings and executed a promissory note in favor of Buffets
Holdings, whereby each agreed to repay the corresponding amount of the
guarantee, together with interest at fixed rates ranging between 6% and 7% per
annum, at the earliest of (1) seven years, (2) termination of employment with
our company or (3) the sale, disposition or other transfer of the management
76
investor's ownership interests in the shares. The aggregate amount of the
guarantees was approximately $0.1 million as of June 30, 2004. Currently, none
of our executive management has any outstanding management investor loan that is
guaranteed by us.
David Goronkin was advanced $315,000 on February 20, 2002 for the purchase
of homestead property in Minnesota. Interest was payable annually at a rate
equal to the company's interest rate on its senior secured borrowing, up to a
maximum of 12% per annum. The principal plus accrued but unpaid interest was
repaid upon his resignation.
SERIES A SENIOR SUBORDINATED AND SERIES B JUNIOR SUBORDINATED NOTES DUE 2011
In connection with the June 2002 refinancing transactions, we issued series
A senior subordinated notes due 2011 to our preferred stockholders as part of
the redemption of our senior preferred stock and series B junior subordinated
notes due 2011 as a dividend to holders of our common stock and holders of
warrants to purchase our common stock. The subordinated notes were originally
issued on June 28, 2002 with a maturity date of June 25, 2011. The subordinated
notes bore interest at the rate of 3% per annum from June 28, 2002 through
December 31, 2002, and thereafter bore interest at the rate of 4.75% per annum.
Payments of accrued interest on the notes were made annually as of June 28 of
each year. In connection with entering into the Existing Credit Facility, we
redeemed all of our outstanding series A senior subordinated notes. We used a
portion of the proceeds of the offering of our 13 7/8% senior discount notes,
among other things, to redeem the remaining series B junior subordinated notes.
The subordinated notes were issued to holders of our preferred stock and to
holders of our common stock and holders of warrants to purchase common stock,
including the following persons in the amounts indicated:
AMOUNT OF SERIES A SENIOR AMOUNT OF SERIES B JUNIOR
NAME OF BENEFICIAL OWNER SUBORDINATED NOTES SUBORDINATED NOTES
- ------------------------ ------------------ ------------------
Caxton-Iseman Investments L.P.(1).......... $ 6,847,427 $ 14,470,628
Sentinel Capital Partners II, L.P.......... 616,197 1,303,378
Frederick Iseman(1)........................ 6,847,427 14,470,628
Kerry A. Kramp............................ -- 595,941
R. Michael Andrews, Jr.................... -- 186,232
Roe H. Hatlen(2)........................... 244,167 552,078
David Goronkin............................. -- 223,478
Glenn D. Drasher........................... 6,162 87,526
Harold T. Mitchell......................... -- 74,493
K. Michael Shrader......................... -- 74,493
Lars C. Hatlen Trust(2).................... -- 130,195
Erik R. Hatlen(2).......................... -- 130,195
Kari E. Hatlen(2).......................... -- 130,195
Beverly J. Hatlen(2)....................... 23,856 --
Eventyr Investments L.P.(2)................ 125,324 175,989
- ----------------------------------
(1) By virtue of Mr. Iseman's indirect control of Caxton-Iseman Investments
L.P., he was deemed to beneficially own the $6,847,427 of series A senior
subordinated notes and $14,470,628 of series B junior subordinated notes
held by that entity.
(2) Mr. Hatlen had sole ownership over $118,843 of series A senior subordinated
notes and $376,089 of series B junior subordinated notes. Mr. Hatlen may
have been deemed to be the beneficial owner of the series B junior
subordinated notes held by the Lars C. Hatlen Trust, Erik R. Hatlen and
Kari E. Hatlen, each such entity or person having owned $130,195 of series
B junior subordinated notes. By virtue of Mr. Hatlen's control over Eventyr
Investments, he was deemed to beneficially own the $125,324 of series A
senior subordinated notes and $175,989 of series B junior subordinated
notes held by that entity.
77
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents aggregate fees for professional services
rendered by our principal accounting firm, Deloitte & Touche LLP, the member
firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, "Deloitte & Touche") for the audit of our annual consolidated
financial statements for the years ended July 2, 2003 and June 30, 2004.
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 2, 2003 JUNE 30, 2004
------------ -------------
Audit fees (1)............................. $ 118,800 $ 285,600
Audit-related fees (2)..................... 243,686 42,850
Tax fees (3)............................... 97,425 57,600
All other fees............................. -- --
------------ -------------
Total fees......................... $ 459,911 $ 386,050
============ =============
- -------------------------
(1) Audit fees are comprised of annual audit fees, quarterly review fees,
comfort letter fees, consent fees, fees associated with the review of
prospectuses, and consultation fees on accounting issues.
(2) Audit-related fees are comprised of annual audits and quarterly reviews
of our subsidiaries.
(3) Tax fees are comprised of tax compliance and consultation fees.
The audit committee evaluates and considers whether the services rendered by
Deloitte & Touche, except for services rendered in connection with its audit of
our annual consolidated financial statements, are compatible with maintaining
Deloitte & Touche's independence pursuant to Independence Standards Board
Standard No. 1. The audit committee has reviewed the nature of non-audit
services provided by Deloitte & Touche and has concluded that these services are
compatible with maintaining the firm's ability to serve as our independent
auditors.
We, and our audit committee, are committed to ensuring the independence of
the independent auditors, both in fact and appearance. In this regard, our audit
committee has established a pre-approval policy in accordance with the
applicable rules of the Securities and Exchange Commission. The pre-approval
policy (i) identifies specifically prohibited services by our independent
auditor; (ii) requires the annual review and approval of audit services,
including the annual audit and quarterly review of us as well as other audits
required contractually; (iii) stipulates certain other audit-related services as
"pre-approved," including procedures performed in connection with issuing
comfort letters and activities associated with the research, application and
interpretation of accounting standards as well as those related to the
Securities and Exchange Commission's review of our security filings; and (iv)
requires the annual review and approval of certain non-audit services once they
exceed specified monetary levels, including income tax preparation, income tax
consulting and debt covenant compliance testing. All non-audit services require
pre-approval by the full audit committee, unless delegated to a committee
member.
78
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following Financial Statements of the Company are
included in Part II, Item 8 of this Annual Report on Form
10-K:
Report of Registered Public Accounting Firm
Consolidated Balance Sheets as of July 3, 2002, July 2, 2003 and
June 30, 2004
Consolidated Statements of Operations for the Year Ended January
2, 2002, for the Twenty-Six Week Transitional Period Ended July 3,
2002, for the Year Ended July 2, 2003 and for the Year Ended June
30, 2004
Consolidated Statements of Shareholder's Equity (Deficit) for the
Year Ended January 2, 2002, for the Twenty-Six Week Transitional
Period Ended July 3, 2002, for the Year Ended July 2, 2003 and for
the Year Ended June 30, 2004
Consolidated Statements of Cash Flows for the Year Ended January
2, 2002, for the Twenty-Six Week Transitional Period Ended July 3,
2002, for the Year Ended July 2, 2003 and for the Year Ended June
30, 2004
Notes to Consolidated Financial Statements
2. Schedules to Financial Statements:
All financial statement schedules have been omitted because they
are either inapplicable or the information required is provided in
the Company's Consolidated Financial Statements and Notes thereto,
included in Part II, Item 8 of this Annual Report on Form 10-K.
3. See Index to Exhibits on page 82 of this report.
(b) Reports on Form 8-K:
1. On August 27, 2004, we filed a current report on Form 8-K (Items
7.01 and 901c) announcing that we are considering an initial
public offering of Income Deposit Securities.
2. On August 27, 2004, we filed a current report on Form 8-K (Items
2.02 and 901c) announcing our results for the fiscal year ended
June 30, 2004 and our same store sale projections for the first
quarter of 2005.
79
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUFFETS HOLDINGS, INC.
Date: September 28, 2004 By: /s/ Kerry A. Kramp
----------------------------
Kerry A. Kramp
Chief Executive Officer
By: /s/ R. Michael Andrews, Jr.
----------------------------
R. Michael Andrews, Jr.
Chief Financial Officer
(Principal Financial and
Accounting Officer)
80
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below hereby constitutes and appoints Kerry A. Kramp or R. Michael Andrews, Jr.
or either of them his true and lawful agent, proxy and attorney-in-fact, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
report filed pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, and to file the same with all exhibits thereto,
and the other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
things requisite and necessary to be done, as fully to all intents and purposes
as such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
and the foregoing Power of Attorney have been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Kerry A. Kramp President, Chief Executive September 28, 2004
- --------------------------- Officer (Principal Executive
Kerry A. Kramp Officer) and Director
/s/ R. Michael Andrews, Jr. Executive Vice President and September 28, 2004
- --------------------------- Chief Financial Officer
R. Michael Andrews, Jr. (Principal Financial and
Accounting Officer)
/s/ Robert A. Ferris Director September 28, 2004
- ---------------------------
Robert A. Ferris
Director (Vice Chairman of
- --------------------------- the Board of Directors)
Roe H. Hatlen
Director (Chairman of the
- --------------------------- Board of Directors)
Frederick J. Iseman
/s/ Steven M. Lefkowitz Director September 28, 2004
- ---------------------------
Steven M. Lefkowitz
/s/ David S. Lobel Director September 28, 2004
- ---------------------------
David S. Lobel
/s/ Robert M. Rosenberg Director September 28, 2004
- ---------------------------
Robert M. Rosenberg
81
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Amended Certificate of Incorporation of Buffets Holdings, Inc.
(incorporated by reference to Exhibit 3.1 to Buffets Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on June
25, 2004 (SEC file No. 333-116897)).
3.2* By-Laws of Buffets Holdings, Inc. (incorporated by reference to
Exhibit 3.2 to Buffets Holdings, Inc.'s Registration Statement on
Form S-4, filed with the Commission on June 25, 2004 (SEC file No.
333-116897)).
4.1* Indenture, dated as of June 28, 2002, among Buffets, Inc., the
Guarantors and U.S. Bank National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Buffets, Inc.'s
Registration Statement on Form S-4, filed with the Commission on
August 16, 2002 (SEC file No. 333-98301)).
4.2* Form of Exchange Note (incorporated by reference to Exhibit A to
Exhibit 4.1 to Buffets, Inc.'s Registration Statement on Form S-4,
filed with the Commission on August 16, 2002 (SEC file No.
333-98301)).
4.3* First Supplemental Indenture ("Subsidiary Guaranty"), dated as of
September 26, 2003, among HomeTown Buffet Merger Company, Inc.,
Buffets, Inc. and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.1 to Buffets, Inc.'s
Quarterly Report on Form 10-Q filed with the Commission on November
7, 2003 (SEC file No. 033-00171)).
4.4* Second Supplemental Indenture, dated as of November 5, 2003, between
Tahoe Joe's, Inc. and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.2 to Buffets, Inc.'s
Quarterly Report on Form 10-Q filed with the Commission on November
7, 2003 (SEC file No. 033-00171)).
4.5* Third Supplemental Indenture, dated as of December 10, 2003 among
NSHE Bennington, LLC, Buffets, Inc. and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to
Buffets, Inc.'s Quarterly Report on Form 10-Q filed with the
Commission on January 27, 2004 (SEC file No. 033-00171)).
4.6* Fourth Supplemental Indenture, dated as of February 20, 2004 among
Buffets Holdings, Inc., Buffets, Inc., and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to
Buffets, Inc.'s Quarterly Report on Form 10-Q filed with the
Commission on May 12, 2004 (SEC file No. 033-00171)).
4.7* Indenture, dated as of May 18, 2004, between Buffets Holdings, Inc.
and U.S. Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.1 to Buffets Holdings, Inc.'s Registration
Statement on Form S-4, filed with the Commission on June 25, 2004
(SEC file No. 333-116897)).
4.8* Form of Exchange Security (incorporated by reference to Exhibit B to
Exhibit 4.1 to Buffets Holdings, Inc.'s Registration Statement on
Form S-4, filed with the Commission on June 25, 2004 (SEC file No.
333-116897)).
10.1* Credit Agreement, dated as of June 28, 2002, among Buffets, Inc.,
Buffets Holdings, Inc., the lenders party thereto and Credit Suisse
First Boston, as administrative agent and as collateral agent for the
lenders (incorporated by reference to Exhibit 10.1 to Buffets, Inc.'s
Registration Statement on Form S-4, filed with the Commission on
August 16, 2002 (SEC file No. 333-98301)).
82
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.2* Amendment Agreement, dated as of February 20, 2004, to the Credit
Agreement dated as of July 28, 2002, among Buffets, Inc., Buffets
Holdings, Inc., the Subsidiaries named therein, the Lenders named
therein and Credit Suisse First Boston, as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit 10.1 to
Buffets, Inc.'s Quarterly Report on Form 10-Q filed with the
Commission on May 12, 2004 (SEC file No. 033-00171)).
10.3* Management and Fee Agreement, dated October 2, 2000, by and among
Buffets, Inc. and Caxton-Iseman Capital, Inc. (incorporated by
reference to Exhibit 10.2 to Buffets, Inc.'s Registration Statement
on Form S-4, filed with the Commission on August 16, 2002 (SEC file
No. 333-98301)).
10.4* Amended and Restated Management and Fee Agreement, dated as of
February 20, 2004, by and between Buffets, Inc. and CxCIC LLC (the
"Amended Management Agreement") (incorporated by reference to Exhibit
10.2 to Buffets Inc.'s Quarterly Report on Form 10-Q filed with the
Commission on May 12, 2004 (SEC file No. 033-00171)).
10.5* Management and Fee Agreement, dated October 2, 2000, by and between
Buffets, Inc. and Sentinel Capital Partners, L.L.C. (incorporated by
reference to Exhibit 10.3 to Buffets, Inc.'s Registration Statement
on Form S-4, filed with the Commission on August 16, 2002 (SEC file
No. 333-98301)).
10.6* Advisory Agreement, dated September 28, 2000, by and among Buffets
Holdings, Inc., Buffets, Inc. and Roe E. Hatlen (incorporated by
reference to Exhibit 10.4 to Buffets, Inc.'s Registration Statement
on Form S-4, filed with the Commission on August 16, 2002 (SEC file
No. 333-98301)).
10.7* Advisory Agreement, dated September 28, 2000, by and among Buffets
Holdings, Inc., Buffets, Inc. and C. Dennis Scott (incorporated by
reference to Exhibit 10.5 to Buffets, Inc.'s Registration Statement
on Form S-4, filed with the Commission on August 16, 2002 (SEC file
No. 333-98301)).
10.8* Guaranty, dated September 28, 2000, from Buffets, Inc. to U.S. Bank
National Association in connection with a Promissory Note and Pledge
Agreement by and among U.S. Bank National Association and David
Goronkin (incorporated by reference to Exhibit 10.7 to Buffets,
Inc.'s Registration Statement on Form S-4, filed with the Commission
on August 16, 2002 (SEC file No. 333-98301)).
10.9* Guaranty, dated September 28, 2000, from Buffets, Inc. to U.S. Bank
National Association in connection with a Promissory Note and Pledge
Agreement by and among U.S. Bank National Association and R. Michael
Andrews, Jr. (incorporated by reference to Exhibit 10.8 to Buffets,
Inc.'s Registration Statement on Form S-4, filed with the Commission
on August 16, 2002 (SEC file No. 333-98301)).
10.10* Promissory Note and Pledge Agreement, dated February 20, 2002, among
David Goronkin, Pamela Goronkin and Buffets, Inc. (incorporated by
reference to Exhibit 10.9 to Buffets, Inc.'s Registration Statement
on Form S-4, filed with the Commission on August 16, 2002 (SEC file
No. 333-98301)).
10.11* Severance Protection Agreements, dated September 29, 2000, between
Buffets, Inc. and each of Kerry A. Kramp, David Goronkin, R. Michael
Andrews, Jr., Glenn D. Drasher, K. Michael Shrader and H. Thomas
Mitchell (incorporated by reference to Exhibit 10.10 to Buffets,
Inc.'s Registration Statement on Form S-4, filed with the Commission
on August 16, 2002 (SEC file No. 333-98301)).
10.12* Severance Protection Agreement, dated September 29, 2000, between
Buffets, Inc. and Jean C. Rostollan (incorporated by reference to
Exhibit 10.9.1 to Buffets, Inc.'s Annual Report on Form 10-K filed
with the Commission on September 30, 2003 (SEC file No. 033-00171)).
10.13 Equity Participation Plan.
12.1 Statement of Computation of Ratios of Earnings of Fixed Charges.
14.1 Code of Ethics
83
EXHIBIT
NUMBER DESCRIPTION
------ -----------
21* List of Subsidiaries of Buffets Holdings, Inc. (incorporated by
reference to Exhibit 21 to Buffets Holdings, Inc.'s Registration
Statement on Form S-1, filed with the Commission on August 27, 2004
(SEC file No. 333-118612)).
24 Powers of Attorney (included on signature pages of this Part II).
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2** Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ------------------------
* Previously provided or incorporated by reference.
** Shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that
Section. Such exhibits shall not be deemed incorporated by reference into
any filing under the Securities Act of 1933 or Securities Exchange Act of
1934.