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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 asset