<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: NOVEMBER 1, 1999
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: 0-6054
STAR BUFFET, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1430786
- --------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
440 LAWNDALE DRIVE,
SALT LAKE CITY, UT 84115
------------------------
(Address of principal executive offices) (Zip Code)
(801) 463-5500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
There were 2,950,000 shares of the issuer's common stock, par value $.001 per
share, outstanding as of December 10, 1999.
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of November 1, 1999 (unaudited)
and January 25, 1999........................................................................3
Unaudited Consolidated Condensed Statements of Income for the twelve and
forty weeks ended November 1, 1999 and November 2, 1998.....................................5
Unaudited Consolidated Condensed Statements of Cash Flows for the forty
weeks ended November 1, 1999 and November 2, 1998...........................................6
Notes to Unaudited Consolidated Condensed Financial Statements..................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................18
Signature...............................................................................................19
</TABLE>
2
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOVEMBER 1, JANUARY 25,
ASSETS 1999 1999
---------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 260,000 $ 121,000
Current portion of notes and other receivables 993,000 2,496,000
Receivable from officer 522,000 -
Inventories 1,047,000 842,000
Deferred income taxes, net 194,000 274,000
Prepaid expenses 783,000 159,000
--------------- ---------------
Total current assets 3,799,000 3,892,000
--------------- ---------------
Property, buildings and equipment, at cost, less accumulated
depreciation 34,776,000 29,490,000
--------------- ---------------
Real property and equipment under capitalized leases, at cost, less
accumulated amortization 1,832,000 2,100,000
--------------- ---------------
Other assets:
Notes receivable, net of current portion 3,494,000 3,491,000
Deposits and other 261,000 344,000
--------------- ---------------
Total other assets 3,755,000 3,835,000
--------------- ---------------
Goodwill, less accumulated amortization 4,054,000 4,069,000
Other intangible assets, less accumulated amortization 711,000 773,000
--------------- ---------------
Total intangible assets 4,765,000 4,842,000
--------------- ---------------
Total assets $ 48,927,000 $ 44,159,000
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY NOVEMBER 1, JANUARY 25,
1999 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 4,650,000 $ 3,622,000
Payroll and related taxes 1,639,000 1,918,000
Sales and property taxes 832,000 869,000
Rent, licenses and other 506,000 705,000
Current maturities of obligations under capital leases and long-term
debt 2,088,000 1,329,000
--------------- ---------------
Total current liabilities 9,715,000 8,443,000
--------------- ---------------
Deferred income taxes, net 379,000 379,000
Capitalized lease obligations, net of current maturities 1,906,000 2,049,000
Long-term debt, net of current maturities 15,900,000 13,925,000
Preferred stock, $.001 par value; authorized 1,500,000 shares; none - -
issued or outstanding
Common stock, $.001 par value; authorized 18,500,000 shares; issued and 3,000 3,000
outstanding 2,950,000 and 2,950,000 shares
Additional paid-in capital 16,351,000 16,351,000
Retained earnings 4,814,000 3,199,000
Treasury stock, at cost, 24,012 and 31,000 shares (141,000) (190,000)
--------------- ---------------
Total stockholders' equity 21,027,000 19,363,000
--------------- ---------------
Total liabilities and stockholders' equity $ 48,927,000 $ 44,159,000
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
------------------------------------- ------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $21,347,000 $ 18,996,000 $ 75,718,000 $ 65,245,000
Costs and expenses
Food costs 7,053,000 6,299,000 24,985,000 21,693,000
Labor costs 7,393,000 6,178,000 25,438,000 20,671,000
Occupancy and other expenses 4,582,000 4,011,000 15,309,000 13,255,000
General and administrative expenses 1,211,000 876,000 3,702,000 3,036,000
Depreciation and amortization 918,000 797,000 2,798,000 2,297,000
--------------- --------------- --------------- ---------------
Total costs and expenses 21,157,000 18,161,000 72,232,000 60,952,000
--------------- --------------- --------------- ---------------
Income from operations 190,000 835,000 3,486,000 4,293,000
Interest expense (341,000) (177,000) (994,000) (298,000)
Interest income 9,000 145,000 30,000 618,000
Other Income 170,000 77,000 170,000 231,000
--------------- --------------- --------------- ---------------
Income before income taxes 28,000 880,000 2,692,000 4,844,000
Income tax expense 11,000 352,000 1,077,000 1,938,000
--------------- --------------- --------------- ---------------
Net income $ 17,000 $ 528,000 $ 1,615,000 $ 2,906,000
=============== =============== =============== ===============
Net income per common share - basic $0.01 $0.13 $0.55 $0.57
=============== =============== =============== ===============
Weighted average shares outstanding - basic 2,950,000 4,164,000 2,950,000 5,064,000
=============== =============== =============== ===============
Net income per common share - diluted $0.01 $0.13 $0.55 $0.57
=============== =============== =============== ===============
Weighted average shares outstanding - diluted 2,950,000 4,164,000 2,950,000 5,064,000
=============== =============== =============== ===============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
--------------------------------------------
NOVEMBER 1, 1999 NOVEMBER 2, 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,615,000 $ 2,906,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,797,000 2,297,000
Amortization of loan cost 70,000 -
Amortization of royalty fee 23,000 334,000
Interest income - (102,000)
Change in operating assets and liabilities:
Receivables 103,000 (492,000)
Inventories (205,000) (293,000)
Prepaid expenses (375,000) (937,000)
Deposits and other (83,000) (834,000)
Deferred taxes - 207,000
Accounts payable 1,028,000 1,341,000
Other accrued liabilities (435,000) (869,000)
--------------- ---------------
Net cash provided by operating activities 4,538,000 3,558,000
Cash flows from investing activities:
Collections on notes receivable 1,124,000 -
Loans to officer (522,000) -
Issuance of notes receivable - (2,694,000)
Acquisition of restaurants - (6,634,000)
Acquisition of property, buildings and equipment (7,778,000) (4,132,000)
--------------- ---------------
Net cash used in investing activities (7,176,000) (13,460,000)
Cash flows from financing activities:
Payments to extinguish long term debt (3,500,000) (8,212,000)
Principal payment on capital leases (242,000) (194,000)
Proceeds from line of credit 6,500,000 -
Sale of treasury stock 49,000 -
Proceeds from issuance of long-term debt - 10,800,000
Loan costs (30,000) (410,000)
Retirement of stock - (5,000,000)
--------------- ---------------
Net cash used in financing activities 2,777,000 (3,016,000)
--------------- ---------------
Net increase/(decrease) in cash and cash equivalents 139,000 (12,918,000)
Cash and cash equivalents at beginning of period 121,000 15,387,000
--------------- ---------------
Cash and cash equivalents at end of period $ 260,000 $ 2,469,000
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
-----------------------------------------
NOVEMBER 1, 1999 NOVEMBER 2, 1998
---------------- ----------------
<S> <C> <C>
Supplemental disclosures of cash flow Information:
CASH PAID FOR INTEREST $ 1,029,000 $ 318,000
============= ==============
CASH PAID FOR INCOME TAXES $ 51,000 $ 2,616,000
============= ==============
NON CASH INVESTING AND FINANCING ACTIVITIES:
Exchange of deposit for principal payment $ 166,000 $ -
Exchange of receivables from Stacey's Buffet, Inc.
for three Stacey's Buffet Restaurants $ - $ 1,004,000
Acquisition of BuddyFreddys assets with debt financing $ - $ 1,200,000
Acquisition of 2,000,000 of common stock with debt
financing $ - $ 7,500,000
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
7
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts for Star Buffet, Inc., together with its direct and indirect wholly
owned subsidiaries Summit Family Restaurants Inc. ("Summit"), HTB
Restaurants, Inc. ("HTB"), Northstar Buffet, Inc. ("NSBI") and Star Buffet
Management, Inc. ("SBMI") (collectively the "Company") and have been prepared
in accordance with generally accepted accounting principles, the instructions
to Form 10-Q and Article 10 of Regulation S-X. These financial statements
should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, included in the Company's Annual Report on
Form 10-K for the fiscal year ended January 25, 1999. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented have been reflected herein.
Results of operations for such interim periods are not necessarily indicative
of results to be expected for the full fiscal year or for any future periods.
Certain reclassifications have been made to the fiscal 1999 consolidated
financial statements to conform to the fiscal 2000 presentation. The
accompanying condensed financial statements include the results of operations
and assets and liabilities directly related to the Company's operations.
Certain estimates, assumptions and allocations were made in preparing such
financial statements.
The operating results for the 12-week period ended November 1, 1999 include
operations for each of the Company's sixteen franchised HomeTown Buffet
restaurants, two Casa Bonita restaurants, six JJ North's Country Buffet
restaurants, two North's Star Buffet restaurants, ten franchised JB's
Restaurants, three BuddyFreddys restaurants, two Holiday House restaurants
and ten BuddyFreddys Country Buffet restaurants. The operating results for
the 12-week period ended November 1, 1999 also include ten weeks of
operations for one North's Star Buffet restaurant, twelve weeks of operations
for one closed North's Star Buffet restaurant which was converted to a JB's
Restaurant on the last day of the quarter, eight weeks of operations of a
newly acquired and remodeled BuddyFreddys Country Buffet, and nine weeks of
operations of two additional BuddyFreddys Country Buffet, one of which was
closed for remodeling and one due to road construction. In addition, the
Company acquired a non-operating property during the last week of the quarter
with the intention of opening the property as a BuddyFreddys Country Buffet
during Fiscal 2001. The operating results for the 12-week period ended
November 2, 1998 include 12 weeks of operations for each of the Company's 16
franchised HomeTown Buffet restaurants, nine JB's Restaurants, six JJ North's
Grand Buffet restaurants, five North Star Buffet restaurants, five Stacey's
Buffet restaurants, three BuddyFreddys restaurants, two Casa Bonita
restaurants and two Maggie's Buffet restaurants. In addition, during such
period the Company had three of the five Stacey's and one of the two Maggie's
Buffet restaurants closed for remodeling.
The Company utilizes a 52/53 week fiscal year which ends on the last Monday
in January. The first quarter of each year contains 16 weeks while the other
three quarters each contain 12 weeks.
NOTE (B) SUBSEQUENT EVENT
The Company has been notified by The Nasdaq Stock Market that it is currently
in noncompliance regarding the minimum market value of public float
potentially resulting in the delisting of its shares from the Nasdaq National
Market in February 2000. Should this occur, the Company plans to apply for a
listing of its shares on the Nasdaq SmallCap Market.
8
<PAGE>
NOTE (C) SUBSEQUENT EVENT
The Company's Board of Directors has authorized the repurchase in the open
market, in private transactions or through alternative repurchase
transactions deemed appropriate by the Board of Directors, of up to 500,000
shares of the Company's common stock.
NOTE (D) RELATED PARTY TRANSACTION
In connection with the company's employment contract with Mr. Robert E.
Wheaton, the Company's President and Chief Executive Officer, the Company has
agreed to provide Mr. Wheaton with certain loans solely for the purchase of
the Company's common stock. The loans are secured and bear interest at the
prevailing rate set forth in the Company's credit facility with BankBoston.
The current rate is approximately seven percent. At the end of the third
quarter ended November 1, 1999, the loans totaled $522,000.
NOTE (E) CONTINGENCIES
On November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand
for Arbitration against the Company with the American Arbitration
Association, Irvine, California (District No. 949-251-9840), alleging breach
of contract in connection with the Company's failure to perform under a
Business Services Agreement between North's and the Company dated July 24,
1997. On June 22, 1999, the parties agreed to dismiss the Arbitration
Proceeding without prejudice since the issues related to the Business Service
Agreement are being litigated in the Utah action described below.
On November 25, 1998, the Company filed an action against North's
Restaurants, Inc. ("North's") in the United States District Court, District
of Utah, Case No. 2-98-CV-893, seeking damages for breach of a promissory
note and an Amended and Restated Credit Agreement (collectively, the "Credit
Agreements") in the amount of $3,570,935. On December 31, 1998, North's filed
an answer to the Company's Complaint, denying generally the allegations, and
filed counterclaims against the Company alleging (i) the Company fraudulently
induced North's to enter into various agreements with the Company relating to
the Company's acquisition of seven JJ North's Grand Buffet Restaurants and an
option to acquire nine additional restaurants operated by North's and (ii)
the Company has breached the Business Services Agreement. The Company plans
to pursue vigorously its claims against North's and to vigorously defend the
counterclaims asserted by North's. The litigation is continuing and is not
yet scheduled for trial.
The Company is from time to time the subject of complaints or litigation from
customers alleging injury on properties operated by the Company, illness or
other food quality, health or operational concerns. Adverse publicity
resulting from such allegations may materially adversely affect the Company
and its restaurants, regardless of whether such allegations are valid or
whether the Company is liable. The Company also is the subject of complaints
or allegations from employees from time to time. The Company believes that
the lawsuits, claims and other legal matters to which it has become subject
in the course of its business are not material to the Company's business,
financial condition or results of operations, but an existing or future
lawsuit or claim could result in an adverse decision against the Company that
could have a material adverse effect on the Company's business, financial
condition and results of operations.
9
<PAGE>
STAR BUFFET, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis should be read in
conjunction with the unaudited consolidated financial statements, and the
notes thereto, presented elsewhere in this Report. The addition of
restaurants in Florida are the principal reasons for the differences when
comparing results of operations for the 12-week period ended November 1, 1999
with the results of operations for the 12-week period ended November 2, 1998.
Comparability of future periods may also from time to time be affected by the
implementation of the Company's acquisition and strategic alliance strategies.
Consolidated net income for the 12-week period ended November 1, 1999
decreased $511,000 or 96.8% to $17,000 or $0.01 per share on a diluted basis
as compared with net income of $528,000 for the comparable prior year period.
Consolidated net income for the 40-week period ended November 1, 1999
decreased $1,291,000 or 44.4% to $1,615,000 or $0.55 per share on a diluted
basis as compared with net income of $2,906,000 for the comparable prior year
period. Net income was adversely impacted by legal costs associated with the
completion of an arbitration case and by higher interest costs from
borrowings associated with increased capital expenditures and the Company's
repurchase of 2,500,000 shares of common stock in the third and fourth
quarters of last year.
This Quarterly Report on Form 10-Q contains forward looking statements, which
are subject to known and unknown risks, uncertainties and other factors which
may cause the actual results, performance, or achievements of the Company to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; success of integrating newly acquired under-performing or
unprofitable restaurants; the impact of competitive products and pricing;
success of operating initiatives; advertising and promotional efforts;
adverse publicity; changes in business strategy or development plans; quality
of management; availability, terms and deployment of capital; changes in
prevailing interest rates and the availability of financing; food, labor, and
employee benefits costs; changes in, or the failure to comply with,
government regulations; weather conditions; construction schedules;
implementation of the Company's acquisition and strategic alliance strategy;
the effect of the Company's accounting polices and other risks detailed in
the Company's Form 10-K, for the fiscal year ended January 25, 1999, and
other filings with the Securities and Exchange Commission.
COMPONENTS OF INCOME FROM OPERATIONS
Total revenues include a combination of food and beverage sales and are net
of applicable state and city sales taxes.
Food costs primarily consist of the costs of food and beverage items. Various
factors beyond the Company's control, including adverse weather and natural
disasters, may affect food costs. Accordingly, the Company may incur periodic
fluctuations in food costs. Generally, these temporary increases are absorbed
by the Company and not passed on to customers; however, management may adjust
menu prices to compensate for increased costs of a more permanent nature.
Labor costs include restaurant management salaries, bonuses, hourly wages for
unit level employees, various health, life and dental insurance programs,
vacations and sick pay and payroll taxes.
10
<PAGE>
Occupancy and other expenses are primarily fixed in nature and generally do
not vary with restaurant sales volume. Rent, insurance, property taxes,
utilities, maintenance and advertising account for the major expenditures in
this category.
General and administrative expenses include all corporate and administrative
functions that serve to support the existing restaurant base and provide the
infrastructure for future growth. Management, supervisory and staff salaries,
employee benefits, data processing, training and office supplies are the
major items of expense in this category.
For the forty weeks ended November 1, 1999, other income represents an
insurance settlement for loss of income on a unit in Florida that was closed
due to fire damage. For the forty weeks ended November 2, 1998, other income
represents management fee income resulting from the Company's management
agreement related to one JJ North's Grand Buffet restaurant which was
converted to a Company unit on January 12, 1999.
11
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of total revenues for the 12 and 40 weeks ended November 1, 1999
and November 2, 1998.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses
Food costs 33.0 33.2 33.0 33.2
Labor costs 34.6 32.5 33.6 31.7
Occupancy and other expenses 21.5 21.1 20.2 20.3
General and administrative
expenses 5.7 4.6 4.9 4.7
Depreciation and amortization 4.3 4.2 3.7 3.5
------ ------ ------ ------
Total costs and expenses 99.1 95.6 95.4 93.4
------ ------ ------ ------
Income from operations 0.9 4.4 4.6 6.6
Interest expense (1.6) (0.9) (1.3) (0.5)
Interest income 0.0 0.8 0.0 0.9
Other Income 0.8 0.4 0.2 0.4
------ ------ ------ ------
Income before income taxes 0.1 4.7 3.5 7.4
Income tax expense 0.0 (1.9) (1.4) (3.0)
------ ------ ------ ------
Net income 0.1% 2.8% 2.1% 4.4%
====== ====== ======= ======
Effective income tax rate 40.0% 40.0% 40.0% 40.0%
====== ====== ======= ======
</TABLE>
Total revenues increased $2,351,000 or 12.4% from $19.0 million in the 12
weeks ended November 2, 1998 to $21.3 million in the 12 weeks ended November
1, 1999. The increase in revenues reflects additional restaurants in
operation in the quarter, primarily in the Florida division. Total revenues
increased $10.5 million or 16.1% from $65.2 million in the 40 weeks ended
November 2, 1998 to $75.7 million in the 40 weeks ended November 1, 1999. The
increase in revenues reflects additional restaurants in operation in the
quarter, primarily in the Florida division.
Food costs as a percentage of total revenues decreased from 33.2% during both
the 12 and 40-week periods ended November 2, 1998 to 33.0% during the 12 and
40 weeks ended November 1, 1999. The decrease as a percentage of total
revenues was primarily attributable to lower food costs in the converted
Florida Buffets Division stores.
Labor costs as a percentage of total revenues increased from 32.5% during the
12-week period ended November 2, 1998 to 34.6% during the 12-week period
ended November 1, 1999, and from 31.7%
12
<PAGE>
during the 40-week period ended November 2, 1998 to 33.6% during the 40 weeks
ended November 1, 1999. The increase as a percentage of total revenues was
primarily attributable to increases in hourly labor, benefits and workers
compensation from the prior year.
Occupancy and other expenses as a percentage of total revenues increased from
21.1% during the 12-week period ended November 2, 1998 to 21.5% during the
12-week period ended November 1, 1999, and decreased from 20.3% during the
40-week period ended November 2, 1998 to 20.2% during the 40-week period
ended November 1, 1999. The increase as a percentage of total revenues during
the 12 weeks ended November 1, 1999 primarily reflects increases in utilities
and supplies.
General and administrative costs as a percentage of total revenues increased
from 4.6% during the 12-week period ended November 2, 1998 to 5.7% during the
12-week period ended November 1, 1999, and from 4.7% during the 40-week
period ended November 2, 1998 to 4.9% during the 40-week period ended
November 1, 1999. The increase as a percentage of total revenues was
primarily attributable to legal costs associated with the completion of an
arbitration case.
Interest expense as a percentage of total revenues increased from 0.9% during
the 12-week period ended November 2, 1998 to 1.6% during the 12-week period
ended November 1, 1999, and from 0.5% during the 40-week period ended
November 2, 1998 to 1.3% during the 40-week period ended November 1, 1999.
The increase as a percentage of total revenues was primarily attributable to
the repurchase of the Company's common stock and conversions of restaurants.
Interest income of $9,000 and $30,000 for the 12 and 40-week periods ended
November 1, 1999, respectively, was generated by the Company's cash and
outstanding notes receivable balances during the period. Management has
suspended the interest accrual on the notes receivable from North's
Restaurants, Inc. ("North's") pending the resolution of the Company's dispute
with North's. Interest income of $145,000 and $618,000 for the 12 and 40-week
periods ended November 2, 1998, respectively, was generated by interest
earned on the Company's cash and cash equivalents and outstanding notes
receivable balances during the period.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment and
construction could affect the Company's operations. Many of the Company's
employees are paid hourly rates related to the federal and state minimum wage
laws. Recent legislation increasing the federal minimum wage has resulted in
higher labor costs to the Company. In addition, the cost of food commodities
utilized by the Company are subject to market supply and demand pressures.
Shifts in these costs may have a significant impact on the Company's food
costs. The Company anticipates that increases in these costs can be offset
through pricing and other cost control efforts; however, there is no
assurance that the Company would be able to pass such costs on to its guests
or if it were able to do so, it could do so in a short period of time.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company historically financed operations through a combination of cash on
hand, cash provided from operations and, prior to the Company's initial
public offering in September 1997, borrowings available to its predecessor
under bank lines of credit.
As of November 1, 1999, the Company had $260,000 in cash. Cash and cash
equivalents increased by $139,000 during the 40 weeks ended November 1, 1999.
Total cash provided by operations was approximately $4.5 million. A note
receivable paid in full provided cash of approximately $1.1 million. The
Company used approximately $7.8 million on capital improvements and
approximately $3.5 million to extinguish long term debt.
The Company opened one BuddyFreddys Country Buffet restaurant, closed two
BuddyFreddys Country Buffets, one for remodeling and one due to road
construction, and closed a North's Star Buffet during the third quarter of
fiscal 2000. In addition, one closed North's Star Buffet restaurant was
re-opened as a JB's Restaurant and a non-operating property was acquired to
convert to a BuddyFreddys Country Buffet.
The Company intends to expand its operations through the opening of new
restaurants and the acquisition of regional buffet chains. In addition, the
Company may expand through the purchase of existing restaurant sites which
would be converted to one of the Company's existing restaurant concepts. In
many instances, management believes that existing restaurant locations can be
acquired and converted to the Company's prototype at a lower cost than new
unit openings. Management estimates the cost of acquiring and converting a
property to one of the existing concepts to be approximately $150,000 to
$650,000. These costs consist primarily of exterior and interior
modifications, signage, new tables, chairs and food bars and the addition of
certain kitchen and food service equipment. There can be no assurance that
the Company will be able to acquire additional restaurant chains or locations
or, if acquired, that these restaurants will have a positive contribution to
the Company's results of operations.
On October 23, 1998, the Company entered into a $20 million syndicated bank
financing agreement led by BankBoston, N.A. The credit facility consists of a
$13 million, 5-year term loan (the "Term Loan Facility") and a $7 million,
5-year revolving credit facility (the "Revolving Credit Facility"). The Term
Loan Facility refinanced existing indebtedness and provided capital for the
repurchase of common stock and acquisitions. The Term Loan Facility balance
was $11,275,000 as of December 10, 1999. Principal payments under the Term
Loan Facility are due in quarterly installments, beginning in November 1999
and continue until the final maturity in October 2003. Borrowings under the
Revolving Credit Facility will be used for the Company's new unit development
and working capital needs. All outstanding amounts under the Revolving Credit
Facility will become due in October 2003. The Revolving Credit Facility
balance was $6.5 million on December 10, 1999.
The Company believes that available cash, cash flow from operations and
amounts available under the Term Loan Facility and Revolving Credit Facility
will be sufficient to satisfy its working capital and capital expenditure
requirements for the foreseeable future. If the Company requires additional
funds to support its working capital requirements or for other purposes,
including acquisitions, it may seek to raise such additional funds through
public or private equity and/or debt financing or from other sources. There
can be no assurance, however, that changes in the Company's operating plans,
the unavailability of a credit facility, the acceleration of the Company's
expansion plans, lower than anticipated revenues, increased expenses,
potential acquisitions, or other events will not cause the Company to seek
14
<PAGE>
additional financing sooner than anticipated. There can be no assurance that
additional financing will be available on acceptable terms or at all.
YEAR 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The "Year 2000" problem stems from computer
applications that were written using two digits rather than four digits to
define the applicable year. As a result, these applications may recognize
"00" as "1900" rather than "2000."
The Company has investigated the impact of the Year 2000 problem on its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company does not expect the Year
2000 problem, including the cost of making the Company's computerized
information systems Year 2000 compliant, to have a material adverse impact on
the Company's financial position, results of operations or cash flows in
future periods. The Company has a few remaining non-compliant restaurants and
home office personal computers that will be upgraded in the next 10 days.
The Company has also initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties to remediate their Year 2000 problems. While the Company has not been
informed of any material risks associated with the Year 2000 problem on these
entities, there can be no assurance that the computerized information systems
of these third parties will be Year 2000 compliant on a timely basis. The
inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company.
The Company does not have a completed contingency plan to address operational
difficulties in the event the Company's Year 2000 evaluation and remediation
efforts to date prove to be unsuccessful.
To date, the Company has expensed incremental costs of approximately $75,000
to assess and remediate potential Year 2000 problems. The total remaining
incremental cost is estimated to be $55,000. The Company is expensing as
incurred all costs related to the assessment and remediation of the Year 2000
issue. These costs are being funded through operating cash flows.
SEGMENT AND RELATED REPORTING
The Company has five reportable operating segments: HomeTown Buffet, Casa
Bonita, North's Star, Florida Buffets Division and JB's Restaurants. The
Company's reportable segments are based on the brand similarities and
geographic location.
The HomeTown Buffet segment includes the Company's 16 franchised HomeTown
Buffet restaurants. The Casa Bonita segment includes two Casa Bonita
restaurants. The North's Star segment includes six JJ North's Country Buffet
restaurants and three North's Star Buffet Restaurants, one of which was
closed on October 16, 1999. The Florida Buffets Division includes three
BuddyFreddys restaurants, twelve BuddyFreddys Country Buffet restaurants and
two Holiday House restaurants. The JB's Restaurants segment includes the
Company's ten franchised JB's Restaurants.
The accounting policies of the reportable segments are the same as those
described in Note A. The Company evaluates the performance of its operating
segments based on income before income taxes.
15
<PAGE>
Summarized financial information concerning the Company's reportable segments
is shown in the following table. The other assets presented in the
consolidated balance sheet and not in the reportable segments relate to the
Company as a whole, and not individual segments. Also certain incomes and
expenses in the consolidated statements of income are not included in the
reportable segments.
<TABLE>
<CAPTION>
(Dollars in Thousands)
40 WEEKS ENDED HOMETOWN CASA NORTH'S FLORIDA
NOVEMBER 1, 1999 BUFFET BONITA STAR BUFFET JB'S OTHER TOTAL
---------------- -------- ------- ------- ------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 32,539 $ 9,346 $ 8,811 $ 16,944 $ 8,078 $ -- $ 75,718
Interest income -- -- 6 -- -- 24 30
Interest expense 125 -- 5 11 6 847 994
Deprecation & amortization 1,409 119 339 734 179 18 2,798
Income (loss) before income taxes 3,522 1,838 (5) (294) 575 (2,944) 2,692
Total assets 21,387 1,562 4,668 15,723 4,453 1,134 48,927
40 WEEKS ENDED
NOVEMBER 2, 1998
----------------
Revenues $ 31,510 $ 9,757 $ 8,553 $ 7,556 $ 7,869 $ -- $ 65,245
Interest income -- -- 215 92 -- 311 618
Interest expense 145 -- 5 29 8 111 298
Deprecation & amortization 1,348 100 459 199 184 7 2,297
Income (loss) before income taxes 3,376 2,015 560 (678) 534 (963) 4,844
Total assets 20,990 1,390 6,513 3,915 1,760 8,641 43,209
</TABLE>
16
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand
for Arbitration against the Company with the American Arbitration
Association, Irvine, California (District No. 949-251-9840), alleging breach
of contract in connection with the Company's failure to perform under a
Business Services Agreement between North's and the Company dated July 24,
1997. On June 22, 1999, the parties agreed to dismiss the Arbitration
Proceeding without prejudice since the issues related to the Business Service
Agreement are being litigated in the Utah action described below.
On November 25, 1998, the Company filed an action against North's
Restaurants, Inc. ("North's") in the United States District Court, District
of Utah, Case No. 2-98-CV-893, seeking damages for breach of a promissory
note and an Amended and Restated Credit Agreement (collectively, the "Credit
Agreements") in the amount of $3,570,935. On December 31, 1998, North's filed
an answer to the Company's Complaint, denying generally the allegations, and
filed counterclaims against the Company alleging (i) the Company fraudulently
induced North's to enter into various agreements with the Company relating to
the Company's acquisition of seven JJ North's Grand Buffet Restaurants and an
option to acquire nine additional restaurants operated by North's and (ii)
the Company has breached the Business Services Agreement. The Company plans
to pursue vigorously its claims against North's and to vigorously defend the
counterclaims asserted by North's. The litigation is continuing and is not
yet scheduled for trial.
HTB Restaurants, Inc. ("HTB") holds 16 franchises for HomeTown Buffet
restaurants. The franchisor, HomeTown Buffet Restaurants, Inc. ("HomeTown"),
has asserted that the Company breached its franchise agreements by using
proprietary information of the franchisor to open the Company's North's Star
Buffet restaurants and issued a Notice of Termination of the 16 franchise
agreements on July 21, 1998. The Company denied any breach and demanded
arbitration to contest the Notice of Termination. In a sixteen page Award,
the arbitrator ruled that HomeTown was not entitled to terminate the
franchise agreements. The arbitrator concluded that the claimed bases for
termination set forth in the July 1998 Notice were either not proved by
HomeTown or were not a violation of the franchise agreements. The arbitrator,
however, found that the franchise agreements placed strict requirements upon
HTB to protect HomeTown's proprietary information and to prevent its
disclosure, and that there was evidence that HomeTown information had been
disclosed. Accordingly, the arbitrator awarded HomeTown damages in the amount
of $250,000 and directed HTB to pay all administrative fees and expenses of
the American Arbitration Association incurred by both parties, as well as all
fees and expenses of the Arbitrator. The Award enjoins HTB and any of its
officers, agents, or employees from using HomeTown information in any other
similar restaurant business as authorized under the franchise agreements. The
Award is a full settlement of all claims submitted to the arbitration.
The Company is from time to time the subject of complaints or litigation from
customers alleging injury on properties operated by the Company, illness or
other food quality, health or operational concerns. Adverse publicity
resulting from such allegations may materially adversely affect the Company
and its restaurants, regardless of whether such allegations are valid or
whether the Company is liable. The Company also is the subject of complaints
or allegations from employees from time to time. The Company believes that
the lawsuits, claims and other legal matters to which it has become subject
in the course of its business are not material to the Company's business,
financial condition or results of operations, but an existing or future
lawsuit or claim could result in an adverse decision against the
17
<PAGE>
Company that could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are attached to this report:
<TABLE>
<CAPTION>
Exhibit Description
Number of Exhibit
------- -----------
<S> <C>
11 Calculation of Earnings per Share
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
The Company did not file any current reports on Form 8-K during the
twelve weeks ended November 1, 1999.
There were no other items to be reported under Part II of this report.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR BUFFET, INC. AND SUBSIDIARIES
December 16, 1999 By: /s/ Robert E. Wheaton
------------------------
Robert E. Wheaton
President and
Chief Executive Officer
19
<PAGE>
EXHIBIT 11
STAR BUFFET, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS
PER SHARE
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
--------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 17,000 $ 528,000 $ 1,615,000 $ 2,906,000
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding during the period 2,950,000 4,164,000 2,950,000 5,064,000
----------- ----------- ----------- -----------
Basic Earnings per Share $ 0.01 $ 0.13 $ 0.55 $ 0.57
----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE
Net Income $ 17,000 $ 528,000 $ 1,615,000 $ 2,906,000
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding during the period 2,950,000 4,164,000 2,950,000 5,064,000
----------- ----------- ----------- -----------
Incremental common shares
attributable to outstanding stock options - - - -
----------- ----------- ----------- -----------
2,950,000 4,164,000 2,950,000 5,064,000
Diluted Earnings per Share $ 0.01 $ 0.13 $ 0.55 $ 0.57
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS BALANCE SHEET AND STATEMENTS OF OPERATIONS AS OF AND FOR THE TWELVE
WEEK PERIOD ENDED NOVEMBER 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> JAN-26-1999
<PERIOD-END> NOV-01-1999
<CASH> 260,000
<SECURITIES> 0
<RECEIVABLES> 993,000
<ALLOWANCES> 0
<INVENTORY> 1,047,000
<CURRENT-ASSETS> 3,799,000
<PP&E> 47,972,000
<DEPRECIATION> (11,364,000)
<TOTAL-ASSETS> 48,927,000
<CURRENT-LIABILITIES> 9,715,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 21,024,000
<TOTAL-LIABILITY-AND-EQUITY> 48,927,000
<SALES> 21,347,000
<TOTAL-REVENUES> 21,347,000
<CGS> 19,946,000
<TOTAL-COSTS> 21,157,000
<OTHER-EXPENSES> (179,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341,000
<INCOME-PRETAX> 28,000
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 17,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,000
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
