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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-6054
STAR BUFFET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 84-1433454
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
440 LAWNDALE DRIVE
SALT LAKE CITY, UTAH 84115
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (801) 463-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF EACH CLASS):
COMMON STOCK
$.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of April 16, 1999, was $12,538,000.
The number of shares outstanding of the registrant's common stock was
2,950,000 shares as of April 16, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after January 25, 1999, are incorporated by reference into Part
III of this Report.
The Exhibit Index is contained in Part IV herein on Page E-1.
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STAR BUFFET, INC., AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 25, 1999
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 20
ITEM 11. EXECUTIVE COMPENSATION...................................... 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 22
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PART I
ITEM 1. BUSINESS
OVERVIEW
Star Buffet, Inc., a Delaware corporation ("Star" and collectively with its
subsidiaries, the "Company") is engaged primarily in the restaurant industry. As
of January 25, 1999, the Company owns and operates 16 franchised HomeTown Buffet
restaurants, eleven BuddyFreddys restaurants, nine franchised JB's restaurants,
six JJ North's Grand Buffet restaurants, five North's Star Buffet restaurants,
three Holiday House restaurants and two Mexican-themed restaurants operated
under the Casa Bonita name. As of January 25, 1999, two of the eleven
BuddyFreddys restaurants were still under construction. The Company's
restaurants are located in nine western states, Oklahoma, Pennsylvania and
Florida and are focused upon providing customers with a wide variety of fresh,
high quality food at moderate prices primarily in the buffet format.
The Company was formed on July 28, 1997 as a wholly-owned subsidiary of CKE
Restaurants, Inc. ("CKE"). On September 30, 1997 the Company completed an
initial public offering (the "Initial Public Offering") of 3,000,000 shares of
its common stock at an Initial Public Offering price of $12.00 per share. Of the
3,000,000 shares of common stock sold in the Initial Public Offering, 2,400,000
shares were sold by the company and 600,000 shares were sold by CKE. On October
7, 1997, the underwriters exercised their over-allotment option and acquired an
additional 450,000 shares of common stock from the Company. The Initial Public
Offering generated total net proceeds to the Company of $30.8 million after
commissions and offering expenses, a portion of the proceeds were used to pay a
dividend to CKE and to repay indebtedness assumed in connection with the
acquisition of restaurants.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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; 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 Prospectus dated September 24, 1997 and other filings
with the Securities and Exchange Commission.
RECENT DEVELOPMENTS
On February 24, 1998, the Company acquired twelve JB's Restaurants from
JB's Restaurants, Inc., a wholly-owned subsidiary of CKE, for $4,265,000,
subject to adjustments. At the time of acquisition, the Company prepaid royalty
fees for one year in the amount of $485,000. The Company continues to operate
nine restaurants under a franchise agreement with JB's Family Restaurants, Inc,
which is a wholly-owned subsidiary of Santa Barbara Restaurant Group, Inc.
During fiscal 1999, the Company completed three conversions of JB's restaurants
to North's Star Buffet restaurants -- the Company's small-format buffet concept.
In February 1999, two of the three restaurants were closed because of
unacceptable margins.
On April 1, 1998, as part of the Company's plan to expand its presence in
Florida, the Company acquired two family-dining restaurants which operate under
the brand name of BuddyFreddys. The purchase price was approximately $1.6
million, subject to adjustments. These restaurants, which the Company believes
have very strong brand recognition in central Florida, were acquired to serve as
a platform for additional restaurant acquisitions in that state. Subsequent to
the purchase of BuddyFreddys, the Company acquired additional
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restaurants for conversion to the BuddyFreddys concept. Seven conversions to the
BuddyFreddys concept occurred as of the end of the fiscal year. Two more
conversions are planned for the first quarter of fiscal 2000. The Company
anticipates that it will continue to expand the BuddyFreddys concept in the
Florida market by acquiring and/or constructing additional units. As part of the
plan to expand its presence in Florida, the Company announced on December 11,
1998 a strategic alliance with DenAmerica Corp. (AMEX:DEN) whereby the Company
plans to convert certain Black-eyed Pea Restaurants currently owned and operated
by DenAmerica in the Orlando market to the BuddyFreddys concept.
On September 10, 1998, the Company entered into a stock repurchase
authorized by its Board of Directors to purchase two million shares of the
Company's Common Stock held by CKE Restaurants, Inc. ("CKE") for a purchase
price of $5 million in cash and a $7.5 million 90 day promissory note secured by
treasury stock. The Company's Board of Directors also authorized the repurchase
of up to an additional 500,000 shares of the Company's Common Stock to be
effected in the open market, in private transactions or through alternative
repurchase transactions approved by the Board of Directors. During the third
quarter, the Company completed the purchase of two million shares from CKE and
in the fourth quarter repurchased 500,000 additional shares in the open market.
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 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
$13 million as of January 25, 1999. Principal payments under the Term Loan
Facility are due in quarterly installments, beginning in November 1999 and
continuing 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 $1.5 million on January 25, 1999. As of April 16, 1999, the Term Loan
Facility balance was $11.9 million and the Revolving Credit Facility was unused.
BUSINESS
The Company's strategic objective is to become a leading operator of
regional buffet restaurant brands through the acquisition of established
regional concepts and subsequent development of additional restaurants within
existing or new markets. The Company believes that certain elements of its
business strategy can be used successfully to improve the financial performance
of its recent and future acquisitions. Key elements of the Company's business
strategy as are follows:
Customer Focus. The Company believes that its ability to deliver high
quality food to customers with superior service in clean and friendly
environments has been central to its success at improving customer perceptions
and sales at its buffet restaurants. The key elements of management's focus
include:
- High Quality Food. The Company seeks to differentiate itself by providing
higher quality and better tasting food than its competitors. Food items
are prepared frequently and in small batches to ensure the correct
temperature, texture and flavor. Management limits the number of items
prepared each day and frequently rotates selected specialty items to
maintain customer interest while ensuring that the Company's signature
items are offered at the highest possible quality.
- Superior Service. The Company provides a level of customer service which
it believes has helped it establish a higher level of customer
satisfaction than its competitors. Customers are greeted by an employee
who seats the customers and explains the features of the restaurant and
menu offerings. In addition, the restaurants' managers seek to visit each
customer's table during meal periods to ensure guest satisfaction. To
help insure superior service levels, the Company utilizes a number of
methods to monitor guest satisfaction including independent mystery
shopper survey and a formalized customer comment card program.
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- Clean and Friendly Environment. The Company strives to offer a pleasant,
customer friendly environment at its restaurants by providing attractive,
updated restaurant decors and by emphasizing cleanliness in all areas of
its operations. Further, through regular maintenance, the Company seeks
to enhance the customer dining experience by keeping its restaurants
clean and pleasant.
Management Practices. The Company's management team has implemented a
series of management practices that have improved the operations of acquired
restaurants. The key elements of these management practices are:
- Restaurant Management. The Company has developed food, labor and customer
service management practices and reporting mechanisms that allow
management to effectively monitor restaurant-level operations, benchmark
restaurant performance statistics and communicate best-practices across
its restaurant operations. Through the use of its restaurant-level
incentive and bonus programs oriented toward motivating employees, as
well as its traditional recognition programs, the Company seeks to
motivate its employees and foster an environment where employees are
encouraged to share their ideas and cost saving suggestions with
management.
- Cost Management. The Company has been able to maintain a lean corporate
management structure by expanding the number of restaurants supervised by
field managers, having corporate personnel oversee multiple
administrative functions and appropriate outsourcing of certain functions
when cost effective. The Company's corporate infrastructure provides
purchasing, information systems, finance and accounting and payroll.
Through effective management of the Company's product mix, production
quantities and staffing, the Company has reduced its food, labor and
other operating costs.
- Brand Management. The Company's strategy is to separately manage each of
its restaurant brands to create a unique presence in the marketplace.
Although each of the companies' and its brands is positioned somewhat
differently in the market, the Company utilizes many of the same
marketing techniques such as local store marketing representatives, radio
advertising and promotional mailers to increase customer awareness and
loyalty.
GROWTH STRATEGY
The Company's strategic objective is to become a leading operator of
regional buffet restaurant brands through (i) acquisitions of existing buffet
restaurant chains which management believes can benefit from the Company's
management practices, (ii) the acquisitions of exiting restaurant properties
that can be converted to buffet brands operated or under development by the
Company and (iii) minority investments in or strategic alliances with other
restaurant chains. The Company's growth strategy is designed to capitalize on
the opportunities management perceives in the fragmented buffet segment of the
restaurant industry.
Acquisition Strategy. Management believes that the Company will be able to
capitalize on the successful attributes of acquired buffet chains while
increasing their focus on operations, customer service and quality. Management
believes that a number of acquisition opportunities exist due to the
fragmentation of the buffet, cafeteria and grill-buffet segments of the
restaurant industry, which are comprised of a substantial number of regional
chains. The Company believes that many of these regional chains are privately
owned and may be available for acquisition because they lack the financial and
operational structure to compete with larger regional and national chains.
Following acquisition, management intends to integrate and improve the
operations and profitability of the acquired units through the implementation of
the following key strategies:
- Enhance Food Quality and Service Levels. Management believes that, due to
the limited capital and management resources of many regional chains,
such restaurants often offer poor food quality and an insufficient level
of customer service. Management intends to increase the chains' customer
focus and utilize the management practices which have proven successful
at other Star Buffet, Inc. restaurants.
- Implement Operational Cost Controls and Management Incentive
Structures. Management believes that the management practices which have
successfully lowered food, labor and other operating costs at other Star
Buffet, Inc. restaurants can be implemented in other regional buffet
chains. In addition, the
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Company believes that its management incentive programs can increase the
customer service and profitability of acquired restaurants.
- Introduce Standardized Marketing Programs. Management believes that
selected increases in marketing expenditures can create meaningful
improvements in restaurant sales and profitability. Management intends to
increase the utilization of a variety of standardized marketing programs
and apply them to newly acquired restaurants.
Acquisitions, however, involve a number of special risks that could
adversely affect the Company's business, financial condition and results of
operations, including the diversion of management's attention, the assimilation
of the operations and personnel of acquired restaurants, the amortization of
acquired intangible assets and the potential loss of key employees.
New Restaurant Opening Strategy. In order to increase the Company's
presence in existing markets, the Company intends to expand through new
restaurant openings. While the Company may construct new restaurant facilities,
management intends to primarily seek opportunities to convert locations
currently occupied by other buffet, family dining or budget steakhouse
restaurant concepts to existing regional brands owned by the Company. The
Company has developed its prototype designs and menus for new restaurant
openings which management believes will offer customers a dining environment and
experience superior to existing buffet restaurants. Management believes that
these designs can be easily implemented at restaurants acquired by the Company.
In recent years, a number of chains in the family dining and budget
steakhouse segments of the restaurant industry have experienced operational
difficulties and declining performance. Management believes that these
difficulties are the result of increasing competition for these concepts from
the rapid growth of lower priced casual dining chains and casual steakhouses
which offer superior product quality and service at only moderately higher
prices. Many of these family dining restaurants and budget steakhouses occupy
desirable locations and provide opportunities to acquire desirable restaurant
locations at attractive prices. Management believes that these locations can be
acquired and converted at lower prices or leased at rates lower than those
available when compared to the cost of new construction.
Minority Investments and Strategic Alliances. Management intends to seek
minority investments in or strategic alliances with other restaurant chains.
Management believes that minority investments can provide an attractive
investment opportunity for the Company and may lower the acquisition cost of
such chains should the Company ultimately seek to acquire those chains.
Management believes that strategic alliances can be an excellent corporate
arrangement to facilitate (i) more productive use of under-performing restaurant
properties at lower cost and less risk than outright acquisition and (ii) reduce
corporate overhead or improve purchasing economies.
HOMETOWN BUFFET RESTAURANTS
General. The Company, through its subsidiary HTB Restaurants, Inc. ("HTB")
has a franchise agreement with HomeTown Buffet, Inc., a wholly-owned subsidiary
of Buffets, Inc., under which HTB operates HomeTown Buffet restaurants in
Arizona, Colorado, New Mexico, Utah and Wyoming.
HTB has entered into a franchise agreement for each location which requires
among other items, the payment of a continuing royalty fee. The royalty fee is
based on the aggregate gross sales of all the Company's HomeTown Buffet
restaurants. Each of the franchise agreements has a 20-year term (with two
five-year renewal options). HTB provides weekly sales reports to the HomeTown
franchisor as well as periodic and annual financial statements. HTB is obligated
to operate its Hometown Buffet restaurants in compliance with the franchisor's
requirements.
The franchisor may terminate a franchise agreement for a number of reasons,
including the failure to pay royalty fees when due, failure to comply with
applicable laws or repeated failure to comply with one or more requirements of
the franchise agreement. Many state franchise laws limit the ability of a
franchisor to terminate or refuse to renew a franchise. Generally, a franchisor
may terminate a franchise agreement only if
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the franchisee violates a material and substantial provision of the agreement
and fails to remedy the violation within a specified period.
Concept and Menu. HomeTown Buffet restaurants are located both in shopping
"strip centers" and as freestanding restaurants. HTB's typical restaurant format
is approximately 10,200 square feet with seating for approximately 375
customers. The restaurant design is based upon standardized construction plans,
with modifications made for each particular site. The restaurants offer fixed
price lunch, dinner and breakfast menus that entitle each customer to unlimited
servings of all menu items and beverages. The average check price is
approximately $6.15. The restaurants offer reduced prices to children under age
12 and to senior citizens.
HomeTown Buffet restaurants seek to differentiate themselves from other
buffet and cafeteria restaurants by the quality and variety of their food
offerings. The restaurants feature a "scatter bar" buffet system with eight
separate food islands in an "all-you-can-eat" format. Menus emphasize
traditional American "home cooking" and include soups, salads, entrees,
vegetables, non-alcoholic beverages and desserts. Customers can choose from
multiple entree choices, including fried and baked chicken and fish, roast beef,
turkey and ham. Additional entrees, such as lasagna, barbecued ribs and other
regional or seasonal dishes, are featured on particular days of the week. In
addition to entrees, each meal includes two freshly-prepared soups, assorted
vegetable and potato dishes, hot bread and an extensive salad bar. Dessert
selections include pudding, assorted cobblers, cakes, cookies and soft-serve
frozen dairy desserts and various sundae toppings.
HTB uses high-quality ingredients, including fresh seasonal fruits and
vegetables, in its menu offerings, and all menu items are prepared in small
batches throughout the day. The items are served promptly in relatively small
serving pans in order to ensure that all items are fresh, visually appealing and
served at the proper temperature.
Operations. The HomeTown Buffet restaurants are supervised directly by a
Vice President of HomeTown Buffet Operations, who reports to the Company's
President. Each HomeTown Buffet restaurant has a general manager and at least
three co-managers or assistant managers. Managers are required to attend formal
training sessions in management and operations of the restaurant. In addition,
each restaurant manager is required to comply with an extensive operations
manual to assure uniformity of operations and consistent high quality of
products. The Company has a performance based incentive program covering its
general and assistant managers in addition to a competitive base salary.
Individual restaurants typically employ between 70 and 110 non-management
hourly employees (made up of a mix of part-time and full-time workers),
depending on restaurant size and traffic.
CASA BONITA
Concept and Menu. The Company's two Casa Bonita restaurants are located in
Denver, Colorado and Tulsa, Oklahoma and contain 52,000 and 26,000 square feet,
respectively. The restaurants are designed to recreate the atmosphere of a
Mexican village at night. The restaurants also feature entertainment daily,
including strolling mariachis, authentic Mexican dancers, magicians, games and
cliff divers. The restaurants' entertainment, combined with high quality,
authentic Mexican food, is designed to attract a diverse customer base,
including tourists and local customers. In addition to typical Mexican menu
offerings, these restaurants feature all-you-can-eat dinners which offer
customers unlimited servings of selected menu items.
The Company focuses on three primary target audiences in its advertising
and promotional programs for its Casa Bonita restaurants: (i) local customers;
(ii) tourists; and (iii) groups and parties. The Company markets aggressively to
attract tourists by placing advertisements in local tourist and special event
guides and by otherwise promoting each Casa Bonita restaurant as a local
attraction. With its large dining areas and private rooms, the Company also
promotes Casa Bonita as an ideal setting for banquets, private parties and other
group events.
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NORTH'S STAR DIVISION
General. The North's Star Division consists of six JJ North's Grand Buffet
restaurants and five North's Star Buffet restaurants, of which two were closed
since the end of the fiscal year due to lower than expected performance. The
Company's six JJ North's Grand Buffet Restaurants are located in Idaho (3),
Washington (2), and Oregon (1). The restaurants are approximately 6,500 to 9,000
square feet and seat approximately 210 to 320 customers. The Company's five
North's Star Buffet restaurants are located in Utah (3), Arizona (1), and
Pennsylvania (1). The restaurants are approximately 4,800 to 9,000 square feet
and seat approximately 150 to 320 customers.
Concept and Menu. Both JJ North's Grand Buffet and North's Star Buffet
restaurants offer fixed price lunch, dinner and weekend breakfast menus that
entitle each customer to unlimited servings of all menu items and beverages.
Prices are approximately $5.59 for lunch and approximately $7.99 for dinner, and
may vary depending on restaurant location. The average check for JJ North's
Grand Buffet is $6.10. The average check in North's Star Buffet is $5.90. The
restaurants offer reduced prices to children under age 12 and to senior
citizens.
Both JJ North's Grand Buffet and North's Star Buffet restaurants seek to
differentiate themselves from other buffet and cafeteria restaurants by the
quality and variety of their food offerings. The restaurants feature a "scatter
bar" buffet system with eight separate food islands in an "all-you-can-eat"
format. Menus emphasize traditional American "home cooking" and include soups,
salads, entrees, vegetables, non-alcoholic beverages and desserts. Customers can
choose from multiple entree choices, including fried and baked chicken and fish,
roast beef, turkey and ham. Additional entrees, such as lasagna, barbecued ribs
and other regional or seasonal dishes, are featured on particular days of the
week. In addition to entrees, each meal includes two freshly-prepared soups,
assorted vegetable and potato dishes, hot bread and an extensive salad bar.
Dessert selections include pudding, assorted cobblers, cakes, cookies and
soft-serve frozen dairy desserts and various sundae toppings.
Both JJ North's Grand Buffet and North's Star Buffet restaurants use
high-quality ingredients, including fresh seasonal fruits and vegetables, in its
menu offerings, and all menu items are prepared in small batches throughout the
day. The items are served promptly in relatively small serving pans in order to
ensure that all items are fresh, visually appealing and served at the proper
temperature. JJ North's Grand Buffet regularly tests new menu items and upgrades
ingredients and cooking methods in order to improve the quality and consistency
of its food offerings.
Operations. The North's Star Division restaurants are supervised by a Vice
President of Operations who reports to the Company's President. Each restaurant
has a general manager and up to three assistant managers and typically employs
between 40 and 100 hourly employees (made up of a mix of part-time and full-time
workers) depending on restaurant size and traffic.
FLORIDA BUFFETS DIVISION
General. The Company, through several transactions, has acquired fourteen
properties in Florida which currently operate under the brand names BuddyFreddys
Country Buffet (9), Holiday House (3) and BuddyFreddys (2). Two of the nine
BuddyFreddys Country Buffet restaurants are undergoing conversion and are
expected to open in the first quarter of fiscal year 2000. Each restaurant
averages approximately 10,000 square feet with seating for approximately 350
guests. Each Holiday House Restaurants which average approximately 5,500 square
feet with seating for approximately 170 guests.
Concept and Menu. The nine BuddyFreddys Country Buffet restaurants offer a
buffet menu specializing in local dishes and southern-style cooking. Each
location also offers a small gift shop selling a variety of BuddyFreddys
apparel, snacks and specialty merchandise. The two BuddyFreddys are different in
that they offer a full a la carte menu in addition to the "all-you-can-eat"
buffet. The three Holiday House restaurants also operate in a buffet format and
specialize in offering the customer a wide variety of meat entrees including
ham, roast beef, turkey and its signature leg of lamb. The average check price
for BuddyFreddys and Holiday House is approximately $6.60.
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Operations. The Florida restaurants are supervised by two Area Directors
who report to a Vice President of Operations who, in turn, reports to the
Company's President. Each restaurant has a general manager and up to four
assistant managers. Each restaurant employs between 50 and 100 hourly employees
(made up of a mix of part-time and full-time workers) depending on restaurant
size and traffic.
JB'S RESTAURANTS
General. The Company, through its subsidiary Summit Family Restaurants,
Inc. ("Summit") has a franchise agreement with JB's Family Restaurants, Inc., a
wholly-owned subsidiary of Santa Barbara Restaurant Group, Inc., under which
Summit, as a franchisee, currently operates nine JB's Restaurants in Arizona,
Montana, New Mexico, Utah and Wyoming. Summit has entered into a franchise
agreement for each location which requires among other items, the payment of a
continuing royalty fee.
Concept and Menu. JB's Restaurants offer a variety of breakfast, lunch and
dinner selections at moderate prices. The breakfast menu features an
"all-you-can-eat" breakfast buffet along with other traditional breakfast fare.
The lunch and dinner menu has a variety of sandwiches as well as steak, chicken,
pasta and seafood entrees. All JB's Restaurants offer an "all-you-can-eat" soup
and salad bar during the lunch and dinner. With the exception of the breakfast
buffet and the "all-you-can-eat" soup and salad bar, all entrees are cooked to
order and served by a wait staff. The average check is approximately $5.90.
Operations. The JB's Restaurants are supervised by a Vice President of
Operations who reports to the Company's President. Each restaurant has a general
manager and at least two assistant managers. Each restaurant employs between 20
and 50 hourly employees (made up of a mix of part-time and full-time workers)
depending on restaurant size and traffic.
LICENSES, TRADEMARKS AND SERVICE MARKS
The Company has purchased the trademarks and service marks for JJ North's
Grand Buffet, Casa Bonita, BuddyFreddys and Holiday House and has entered into a
license agreement with CKE for use of the "Star" name and design. The Company
utilizes the marks JB's Restaurant and HomeTown Buffet pursuant to various
franchise agreements.
SEASONALITY
The Company's business is somewhat seasonal in nature with the first and
second fiscal quarters being the highest volume periods. The Company's lowest
volume periods typically occur during the third and fourth fiscal quarters.
EMPLOYEES
As of April 16, 1999, the Company employed approximately 3,400 persons, of
whom approximately 3,200 were restaurant employees, and approximately 200 were
restaurant management, supervisory and corporate personnel. Restaurant employees
include both full-time and part-time workers paid on an hourly basis. No Company
employees are covered by collective bargaining agreements. The Company believes
that its relations with its employees are generally good.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers:
NAME AGE POSITION
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Robert E. Wheaton.......... 47 Chief Executive Officer, President and Chairman
Ronald E. Dowdy............ 42 Group Controller, Treasurer and Secretary
Jack M. Lloyd.............. 48 Director
Thomas G. Schadt........... 57 Director
Phillip "Buddy" Johnson.... 46 Director
Craig B. Wheaton........... 41 Director
Robert E. Wheaton has served as the Chief Executive Officer and President
and as a director of the Company since its formation in July 1997. Mr. Wheaton
has been Chairman of the Board since September 1998. Mr. Wheaton served as
Executive Vice President of CKE from January 1996 through January 1999. From
April 1995 to January 1996, he served as Vice President and Chief Financial
Officer of Denny's Inc., a subsidiary of Flagstar Corporation. From 1991 to
1995, Mr. Wheaton served as President and Chief Executive Officer, and from 1989
to 1991 as Vice President and Chief Financial Officer of The Bekins Company.
Ronald E. Dowdy has served as the Group Controller since June 1998 and as
Treasurer and Secretary since February 1999. Mr. Dowdy served as Controller to
Holiday House Corporation for nineteen years prior to joining Star Buffet.
Thomas G. Schadt has served as a director of the Company since the
completion of the Company's initial public offering in September 1997. Mr.
Schadt has been the Chief Executive Officer of a privately-held beverage
distribution company, Bear Creek, L.L.C., since 1995. From 1976 to 1994, he held
several positions with PepsiCo, Inc., most recently, Vice President of Food
Service.
Jack M. Lloyd has served as a director of the Company since the completion
of the Company's initial public offering in September 1997. Mr. Lloyd has served
as Chairman of the Board of DenAmerica Corp. since July 9, 1996 and as
President, Chief Executive Officer and a director of DenAmerica Corp. since
March 29, 1996. Mr. Lloyd served as Chairman of the Board and Chief Executive
Officer of Denwest Restaurant Corp. ("DRC") from 1987 until the March 1996
merger of DRC and DenAmerica and as President of DRC from 1987 until November
1994. Mr. Lloyd engaged in commercial and residential real estate development
and property management as President of First Federated Investment Corporation
during the early and mid-1980's. Mr. Lloyd also currently serves as a director
of Action Performance Companies, Inc.
Phillip "Buddy" Johnson has served as a Director of the Company since
February 1999 and as President of the BuddyFreddys Division since it was
acquired in April 1998. From 1980 until 1998, he was the founding Chairman and
CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnson served as
Republican floor leader in the Florida House of Representatives. Mr. Johnson
also served on the executive committee of The Foundation for Florida's Future, a
non-profit corporation established in 1995 by Jeb Bush.
Craig B. Wheaton has served as a director of the Company since February
1999. Mr. Wheaton is a partner in the law firm Kilpatrick Stockton LLP. His main
areas of practice include employee benefits, executive compensation and general
corporate law. Mr. Wheaton received his B.A. degree, with honors, from the
University of Virginia and his J.D. degree from Wake Forest University. Mr.
Wheaton was a member of the Tax Council of the North Carolina Bar Association
Section on Taxation ("93-'98) and chair of its Employee Benefits Committee
('95-'97). He is a member and former president of the Triangle Benefits Forum.
He is a member of the Southern Employee Benefits Conference, the Employee
Benefits Committee of the American Bar Association's Section of Taxation, the
National Pension Assistance Project's National Lawyers Network, and the National
Association of Stock Plan Professionals. Mr. Wheaton is the brother of Robert E.
Wheaton, the Company's Chairman, President and Chief Executive Officer.
8
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BUSINESS RISKS
Growth via Acquisitions. The Company intends to pursue an aggressive growth
strategy, the success of which will depend in part on the ability of the Company
to acquire additional buffet restaurants or to convert acquired sites into
buffet restaurants, both within existing and new markets. The success of the
Company's growth strategy is dependent upon numerous factors, many of which are
beyond the Company's control, including the availability of suitable acquisition
opportunities, the leasing or purchase of suitable sites on acceptable terms,
the ability of the Company to obtain necessary governmental permits and
approvals, the availability of appropriate financing and general economic
conditions. The Company must compete with other restaurant operators for
acquisition opportunities and with other restaurant operators, retail stores,
companies and developers for desirable site locations. Many of these entities
have substantially greater financial and other resources than the Company. There
can be no assurance that the Company will be able to identify, negotiate and
consummate acquisitions of additional buffet restaurants or new restaurant sites
or that acquired restaurants or newly constructed or converted restaurants can
be operated profitably and successfully integrated into the Company's
operations. Many of its acquired and new restaurants will be located in
geographic markets in which the Company has limited or no operating experience.
In addition, the Company's acquisition strategy includes the identification of
companies or properties that are viewed as underperforming by the Company. This
element of the Company's strategy increases the risks involved with the
Company's acquisitions.
Acquisitions involve a number of special risks that could adversely affect
the Company's business, results of operations and financial condition, including
the diversion of management's attention, the assimilation of the operations and
personnel of the acquired restaurants, the amortization of acquired intangible
assets and the potential loss of key employees. In particular, the failure to
maintain adequate operating and financial control systems or unexpected
difficulties encountered during expansion could materially and adversely affect
the Company's business, financial condition and results of operations. There can
be no assurance that any acquisition will not materially and adversely affect
the Company or that any such acquisition will enhance the Company's business.
The Company is unable to predict the likelihood of any additional acquisitions
being proposed or completed in the near future. If the Company determines to
make any significant acquisition, the Company may be required to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that adequate
equity or debt financing would be available to the Company for any such
acquisitions.
From February 1998 to January 1999, the Company has acquired 27 restaurants
in seven states, including 14 units in Florida. As a result of the acquisitions,
the Company is more complex and diverse, and the integration of the recent
acquisitions presents difficult challenges for the Company's management due to
the increased time and resources required in management effort. In order to
maintain and increase profitability, the Company will need to successfully
integrate and streamline overlapping functions. There can be no assurance that
integration will be successfully accomplished. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separate organizations. The integration of certain operations following the
acquisitions requires the dedication of management resources which may
temporarily distract attention from the day-to-day business of the Company. The
failure to effectively integrate the operations of the Company or to improve the
results of operations of the acquired restaurants could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence Upon and Restrictions Resulting from Franchisors. The Company
owns and operates 25 out of its 52 restaurants pursuant to the terms of
franchise agreements. The Company operates its 16 HomeTown Buffet Restaurants
through its wholly-owned subsidiary, HTB Restaurants, Inc., which is a party to
a Franchise Agreement with the HomeTown Franchisor for each such restaurant. The
Company operates its nine JB's Restaurants through its wholly-owned subsidiary,
Summit, which is a party to a Franchise Agreement with JB's Restaurant, Inc.
("JB's") for each such restaurant. The performance of the Company's HomeTown
Buffet restaurant operations and JB's restaurant operations is directly related
to the success of the HomeTown Buffet restaurant system and the JB's restaurant
system, respectively, including the management and financial condition of
HomeTown and JB's as well as restaurants operated by HomeTown and JB's and
9
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their respective franchisees. The inability of such restaurants to compete
effectively would have a material adverse effect on the Company's operations.
The success of the Company's HomeTown Buffet and JB's restaurants depends in
part on the effectiveness of the HomeTown Franchisor's and JB's marketing
efforts, new product development programs, quality assurance and other
operational systems over which the Company has no control. For example, adverse
publicity involving HomeTown, JB's or one or more HomeTown Buffet or JB's
restaurants operated by the franchisors or their other franchisees could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's operations with respect to its HomeTown and JB's restaurants
are subject to certain restrictions imposed by policies and procedures of
HomeTown or JB's as in effect from time to time. These restrictions limit the
Company's ability to modify the menu items and decor of its restaurants and may
have the effect of limiting the Company's ability to pursue its business plan.
Furthermore, the Franchise Agreement with the HomeTown franchisor imposes
substantial restrictions on the Company's ability to operate certain restaurant
formats and to open additional restaurants in certain geographical areas.
Fluctuations in Quarterly Results. The Company has in the past experienced,
and expects to continue to experience, significant fluctuations in restaurant
revenues and results of operations from quarter to quarter. In particular, the
Company's quarterly results can vary as a result of acquisitions, costs incurred
to integrate newly acquired entities, and seasonal patterns. A large number of
the Company's restaurants are located in areas which are susceptible to severe
winter weather conditions which may have a negative impact on customer traffic
and restaurant revenues. Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance.
There can be no assurance that future seasonal and quarterly fluctuations will
not have a material adverse effect on the Company's business, results of
operation and financial condition.
Competition. The restaurant industry is highly competitive. The Company
competes on the basis of the quality and value of food products offered, price,
service, location, ambiance and overall dining experience. The Company's
competitors include a large and diverse group of restaurant chains and
individually owned restaurants, including chains and individually owned
restaurants that use a buffet format. The number of buffet restaurants with
operations generally similar to the Company's has grown considerably in the last
several years and the Company believes competition among buffet-style
restaurants is increasing. As the Company and its principal competitors expand
operations in various geographic areas, competition, including competition among
buffet-style restaurants, can be expected to intensify. Such intensified
competition could increase the Company's operating costs or adversely affect its
revenues. A number of competitors have been in existence longer than the Company
and have substantially greater financial, marketing and other resources and
wider geographical diversity than does the Company. In addition, the restaurant
industry has few noneconomic barriers to entry and is affected by changes in
consumer tastes, national, regional and local economic conditions and market
trends. The Company's significant investment in, and long term commitment to,
each of its restaurant sites limits its ability to respond quickly or
effectively to changes in local competitive conditions or other changes that
could affect the Company's operations.
Restaurant Industry. Food service businesses are often affected by changes
in consumer tastes, national, regional and local economic conditions and
demographic trends. The performance of individual restaurants may be adversely
affected by factors such as traffic patterns, demographic considerations and the
type, number and location of competing restaurants. Multi-unit food service
businesses such as the Company's can also be materially and adversely affected
by publicity resulting from poor food quality, illness, injury or other health
concerns or operating issues stemming from one restaurant or a limited number of
restaurants. Dependence on frequent deliveries of fresh produce and groceries
subjects food service businesses such as the Company's to the risk that
shortages or interruptions in supply, caused by adverse weather or other
conditions, could adversely affect the availability, quality and cost of
ingredients. The Company's profitability is highly sensitive to increases in
food, labor and other operating costs that cannot always be passed on to its
guests in the form of higher prices or otherwise compensated for. In addition,
unfavorable trends or developments concerning factors such as inflation,
increased food, labor and employee benefits costs (including increases in hourly
wage and unemployment tax rates), increases in the number and locations of
competing buffet-style restaurants, regional weather conditions and the
availability of experienced management and hourly employees may also
10
13
adversely affect the food service industry in general and the Company's
business, financial condition and results of operations in particular. Changes
in economic conditions affecting the Company's guests could reduce traffic in
some or all of the Company's restaurants or impose practical limits on pricing,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The success of the Company will
depend in part on the ability of the Company's management to anticipate,
identify and respond to changing conditions. There can be no assurance that
management will be successful in this regard.
Dependence on Key Personnel. The Company believes that its success will
depend in part on the services of its key executives, including Robert E.
Wheaton, Chairman of the Board, President and Chief Executive Officer. The
Company does not maintain any key man life insurance. The loss of the services
of Mr. Wheaton could have a material adverse effect upon the Company's business,
financial condition and results of operations, and there can be no assurance
that a qualified replacement would be available in a timely manner if at all.
The Company's continued growth will also depend in part on its ability to
attract and retain additional skilled management personnel.
Government Regulation. The restaurant industry is subject to federal, state
and local government regulations, including those relating to the preparation
and sale of food and building and zoning requirements. In addition, the Company
is subject to laws governing its relationship with employees, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. The failure to obtain or retain food licenses or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees, could have a material adverse effect on the Company's business,
financial condition and results of operations. Many of the Company's employees
are paid hourly rates based upon the federal and state minimum wage laws. Recent
legislation increasing the minimum wage has resulted in higher labor costs to
the Company.
Effect of Certain Charter and Bylaw Provisions. Certain provisions of the
Company's Certificate of Incorporation and Bylaws may have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. The Company's Certificate of Incorporation
allows the Company to issue up to 1,500,000 shares of currently undesignated
Preferred Stock, to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed on any
unissued series of that Preferred Stock, and to fix the number of shares
constituting any such series and the designation of such series, without any
vote or future action by the stockholders. The Preferred Stock could be issued
with voting, liquidation, dividend and other rights superior to the rights of
the Common Stock. The Certificate of Incorporation also eliminates the ability
of stockholders to call special meetings. The Company's Bylaws require advance
notice to nominate a director or take certain other actions. Such provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company has not elected to be excluded from the
provisions of Section 203 of the Delaware General Corporation Law, which imposes
certain limitations on transactions between a corporation and "interested"
stockholders, as defined in such provisions.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. Factors
such as fluctuations in the Company's operating results, failure of such
operating results to meet the expectations of stock market analysts and
investors, changes in stock market analyst recommendations regarding the
Company, its competitors and other companies in the restaurant industry, as well
as changes in general economic or market conditions and changes in the
restaurant industry may have a significant adverse effect on the market price of
the Common Stock.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Salt Lake City, Utah.
11
14
The Company's restaurants are primarily freestanding locations. As of
January 25, 1999 the majority of the Company's restaurant facilities were
leased. The leases expire on dates ranging from 1999 to 2014 with the majority
of the leases providing for renewal options. All leases provide for specified
periodic rental payments, and most call for additional rent based upon revenue
volume. Most leases require the Company to maintain the property and pay for the
cost of insurance and taxes.
The following is a summary of the Company's restaurant properties as of
March 1, 1999:
HOMETOWN NORTH'S FLORIDA
BUFFET CASA BONITA STAR BUFFETS JB'S TOTAL
-------- ----------- ------- ------- ---- -----
Owned.................................. -- -- 2 2 2 6
Leased................................. 16 2 9 12 7 46
As of January 25, 1999, the Company's restaurants are located in the
following states:
NUMBER OF RESTAURANTS
----------------------------------------------------
HOMETOWN CASA NORTH'S FLORIDA
STATE BUFFET BONITA STAR BUFFETS JB'S TOTAL
----- -------- ------ ------- ------- ---- -----
Arizona.................................... 8 -- 1 -- 1 10
Colorado................................... 2 1 -- -- -- 3
Florida.................................... -- -- -- 14 -- 14
Idaho...................................... -- -- 3 -- -- 3
Montana.................................... -- -- -- -- 4 4
New Mexico................................. 2 -- -- -- 1 3
Oklahoma................................... -- 1 -- -- -- 1
Oregon..................................... -- -- 1 -- -- 1
Pennsylvania............................... -- -- 1 -- -- 1
Utah....................................... 3 -- 3 -- 2 8
Washington................................. -- -- 2 -- -- 2
Wyoming.................................... 1 -- -- -- 1 2
-- -- -- -- -- --
Total............................ 16 2 11 14 9 52
== == == == == ==
ITEM 3. 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. The Company has
evaluated the claims and believes that such claims are invalid. The Company does
not believe that the result of the arbitration proceeding will have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 the (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. holds 16 franchises for HomeTown Buffet restaurants.
The franchisor, HomeTown Buffet Restaurants, Inc., has asserted that the Company
breached its franchise agreements by
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using proprietary information of the franchisor to open the Company's North's
Star Buffet restaurants. The Company has denied any breach and has demanded
arbitration, which is ongoing at this time. The franchisor is seeking all
available remedies, including termination of the franchise agreements,
modification of the North's Star restaurants, and purchase of some or all of the
franchised restaurants at fair market value. The Company is contesting
vigorously the allegations and believes that it has substantial defenses to the
claimed breaches.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock which began trading on September 30, 1997 after
the completion of the Company's Initial Public Offering, is listed on the NASDAQ
national market under the symbol "STRZ". As of April 16, 1999, there were
approximately 775 record holders of the Company's Common Stock. The following
table sets forth the high and low bid quotations for the Common Stock, as
reported by NASDAQ.
1999 1998
---------------- ----------------
FISCAL YEAR HIGH LOW HIGH LOW
----------- ----- ----- ----- -----
First Quarter....................... $17 1/4 $11 7/8 -- --
Second Quarter...................... 15 7/8 6 7/8 -- --
Third Quarter....................... 8 3/8 3 5/8 $16 1/2 $13 1/4
Fourth Quarter...................... 7 5/16 5 3/8 13 5/8 11 3/8
In connection with the Company's Initial Public Offering, the Company
declared and paid a cash dividend of $9.3 million to CKE. Other than this
dividend, the Company has never declared or paid dividends on its Common Stock.
The Company expects future earnings, if any, will be retained to finance the
operation and expansion of the Company's business and, accordingly, does not
intend to declare or pay any cash dividends on the Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information and other data presented below should be
read in conjunction with the "Consolidated Financial Statements", and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. The operating results for the
52-week period ended January 25, 1999 included 52 weeks of operations for the
Company's 16 franchised HomeTown Buffet restaurants, two Casa Bonita restaurants
and six JJ North's Grand Buffet restaurants. The results also included 48 weeks
of operations for the nine franchised JB's Restaurants operated by the Company;
50 weeks for three Stacey's Buffets that were converted to BuddyFreddys Country
Buffet; 48 weeks for two Maggies Buffets that were converted; 43 weeks for two
BuddyFreddys; 8 weeks for one BuddyFreddys Country Buffet; 3 weeks of operations
for one BuddyFreddys Country Buffet; 50 weeks for one North's Star Buffet; 48
weeks for one North's Star Buffet; 36 weeks for one North's Star Buffet; 31
weeks for one North's Star Buffet; 24 weeks for one North's Star Buffet; and 3
weeks for three Holiday House restaurants
The operating results for the 30-week period ending July 15, 1996, and the
52-week periods ending December 18, 1995 and December 19, 1994 include only the
results of operations of HTB Restaurants, Inc., an operator of franchised
HomeTown Buffet restaurants, and are referred to herein as the Predecessor
Company or Predecessor. Summit Family Restaurants Inc. and its wholly-owned
subsidiary HTB was acquired by CKE on July 15, 1996 (the "Summit Acquisition").
Operating statement data for periods beginning after July 15, 1996 are herein
referred to as the Successor Company or Successor. The operating statement data
for the 28-weeks ending January 27, 1997 include the results of operations of 16
franchised HomeTown Buffet restaurants and the results of operations of the two
Casa Bonita restaurants from October 1, 1996, (the date of the Casa Bonita
acquisition). The 52-week period ended January 26, 1998 includes the results of
operations of 16 franchised HomeTown Buffet restaurants, two Casa Bonita
restaurants and seven JJ North's Grand Buffet Restaurants operated by the
Company from September 30, 1997, (the date of JJ North's acquisition).
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SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------------------------- ---------------------------------------------
FIFTY-TWO FIFTY-TWO TWENTY-EIGHT THIRTY
WEEKS WEEKS WEEKS WEEKS FIFTY-TWO WEEKS ENDED
ENDED ENDED ENDED ENDED -----------------------------
JAN. 25, 1999 JAN. 26, 1998 JAN. 27, 1997 JULY 15, 1996 DEC. 18, 1995 DEC. 19, 1994
------------- ------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENTS OF
EARNINGS DATA:
Total revenues.............. $85,409 $54,659 $23,632 $23,207 $36,741 $30,871
Costs and expenses:
Food costs................ 28,578 18,024 8,371 8,569 13,769 11,469
Labor costs............... 27,983 17,301 7,565 6,810 10,878 9,089
Occupancy and other
expenses................ 17,806 10,829 4,732 5,030 8,954 6,769
General and
administrative.......... 4,272 2,291 1,062 1,193 1,666 1,762
Depreciation and
amortization............ 3,048 2,109 988 914 1,232 821
------- ------- ------- ------- ------- -------
Total costs and
expenses......... 81,687 50,554 22,718 22,516 36,499 29,910
------- ------- ------- ------- ------- -------
Income from operations...... 3,722 4,105 914 691 242 961
Interest expense............ (597) (200) (106) (145) (192) (203)
Other Income................ 933 593 -- -- -- --
------- ------- ------- ------- ------- -------
Income before income
taxes..................... 4,058 4,498 808 546 50 758
Income taxes................ 1,623 1,799 338 216 22 301
------- ------- ------- ------- ------- -------
Net Income.................. $ 2,435 $ 2,699 $ 470 $ 330 $ 28 $ 457
======= ======= ======= ======= ======= =======
Net Income per common
share -- diluted.......... $ 0.53 $ 0.76 $ 0.18
======= ======= ======= ======= ======= =======
Weighted average shares
outstanding -- diluted.... 4,601 3,528 2,600
BALANCE SHEET DATA:
Total assets................ $44,159 $40,969 $16,783 $16,283 $13,003
Total debt including current
portion................... 17,303 2,368 2,609 11,150 6,714
Stockholders' equity........ $19,363 $32,537 $ 9,742 $ 1,806 $ 1,801
OTHER DATA:
Operating units(1)
HomeTown Buffet........... 16 16 16 16 16 14
Casa Bonita............... 2 2 2 -- -- --
North's Star Division..... 11 7 -- -- -- --
Florida Buffets
Division................ 12 -- -- -- -- --
JB's Restaurants.......... 9 -- -- -- -- --
Non-Operating............. 2 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total.............. 52 25 18 16 16 14
======= ======= ======= ======= ======= =======
- ---------------
(1) At the end of the respective periods.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis should be read in
conjunction with the condensed combined financial statements, and the notes
thereto, presented elsewhere in this Form 10-K. The operating results for the
52-week period ended January 25, 1999 ("fiscal 1999") included 52 weeks of
operations for the Company's 16 franchised HomeTown Buffet restaurants, two Casa
Bonita restaurants and six JJ North's Grand Buffet restaurants operated by the
Company (one store was converted to a North's Star Buffet restaurant). The
results also included 48 weeks of operations for the nine franchised JB's
Restaurants operated by the Company; 50 weeks for three Stacey's Buffets that
were converted to BuddyFreddys Country Buffet; 48 weeks for two Maggies Buffets
that were converted; 43 weeks for two BuddyFreddys; 8 weeks for one BuddyFreddys
Country Buffet; 3 weeks of operations for one BuddyFreddys Country Buffet; 50
weeks for one North's Star Buffet; 48 weeks for one North's Star Buffet; 36
weeks for one North's Star Buffet; 31 weeks for one North's Star Buffet; 24
weeks for one North's Star Buffet; and 3 weeks for three Holiday House
restaurants. The results of operations for the period ended January 26, 1998,
("fiscal 1998") include fifty-two weeks of operations for the Company's sixteen
franchised Hometown Buffet Restaurants, fifty-two weeks of operations for the
Company's two Casa Bonita Restaurants and seventeen weeks of operations for the
seven JJ North's Grand Buffet restaurants operated by the Company. The operating
results for the twenty-eight weeks ending January 27, 1997 include the results
of operations of 16 franchised HomeTown Buffet restaurants and the results of
operations of the two Casa Bonita restaurants from October 1, 1996, (the date of
the Casa Bonita acquisition). The operating statement data for the thirty weeks
ending July 15, 1996 include only the results of operations of 16 franchised
HomeTown Buffet restaurants Restaurants, Inc., an operator of franchised
HomeTown Buffet restaurants. Comparability of future periods may also from time
to time be affected by the implementation of the Company's acquisition and
strategic alliance strategies, and the costs associated with integrating new
restaurants or under performing or unprofitable restaurants, if any, acquired or
otherwise operated by the Company may have a material adverse effect on the
Company's results of operations.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of total revenues for the fifty-two weeks ended January 26, 1998
("fiscal 1998") and fifty-two weeks ended January 25, 1999 ("fiscal 1999").
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------- -----------
FIFTY-TWO FIFTY-TWO TWENTY-EIGHT THIRTY
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
JANUARY 25, JANUARY 26, JANUARY 27, JULY 15,
1999 1998 1997 1996
----------- ----------- ------------ -----------
TOTAL REVENUES.......................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Food costs............................ 33.5 33.0 35.4 36.9
Labor costs........................... 32.8 31.6 32.0 29.3
Occupancy and other expenses.......... 20.7 19.8 20.0 21.7
General and administrative expenses... 5.0 4.2 4.5 5.1
Depreciation and amortization......... 3.6 3.9 4.2 4.0
----- ----- ----- -----
TOTAL COSTS AND EXPENSES................ 95.6 92.5 96.1 97.0
----- ----- ----- -----
INCOME FROM OPERATIONS.................. 4.4 7.5 3.9 3.0
Interest expense...................... (0.7) (0.4) (0.5) (0.6)
Other income.......................... 1.1 1.1 -- --
----- ----- ----- -----
Income before income taxes............ 4.8 8.2 3.4 2.4
INCOME TAX EXPENSE...................... (1.9) (3.3) (1.4) (1.0)
----- ----- ----- -----
NET INCOME.............................. 2.9% 4.9% 2.0% 1.4%
===== ===== ===== =====
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Comparison of Fiscal 1998 to Fiscal 1999
Total revenues increased $30.8 million or 56.3% from $54.7 million in
fiscal 1998 to $85.4 million in fiscal 1999. The increase was attributable to
the addition of nine JB's Restaurants in fiscal 1999 ($10.0 million), a full
year of JJ North's Grand Buffet restaurants plus four North's Star Buffet
restaurants ($8.5 million) and 12 restaurants in Florida ($11.4 million), a 1.5%
or $603,000 increase in same store sales at the Company's HomeTown Buffet
Restaurants and various other changes increasing revenues $300,000.
Food costs as a percent of total revenues increased from 33.0% in fiscal
1998 to 33.5% in fiscal 1999. The increase is primarily attributable to higher
food costs associated with the Florida Buffets Division stores and the North's
Star Buffet restaurants.
Labor costs as a percent of total revenues increased from 31.6% in fiscal
1998 to 32.8% in fiscal 1999. The increase was primarily attributable to the
addition of the Florida Buffets Division restaurants which operate at a higher
labor cost than the Company's sixteen HomeTown Buffet Restaurants.
Occupancy and other expenses as a percent of total revenues increased from
19.8% in fiscal 1998 to 20.7% in fiscal 1999. The increase is primarily
attributable to higher supply and utility expenses associated with the Florida
Buffets Division stores.
General and administrative expenses as a percentage of total revenues
increased from 4.2% in fiscal 1998 to 5.0% in fiscal 1999. The increase is
primarily attributable to higher general and administrative costs resulting from
the reduction and subsequent termination of the Service Agreement with CKE.
Depreciation and amortization as a percent of total revenues decreased from
3.9% in fiscal 1998 to 3.6% in fiscal 1999. The decrease is primarily
attributable to increased revenues of $30.8 million.
Interest expense as a percent of total revenues increased from 0.4% in
fiscal 1998 to 0.7% in fiscal 1999. The increase is primarily attributable to
financing of the purchase and retirement of 2.5 million shares of common stock.
Other income as a percent of total revenues remained the same at 1.1% in
fiscal 1998 and fiscal 1999.
In fiscal 1998 and in fiscal 1999, income taxes were 40.0% of earnings
before taxes.
Comparison of the twenty-eight weeks ended January 27, 1997, to Fiscal 1998
Due to the differing lengths of time included in each period presented, the
comparison of these periods may not be meaningful or indicative of future
results.
Revenues increased $31.1 million or 131.8% from $23.6 million for the
twenty-eight weeks ended January 27, 1997, to $54.7 million for fiscal 1998. The
increase is attributable to the full year impact of the Company's HomeTown
Buffet and Casa Bonita restaurants, $18.9 million and $8.5 million respectively,
the addition of seven JJ North's Grand Buffet Restaurants in fiscal 1998, $2.7
million, and a 2.5% or $1.0 million increase in same store sales at the
Company's HomeTown Buffet Restaurants.
Food costs as a percentage of total revenues decreased from 35.4% for the
twenty-eight weeks ended January 27, 1997, to 33.0% for fiscal 1998. The
decrease is attributable to the inclusion of Casa Bonita for a full year, which
operates at a lower level of food costs.
Labor costs as a percentage of total revenues decreased from 32.0% for the
twenty-eight weeks ended January 27, 1997, to 31.6% for fiscal 1998. The
decrease is attributable to a consistent improvement in labor costs in the Casa
Bonita restaurants.
Occupancy and other, general and administrative and depreciation and
amortization expenses as a percentage of total revenues have all decreased in
fiscal 1998 as compared to the twenty-eight weeks ended January 27, 1997. These
decreases are attributable to the inclusion of Casa Bonita for a full year.
17
20
Other income in fiscal 1998 represents interest income on cash balances and
notes receivable ($321,000) and management fee income ($272,000) resulting from
the Company's strategic alliance with Stacey's Buffet, Inc.
In fiscal 1998, income taxes were 40.0% of earnings before taxes. In the
twenty-eight weeks ended January 27, 1997, income taxes were 41.8% of earnings
before taxes.
18
21
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company, prior to the reorganization, historically financed operations
through a combination of cash on hand, cash provided from operations and
available borrowings under bank lines of credit. As of January 25, 1999, the
Company had $121,000 in cash, and as of January 26, 1998, the Company had $15.4
million in cash and cash equivalents. The Company used approximately $15.0
million to fund the acquisition of 27 restaurants and fund capital improvements
to existing and acquired restaurants. In addition, the Company used
approximately $3.5 million to fund loans related to acquired restaurants. The
Company also repurchased 2 million shares of its common stock from CKE for a
purchase price equal to $5.0 million in cash and a 90 day promissory note in the
amount of $7.5 million on September 10, 1998. The Company used $7.5 million of
the proceeds from its bank financing arrangement with BankBoston, N.A. to
discharge all of its obligation to CKE on the 90 day promissory note.
Cash provided by operations was approximately $5.9 million for fiscal 1999
and approximately $6.0 million for fiscal 1998.
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. Management
estimates the cost of opening its prototype restaurant to be approximately $1.5
million to $1.7 million, assuming leased real estate. 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 $450,000. These costs
consist primarily of exterior and interior appearance modifications, new table,
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 will provide capital for the
repurchase of common stock and acquisitions. The Term Loan Facility balance was
$11.9 million as of April 16, 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 zero on April 16, 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 of other events will not cause the Company to seek 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."
19
22
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 6 months.
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.
To date, the Company has expensed incremental costs of approximately
$70,000 to assess and remediate potential Year 2000 problems. The total
remaining incremental cost is estimated to be $130,000. 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.
IMPACT OF INFLATION
Management recognizes that inflation has an impact on food, construction,
labor and benefit costs, all of which can significantly affect the Company's
operations. Historically, the Company has been able to pass any associated
higher costs due to these inflationary factors along to its customers because
those factors have impacted nearly all restaurant companies. During fiscal 1999
and fiscal 1998, however, management has emphasized cost controls rather than
price increases, given the competitive pressure within the quick-service
restaurant industry.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS no. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement established standards for
derivative instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company has no instruments or
transactions subject to this Statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information pertaining to directors and executive officers of the
registrant is hereby incorporated by reference to the Company's Proxy Statement
to be used in connection with the Company's 1999 Annual Meeting of Stockholders,
to be filed with the Commission within 120 days of January 25, 1999. Information
concerning the current executive officers of the Company is contained in Item 1
of Part I of this Annual Report on Form 10-K.
20
23
ITEM 11. EXECUTIVE COMPENSATION
The information pertaining to executive compensation is hereby incorporated
by reference to the Company's Proxy Statement to be used in connection with the
Company's 1999 Annual Meeting of Stockholders, to be filed with the Commission
within 120 days of January 25, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information pertaining to security ownership of certain beneficial
owners and management is hereby incorporated by reference to the Company's Proxy
Statement to be used in connection with the Company's 1999 Annual Meeting of
Stockholders, to be filed with the Commission within 120 days of January 25,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information pertaining to certain relationships and related
transactions is hereby incorporated by reference to the Company's Proxy
Statement to be used in connection with the Company's 1999 Annual Meeting of
Stockholders, to be filed with the Commission within 120 days of January 25,
1999.
21
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
PAGE NUMBER
-----------
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets -- as of January 25, 1999 and
January 26, 1998.......................................... F-2
Consolidated Statements of Income -- for the 52-weeks ended
January 25, 1999, 52-weeks ended January 26, 1998,
28-weeks ended January 27, 1997 and 30-weeks ended July
15, 1996.................................................. F-4
Consolidated Statements of Stockholders' Equity -- for the
52-weeks ended January 25, 1999, 52-weeks ended January
26, 1998, 28-weeks ended January 27, 1997 and 30-weeks
ended July 15, 1996....................................... F-5
Consolidated Statements of Cash Flows -- for the 52-weeks
ended January 25, 1999, 52-weeks ended January 26, 1998,
28-weeks ended January 27, 1997 and 30-weeks ended July
15, 1996.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted since the required information is not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements or the
notes thereto.
(a)(3) EXHIBITS:
An "Exhibit Index" has been filed as a part of this Form 10-K beginning on
Page E-1 hereof and is incorporated herein by reference.
(b) CURRENT REPORTS ON FORM 8-K:
A current report on Form 8-K dated November 2, 1998 was filed during the
fourth quarter of the fiscal year to report the resignations of William P. Foley
and C. Thomas Thompson from its Board of Directors effective November 2, 1998.
Additionally, on November 3, 1998 the Board of Directors received the
resignation of John F. North from its Board of Directors effective November 3,
1998.
A current report on Form 8-K dated December 2, 1998 was filed during the
fourth quarter of the fiscal year to report the resignation of Stuart Clifton
from the Company's Board of Directors effective December 2, 1998, and
additionally on December 2, 1998, the Board of Directors appointed Robert
Wheaton as Chairman of the Board.
22
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STAR BUFFET, INC.
(Registrant)
April 26, 1999 By: /s/ ROBERT E. WHEATON
------------------------------------
Robert E. Wheaton
President and Chief Executive
Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT E. WHEATON President and Chief Executive April 26, 1999
- ----------------------------------------------------- Officer and Director
Robert E. Wheaton
/s/ RONALD E. DOWDY Group Controller, Treasurer April 26, 1999
- ----------------------------------------------------- and Secretary
Ronald E. Dowdy
/s/ JACK M. LLOYD Director April 26, 1999
- -----------------------------------------------------
Jack M. Lloyd
/s/ THOMAS G. SCHADT Director April 26, 1999
- -----------------------------------------------------
Thomas G. Schadt
/s/ PHILLIP "BUDDY" JOHNSON Director April 26, 1999
- -----------------------------------------------------
Phillip "Buddy" Johnson
/s/ CRAIG B. WHEATON Director April 26, 1999
- -----------------------------------------------------
Craig B. Wheaton
23
26
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Star Buffet, Inc.:
We have audited the accompanying consolidated balance sheets of Star
Buffet, Inc. and subsidiaries (Successor Company) as of January 25, 1999 and
January 26, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for the 52-week periods ended January 25,
1999 and January 26, 1998 and the 28-week period ended January 27, 1997
(Successor Period) and the statements of income, stockholders' equity and cash
flows of HTB Restaurants, Inc. (Predecessor Company) for the 30-week period
ended July 15, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial
statements present fairly, in all material aspects, the financial position of
Star Buffet, Inc. (and CKE operations that became Star Buffet, Inc.) and
subsidiaries as of January 25, 1999 and January 26, 1998, and the results of
their operations and their cash flows for the Successor Period, in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of HTB
Restaurants, Inc. for the Predecessor Period, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
July 16, 1996, CKE acquired all of the outstanding stock of HTB Restaurants,
Inc. in a business combination accounted for as a purchase. As a result of the
acquisition, the consolidated financial information for the periods after the
acquisition (Successor Period) is presented on a different cost basis than that
for the periods before the acquisition (Predecessor Period) and, therefore, is
not comparable.
/s/ KPMG LLP
Salt Lake City, Utah
April 2, 1999
F-1
27
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 25, JANUARY 26,
1999 1998
----------- -----------
Current assets:
Cash and cash equivalents................................. $ 121,000 $15,387,000
Current portion of notes and other receivables............ 2,496,000 336,000
Inventories............................................... 842,000 493,000
Deferred income taxes, net................................ 274,000 110,000
Prepaid expenses.......................................... 159,000 204,000
----------- -----------
Total current assets:.................................. 3,892,000 16,530,000
Property, buildings and equipment, at cost, less accumulated
depreciation.............................................. 29,490,000 15,077,000
Real property and equipment under capitalized leases, at
cost, less accumulated amortization....................... 2,100,000 2,287,000
Notes receivable, net of current portion.................... 3,491,000 3,235,000
Deposits and other.......................................... 344,000 1,960,000
Deferred income taxes, net.................................. -- 207,000
Goodwill, less accumulated amortization..................... 4,069,000 1,313,000
Other intangible assets, less accumulated amortization...... 773,000 360,000
----------- -----------
Total assets...................................... $44,159,000 $40,969,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade.................................... $ 3,622,000 $ 2,212,000
Payroll and related taxes................................. 1,918,000 1,643,000
Sales and property taxes.................................. 869,000 1,178,000
Rent, licenses and other.................................. 705,000 822,000
Current maturities of obligations under capital leases and
long-term debt......................................... 1,329,000 259,000
Other current liabilities................................. -- 209,000
----------- -----------
Total current liabilities.............................. 8,443,000 6,323,000
Deferred income taxes, net.................................. 379,000 --
Capitalized lease obligations, net of current maturities.... 2,049,000 2,109,000
Long-term debt, net of current maturities................... 13,925,000 --
Stockholders' equity:
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 Outstanding 2,950,000 shares in 1999
and 5,450,00 shares in 1998............................ 3,000 5,000
Additional paid-in capital................................ 16,351,000 31,768,000
Retained earnings......................................... 3,199,000 764,000
Treasury stock, at cost, 31,000 shares.................... (190,000) --
----------- -----------
Total stockholders' equity............................. 19,363,000 32,537,000
Total liabilities and stockholders' equity........ $44,159,000 $40,969,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
28
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------------------ -------------
FIFTY-TWO FIFTY-TWO TWENTY-EIGHT THIRTY
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
JANUARY 25, 1999 JANUARY 26, 1998 JANUARY 27, 1997 JULY 15, 1996
---------------- ---------------- ---------------- -------------
Total revenues....................... $85,409,000 $54,659,000 $23,632,000 $23,207,000
----------- ----------- ----------- -----------
Costs and expenses
Food costs......................... 28,578,000 18,024,000 8,371,000 8,569,000
Labor costs........................ 27,983,000 17,301,000 7,565,000 6,810,000
Occupancy and other expenses....... 17,806,000 10,829,000 4,732,000 5,030,000
General and administrative
expenses........................ 4,272,000 2,291,000 1,062,000 1,193,000
Depreciation and amortization...... 3,048,000 2,109,000 988,000 914,000
----------- ----------- ----------- -----------
Total costs and expenses........ 81,687,000 50,554,000 22,718,000 22,516,000
----------- ----------- ----------- -----------
Income from operations............... 3,722,000 4,105,000 914,000 691,000
Interest expense..................... (597,000) (200,000) (106,000) (145,000)
Interest income...................... 666,000 321,000 -- --
Other income......................... 267,000 272,000 -- --
----------- ----------- ----------- -----------
Income before income taxes........... 4,058,000 4,498,000 808,000 546,000
Income tax expense................... 1,623,000 1,799,000 338,000 216,000
----------- ----------- ----------- -----------
Net income........................... $ 2,435,000 $ 2,699,000 $ 470,000 $ 330,000
=========== =========== =========== ===========
Net income per common share --
basic.............................. $ 0.53 $ 0.77 $ 0.18
=========== =========== ===========
Weighted average shares outstanding--
basic.............................. 4,601,000 3,515,000 2,600,000
----------- ----------- -----------
Net income per common share --
diluted............................ $ 0.53 $ 0.76 $ 0.18
=========== =========== ===========
Weighted average shares outstanding--
diluted............................ 4,601,000 3,528,000 2,600,000
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-3
29
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
---------- ------- ------------ ----------- --------- -------------
PREDECESSOR COMPANY
Balance at December 18,
1995.................. 10 $ -- $ 1,000,000 $ 806,000 $ -- $ 1,806,000
Net income.............. -- -- -- 330,000 -- 330,000
---------- ------- ------------ ----------- --------- ------------
Balance at July 15,
1996.................. 10 $ -- $ 1,000,000 $ 1,136,000 $ -- $ 2,136,000
========== ======= ============ =========== ========= ============
SUCCESSOR COMPANY
Beginning balance, July
15, 1996.............. 2,600,000 $ 2,000 $ 8,025,000 $ -- $ -- $ 8,027,000
Net activity with
principal
stockholder........... -- -- 1,245,000 -- -- 1,245,000
Net income.............. -- -- -- 470,000 -- 470,000
---------- ------- ------------ ----------- --------- ------------
Balance at January 27,
1997.................. 2,600,000 2,000 9,270,000 470,000 -- 9,742,000
Net activity with
principal
stockholder........... -- -- (8,272,000) (2,405,000) -- (10,677,000)
Issuance of common
stock................. 2,850,000 3,000 30,770,000 -- -- 30,773,000
Net income.............. -- -- -- 2,699,000 -- 2,699,000
---------- ------- ------------ ----------- --------- ------------
Balance at January 26,
1998.................. 5,450,000 5,000 31,768,000 764,000 -- 32,537,000
Redemption and
retirement of stock
from Principal
stockholder........... (2,000,000) (2,000) (12,498,000) -- -- (12,500,000)
Purchase and retirement
of stock.............. (500,000) (500) (2,919,000) -- -- (2,919,000)
Purchase of treasury
stock................. -- -- -- -- (190,000) (190,000)
Net income.............. -- -- -- 2,435,000 -- 2,435,000
---------- ------- ------------ ----------- --------- ------------
Balance at January 26,
1998.................. 2,950,000 $ 3,000 $ 16,351,000 $ 3,199,000 $(190,000) $ 19,363,000
========== ======= ============ =========== ========= ============
See accompanying notes to consolidated financial statements.
F-4
30
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------ -----------
FIFTY-TWO FIFTY-TWO TWENTY-EIGHT THIRTY
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 25, JANUARY 26, JANUARY 27, JULY 15,
1999 1998 1997 1996
------------ ------------ ------------ -----------
Cash flows from operating activities:
Net income............................ $ 2,435,000 $ 2,699,000 $ 470,000 $ 330,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 3,048,000 2,109,000 988,000 914,000
Provision for losses on other
assets............................. -- 75,000 -- --
Non-cash investment income............ -- (78,000) -- --
Amortization of royalty fee........... 460,000 -- -- --
Change in operating assets and
liabilities:
Receivables........................ (1,280,000) 207,000 (114,000) 21,000
Inventories........................ (349,000) (109,000) (5,000) 39,000
Prepaid expenses................... (414,000) (154,000) 178,000 (202,000)
Deposits........................... 576,000 183,000 -- --
Deferred income taxes.............. 422,000 (331,000) 100,000 (78,000)
Accounts payable-trade............. 1,410,000 (14,000) 273,000 (280,000)
Other accrued liabilities.......... (360,000) 1,377,000 27,000 72,000
------------ ------------ ----------- ---------
Net cash provided by operating
activities............................ 5,948,000 5,964,000 1,917,000 816,000
Cash flows used in investing activities:
Increase in notes receivable.......... (3,468,000) (3,400,000) -- --
Deposits on future acquisitions....... -- (1,936,000) -- --
Acquisition of property, buildings and
equipment.......................... (14,979,000) (5,562,000) (103,000) (68,000)
Deferred organization and franchise
costs.............................. -- (67,000) -- --
Purchase of short-term investments.... -- 180,000 (180,000) --
------------ ------------ ----------- ---------
Net cash used in investing activities... (18,447,000) (10,785,000) (283,000) (68,000)
Cash flows from financing activities:
Proceeds from issuance of common
stock.............................. -- 30,773,000 -- --
Payments to extinguish debt........... (8,424,000) -- -- --
Proceeds from issuance of long-term
debt............................... 14,500,000 -- -- --
Capitalized loan costs................ (437,000) -- -- --
Redemption of common stock............ (7,919,000) -- -- --
Purchase of treasury stock............ (190,000) -- -- --
Net activity with principle
shareholder........................ -- (10,677,000) (1,245,000) (546,000)
Principal payment on capital leases... (297,000) (241,000) (245,000) (110,000)
------------ ------------ ----------- ---------
Net cash provided by (used in) financing
activities............................ (2,767,000) 19,855,000 (1,490,000) (656,000)
------------ ------------ ----------- ---------
Net increase (decrease) in cash and cash
equivalents........................... (15,266,000) 15,034,000 144,000 92,000
Cash and cash equivalents at beginning
of period............................. 15,387,000 353,000 209,000 117,000
------------ ------------ ----------- ---------
Cash and cash equivalents at end of
period................................ $ 121,000 $ 15,387,000 $ 353,000 $ 209,000
============ ============ =========== =========
See accompanying notes to consolidated financial statements.
F-5
31
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of certain significant accounting policies not disclosed
elsewhere in the footnotes to the consolidated financial statements is set forth
below.
BASIS OF PRESENTATION
The accompanying 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"). The accompanying 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. In addition, prior to the Formation
Transactions described below, the entities comprising the Company operated
independently of each other and were not under common control or management
until October 1, 1996. As a result, such financial statements may not
necessarily be indicative of the results of operations, financial position or
cash flows that would have existed had the Company been a separate, independent
company.
ORGANIZATION AND NATURE OF OPERATIONS
The Company was formed by CKE Restaurants, Inc. ("CKE") in July 1997 in
connection with the reorganization of CKE's buffet-style restaurant business.
Pursuant to a contribution agreement among the Company and CKE and certain of
their respective subsidiaries, CKE transferred to Summit the net assets of its
two Casa Bonita Mexican theme restaurants (which were acquired by CKE on October
1, 1996), and Summit transferred substantially all of its assets and liabilities
(primarily those relating to the JB's Restaurant system and Galaxy Diner
restaurants, but excluding 16 HomeTown Buffet restaurants operated by HTB) to a
newly formed subsidiary of CKE. Summit was acquired by CKE on July 16, 1996.
Then, CKE contributed the outstanding shares of Summit to the Company in
exchange for 2,600,000 shares of the Company's Common Stock. All of the parties
to the foregoing transactions (the "Formation Transactions") were, upon
completion thereof, direct or indirect wholly owned subsidiaries of CKE, and
such Formation Transactions were accounted for as a reorganization among
companies under common control. Accordingly, results of operations are presented
for the period commencing on July 16, 1996 (the date of CKE's acquisition of
Summit), and include results of operations of the two Casa Bonita Mexican theme
restaurants only from October 1, 1996 (the date of acquisition by CKE) and the
results of operations of seven JJ North's Grand Buffet Restaurants operated by
the Company only from September 30, 1997 (the date of acquisition by the
Company). See Note 3 for acquisitions subsequent to the Formation Transactions.
The operating results for the 52-week period ended January 25, 1999 include
52 weeks of operations for the 16 franchised HomeTown Buffet restaurants, two
Casa Bonita restaurants and six