SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 4, 2002
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-6054
STAR BUFFET, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 84-1430786 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
420 Lawndale Drive,
Salt Lake City, UT 84115
(Address of principal executive offices) (Zip Code)
(801) 463-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
There were 2,950,000 shares of the issuer's common stock, par value $.001 per share, outstanding as of December 12, 2002.
STAR BUFFET, INC. AND SUBSIDIARIES
INDEX
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| PART I. | FINANCIAL INFORMATION | |||||
Item 1. |
Condensed Consolidated Financial Statements: |
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Condensed Consolidated Balance Sheets as of November 4, 2002 (unaudited) and January 28, 2002 |
3 |
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Unaudited Condensed Consolidated Statements of Operations for the twelve and forty weeks ended November 4, 2002 and November 5, 2001 |
5 |
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Unaudited Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 4, 2002 and November 5, 2001 |
6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
19 |
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Item 4. |
Controls and Procedures |
20 |
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PART II. |
OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
21 |
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Item 6. |
Exhibits and Reports on Form 8-K |
21 |
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Signatures |
22 |
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Certifications |
23 |
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Item 1: Condensed Consolidated Financial Statements
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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November 4, 2002 |
January 28, 2002 |
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(Unaudited) |
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| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 675,000 | $ | 727,000 | |||
| Current portion of notes and other receivables | 129,000 | 436,000 | |||||
| Receivables, net of allowance | 943,000 | 876,000 | |||||
| Inventories | 710,000 | 770,000 | |||||
| Deferred income taxes, net | 206,000 | 206,000 | |||||
| Prepaid expenses | 607,000 | 146,000 | |||||
| Net assets held for sale | 1,207,000 | — | |||||
| Total current assets | 4,477,000 | 3,161,000 | |||||
| Property, buildings and equipment, net | 28,279,000 | 32,314,000 | |||||
| Real property and equipment under capitalized leases, net | 1,335,000 | 1,462,000 | |||||
| Other assets: | |||||||
| Notes receivable, net of current portion | 2,759,000 | 2,723,000 | |||||
| Deposits and other | 187,000 | 163,000 | |||||
| Deferred income taxes, net | 158,000 | — | |||||
| Total other assets | 3,104,000 | 2,886,000 | |||||
| Goodwill, less accumulated amortization | 3,756,000 | 3,756,000 | |||||
| Other intangible assets, less accumulated amortization | 291,000 | 393,000 | |||||
| Total intangible assets | 4,047,000 | 4,149,000 | |||||
| Total assets | $ | 41,242,000 | $ | 43,972,000 | |||
The
accompanying notes are an integral part of the condensed consolidated financial statements.
(Continued)
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
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November 4, 2002 |
January 28, 2002 |
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(Unaudited) |
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| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current liabilities: | |||||||||
| Accounts payable—trade | $ | 5,821,000 | $ | 4,531,000 | |||||
| Payroll and related taxes | 1,374,000 | 1,518,000 | |||||||
| Sales and property taxes | 1,285,000 | 1,168,000 | |||||||
| Rent, licenses and other | 534,000 | 444,000 | |||||||
| Income tax payable | 128,000 | 434,000 | |||||||
| Current maturities of obligations under capital leases | 102,000 | 103,000 | |||||||
| Current maturities of long-term debt | 5,660,000 | 3,548,000 | |||||||
| Total current liabilities | 14,904,000 | 11,746,000 | |||||||
| Deferred income taxes, net | — | 113,000 | |||||||
| Deferred rent payable | 1,059,000 | 958,000 | |||||||
| Capitalized lease obligations, net of current maturities | 1,771,000 | 1,849,000 | |||||||
| Long-term debt, net of current maturities | 2,449,000 | 7,536,000 | |||||||
| Total liabilities | 20,183,000 | 22,202,000 | |||||||
| Stockholders' equity: | |||||||||
| Preferred stock, $.001 par value; authorized 1,500,000 shares; none issued or outstanding Common stock, $.001 par value; authorized 8,000,000 shares; issued and outstanding 2,950,000 shares | — | — | |||||||
| Additional paid-in capital | 16,351,000 | 16,351,000 | |||||||
| Officer's note receivable | (1,338,000 | ) | (1,338,000 | ) | |||||
| Retained earnings | 6,043,000 | 6,754,000 | |||||||
| Total stockholders' equity | 21,059,000 | 21,770,000 | |||||||
| Total liabilities and stockholders' equity | $ | 41,242,000 | $ | 43,972,000 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Twelve Weeks Ended |
Forty Weeks Ended |
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November 4, 2002 |
November 5, 2001 |
November 4, 2002 |
November 5, 2001 |
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| Total revenues | $ | 15,587,000 | $ | 17,246,000 | $ | 58,739,000 | $ | 65,799,000 | ||||||
| Costs and expenses | ||||||||||||||
| Food costs | 5,226,000 | 5,691,000 | 20,382,000 | 21,372,000 | ||||||||||
| Labor costs | 5,607,000 | 6,105,000 | 20,158,000 | 22,242,000 | ||||||||||
| Occupancy and other expenses | 3,533,000 | 3,789,000 | 12,479,000 | 13,476,000 | ||||||||||
| General and administrative expenses | 881,000 | 600,000 | 2,798,000 | 2,727,000 | ||||||||||
| Depreciation and amortization | 787,000 | 865,000 | 2,611,000 | 2,847,000 | ||||||||||
| Impairment of long-lived assets | — | 806,000 | 1,040,000 | 806,000 | ||||||||||
| Total costs and expenses | 16,034,000 | 17,856,000 | 59,468,000 | 63,470,000 | ||||||||||
| Income (loss) from operations | (447,000 | ) | (610,000 | ) | (729,000 | ) | 2,329,000 | |||||||
| Interest expense | (186,000 | ) | (234,000 | ) | (575,000 | ) | (859,000 | ) | ||||||
| Interest income | 50,000 | 68,000 | 186,000 | 208,000 | ||||||||||
| Income (loss) before income taxes | (583,000 | ) | (776,000 | ) | (1,118,000 | ) | 1,678,000 | |||||||
| Income taxes (benefit) | (201,000 | ) | (334,000 | ) | (407,000 | ) | 551,000 | |||||||
| Net income (loss) | $ | (382,000 | ) | $ | (442,000 | ) | $ | (711,000 | ) | $ | 1,127,000 | |||
| Net income (loss) per common share—basic and diluted | ($ | 0.13 | ) | ($ | 0.15 | ) | ($ | 0.24 | ) | $ | 0.38 | |||
| Weighted average shares outstanding—basic and diluted | 2,950,000 | 2,950,000 | 2,950,000 | 2,950,000 | ||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Forty Weeks Ended |
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November 4, 2002 |
November 5, 2001 |
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| Cash flows from operating activities: | ||||||||||
| Net income (loss) | $ | (711,000 | ) | $ | 1,127,000 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 2,611,000 | 2,847,000 | ||||||||
| Impairment of long-lived assets | 1,040,000 | 806,000 | ||||||||
| Amortization of loan cost | 96,000 | 91,000 | ||||||||
| Change in deferred income taxes, net | (271,000 | ) | (12,000 | ) | ||||||
| Change in operating assets and liabilities: | ||||||||||
| Receivables | (67,000 | ) | 212,000 | |||||||
| Inventories | 60,000 | 233,000 | ||||||||
| Prepaid expenses | (461,000 | ) | (410,000 | ) | ||||||
| Deposits and other | (24,000 | ) | 134,000 | |||||||
| Deferred rent payable | 101,000 | (6,000 | ) | |||||||
| Accounts payable—trade | 1,290,000 | (907,000 | ) | |||||||
| Income tax payable | (306,000 | ) | 208,000 | |||||||
| Other accrued liabilities | (36,000 | ) | (295,000 | ) | ||||||
| Total adjustments | 4,033,000 | 2,901,000 | ||||||||
| Net cash provided by operating activities | 3,322,000 | 4,028,000 | ||||||||
| Cash flows provided by (used) in investing activities: | ||||||||||
| Payments received (issuance of) notes receivable | 271,000 | (14,000 | ) | |||||||
| Acquisition of property, buildings and equipment | (578,000 | ) | (3,192,000 | ) | ||||||
| Loans to officer | — | (420,000 | ) | |||||||
| Net cash used in investing activities | (307,000 | ) | (3,626,000 | ) | ||||||
| Cash flows from financing activities: | ||||||||||
| Payments on long term debt | (10,150,000 | ) | (6,580,000 | ) | ||||||
| Proceeds from issuance of long-term debt | 7,175,000 | 5,795,000 | ||||||||
| Capitalized loan costs | (13,000 | ) | (23,000 | ) | ||||||
| Principal payment on capital leases | (79,000 | ) | (65,000 | ) | ||||||
| Sale of treasury stock | — | 3,000 | ||||||||
| Net cash used in financing activities | (3,067,000 | ) | (870,000 | ) | ||||||
| Net decrease in cash and cash equivalents | (52,000 | ) | (468,000 | ) | ||||||
| Cash and cash equivalents at beginning of period | 727,000 | 1,101,000 | ||||||||
| Cash and cash equivalents at end of period | $ | 675,000 | $ | 633,000 | ||||||
The
accompanying notes are an integral part of the condensed consolidated financial statements.
(Continued)
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
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Forty Weeks Ended |
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November 4, 2002 |
November 5, 2001 |
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| Supplemental disclosures of cash flow information: | |||||||
| Cash paid for interest | $ | 334,000 | $ | 688,000 | |||
| Cash paid for income taxes | $ | 170,000 | $ | 355,000 | |||
| Non cash investing and financing activities: | |||||||
| Exchange of deposit for property acquisition | $ | — | $ | 53,000 | |||
| Acquisition of property with debt financing | $ | — | $ | 460,000 | |||
During the forty weeks ended November 4, 2002, the company reclassified net assets totaling $1,207,000 from property, buildings and equipment to net assets held for sale. The amount reclassified consisted of the following assets under contract for sale:
| Land | $ | 775,000 | |
| Building | 432,000 | ||
| Total | $ | 1,207,000 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note (A) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts for Star Buffet, Inc., together with its direct and indirect wholly-owned subsidiaries Summit Family Restaurants Inc. ("Summit"), HTB Restaurants, Inc. ("HTB"), Northstar Buffet, Inc. ("NSBI") and Star Buffet Management, Inc. ("SBMI") (collectively, the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2002. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been reflected herein. Results of operations for such interim periods are not necessarily indicative of results to be expected for the full fiscal year or for any future periods. Certain reclassifications have been made to the fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company's operations. Certain estimates, assumptions and allocations were made in preparing such financial statements.
The operating results for the 12-week period ended November 4, 2002 include operations for each of the Company's 16 franchised HomeTown Buffet restaurants, ten JB's Restaurants, six JJ North's Country Buffet restaurants, five BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants, one North's Star Buffet restaurant and one JJ North's Family Restaurant and the fixed charges for six restaurants closed for the entire quarter. One restaurant was closed during the quarter. Five restaurants remain closed at the end of the third quarter of fiscal 2003 for remodeling and repositioning. One closed restaurant has been leased and the net assets of another one is under contract to be sold and reported as net assets held for sale.
The operating results for the 12-week period ended November 5, 2001 include operations for each of the Company's 16 franchised HomeTown Buffet restaurants, ten JB's Restaurants, nine BuddyFreddys Country Buffet restaurants, seven JJ North's Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. At the end of the third quarter, six BuddyFreddys Country Buffet restaurants have been closed, two were permanently closed during the quarter. The remaining four BuddyFreddys Country Buffet restaurants remained closed at the end of the third quarter of fiscal 2002 for remodeling and repositioning.
The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each year contains 16 weeks while the other three quarters each contain 12 weeks.
Note (B) Related Party Transactions
In connection with the Company's employment contract with Mr. Robert E. Wheaton, the Company's President and Chief Executive Officer, the Company has agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company's common stock. The loans, entered into prior to calendar year 2002, are secured by the common stock and bear interest at the prevailing rate set forth in the Company's credit facility with Fleet Boston Bank. The current rate is approximately 3.6 percent for the forty weeks ended November 4, 2002. At November 4, 2002, the loans totaled $1,338,000 ($1,338,000 at January 28, 2002).
The Company had an $185,000 note receivable with Phillip "Buddy" Johnson who is a member of the Board of Directors. The note receivable was due July 31, 2002 and was secured by property adjacent to our Plant City, Florida facility. The Company uses the property as additional parking. The note receivable bears interest at 6.5% due monthly. The note receivable was paid in full in June 2002.
Note (C) Segment and Related Reporting
The Company has five reportable operating segments: HomeTown Buffet, Casa Bonita, North's Star, Florida Buffet Division and JB's Restaurants. The Company's reportable segments are based on the brand similarities.
At November 4, 2002, the HomeTown Buffet segment includes the Company's 16 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The North's Star segment includes six JJ North's Country Buffet restaurants and one North's Star Buffet restaurant. The Florida Buffets Division includes two BuddyFreddys restaurants, five BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The JB's Restaurants segment includes the Company's ten JB's Restaurants and one JJ North's Family Restaurant.
The accounting policies of the reportable segments are the same as those described in Note 1 of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K. The Company evaluates the performance of its operating segments based on income (loss) before income taxes.
Summarized financial information concerning the Company's reportable segments is shown in the following table. "Other" includes assets presented in the condensed consolidated balance sheets and not in the reportable segments related to the Company as a whole, and not individual segments. Also certain corporate incomes and expenses in the condensed consolidated statements of operations are not included in the reportable segments and are also included in "other."
| 40 Weeks Ended November 4, 2002 |
HomeTown Buffet |
Casa Bonita |
North's Star(1) |
Florida Buffet(2) |
JB's(3) |
Other |
Total |
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(Dollars in Thousands) |
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| Revenues | $ | 27,422 | $ | 8,035 | $ | 5,938 | $ | 9,252 | $ | 8,092 | $ | — | $ | 58,739 | ||||||||
| Interest income | — | — | — | — | — | 186 | 186 | |||||||||||||||
| Interest expense | (161 | ) | — | — | (25 | ) | (2 | ) | (387 | ) | (575 | ) | ||||||||||
| Deprecation and amortization | 1,195 | 190 | 282 | 687 | 230 | 27 | 2,611 | |||||||||||||||
| Impairment of long-lived assets | — | — | 300 | 740 | — | — | 1,040 | |||||||||||||||
| Income (loss) before income taxes | 991 | 1,572 | (852 | ) | (1,036 | ) | 292 | (2,085 | ) | (1,118 | ) | |||||||||||
| Total assets | 13,024 | 1,727 | 7,296 | 13,471 | 5,046 | 678 | 41,242 | |||||||||||||||
40 Weeks Ended November 5, 2001 |
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| Revenues | $ | 28,580 | $ | 8,859 | $ | 7,106 | $ | 12,899 | $ | 8,355 | $ | — | $ | 65,799 | ||||||||
| Interest income | — | — | — | 2 | — | 206 | 208 | |||||||||||||||
| Interest expense | (167 | ) | — | — | (24 | ) | (4 | ) | (664 | ) | (859 | ) | ||||||||||
| Deprecation and amortization | 1,128 | 163 | 327 | 938 | 265 | 26 | 2,847 | |||||||||||||||
| Impairment of long-lived assets | — | — | — | 806 | — | — | 806 | |||||||||||||||
| Income (loss) before income taxes | 2,666 | 1,579 | 31 | (1,078 | ) | 551 | (2,071 | ) | 1,678 | |||||||||||||
| Total assets | 14,244 | 2,030 | 7,354 | 15,772 | 5,283 | 179 | 44,862 | |||||||||||||||
$46,000 of depreciation and amortization, and $300,000 in impairment of long-lived assets. This location represents $78,000 and $0 of net book value of equipment and leasehold improvements included in total assets, respectively, at November 4, 2002.
Included in the reportable segment for the 40 weeks ended November 5, 2001 is one location opened during the second quarter. This location contributed revenues of $251,000, and incurred $41,000 of depreciation and amortization. This location represents $111,000 and $202,000 of net book value of equipment and leasehold improvements included in total assets, respectively, at November 5, 2001.
Included in the reportable segment for the 40 weeks ended November 5, 2001 is one location closed for the entire period and five locations closed during the first half of fiscal 2002. These six locations contributed revenues of $1,694,000 and incurred $311,000 of depreciation and amortization. These locations also have a net book value of equipment of $1,799,000, buildings of $2,691,000 and land of $2,676,000 included in total assets at November 5, 2001.
Note (D) Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the weighted-average number of common shares outstanding and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents.
Basic net income (loss) per common share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted net income (loss) per common share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.
In calculated net income (loss) per common share, the net income (loss) and the weighted-average number of common shares outstanding were the same for both the basic and diluted calculation. The computation of diluted net (loss) per share for the 12 week and 40 week periods ended November 4, 2002, does not include 735,000 in outstanding options as they would be anti-dilutive for the loss periods. The computation of diluted net income per share for the 12 week and 40 week periods ended November 5, 2001, excludes 742,000 in outstanding options due to the market price of the underlying stock being less than the exercise price.
Note (E) Goodwill
As of January 29, 2002, the Company adopted Statement of Financial Accounting Standard "SFAS" No. 142, "Goodwill and Other Intangible Assets." Accordingly, effective January 29, 2002, the Company ceased amortizing goodwill recorded in past business combinations.
The following is the Company's disclosure of what reported net income (loss) and income (loss) per share would have been in all periods presented, exclusive of amortization expenses (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes to amortization periods for intangible assets that will continue to be amortized.
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Twelve Weeks Ended |
Forty Weeks Ended |
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November 4, 2002 |
November 5, 2001 |
November 4, 2002 |
November 5, 2001 |
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| Net income (loss) as reported | $ | (382,000 | ) | $ | (442,000 | ) | $ | (711,000 | ) | $ | 1,127,000 | |
| Goodwill amortization, net of tax | — | 17,000 | — | 53,000 | ||||||||
| Adjusted net income (loss) | $ | (382,000 | ) | $ | (425,000 | ) | $ | (711,000 | ) | $ | 1,180,000 | |
| Basic and diluted income (loss) per share: | ||||||||||||
| As reported | $ | (0.13 | ) | $ | (0.15 | ) | $ | (0.24 | ) | $ | 0.38 | |
| Change in amortization expense | — | 0.01 | — | 0.02 | ||||||||
| Adjusted basic and diluted income (loss) per share | $ | (0.13 | ) | $ | (0.14 | ) | $ | (0.24 | ) | $ | 0.40 | |
SFAS 142 requires the Company to perform a transitional impairment test to determine whether there is an indication that goodwill currently recorded is impaired as of January 29, 2002. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Then the Company must compare the fair value of the assets of each reporting unit to its carrying amount as of January 29, 2002.
The Company completed the first step of the transitional impairment test required by SFAS 142 during the quarter ended August 12, 2002. The Company has determined a reporting unit to be at the individual store level, assessed the fair value of the Company and compared that value to its stockholders' equity. In determining fair value, the Company considered the guidance in SFAS No. 142, including the Company's market capitalization, control premiums, discounted cash flows and other indicators of fair value. Based on this analysis, there is an indication that goodwill of approximately $700,000 as of January 29, 2002, may be impaired.
The Company is in the process of completing the second step of the transitional impairment analysis. This step requires the Company to compare the implied fair value of each reporting unit's goodwill, determined