STAR BUFFET INC - 10-Q Quarterly Report

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STAR BUFFET, INC. AND SUBSIDIARIES INDEX

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 1, 2004
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 (State or other jurisdiction of incorporation or organization)		84-1430786 (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

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of December 7, 2004, there were 2,950,000 shares of the registrant's Common Stock, outstanding.

STAR BUFFET, INC. AND SUBSIDIARIES
INDEX


PART I. FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets as of November 1, 2004 (unaudited) and January 26, 2004
		Unaudited Condensed Consolidated Statements of Operations for the twelve and forty weeks ended November 1, 2004 and November 3, 2003
		Unaudited Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 1, 2004 and November 3, 2003
		Notes to Unaudited Condensed Consolidated Financial Statements
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 6.	Exhibits and Reports on Form 8-K
Signatures

PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		November 1, 2004		January 26, 2004
		(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	83,000	$	445,000
	Current portion of notes receivable		18,000		17,000
	Receivables		221,000		377,000
	Inventories		505,000		494,000
	Deferred income taxes		168,000		162,000
	Prepaid expenses		351,000		124,000
	Property held for sale		—		931,000

	Total current assets		1,346,000		2,550,000

Property, buildings and equipment:
	Property, buildings and equipment, net		18,286,000		18,391,000
	Property and equipment leased to third parties, net		4,405,000		3,734,000
	Property, buildings and equipment held for future use		2,618,000		2,374,000
	Property and equipment under capitalized leases, net		1,052,000		1,153,000
	Property held for sale		931,000		—

	Total property, buildings and equipment		27,292,000		25,652,000

Other assets:
	Notes receivable, net of current portion		2,860,000		2,878,000
	Deposits and other		233,000		276,000

	Total other assets		3,093,000		3,154,000

Deferred income taxes, net			588,000		590,000
Intangible assets:
	Goodwill		2,823,000		2,907,000
	Other intangible assets, net		851,000		931,000

	Total intangible assets		3,674,000		3,838,000

Total assets		$	35,993,000	$	35,784,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

(Continued)

STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

			November 1, 2004			January 26, 2004
			(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable-trade		$	2,050,000		$	2,798,000
	Payroll and related taxes			1,184,000			1,280,000
	Sales and property taxes			1,008,000			806,000
	Rent, licenses and other			374,000			475,000
	Income taxes payable			542,000			356,000
	Revolving line of credit			400,000			1,900,000
	Current maturities of obligations under long-term debt			552,000			329,000
	Current maturities of obligations under capital leases			111,000			96,000

		Total current liabilities		6,221,000			8,040,000

	Deferred rent payable			759,000			896,000
	Other long-term liability			68,000			101,000
	Capitalized lease obligations, net of current maturities			1,566,000			1,655,000
	Long-term debt, net of current maturities			6,116,000			3,987,000

		Total liabilities		15,230,000			14,679,000

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			3,000			3,000
	Additional paid-in capital			16,351,000			16,351,000
	Officer's note receivable			(698,000	)		(1,330,000	)
	Retained earnings			5,607,000			6,081,000

		Total stockholders' equity		21,263,000			21,105,000

Total liabilities and stockholders' equity			$	35,993,000		$	35,784,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Twelve Weeks Ended						Forty Weeks Ended
		November 1, 2004			November 3, 2003			November 1, 2004			November 3, 2003
Total revenues		$	13,269,000		$	14,378,000		$	50,360,000		$	53,073,000
Costs and expenses
	Food costs		4,611,000			4,816,000			17,341,000			17,794,000
	Labor costs		4,577,000			4,943,000			16,767,000			17,919,000
	Occupancy and other expenses		2,876,000			3,121,000			10,025,000			10,829,000
	General and administrative expenses		540,000			645,000			2,070,000			1,978,000
	Depreciation and amortization		531,000			574,000			1,828,000			1,997,000
	Impairment of long-lived assets		262,000			128,000			516,000			617,000

	Total costs and expenses		13,397,000			14,227,000			48,547,000			51,134,000

(Loss) income from operations			(128,000	)		151,000			1,813,000			1,939,000
	Interest expense		(167,000	)		(155,000	)		(493,000	)		(543,000	)
	Interest income		—			50,000			5,000			168,000
	Reversal of litigation accrual		—			—			—			400,000
	Other income		67,000			99,000			213,000			165,000

Income (loss) before income taxes			(228,000	)		145,000			1,538,000			2,129,000
Income taxes (benefit)			(75,000	)		50,000			537,000			735,000

Net (loss) income		$	(153,000	)	$	95,000		$	1,001,000		$	1,394,000

Net (loss) income per common share—basic		$	(0.05	)	$	0.03		$	0.34		$	0.47

Net (loss) income per common share—diluted		$	(0.05	)	$	0.03		$	0.31		$	0.47

Weighted average shares outstanding—basic			2,950,000			2,950,000			2,950,000			2,950,000

Weighted average shares outstanding—diluted			2,950,000			2,950,000			3,184,375			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)

				Forty Weeks Ended
				November 1, 2004			November 3, 2003
Cash flows from operating activities:
Net income (loss)				$	1,001,000		$	1,394,000
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization				1,807,000			1,997,000
	Amortization of loan cost				21,000			95,000
	Impairment of long-lived assets				516,000			617,000
	Deferred income taxes				(4,000	)		682,000
	Change in operating assets and liabilities:
		Receivables			156,000			74,000
		Inventories			(11,000	)		72,000
		Prepaid expenses			(227,000	)		(295,000	)
		Deposits and other			43,000			(33,000	)
		Deferred rent payable			(137,000	)		(176,000	)
		Accounts payable-trade			(748,000	)		(565,000	)
		Income taxes payable			186,000			—
		Other accrued liabilities			(26,000	)		(171,000	)

			Total adjustments		1,576,000			2,297,000

		Net cash provided by operating activities			2,577,000			3,691,000
Cash flows from investing activities:
	Loan to officer				632,000			—
	Interest income				(3,000	)		—
	Receipts from payments on notes receivable				20,000			26,000
	Acquisition of property, buildings and equipment				(2,863,000	)		(1,637,000	)
	Proceeds from sale of property, buildings and equipment				—			1,159,000

		Net cash used in investing activities			(2,214,000	)		(452,000	)
Cash flows from financing activities:
	Reduction in bank overdraft				—			(1,306,000	)
	Payments on long term debt				(724,000	)		(7,344,000	)
	Proceeds from issuance of long-term debt				3,075,000			5,349,000
	Payments on line of credit, net				(1,500,000	)		—
	Capitalized loan costs				(27,000	)		(19,000	)
	Principal payment on capitalized lease obligations				(74,000	)		(78,000	)
	Dividends paid				(1,475,000	)		—

		Net cash used in financing activities			(725,000	)		(3,398,000	)

Net (decrease) increase in cash and cash equivalents					(362,000	)		(159,000	)
Cash and cash equivalents at beginning of period					445,000			433,000

Cash and cash equivalents at end of period				$	83,000		$	274,000

(Continued)

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

		Forty Weeks Ended
		November 1, 2004		November 3, 2003
Supplemental disclosures of cash flow information:
Cash paid during the period for:
	Interest	$	491,000	$	455,000
	Income taxes	$	354,000	$	52,000
Non cash investing and financing activities:
	Reclassification of property held for sale to property, buildings and equipment	$	—	$	52,000
	Exchange of property, buildings and equipment for notes receivable	$	—	$	100,000
	Exchange of property rental for repair services	$	2,000	$	—

During the forty weeks ended November 3, 2003, the Company reclassified net assets totaling $931,000 from property, buildings and equipment to net assets held for sale; these assets were classified as current prior to the third quarter of fiscal 2005. The amount reclassified included land of $567,000 and buildings of $364,000.

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 26, 2004. 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 2004 consolidated financial statements to conform to the fiscal 2005 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 following is a summary of the Company's restaurant properties as of November 1, 2004. The HomeTown Buffet segment includes the Company's 15 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The North's Star segment includes three JJ North's Country Buffet restaurants. This segment also included one non-operating property. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also included four non-operating properties. The JB's Restaurants segment includes the Company's seven JB's Restaurants. This segment also included two non-operating properties.

		HomeTown Buffet	Casa Bonita	North's Star	Florida Buffets	JB's	Total
Owned		3	—	1	5	4	13
Leased		12	2	3	6	5	28

	Total	15	2	4	11	9	41

As of November 1, 2004, the Company's operating and non-operating restaurants are located in the following states:

		Number of Restaurants
State		HomeTown Buffet	Casa Bonita	North's Star	Florida Buffets	JB's	Total
Arizona		8	—	1	—	1	10
Colorado		1	1	—	—	—	2
Florida		—	—	—	11	—	11
Idaho		—	—	1	—	—	1
Montana		—	—	—	—	2	2
New Mexico		2	—	—	—	1	3
Oklahoma		—	1	—	—	—	1
Oregon		—	—	1	—	—	1
Utah		3	—	—	—	4	7
Washington		—	—	1	—	—	1
Wyoming		1	—	—	—	1	2

	Total	15	2	4	11	9	41

As of November 1, 2004, the Company's non-operating restaurants are located in the following states:

		Number of Non-Operating Restaurants
State		HomeTown Buffet	Casa Bonita	North's Star	Florida Buffets	JB's	Total
Arizona		—	—	1	—	—	1
Florida		—	—	—	4	—	4
Utah		—	—	—	—	1	1
Wyoming		—	—	—	—	1	1

	Total	—	—	1	4	2	7

The operating results for the 12-week period ended November 1, 2004 included operations shown in the tables above and the fixed charges for five restaurants operating for two, six, six, seven and 11 weeks, respectively, and for five restaurants closed for the entire quarter. One non-operating restaurant is for sale and is recorded as property held for sale. The four remaining closed restaurants have been leased.

The following is a summary of the Company's restaurant properties as of November 3, 2003. 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 five JJ North's Country Buffet restaurants and one North's Star Buffet Restaurant. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also included four non-operating

properties. The JB's Restaurants segment includes the Company's eight JB's Restaurants. This segment also included one non-operating property.

		HomeTown Buffet	Casa Bonita	North's Star	Florida Buffets	JB's	Total
Owned		2	—	1	4	3	10
Leased		14	2	5	7	6	34

	Total	16	2	6	11	9	44

As of November 3, 2003, the Company's operating and non-operating restaurants are located in the following states:

			Number of Restaurants
State			HomeTown Buffet		Casa Bonita		North's Star		Florida Buffets		JB's		Total