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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended January 28, 2002

OR

Commission file number: 0-6054

STAR BUFFET, INC.
(Exact Name of Registrant as Specified in its Charter)

Registrant's Telephone Number, Including Area Code: (801) 463-5500

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 ý    No o

        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. o

        The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 15, 2002, was $3,765,000.

        The number of shares outstanding of the registrant's common stock was 2,950,000 shares as of April 15, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's Proxy Statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after January 28, 2002, are incorporated by reference into Part III of this Report.

        The Exhibit Index is contained in Part IV herein on Page E-1.

STAR BUFFET, INC., AND SUBSIDIARIES

Index to Annual Report on Form 10-K

For the Fiscal Year Ended January 28, 2002

PART I

Item 1. Business

Overview

        Star Buffet, Inc., a Delaware corporation ("Star" and collectively with its subsidiaries, the "Company") is engaged in the restaurant industry. As of January 28, 2002, the Company owned and operated 16 franchised HomeTown Buffet restaurants, 13 BuddyFreddys restaurants, ten JB's Restaurants, seven JJ North's Country Buffet restaurants, one North's Star Buffet restaurant, two Holiday House restaurants and two Mexican-themed restaurants operated under the Casa Bonita name. As of January 28, 2002, four of the 13 BuddyFreddys restaurants were closed for remodeling and repositioning. The Company's restaurants are located in nine western states, Oklahoma and Florida and are focused upon providing customers with a wide variety of fresh, high quality food at moderate prices.

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; success of integrating newly acquired under performing or unprofitable restaurants; the impact of competitive products and pricing; success of operating initiatives; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; changes in prevailing interest rates and the availability of financing; food, labor and employee benefits costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; implementation of the Company's acquisition and strategic alliance strategy; the effect of the Company's accounting polices and other risks detailed in the Company's Prospectus dated September 24, 1997 and other filings with the Securities and Exchange Commission.

Recent Developments

        As a result of a review of its accounting records during the normal course of the fiscal 2002 independent audit, the Company has restated its previously reported audited financial statements for the fiscal years ended January 29, 2001 and January 31, 2000 and the related unaudited quarterly financial data for those periods, as well as the unaudited quarterly financial data for the quarters ended May 21, 2001, August 13, 2001 and November 5, 2001. The restated financial statements for fiscal years 2001 and 2000 and restated consolidated statements of income by quarter for fiscal 2002, 2001 and 2000 are contained in this report. See Note 2 to the Consolidated Financial Statements included in this report for the restated amounts for each respective annual and quarterly period.

        On February 28, 2002, the Company's main food supplier Alliant Foodservice, Inc. ("Alliant") terminated the Master Distribution Agreement between the two companies. Alliant Foodservice, Inc. provided over 80 percent of the company's food purchases. The Company has replaced Alliant with several food suppliers and is less dependent on any one supplier.

        On March 21, 2002, Alliant Foodservice, Inc. ("Alliant") filed a breach of contract complaint against the Company in the Superior Court for the State of Arizona in and for the County of Maricopa (No. CVZ002-005195), alleging breach of the Master Distribution Agreement ("MDA") executed between the Company and Alliant on or about December 1, 1999. Alliant seeks $2,478,573 for alleged amounts owed by the Company plus attorneys' fees and costs. The Company denies the allegations and plans to vigorously defend the alleged breach of contract. Furthermore, on April 29, 2002, the Company filed an answer and counterclaim in Superior Court citing among other things, breach of the MDA. The Company is seeking over $7,250,000 in damages.

        On February 16, 2000, the Company moved from the Nasdaq National Market to the Nasdaq Smallcap Market effective February 17, 2000. The move was due to noncompliance regarding the minimum market value of public float.

Business

        The Company's 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 uniformly applied business practices can be used successfully to improve the financial performance of its past and future acquisitions. Key elements of the Company's business practices are as 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. Management's focus includes the following key elements:

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High Quality Food.  The Company seeks to differentiate itself by providing higher quality and better tasting food than its competitors. In addition, each brand maintains its own unique recipes that cater to regional taste profiles of its customers. 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. Restaurant managers are encouraged 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.



•

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:

•

Performance Measurements.  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 rewarding 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 Control.  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, accounting and payroll so that restaurant managers can focus on restaurant operations and guest satisfaction.

        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, radio advertising and promotional mailers to increase customer awareness and loyalty.

Growth Strategy

        The Company's 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.

        Restaurant Conversions.    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.

Restaurant Concepts

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 16 HomeTown Buffet restaurants in Arizona, Colorado, New Mexico, Utah and Wyoming.

        HTB 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 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 $6.10. The restaurants offer reduced prices to children under age 12 and to senior citizens.

        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 specific franchisor-provided guidelines 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 over a broad regional territory to attract tourists by placing advertisements in tourist and special event guides and by otherwise promoting each Casa Bonita restaurant as a major destination 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.

        Operations.    The two Casa Bonita restaurants are supervised by a Vice President of Operations who reports directly to the Company's President. Each Casa Bonita restaurant has a general manager and at least three assistant managers. Each restaurant employs between 150 and 270 hourly employees (made up of a mix of part-time and full-time workers) depending on restaurants size and traffic.

North's Star Division

        General.    The North's Star Division consists of seven JJ North's Country Buffet restaurants and one North's Star Buffet restaurant. The Company's seven JJ North's Country Buffet Restaurants are located in Idaho (3), Washington (2), Oregon (1) and Utah (1). The restaurants are approximately 6,500 to 9,000 square feet and seat approximately 210 to 320 customers. The Company's North's Star Buffet restaurant is located in Arizona. The restaurant is approximately 9,000 square feet and seats approximately 320 customers.

        Concept and Menu.    Both JJ North's Country 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 Country Buffet is $6.25. The average check in North's Star Buffet is $5.95. The restaurants offer reduced prices to children under age 12 and to senior citizens.

        Both JJ North's Country 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 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 period includes 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.

Florida Buffets Division

        General.    The Company, through several transactions, has acquired fifteen properties in Florida which currently operate under the brand names BuddyFreddys Country Buffet (11), BuddyFreddys (2) and Holiday House (2). Four of the 11 BuddyFreddys Country Buffet restaurants were closed for remodeling and repositioning as of January 28, 2002. BuddyFreddys restaurants average approximately 10,000 square feet with seating for approximately 350 guests. Holiday House restaurants average approximately 5,500 square feet with seating for approximately 170 guests.

        Concept and Menu.    The 11 BuddyFreddys Country Buffet restaurants (four of which were closed for remodeling and repositioning as of January 28, 2002) 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 differ from BuddyFreddys Country Buffets in that they offer a full a la carte menu in addition to the "all-you-can-eat" buffet. The two 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.

JB's Restaurants

        General.    The Company, through its subsidiary Summit Family Restaurants, Inc. ("Summit") operates ten JB's Restaurants in Arizona, Montana, New Mexico, Utah and Wyoming. In connection with the acquisition of certain JB's Restaurants in 1998 from CKE Restaurants, Inc., the Company entered into a one-year franchise agreement for each location which required among other items, the payment of royalty fees. The restaurants are approximately 4,300 to 5,600 square feet and seat approximately 110 to 180 customers.

        Subsequent to the acquisition of certain JB's Restaurants, the Company negotiated a ten-year option for annual renewable franchise agreements for each of the JB's Restaurants the Company operates. In February 2000, the annual renewable franchise agreement expired and to date, the Company has elected not to renew these franchise agreements, but instead has entered into negotiations to acquire a long-term license agreement to utilize the JB's Restaurant name. To date, the negotiations have not been finalized with respect to a license agreement.

        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 $6.35.

        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 owns the trademarks and service marks for Casa Bonita, BuddyFreddys and Holiday House and has a license agreement with CKE for use of the "Star" name and design. The Company has an agreement with North's Restaurants, Inc. for a royalty-free, transferable license to use the intangible property of JJ North's and is negotiating to acquire a license to operate restaurants under the JB's name. The Company utilizes the HomeTown Buffet mark pursuant to various franchise agreements.

Seasonality

        The Company's business is moderately 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 15, 2002, the Company employed approximately 2,600 persons, of whom approximately 2,455 were restaurant employees, and approximately 145 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.

Directors and Executive Officers

        The following table sets forth certain information regarding the Company's directors and executive officers:

        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. Mr. Wheaton is the brother of Craig B. Wheaton

        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 served as Chairman of the Board of DenAmerica Corp. from July 1996, until September 2000, and as President, Chief Executive Officer and a director of DenAmerica Corp. from March 1996, until September 2000. DenAmerica Corp. changed its name to Phoenix Restaurant Group in June 1999. 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 until March 2001. Mr. Johnson has served as the Director of the Division of Real Estate in the Florida Department of Business and Professional Regulations since March 2001. 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 now governor, 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 Chief Executive Officer, President and Chairman.

Risks

        Growth via Acquisitions.    The Company intends to pursue a strategy of moderate growth, primarily through acquisitions. The success of this strategy 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 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. Many of its acquired 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 management's identification of under performing companies or properties thus increasing the risks involved with the Company's acquisitions. There can be no assurance that the Company will be able to identify, negotiate and consummate acquisitions of additional buffet restaurants or that acquired restaurants or converted restaurants can be operated profitably and successfully integrated into the Company's operations.

        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 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. Furthermore, the Company is unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future.

        A strategy of growth through acquisitions requires access to significant capital resources. If the Company determines to make a sizeable 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. At present, the Company has only limited availability under its credit facilities and such availability will be restricted in the future given scheduled principal repayments. As a result, there can be no assurance that adequate financing under its credit facilities would be available to the Company for any such acquisition.

        From February 1998 to January 2001, the Company acquired 27 restaurants in seven states, including 15 stores in Florida. As a result of these acquisitions, the Company is more complex and diverse, and the integration of the acquisitions has presented difficult challenges for the Company requiring increased management time and resources. In order to improve profitability, the Company will need to successfully integrate and streamline restaurant functions. There can be no assurance that integration will be successfully accomplished. The difficulties of such integration have been increased by the necessity of coordinating geographically separate organizations. The integration of certain operations following the acquisitions required the dedication of management resources which has temporarily distracted 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 16 out of its 51 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 performance of the Company's HomeTown Buffet restaurant operations is directly related to the success of the HomeTown Buffet restaurant system, including the management and financial condition of HomeTown as well as restaurants operated by HomeTown and their other 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 restaurants depends in part on the effectiveness of the HomeTown Franchisor'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 restaurants operated by the franchisor 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 restaurants are subject to certain restrictions imposed by policies and procedures of HomeTown currently in effect and which from time to time change. 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.

        The Company, through its subsidiary Summit Family Restaurants, Inc. ("Summit") operates 10 JB's Restaurants in Arizona, Montana, New Mexico, Utah and Wyoming. In connection with the acquisition of certain JB's Restaurants in 1998 from CKE Restaurants, Inc., the Company entered into a one-year franchise agreement for each location which required among other items, the payment of royalty fees. Subsequent to the acquisition of certain JB's Restaurants, the Company negotiated a ten-year option for annual renewable franchise agreements for each of the JB's Restaurants the Company operates. In February 2000, the annual renewable franchise agreement expired and to date, the Company has elected not to renew these franchise agreements, but instead has entered into negotiations to acquire a long-term license agreement to utilize the JB's Restaurant name. To date, the negotiations have not been finalized with respect to a license agreement.

        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 or tropical storm patterns 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, employee benefits and utility 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 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. The impact and uncertainty created by the September 11, 2001 terrorist attack and the consequences of any future terrorist attacks, as well as other events affecting the national and world economies may affect the Company's business.

        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 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, as there can be no assurances 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 as well as 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, rights, qualifications and 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.

        Sale of a Substantial Number of Shares of Our Common Stock Could Cause the Market Price to Decline.    Sales of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock. As of April 15, 2002, 2,950,000 shares of Common Stock were outstanding and 735,000 shares were issuable upon exercise of outstanding options at exercise prices ranging from $5.00 to $12.00. The Company cannot predict the effect, if any, that sales of shares of the Company's common stock or the availability of such shares for sale will have on prevailing market prices. However, substantial amounts of the Company's common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock.

        Control by One Principal Stockholder.    Robert E. Wheaton, our Chairman, Chief Executive Officer and President, currently beneficially owns approximately 45.2% of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 45.2% of the total voting power. Thus Mr. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of our directors.

Item 2. Properties

        The Company's corporate headquarters are located in Salt Lake City, Utah, and other executive offices are located in Scottsdale, Arizona.

        The Company's restaurants are primarily freestanding locations. As of January 28, 2002 most of the Company's restaurant facilities were leased. The leases expire on dates ranging from 2001 to 2014 with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments including periodic rent escalation terms in certain instances, 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 January 28, 2002:

        As of January 28, 2002, the Company's restaurants are located in the following states:

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. On June 22, 1999, the parties agreed to dismiss the Arbitration Proceeding without prejudice since the issues related to the Business Service Agreement were being litigated in the Utah action described below.

        On November 25, 1998, the Company filed an action against North's Restaurants, Inc. ("North's") in the United States District Court, District of Utah, Case No. 2-98-CV-893, seeking damages for breach of a promissory note and an Amended and Restated Credit Agreement (collectively, the "Credit Agreements") in the amount of $3,570,935. On December 31, 1998, North's filed an answer to the Company's Complaint, denying generally the allegations, and filed counterclaims against the Company alleging (i) the Company fraudulently induced North's to enter into various agreements with the Company relating to the Company's acquisition of seven JJ North's Grand Buffet Restaurants and an option to acquire nine additional restaurants operated by North's and (ii) the Company had breached the Business Services Agreement. On January 26, 2001, the parties entered into a Settlement Agreement (the "Settlement Agreement"). The Settlement Agreement provides, among other things, that the Credit Agreement and Revolving Note terminate concurrently with the execution of the Settlement Agreement, that the Term Note be amended and restated, that the terms of the Term Note have no further force or effect and that the security interest transferred to Star Buffet pursuant to the Assignment Agreement dated September 30, 1997 between Star Buffet and U.S. Bank National Association be amended and restated pursuant to an Amended and Restated Star Buffet Security Agreement (the "Security Agreement"). The Company and North's have agreed that the Star Buffet Debt be reduced to a total amount of $3,500,000.00, and that such reduced obligation be payable by North's pursuant to the terms of the Amended and Restated Promissory Note. The Company recorded no gain or loss on the settlement as the recorded balance of the note was approximately $3.5 million at the time of the settlement. The Company and North's have agreed that the Company's existing liens encumbering certain property of North's remain in place and continue to secure North's obligations to the Company, and the Company and North's reserve all rights, claims and defenses with respect to the extent and validity of such existing liens.

        On March 21, 2002, Alliant Foodservice, Inc. ("Alliant") filed a breach of contract complaint against the Company in the Superior Court for the State of Arizona in and for the County of Maricopa (No. CVZ002-005195), alleging breach of the Master Distribution Agreement ("MDA") executed between the Company and Alliant on or about December 1, 1999. Alliant seeks $2,478,573 for alleged amounts owed by the Company plus attorneys' fees and costs. The Company denies the allegations and plans to vigorously defend the alleged breach of contract. Furthermore, on April 29, 2002, the Company filed an answer and counterclaim in Superior Court citing among other things, breach of the MDA. The Company is seeking over $7,250,000 in damages.

        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.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        The Company's Common Stock is listed on the NASDAQ smallcap market under the symbol "STRZ". As of April 15, 2002, there were approximately 550 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.

        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 28, 2002 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, ten JB's restaurants, nine BuddyFreddys restaurants (seven of the nine BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants), six JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, the results include 36, 35, 24, 19 and 3 weeks respectively for five BuddyFreddys Country Buffet restaurants. Results include 30 weeks of operations for one JJ North's Country Buffet restaurant which reopened in July 2001. Four restaurants were closed at the end of the fiscal year for remodeling and repositioning. During the first quarter of fiscal 2003, an additional restaurant was closed for remodeling and repositioning.

        The operating results for the 52-week period ended January 29, 2001 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, ten JB's restaurants, ten BuddyFreddys Country Buffet restaurants, six JJ North's Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. The results also include 14 weeks for one North's Star Buffet restaurant which was closed for remodeling and 15 weeks for one JB's restaurant which closed when the lease terminated. In addition, results include 49, 31, 18, 12 and 12 weeks respectively for five BuddyFreddys Country Buffet restaurants. Two restaurants were closed at the end of the fiscal year for remodeling and repositioning. During the first quarter of fiscal 2002, an additional restaurant was closed for remodeling and repositioning.

        The operating results for the 53-week period ended January 31, 2000 included 53 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, nine franchised JB's restaurants, six JJ North's Country Buffet restaurants, five BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two North's Star Buffet restaurants, two Casa Bonita restaurants and two Holiday House restaurants. The results also included 3 weeks of operations for 2 North's Star Buffet restaurants that were converted back to JB's Restaurants operating for 28 and 13 weeks respectively in fiscal 2000; 17 weeks of operations for one Holiday House that was converted to a BuddyFreddys Country Buffet restaurant operating for 34 weeks; and 46, 45, 40, 32, 25, 21 and 14 weeks respectively for seven BuddyFreddys Country Buffet restaurants. In addition, two restaurants were closed at the end of the fiscal year—one due to impassable road construction, the other is a recent acquisition awaiting conversion to a BuddyFreddys Country Buffet restaurant.

        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 Country 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 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).

SELECTED FINANCIAL DATA
(In thousands except per share amounts and restaurant data)

(1)

The financial statements for each of the periods indicated have been restated to reflect the adjustments described in Note 2 to the Consolidated Financial Statements.

(2)

At the end of the respective periods.

        Supplemental Quarterly Financial Data (Unaudited).    Quarterly financial results for the 52 weeks ended January 28, 2002, 52 weeks ended January 29, 2001 and the 53 weeks ended January 31, 2000, are summarized below. Each quarter except fourth quarter fiscal 2002 has been restated to reflect the adjustments as described in Note 2 of the notes to the consolidated financial statements.

(In Thousands Except Per-Share Data)

(In Thousands Except Per-Share Data)

(In Thousands Except Per-Share Data)

Amounts indicated may not foot due to quarterly rounding.

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 consolidated financial statements, and the notes thereto, presented elsewhere in this Form 10-K. The operating results for the 52-week period ended January 28, 2002, the 52-week period ended January 29, 2001 and the 53-week period ended January 31, 2000 are based on the composition of restaurant operations as discussed in Item 6—Selected Financial Data.

        As a result of a review of its accounting records during the normal course of fiscal 2002 independent audit, the Company has restated its previously reported audited financial statements for the fiscal years ended January 29, 2001 and January 31, 2000 and the related unaudited quarterly financial data for those periods, as well as the unaudited quarterly financial data for the quarters ended May 21, 2001, August 13, 2001 and November 5, 2001. The restated financial statements for fiscal years 2001 and 2000 and restated consolidated statements of income by quarter for fiscal 2002, 2001 and 2000 are contained in this report. See Note 2 to the Consolidated Financial Statements included in this report for the restated amounts for each respective annual and quarterly period. Management's discussion and analysis of financial condition and results of operations incorporates the restated amounts for fiscal years 2001 and 2000.

        The implementation of the Company's acquisition and strategic alliance strategies, and the costs associated with integrating new, under performing or unprofitable restaurants, acquired or otherwise operated by the Company may affect the comparability of future periods and 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 28, 2002 ("fiscal 2002"), fifty-two weeks ended January 29, 2001 ("fiscal 2001") and fifty-three weeks ended January 31, 2000 ("fiscal 2000").

Comparison of Fiscal 2001 to Fiscal 2002

        Total revenues decreased $10.8 million or 11.5% from $94.0 million in fiscal 2001 to $83.2 million in fiscal 2002. The decrease was primarily attributable to lower same store sales due to the sluggish economic conditions and a decrease in the number of restaurants open and operating in fiscal 2002 as compared to fiscal 2001.

        Food costs as a percent of total revenues decreased from 32.9% in fiscal 2001 to 32.4% in fiscal 2002. The decrease was primarily attributable to lower food costs in the HomeTown Buffet division.

        Labor costs as a percent of total revenues decreased from 34.3% in fiscal 2001 to 34.0% in fiscal 2002. The decrease was primarily attributable to lower benefit costs in the current year. The decrease in benefit costs was a result of the Company increasing the employee share of health and medical costs and lower workers compensation costs.

        Occupancy and other expenses as a percent of total revenues increased from 20.2% in fiscal 2001 to 20.8% in fiscal 2002. The increase is primarily attributable to decreased revenues while the fixed portion of occupancy costs remains constant.

        General and administrative expenses as a percentage of total revenues decreased from 4.4% in fiscal 2001 to 4.3% in fiscal 2002. The decrease is primarily attributable to reduced legal expenses.

        Depreciation and amortization as a percent of total revenues increased from 3.9% in fiscal 2001 to 4.4% in fiscal 2002. The increase is primarily attributable to decreased revenues while depreciation and amortization remains constant from year to year.

        Impairment of long-lived assets increased from 0.6% in fiscal 2001 to 1.0% in fiscal 2002. The impairment in fiscal 2002 was a result of terminating two leased restaurants in Florida. The impairment in fiscal 2001 was a result of closing three stores in Florida and one in Utah.

        Interest expense as a percent of total revenues decreased from 1.7% in fiscal 2001 to 1.3% in fiscal 2002. The decrease is primarily attributable to lower interest rates on the Term Loan Facility and Revolving Credit Facility financed by Fleet National Bank as discussed in Note 6 and lower outstanding balances on those facilities.

        Income taxes decreased from 39.4% of earnings before taxes in fiscal 2001 to 15.2% of earnings before taxes in fiscal 2002. The Company amended prior tax returns and received a credit for excess social security tax on tips exceeding minimum wage.

Comparison of Fiscal 2000 to Fiscal 2001

        Total revenues decreased $5.0 million or 5.1% from $99.1 million in fiscal 2000 to $94.0 million in fiscal 2001. The decrease was primarily attributable to a decrease in the number of restaurants open and operating in fiscal 2001 and an additional week of operating results in fiscal 2000.

        Food costs as a percent of total revenues remained at 32.9% in fiscal 2000 and fiscal 2001.

        Labor costs as a percent of total revenues increased from 34.0% in fiscal 2000 to 34.3% in fiscal 2001. The increase was primarily attributable to higher management and benefit costs.

        Occupancy and other expenses as a percent of total revenues decreased from 20.8% in fiscal 2000 to 20.2% in fiscal 2001. The decrease is primarily attributable to fewer operating units in the North's Star and Florida divisions.

        General and administrative expenses as a percentage of total revenues decreased from 5.1% in fiscal 2000 to 4.4% in fiscal 2001. The decrease is primarily attributable to reduced legal expenses due to the end of an arbitration case with HomeTown Buffet Restaurants, Inc. in fiscal 2000.

        Depreciation and amortization as a percent of total revenues increased from 3.7% in fiscal 2000 to 3.9% in fiscal 2001. The increase is primarily attributable to decreased revenues.

        Impairment of long-lived assets increased from 0.0% in fiscal 2000 to 0.6% in fiscal 2001. The impairment in fiscal 2001 was a result of closing three stores in Florida and one in Utah.

        Interest expense as a percent of total revenues increased from 1.5% in fiscal 2000 to 1.7% in fiscal 2001. The increase is primarily attributable to higher interest rates on the Term Loan Facility and Revolving Credit Facility financed by Fleet National Bank as discussed in Note 6.

        Other income as a percent of total revenues decreased from 0.2% in fiscal 2000 to 0.1% in fiscal 2001. The decrease is primarily attributable to an insurance refund in fiscal 2000 for loss of income.

        Income taxes increased from 31.1% of earnings before taxes in fiscal 2000 to 39.4% of earnings before taxes in fiscal 2001.

FINANCIAL CONDITION

Liquidity and Capital Resources

        The Company has 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 28, 2002, the Company had $727,000 in cash, and as of January 29, 2001, the Company had $1,101,000 in cash and cash equivalents. During fiscal 2002, the Company used approximately $3.4 million to fund capital improvements to existing and acquired restaurants. The Company funded the acquisition of two restaurant properties during fiscal 2002. One property included a first mortgage for $460,000. During fiscal 2001, the Company used approximately $2.5 million to fund the acquisition of one restaurant and fund capital improvements to existing and acquired restaurants.

        Cash provided by operations was approximately $5.3 million for fiscal 2002 and approximately $6.5 million for fiscal 2001.

        The Company intends to modestly expand operations through the acquisition of regional buffet chains or through the purchase of existing restaurants which would be converted to one of the Company's existing restaurant concepts. In many instances, management believes that existing restaurant locations can be acquired and converted to a Company's prototype at a lower cost. Management estimates the cost of acquiring and converting leased 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 tables, chairs and food bars and the addition of certain kitchen and food service equipment. There can be no assurance that the Company will be able to acquire additional restaurant chains or locations or, if acquired, that these restaurants will have a positive contribution to the Company's results of operations.

        On October 23, 1998, the Company entered into a $20 million syndicated bank financing agreement led by FleetBoston Financial Corporation (formerly known as BankBoston, N.A.). The credit facility consists of a $13 million, 5-year term loan (the "Term Loan Facility") and a $7 million, 5-year revolving credit facility (the "Revolving Credit Facility"). The Term Loan Facility refinanced existing indebtedness and provided capital for the repurchase of Star Buffet common stock and acquisitions. The Term Loan Facility balance was $3,500,000 as of April 15, 2002. Principal payments under the Term Loan Facility are due in quarterly installments until the final maturity in October 2003. Borrowings under the Revolving Credit Facility have been used for the Company's new unit development and working capital needs. All outstanding amounts under the Revolving Credit Facility will become due in October 2003. The Revolving Credit Facility balance was $6,600,000 on April 15, 2002 and $6,375,000 at January 28, 2002. The Company has $200,000 in letters of credit against the Revolving Credit Facility leaving $200,000 available for borrowing on April 15, 2002.

        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, 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.

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. However, management has emphasized cost controls rather than price increases, particularly considering the competitive pressure within the quick-service restaurant industry.

Critical Accounting Policies and Judgments

        The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company's consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1—Summary of Significant Accounting Policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported result and financial position for the period or in future periods. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.

        Property, Buildings and Equipment

        Property and equipment and real property under capitalized leases are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives: buildings and leasehold improvements—lesser of lease life or 40 years; furniture, fixtures and equipment—five to eight years; capitalized leases—lesser of lease life or 20 years. Lease renewal option periods are included in determining leasehold improvement useful lives when, in management's opinion, such renewal options will be exercised.

        Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized.

        The Company's accounting policies regarding land, buildings, and equipment include certain management judgements regarding the estimated useful lives of such assets, the residual values to which the assets are depreciated, and the determination as to what constitutes increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense that would be reported if different assumptions were used. As discussed further below, these judgements may also impact the Company's need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.

        Impairment of Long-Lived Assets

        The Company determines that an impairment write down is necessary for locations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.

        Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

New Accounting Pronouncement

        In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition to requiring the use of the purchase method for all future business combinations, SFAS 141 broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 addresses accounting and reporting standards for acquired goodwill and other intangible assets. Under the new standards, goodwill and indefinite life intangible assets are no longer amortized but will be subject to annual impairment tests. Finite life intangible assets such as franchise agreements will continue to be amortized over their useful lives. The provisions of SFAS 141 are required to be applied starting with fiscal years beginning after December 15, 2001.

        The Company adopted this statement effective January 29, 2002. As a result, the Company will cease amortization of goodwill and indefinite life intangible assets which is expected to increase income before income taxes by approximately $100,000 in fiscal 2003. Annual amortization expense related to goodwill was $106,000, $105,000 and $110,000 for the fifty-two weeks ended January 28, 2002, fifty-two weeks ended January 29, 2001 and the fifty-three weeks ended January 31, 2000, respectively. In fiscal 2001, the Company had an impairment of goodwill of $67,000 for store closures. During fiscal 2003, the Company will perform the required transitional impairment tests of goodwill and indefinite life intangible assets. It is management's preliminary assessment that a transitional impairment charge, if any, will not be material.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. The standard is effective for fiscal years beginning after June 15, 2002. The Company is reviewing the provisions of this standard. Its adoption is not expected to have a material effect on the financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops a single accounting model, based on the framework established in SFAS No. 121 for long-lived assts to be disposed of by sale, whether such assets are or are not deemed to be a business. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations and is effective for fiscal years beginning after December 15, 2001. The standard was adopted on January 29, 2002, and is not expected to have a material effect on the financial statements except that any future discontinued operations may be presented in the financial statements differently under the new rules as compared to the previous rules.

Interest Rate Risk

        The Company's principal exposure to financial market risks is the impact that interest rate changes could have on our $20.0 million credit facility, of which $10,100,000 remained outstanding as of April 15, 2002. Borrowings under our credit facility bear interest at the prime rate or at LIBOR plus an applicable margin based on certain financial ratios (averaging 5.8% in fiscal 2002). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $101,000 in annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of our credit facility and assumes no change in the volume, index or composition of debt at April 15, 2002. All of the Company's business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on us and are not expected to in the foreseeable future.

Commodity Price Risk

        The Company purchases certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. Typically the Company uses these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, the Company believes it will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting our menu pricing, menu mix or changing our product delivery strategy. However, increases in commodity prices could result in lower operating margins for our restaurant concepts.

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

        In September 2001, pursuant to the recommendation of management and the approval of the board of directors and the audit committee of the board, the Company appointed Grant Thornton LLP as the Company's independent public auditors for the year ended January 28, 2002. KPMG LLP was the Company's prior independent public audit firm. The reports of KPMG LLP on the Company's financial statements for the years ended January 29, 2001 and January 31, 2000 did not contain any adverse opinions or disclaimers of opinion, nor were they qualified as to uncertainty, audit scope or accounting principles. The Company reports in accordance with Regulation 8-K, Item 304(a)(1)(v)(A) that in connection with the audit of the fiscal year ended January 31, 2000, KPMG LLP issued a letter to the Company's audit committee dated April 7, 2000, informing the Company that KPMG LLP believed a material weakness existed with respect to the Company's cash reconciliation process. The Company corrected the bank reconciliations in question and has implemented new procedures to address the weakness identified by KPMG LLP. The Company has authorized KPMG to respond fully to inquiries from the successor accountants with respect to such matter. There were no reporting disagreements between the Company and KPMG LLP on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by these reports.

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 2002 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2002. 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.

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 2002 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2002.

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 2002 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2002.

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 2002 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2002.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)    Index to Consolidated Financial Statements:

(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:

        None.

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
Star Buffet, Inc.:

        We have audited the accompanying consolidated balance sheet of Star Buffet, Inc. and subsidiaries (a Utah corporation) as of January 28, 2002, and the related statements of income, stockholders' equity, and cash flows for the 52-week period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

        In our opinion, the fiscal 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Buffet, Inc. and subsidiaries as of January 28, 2002, and the consolidated results of their operations and their consolidated cash flows for the 52-week period then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Salt Lake City, Utah
April 5, 2002 except for Note 2 for which the date is April 18, 2002 and except for Note 15 for which the date is April 29, 2002

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 as of January 29, 2001 and the related consolidated statements of income, stockholders' equity and cash flows for the 52-week period ended January 29, 2001 and the 53-week period ended January 31, 2000. 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 auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Star Buffet, Inc. and subsidiaries as of January 29, 2001 and the results of their operations and their cash flows for the 52-week period ended January 29, 2001 and the 53-week period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 2 to the consolidated financial statements, the consolidated balance sheet as of January 29, 2001 and the related consolidated statements of income, stockholder's equity and cash flows for the 52-week period ended January 29, 2001 and the 53-week period ended January 31, 2000 have been restated.

/s/ KPMG LLP

Salt Lake City, Utah
March 16, 2001 except as to Note 2 which is as of April 18, 2002

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS