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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MAY 20, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-6054
STAR BUFFET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1430786
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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 X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. AS OF JUNE 26, 2002 THERE WERE
2,950,000 SHARES OF COMMON STOCK, $ .001 PAR VALUE, OUTSTANDING.
STAR BUFFET, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of May 20, 2002 (unaudited) and January 28, 2002.....................3
Unaudited Condensed Consolidated Statements of Income for the sixteen weeks
ended May 20, 2002 and May 21, 2001............................................................5
Unaudited Condensed Consolidated Statements of Cash Flows for the sixteen weeks ended
May 20, 2002 and May 21, 2001..................................................................6
Notes to Unaudited Condensed Consolidated Financial Statements................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..........................................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................17
Part II. Other Information
Item 1. Legal Proceedings......................................................................................18
Item 6. Exhibits and Reports on Form 8-K.......................................................................18
Signatures........................................................................................................19
2
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I: FINANCIAL INFORMATION
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 20, January 28,
ASSETS 2002 2002
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $965,000 $727,000
Current portion of notes and other receivables 441,000 436,000
Receivables, net of allowance 757,000 876,000
Inventories 835,000 770,000
Deferred income taxes, net 206,000 206,000
Prepaid expenses 450,000 146,000
------------ -----------
Total current assets 3,654,000 3,161,000
------------ -----------
Property, buildings and equipment, net 31,565,000 32,314,000
------------ -----------
Real property and equipment under capitalized leases, net 1,411,000 1,462,000
------------ -----------
Other assets:
Notes receivable, net of current portion 2,669,000 2,723,000
Deposits and other 163,000 163,000
------------ -----------
Total other assets 2,832,000 2,886,000
------------ -----------
Goodwill, less accumulated amortization 3,756,000 3,756,000
Other intangible assets, less accumulated amortization 360,000 393,000
------------ -----------
Total intangible assets 4,116,000 4,149,000
------------ -----------
Total assets $43,578,000 $43,972,000
============ ===========
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Statements.
3
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
May 20, January 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2002
----------- -----------
(Unaudited)
Current liabilities:
Accounts payable - trade $5,472,000 $4,531,000
Payroll and related taxes 1,614,000 1,518,000
Sales and property taxes 1,016,000 1,168,000
Rent, licenses and other 432,000 444,000
Income tax payable 571,000 434,000
Current maturities of obligations under capital leases and
long-term debt 265,000 3,651,000
----------- -----------
Total current liabilities 9,370,000 11,746,000
----------- -----------
Deferred income taxes, net 113,000 113,000
Deferred rent payable 1,018,000 958,000
Capitalized lease obligations, net of current maturities 1,811,000 1,849,000
Long-term debt, net of current maturities 9,208,000 7,536,000
----------- -----------
Total liabilities 21,520,000 22,202,000
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value; authorized 1,500,000 shares; none
issued or outstanding -- --
Common stock, $.001 par value; authorized 8,000,000 shares; issued and
outstanding 2,950,000 shares 3,000 3,000
Additional paid-in capital 16,351,000 16,351,000
Officer's note receivable (1,338,000) (1,338,000)
Retained earnings 7,042,000 6,754,000
----------- -----------
Total stockholders' equity 22,058,000 21,770,000
----------- -----------
Total liabilities and stockholders' equity $43,578,000 $43,972,000
=========== ===========
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Statements.
4
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Sixteen Weeks Ended
------------------------------------
May 20, May 21,
2002 2001
------------ ------------
Total revenues $25,192,000 $28,685,000
Costs and expenses
Food costs 8,960,000 9,524,000
Labor costs 8,386,000 9,449,000
Occupancy and other expenses 5,115,000 5,616,000
General and administrative expenses 1,083,000 1,243,000
Depreciation and amortization 1,053,000 1,127,000
------------ ------------
Total costs and expenses 24,597,000 26,959,000
------------ ------------
Income from operations 595,000 1,726,000
Interest expense (228,000) (387,000)
Interest income 73,000 80,000
------------ ------------
Income before income taxes 440,000 1,419,000
Income tax expense 152,000 546,000
------------ ------------
Net income $288,000 $873,000
============ ============
Net income per common share - basic and diluted $0.10 $0.30
============ ============
Weighted average shares outstanding - basic and diluted 2,950,000 2,950,000
============ ============
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Statements.
5
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Sixteen Weeks Ended
--------------------------------------
May 20, 2002 May 21, 2001
------------- -------------
Cash flows from operating activities:
Net income $288,000 $873,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,053,000 1,127,000
Amortization of loan cost 38,000 36,000
Change in operating assets and liabilities:
Receivables 114,000 90,000
Inventories (65,000) 85,000
Prepaid expenses (304,000) (135,000)
Deposits and other -- 35,000
Deferred income taxes -- (18,000)
Accounts payable-trade 941,000 (416,000)
Income tax payable 137,000 210,000
Other accrued liabilities (8,000) (99,000)
------------- -------------
Total adjustments 1,906,000 915,000
------------- -------------
Net cash provided by operating activities 2,194,000 1,788,000
Cash flows used in investing activities:
Increase in notes receivable -- (185,000)
Decrease in notes receivable 54,000 44,000
Acquisition of property, buildings and equipment (245,000) (383,000)
Loans to officers -- (234,000)
------------- -------------
Net cash used in investing activities (191,000) (758,000)
Cash flows from financing activities:
Payments on long term debt (7,521,000) (2,353,000)
Proceeds from issuance of long-term debt 5,800,000 850,000
Capitalized loan costs (13,000) --
Principal payment on capital leases (31,000) (25,000)
Sale of treasury stock -- 3,000
------------- -------------
Net cash used in financing activities (1,765,000) (1,525,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents 238,000 (495,000)
Cash and cash equivalents at beginning of period 727,000 1,101,000
------------- -------------
Cash and cash equivalents at end of period $965,000 $606,000
============= =============
(Continued)
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Statements.
6
STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Sixteen Weeks Ended
--------------------------------------------
May 20, 2002 May 21, 2001
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 137,000 $ 336,000
============ ===========
Cash paid for income taxes $ 15,000 $ 355,000
============ ===========
Non cash investing and financing activities:
Exchange of deposit for property acquisition $ -- $ 53,000
Acquisition of property with debt financing $ -- $ 460,000
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Statements.
7
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts for Star Buffet, Inc., together with its direct and indirect wholly
owned subsidiaries Summit Family Restaurants Inc. ("Summit"), HTB Restaurants,
Inc. ("HTB"), Northstar Buffet, Inc. ("NSBI") and Star Buffet Management, Inc.
("SBMI") (collectively the "Company") and have been prepared in accordance with
accounting principles generally accepted in the United States of America, the
instructions to Form 10-Q and Article 10 of Regulation S-X. These financial
statements should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, included in the Company's Annual Report on
Form 10-K for the fiscal year ended January 28, 2002. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented have been reflected herein. Results
of operations for such interim periods are not necessarily indicative of results
to be expected for the full fiscal year or for any future periods. Certain
reclassifications have been made to the fiscal 2002 consolidated financial
statements to conform to the fiscal 2003 presentation. The accompanying
condensed consolidated financial statements include the results of operations
and assets and liabilities directly related to the Company's operations. Certain
estimates, assumptions and allocations were made in preparing such financial
statements.
The operating results for the 16-week period ended May 20, 2002 include
operations for each of the Company's sixteen franchised HomeTown Buffet
restaurants, ten JB's Restaurants, seven JJ North's Grand Buffet restaurants,
seven BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two
Casa Bonita restaurants, two Holiday House restaurants and one North's Star
Buffet restaurant and the fixed charges for four restaurants closed for the
entire quarter. Five restaurants were closed at the end of the first quarter of
fiscal 2003 for remodeling and repositioning. During the second quarter of
fiscal 2003, an additional restaurant was closed for remodeling and
repositioning.
The operating results for the 16-week period ended May 21, 2001 include
operations for each of the Company's sixteen franchised HomeTown Buffet
restaurants, thirteen BuddyFreddys Country Buffet restaurants, ten JB's
Restaurants, six JJ North's Grand Buffet restaurants, two BuddyFreddys
restaurants, two Casa Bonita restaurants, two Holiday House restaurants and two
North's Star Buffet restaurants and the fixed charges for two restaurants closed
for the entire quarter. Three restaurants were closed at the end of the first
quarter of fiscal 2002 for remodeling and repositioning. During the second
quarter of fiscal 2002, an additional restaurant was closed for remodeling and
repositioning.
The Company utilizes a 52/53 week fiscal year which ends on the last Monday in
January. The first quarter of each year contains 16 weeks while the other three
quarters each contain 12 weeks.
NOTE (B) RELATED PARTY TRANSACTIONS
In connection with the Company's employment contract with Mr. Robert E. Wheaton,
the Company's President and Chief Executive Officer, the Company has agreed to
provide Mr. Wheaton with certain loans solely for the purchase of the Company's
common stock. The loans are secured by the common stock and bear interest at the
prevailing rate set forth in the Company's credit facility with FleetBoston
Bank. The current rate is approximately three and three-quarters percent. At the
end of the first quarter ended May 20, 2002, the loans totaled $1,338,000
($1,338,000 at January 28, 2002).
The Company has an $185,000 note receivable with Phillip "Buddy" Johnson who is
on the Board of Directors. The note receivable is due July 31, 2002 and is
secured by property adjacent to the Plant City, Florida facility.
8
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the property as additional parking. The note receivable bears
interest at 6.5% due monthly. The note receivable was paid in full in June 2002.
NOTE (C) SEGMENT AND RELATED REPORTING
The Company has five reportable operating segments: HomeTown Buffet, Casa
Bonita, North's Star, Florida Buffet Division and JB's Restaurants. The
Company's reportable segments are based on the brand similarities.
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 seven JJ North's Grand Buffet restaurants and one
North's Star Buffet Restaurants. The Florida Buffets Division includes two
BuddyFreddys restaurants, seven BuddyFreddys Country Buffet restaurants and two
Holiday House restaurants. The JB's Restaurants segment includes the Company's
ten JB's Restaurants.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K. The Company evaluates the performance
of its operating segments based on income before income taxes.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. "Other" includes assets presented in the condensed
consolidated balance sheets and not in the reportable segments relate to the
Company as a whole, and not individual segments. Also certain corporate incomes
and expenses in the condensed consolidated statements of income are not included
in the reportable segments and are included in "other."
(Dollars in Thousands)
16 Weeks Ended HomeTown Casa North's Florida
May 20, 2002 Buffet Bonita Star( 1) Buffet(2) JB's Other Total
-------------- -------- ------- -------- --------- ------ ---------- -------
Revenues $11,855 $3,019 $2,578 $4,511 $3,229 $ -- $25,192
Interest income -- -- -- -- -- 73 73
Interest expense (65) -- -- (10) (1) (152) (228)
Deprecation & amortization 507 79 84 294 78 11 1,053
Income (loss) before income taxes 689 512 (222) 92 192 (823) 440
Total assets 13,421 2,000 7,449 15,294 5,102 312 43,578
16 Weeks Ended
May 21, 2001
--------------
Revenues $12,642 $3,322 $2,865 $6,584 $3,272 $ -- $28,685
Interest income -- -- -- -- -- 80 80
Interest expense (67) -- -- (9) (2) (309) (387)
Deprecation & amortization 455 62 130 368 103 9 1,127
Income (loss) before income taxes 1,366 416 80 340 175 (958) 1,419
Total assets 12,866 2,029 7,639 17,027 5,253 456 45,270
(1) Included in the reportable segment for the quarter ended May 21, 2001 is one
location closed for the entire quarter. This location represents $263,000 and
$333,000 of net book value of equipment and leasehold
9
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
improvements included in total assets, respectively, and incurred $16,000 in
depreciation and amortization expense. (2) Included in the reportable segment
for the quarter ended May 20, 2002 are four locations closed for the entire
quarter and one closed during the quarter. These five locations contributed
revenues of $67,000, and incurred $96,000 of depreciation and amortization in
the quarter ended May 20, 2002. These locations also have a net book value of
equipment of $1,972,000, buildings of $3,558,000 and land of $2,801,000 included
in total assets at May 20, 2002. Included in the reportable segment for the
quarter ended May 21, 2001 is one location closed for the entire quarter and one
closed during the quarter. These two locations contributed revenues of $31,000
offset by depreciation and amortization of $31,000 during the quarter ended May
21, 2001, and have a net book value in equipment of $855,000, buildings of
$1,116,000 and land of $1,342,000 included in total assets at May 21, 2001.
NOTE (D) NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income and the
weighted-average number of common shares outstanding were the same for both the
basic and diluted calculation. Outstanding options not included in the
computation of diluted net income per share for the 16-week periods ended May
20, 2002, and May 21, 2001, were 735,000 and 742,000, respectively, due to the
market price of the underlying stock being less than the exercise price.
NOTE (E) GOODWILL
As of January 29, 2002, the Company has adopted Statement of Financial
Accounting Standard "SFAS" No. 142, "Goodwill and Other Intangible Assets."
Thus, effective January 29, 2002, the Company has ceased amortizing goodwill
recorded in past business combinations. SFAS 142 requires the Company to perform
a transitional impairment test to determine whether there is an indication that
goodwill currently recorded is impaired as of January 29, 2002. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 29, 2002.
The Company has until July 28, 2002 to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company must
perform the second step of the transitional impairment test.
In the second step, the Company must compare the implied fair value of each
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets and liabilities in a manner similar to a purchase
price allocation in a business combination, to its carrying amount, both of
which would be measured as
10
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of January 29, 2002. This second step is required to be completed as soon as
possible, but no later than January 27, 2003. Any transitional impairment loss
will be recognized as a cumulative effect of a change in accounting principle in
the Company's statement of operations.
The Company has not completed the first step in the transitional impairment test
and has not determined what the effect of adopting SFAS 142 will be on the
Company's results of operations. As of January 29, 2002, the Company has
$3,756,000 of goodwill net of amortization that is subject to the transitional
impairment test.
The following is the Company's disclosure of what reported net income and income
per share would have been in all periods presented, exclusive of amortization
expenses (including any related tax effects) recognized in those periods related
to goodwill, intangible assets that are no longer being amortized and changes to
amortization periods for intangible assets that will continue to be amortized.
Sixteen Weeks Ended
----------------------------
May 20, May 21,
2002 2001
---------- ---------
Net income as reported................. $288,000 $873,000
Amortization, net of tax............... -- 69,000
---------- ---------
Adjusted net income.................... $288,000 $942,000
========== =========
Basic and diluted income per share:
As reported............................ $0.10 $0.30
Change in amortization expense......... -- 0.02
---------- ---------
Adjusted basic and diluted income per
share................................. $0.10 $0.32
========== =========
NOTE (F) CONTINGENCIES
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 has
included in net payables $2,037,379 for this alleged amount owed in relation to
this litigation net of amounts receivable included in accounts payable-trade at
May 20, 2002. 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 for the State of Arizona in
and for the County of Maricopa 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
11
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. During the first quarter, the Company settled an alleged dispute for
$100,000.
12
STAR BUFFET, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis should be read in conjunction
with the unaudited condensed consolidated financial statements, and the notes
thereto, presented elsewhere in this report. Comparability of future periods may
from time to time be affected by the implementation of the Company's acquisition
and strategic alliance strategies. The costs associated with integrating new
restaurants or underperforming or unprofitable restaurants, if any, acquired or
otherwise operated by the Company may have a material adverse effect on the
Company's results of operations.
Consolidated net income for the 16-week period ended May 20, 2002 decreased
$585,000 or 67.0% to $288,000 or $0.10 per share on a diluted basis as compared
with restated net income of $873,000 for the comparable prior year period. The
decrease in net income is primarily due to higher food costs, lower same store
sales and higher fixed costs as a percentage of sales. The increase in food
costs primarily results from changing to several new food suppliers during the
first quarter when the former supplier cancelled a food contract with the
Company. The Company does not believe the former food supplier had the right to
cancel the contract and has filed a lawsuit to collect damages. Management
believes food costs will be impacted for the next year as the Company secures
more competitive suppliers. Management believes the majority of the impact for
the remainder of the year will be in the second quarter. Management also
believes the same store sales decrease is primarily due to the slower economy
and increased competition in certain areas. Occupancy and other expenses are
primarily fixed in nature and generally do not vary with restaurant sales
volume. Rent, insurance, property taxes, utilities, maintenance and advertising
account for the major expenditures in this category. In addition, certain
salaries and benefits do not vary with restaurant sales volume.
This Quarterly Report on Form 10-Q contains forward looking statements, which
are subject to known and unknown risks, uncertainties and other factors which
may cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; success
of integrating newly acquired under performing or unprofitable restaurants; the
impact of competitive products and pricing; success of operating initiatives;
advertising and promotional efforts; adverse publicity; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; changes in prevailing interest rates and the availability
of financing; food, labor, and employee benefits costs; changes in, or the
failure to comply with, government regulations; weather conditions; construction
schedules; implementation of the Company's acquisition and strategic alliance
strategy; the effect of the Company's accounting polices and other risks
detailed in the Company's Form 10-K, for the fiscal year ended January 28, 2002,
and other filings with the Securities and Exchange Commission.
The results of operations for the 16-week period ended May 21, 2001 have been
restated as reported in the Company's January 28, 2002 year-end Form 10-K.
COMPONENTS OF INCOME FROM OPERATIONS
Total revenues include a combination of food and beverage sales and are net of
applicable state and city sales taxes.
Food costs primarily consist of the costs of food and beverage items. Various
factors beyond the Company's control, including adverse weather and natural
disasters, may affect food costs. Accordingly, the Company may incur periodic
fluctuations in food costs. Generally, these temporary increases are absorbed by
the Company and
13
not passed on to customers; however, management may adjust menu prices to
compensate for increased costs of a more permanent nature.
Labor costs include restaurant management salaries, bonuses, hourly wages for
unit level employees, various health, life and dental insurance programs,
vacations and sick pay and payroll taxes.
Occupancy and other expenses are primarily fixed in nature and generally do not
vary with restaurant sales volume. Rent, insurance, property taxes, utilities,
maintenance and advertising account for the major expenditures in this category.
General and administrative expenses include all corporate and administrative
functions that serve to support the existing restaurant base and provide the
infrastructure for future growth. Management, supervisory and staff salaries,
employee benefits, data processing, training and office supplies are the major
items of expense in this category.
Depreciation and amortization includes depreciation on assets for closed stores
that management is evaluating for future remodeling and repositioning.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of total revenues for the 16 weeks ended May 20, 2002 and May 21,
2001.
Sixteen Weeks Ended
-------------------------------
May 20, May 21,
2002 2001
-------- --------
Total revenues 100.0% 100.0%
-------- --------
Costs and expenses
Food costs 35.6 33.2
Labor costs 33.3 33.0
Occupancy and other expenses 20.3 19.6
General and administrative expenses 4.3 4.3
Depreciation and amortization 4.2 3.9
-------- --------
Total costs and expenses 97.7 94.0
-------- --------
Income from operations 2.3 6.0
Interest expense (0.9) (1.4)
Interest income 0.3 0.3
-------- --------
Income before income taxes 1.7 4.9
Income tax expense 0.6 1.9
-------- --------
Net income 1.1% 3.0%
======== ========
Effective income tax rate 34.5% 38.5%
======== ========
Total revenues decreased $3,493,000 or 12.2% from $28.7 million in the 16 weeks
ended May 21, 2001 to $25.2 million in the 16 weeks ended May 20, 2002. The
decrease in revenues was primarily attributable to declines in
14
comparable same store sales. Management believes the same store sales
decrease is primarily due to the slower economy and increased competition in
certain areas.
Food costs as a percentage of total revenues increased from 33.2% during the
16-week period ended May 21, 2001 to 35.6% during the 16-week period ended May
20, 2002. The increase as a percentage of total revenues was primarily
attributable to higher food costs from changing to several new food suppliers
during the first quarter when the former supplier cancelled a food contract with
the Company. The Company does not believe the former food supplier had the right
to cancel the contract and has filed a lawsuit to collect damages. Management
believes food costs will be impacted for the next year as the Company secures
more competitive suppliers. Management believes the majority of the impact for
the remainder of the year will be in the second quarter.
Labor costs as a percentage of total revenues increased from 33.0% during the
16-week period ended May 21, 2001 to 33.3% during the 16-week period ended May
20, 2002. The increase as a percentage of total revenues was primarily
attributable to decreased revenues.
Occupancy and other expenses as a percentage of total revenues increased from
19.6% during the 16-week period ended May 21, 2001 to 20.3% during the 16-week
period ended May 20, 2002. The increase as a percentage of total revenues was
primarily attributable to a decrease in revenues.
General and administrative costs remained flat at 4.3% as a percentage of
revenues during the 16-week period ended May 20, 2002 and May 21, 2001 even
though revenues declined. This was achieved through a decrease of approximately
$160,000 in administrative costs at the divisional level.
Depreciation and amortization as a percentage of total revenues increased from
3.9% during the 16-week period ended May 21, 2001 to 4.2% during the 16-week
period ended May 20, 2002. The increase as a percentage of total revenues was
primarily attributable to a decrease in revenues.
Interest expense as a percentage of total revenues decreased from 1.4% during
the 16-week period ended May 21, 2001 to 0.9% during the 16-week period ended
May 20, 2002. The decrease as a percentage of total revenues was primarily
attributable to the lower debt balances and lower interest rates.
Interest income decreased from $80,000 for the 16-week period ended May 21, 2001
to $73,000 for the 16-week period ended May 20, 2002. The interest income was
generated by the Company's cash and outstanding notes receivable balances.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment and construction
could affect the Company's operations. Many of the Company's employees are paid
hourly rates related to the federal and state minimum wage laws. Legislation
increasing the federal minimum wage has resulted in higher labor costs to the
Company. In addition, the cost of food commodities utilized by the Company are
subject to market supply and demand pressures. Shifts in these costs may have an
impact on the Company's food costs. The Company anticipates that modest
increases in these costs can be offset through pricing and other cost control
efforts; however, there is no assurance that the Company would be able to pass
more significant costs on to its customers or if it were able to do so, it could
do so in a short period of time.
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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 May 20, 2002, the Company had $965,000 in cash. Cash and cash equivalents
increased by $238,000 during the 16 weeks ended May 20, 2002. Total cash
provided by operations was approximately $2.2 million. The Company used
approximately $245,000 on capital improvements and approximately $1.7 million to
extinguish long term debt.
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 the Company's prototype at a lower cost. Management
estimates the cost of acquiring and converting a 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. 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
financing agreement had an average interest rate of approximately three and
three-quarters percent and seven and one-third percent for the quarters ending
May 20, 2002 and May 21, 2001, respectively. Principal payments under the Term
Loan Facility due in quarterly installments began November 1999 and were
scheduled to continue until the final maturity in October 2003. However, the
Company paid the Term Loan Facility in full on May 17, 2002. Borrowings under
the Revolving Credit Facility are 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 $6,675,000 and $6,000,000 on May 20, 2002 and June 26, 2002, respectively.
The Company has $200,000 in letters of credit against the Revolving Credit
Facility leaving $800,000 available for borrowing on June 26, 2002.
On May 2, 2002, the Company completed a $1,500,000 ten year first real estate
mortgage with M&I Marshall & Ilsley Bank. The mortgage has monthly payments
including interest of $17,894 and matures on May 2, 2012 with a fixed interest
rate of 7.5% for the first five years with interest for years six to ten
calculated at the five year LIBOR rate plus 250 basis points with a floor of
7.5%. The proceeds were used to pay the FleetBoston Term Loan Facility as
required by the Company's agreement with FleetBoston. The mortgage is secured by
the Company's HomeTown Buffet restaurant in Scottsdale, Arizona.
The Company believes that available cash, cash flow from operations and amounts
available under the 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our principal exposure to financial market risks is the impact that interest
rate changes could have on our $20.0 million credit facility, of which
$6,000,000 remained outstanding as of June 26, 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 approximately 3.75% in the first
quarter of fiscal 2003). A hypothetical increase of 100 basis points in
short-term interest rates would result in a reduction of approximately $60,000
in annual pre-tax earnings. The estimated reduction is based upon the current
outstanding balance of our credit facility and assumes no change in the volume,
index or composition of debt at June 26, 2002. Substantially all of our 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 including food items and utilities which
are affected by commodity price fluctuations and are, therefore, subject to
volatility caused by weather, market conditions and other factors which are not
considered predictable or within our control. In certain cases, we believe we
will be able to address commodity cost increases that appear to be long-term in
nature by adjusting our menu pricing, menu mix, changing our product delivery
strategy or substituting alternative energy sources. However, increases in
commodity prices could result in lower operating margins for our restaurant
concepts.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 has
included in net payables $2,037,379 for this alleged amount owed in relation to
this litigation net of amounts receivable included in accounts payable-trade at
May 20, 2002. 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 for the State of Arizona in
and for the County of Maricopa 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are attached to this report:
Exhibit Description
Number of Exhibit
------- -----------
None.
(b) Current Reports on Form 8-K:
None.
There were no other items to be reported under Part II of this report.
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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 hereunto duly authorized.
STAR BUFFET, INC. AND SUBSIDIARIES
July 5, 2002 By: /s/ Robert E. Wheaton
Robert E. Wheaton
President and
Chief Executive Officer
July 5, 2002 By: /s/ Ronald E. Dowdy
Ronald E. Dowdy
Group Controller,
Treasurer, Secretary and
Principal Accounting Officer
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