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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549

FORM 10-Q

(Mark One)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: November 4, 2002

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission File Number: 0-6054

STAR BUFFET, INC.
(Exact name of registrant as specified in its charter)

420 Lawndale Drive,
Salt Lake City, UT 84115
(Address of principal executive offices) (Zip Code)

(801) 463-5500
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        There were 2,950,000 shares of the issuer's common stock, par value $.001 per share, outstanding as of December 12, 2002.

STAR BUFFET, INC. AND SUBSIDIARIES
INDEX

PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

        During the forty weeks ended November 4, 2002, the company reclassified net assets totaling $1,207,000 from property, buildings and equipment to net assets held for sale. The amount reclassified consisted of the following assets under contract for sale:

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

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note (A) Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements include the accounts for Star Buffet, Inc., together with its direct and indirect wholly-owned subsidiaries Summit Family Restaurants Inc. ("Summit"), HTB Restaurants, Inc. ("HTB"), Northstar Buffet, Inc. ("NSBI") and Star Buffet Management, Inc. ("SBMI") (collectively, the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2002. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been reflected herein. Results of operations for such interim periods are not necessarily indicative of results to be expected for the full fiscal year or for any future periods. Certain reclassifications have been made to the fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company's operations. Certain estimates, assumptions and allocations were made in preparing such financial statements.

        The operating results for the 12-week period ended November 4, 2002 include operations for each of the Company's 16 franchised HomeTown Buffet restaurants, ten JB's Restaurants, six JJ North's Country Buffet restaurants, five BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants, one North's Star Buffet restaurant and one JJ North's Family Restaurant and the fixed charges for six restaurants closed for the entire quarter. One restaurant was closed during the quarter. Five restaurants remain closed at the end of the third quarter of fiscal 2003 for remodeling and repositioning. One closed restaurant has been leased and the net assets of another one is under contract to be sold and reported as net assets held for sale.

        The operating results for the 12-week period ended November 5, 2001 include operations for each of the Company's 16 franchised HomeTown Buffet restaurants, ten JB's Restaurants, nine BuddyFreddys Country Buffet restaurants, seven JJ North's Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. At the end of the third quarter, six BuddyFreddys Country Buffet restaurants have been closed, two were permanently closed during the quarter. The remaining four BuddyFreddys Country Buffet restaurants remained closed at the end of the third quarter of fiscal 2002 for remodeling and repositioning.

        The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each year contains 16 weeks while the other three quarters each contain 12 weeks.

Note (B) Related Party Transactions

        In connection with the Company's employment contract with Mr. Robert E. Wheaton, the Company's President and Chief Executive Officer, the Company has agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company's common stock. The loans, entered into prior to calendar year 2002, are secured by the common stock and bear interest at the prevailing rate set forth in the Company's credit facility with Fleet Boston Bank. The current rate is approximately 3.6 percent for the forty weeks ended November 4, 2002. At November 4, 2002, the loans totaled $1,338,000 ($1,338,000 at January 28, 2002).

        The Company had an $185,000 note receivable with Phillip "Buddy" Johnson who is a member of the Board of Directors. The note receivable was due July 31, 2002 and was secured by property adjacent to our Plant City, Florida facility. The Company uses the property as additional parking. The note receivable bears interest at 6.5% due monthly. The note receivable was paid in full in June 2002.

Note (C) Segment and Related Reporting

        The Company has five reportable operating segments: HomeTown Buffet, Casa Bonita, North's Star, Florida Buffet Division and JB's Restaurants. The Company's reportable segments are based on the brand similarities.

        At November 4, 2002, the HomeTown Buffet segment includes the Company's 16 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The North's Star segment includes six JJ North's Country Buffet restaurants and one North's Star Buffet restaurant. The Florida Buffets Division includes two BuddyFreddys restaurants, five BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The JB's Restaurants segment includes the Company's ten JB's Restaurants and one JJ North's Family Restaurant.

        The accounting policies of the reportable segments are the same as those described in Note 1 of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K. The Company evaluates the performance of its operating segments based on income (loss) before income taxes.

        Summarized financial information concerning the Company's reportable segments is shown in the following table. "Other" includes assets presented in the condensed consolidated balance sheets and not in the reportable segments related to the Company as a whole, and not individual segments. Also certain corporate incomes and expenses in the condensed consolidated statements of operations are not included in the reportable segments and are also included in "other."

(1)

Included in the reportable segment for the 40 weeks ended November 4, 2002 is one location closed during the second quarter. This location contributed revenues of $167,000, and incurred

$46,000 of depreciation and amortization, and $300,000 in impairment of long-lived assets. This location represents $78,000 and $0 of net book value of equipment and leasehold improvements included in total assets, respectively, at November 4, 2002.

Included in the reportable segment for the 40 weeks ended November 5, 2001 is one location opened during the second quarter. This location contributed revenues of $251,000, and incurred $41,000 of depreciation and amortization. This location represents $111,000 and $202,000 of net book value of equipment and leasehold improvements included in total assets, respectively, at November 5, 2001.

(2)

Included in the reportable segment for the 40 weeks ended November 4, 2002 are four locations closed for the entire 40 weeks and two locations closed during the first half of fiscal 2003. These six locations contributed revenues of $381,000, incurred $277,000 of depreciation and amortization, and represented $453,000 of the $740,000 in impairment of long-lived assets. These closed locations comprised a net book value of equipment of $1,362,000, buildings of $2,540,000 and land of $2,126,000 included in total assets and $1,207,000 included in net assets held for sale.

Included in the reportable segment for the 40 weeks ended November 5, 2001 is one location closed for the entire period and five locations closed during the first half of fiscal 2002. These six locations contributed revenues of $1,694,000 and incurred $311,000 of depreciation and amortization. These locations also have a net book value of equipment of $1,799,000, buildings of $2,691,000 and land of $2,676,000 included in total assets at November 5, 2001.

(3)

Included in the reportable segment for the 40 weeks ended November 4, 2002 is one location opened during the second quarter. This location contributed revenues of $172,000 and incurred $1,000 of depreciation and amortization. This location has $19,000 of net book value of equipment and leasehold improvements included in total assets, at November 4, 2002. Also included in the reportable segment for the 40 weeks ended November 4, 2002 is one location closed during the second quarter. This location contributed revenues of $342,000 and incurred $33,000 of depreciation and amortization. This location has a net book value of equipment of $66,000, buildings of $832,000 and land of $228,000 included in total assets, at November 4, 2002.

Note (D) Net Income (Loss) per Common Share

        Net income (loss) per common share is computed based on the weighted-average number of common shares outstanding and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents.

        Basic net income (loss) per common share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted net income (loss) per common share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.

        In calculated net income (loss) per common share, the net income (loss) and the weighted-average number of common shares outstanding were the same for both the basic and diluted calculation. The computation of diluted net (loss) per share for the 12 week and 40 week periods ended November 4, 2002, does not include 735,000 in outstanding options as they would be anti-dilutive for the loss periods. The computation of diluted net income per share for the 12 week and 40 week periods ended November 5, 2001, excludes 742,000 in outstanding options due to the market price of the underlying stock being less than the exercise price.

Note (E) Goodwill

        As of January 29, 2002, the Company adopted Statement of Financial Accounting Standard "SFAS" No. 142, "Goodwill and Other Intangible Assets." Accordingly, effective January 29, 2002, the Company ceased amortizing goodwill recorded in past business combinations.

        The following is the Company's disclosure of what reported net income (loss) and income (loss) per share would have been in all periods presented, exclusive of amortization expenses (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes to amortization periods for intangible assets that will continue to be amortized.

        SFAS 142 requires the Company to perform a transitional impairment test to determine whether there is an indication that goodwill currently recorded is impaired as of January 29, 2002. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Then the Company must compare the fair value of the assets of each reporting unit to its carrying amount as of January 29, 2002.

        The Company completed the first step of the transitional impairment test required by SFAS 142 during the quarter ended August 12, 2002. The Company has determined a reporting unit to be at the individual store level, assessed the fair value of the Company and compared that value to its stockholders' equity. In determining fair value, the Company considered the guidance in SFAS No. 142, including the Company's market capitalization, control premiums, discounted cash flows and other indicators of fair value. Based on this analysis, there is an indication that goodwill of approximately $700,000 as of January 29, 2002, may be impaired.

        The Company is in the process of completing the second step of the transitional impairment analysis. This step requires the Company to compare the implied fair value of each reporting unit's goodwill, determined 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 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.

        As of January 29, 2002, the Company had $3,756,000 of goodwill net of amortization that is subject to the transitional impairment test. Internal valuations and analysis for the first step have been completed to determine if there is goodwill impairment as of the date of adoption. The Company will engage a professional services firm to assist in the valuation process for approximately four locations where initial tests have indicated that goodwill may be impaired. The definitive amount of the loss will be known by the end of the fourth quarter and will be reported as a change in accounting principle in the current fiscal year. Such a charge would not affect the Company's tangible net worth and is not expected to adversely affect its business operations or cash flows.

Note (F) Notes Receivable

        The receivable from North's Restaurants, Inc. ("North's") originally included $3,123,000 for a term note and $371,000 on a line of credit that was converted to a note receivable. As a result of a dispute with North's Restaurants, Inc., management had ceased accruing interest income pending resolution of the dispute with North's Restaurants, Inc. As part of a Settlement Agreement, entered on January 26, 2001, North's promises to pay the Company the principal sum of $3,500,000, with an interest rate of 8% per annum. North's paid the Company $295,000 pursuant to the terms of the Settlement Agreement and such payment was applied to reduce the principal amount owing. The $3.5 million note receivable stipulates that monthly payments of principal and interest be made in the amount of $39,954. The loan calls for monthly payments to start on February 26, 2001 and continue on the 26th day of each month thereafter, with a final payment of all remaining unpaid principal, accrued interest and other sums due under the note due and payable on September 26, 2010.

        The Company accommodated North's request for working capital and remodeling expenditures by reducing the principal payments due from June 26, 2002 through July 26, 2003 from $303,000 to $65,000. Full principal and interest payments will resume in August 2003 through January 2011 with the final payment due in February 2011.

Note (G) Recent Developments

        On July 17, 2002, JB's Family Restaurants, Inc. ("JBFR") filed a complaint in the United States Bankruptcy Court District of Arizona against the Company, Case No. 02-03349-ECF-CGC, Adversary No. 02-815, alleging various claims arising from an alleged breach of a franchise agreement. JBFR sought injunctive relief prohibiting the Company's use of various JB's trademarks together with monetary damages.

        On November 8, 2002, the Company reached an accord with JBFR that settles all alleged breaches of the franchise agreement. Under this accord, JBFR has granted the Company a license agreement for the use of the JB's trademark from February 23, 2000 until August 31, 2012 in exchange for certain cash payments with an option for an additional ten years. This accord is subject to approval by the United States Bankruptcy Court District of Arizona. To date, all license and marketing expenses related to this accord have been expensed in the periods incurred with no additional amounts required.

Note (H) 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 $2,066,927 for this alleged amount owed in relation to this litigation in accounts payable-trade at November 4, 2002 net of any amounts receivable from Alliant. 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 above the amount provided for 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.

STAR BUFFET, INC. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        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.

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 loss for the 12-week period ended November 4, 2002 increased $60,000 to a net loss of $382,000 or ($0.13) per share on a diluted basis as compared with net loss of $442,000 for the comparable prior year period. Consolidated net income (loss) for the 40-week period ended November 4, 2002 decreased $1,838,000 to a loss of ($711,000) or ($0.24) per share on a diluted basis as compared with net income (loss) of $1,127,000 for the comparable prior year period. The decrease in net income is due primarily to an impairment of long-lived assets of $1,040,000 recorded in the second quarter of fiscal 2003 with an impairment of long-lived assets of $806,000 recorded in the third quarter of fiscal 2002. The decrease in net income is also due to higher food costs, lower same store sales and higher fixed costs as a percentage of sales even though occupancy, general and administrative and other expense decreased by $926,000. The increase in food costs primarily results from the transition 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 remainder of fiscal 2003 as the Company secures more competitive suppliers. Management believes the impact for the remainder of the year will be less than in the first and second quarters primarily due to retaining more competitive suppliers for the third and fourth quarters. Management also believes the same store sales decrease is primarily due to the slower economy and increased competition in certain areas. The decline in sales significantly impacts net income (loss) because occupancy, salaries, benefits, and other expenses are primarily fixed in nature and generally do not vary significantly with restaurant sales volume. Occupancy and other expense includes major expenditures such as rent, insurance, property taxes, utilities, maintenance and advertising.

        The results of operations for the 12 and 40-week periods ended November 5, 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 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 significantly 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 also 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 12 and 40 weeks ended November 4, 2002 and November 5, 2001, respectively.

        Total revenues decreased $1,659,000 or 9.6% from $17.2 million in the 12 weeks ended November 5, 2001 to $15.6 million in the 12 weeks ended November 4, 2002. Total revenues decreased $7.1 million or 10.7% from $65.8 million in the 40 weeks ended November 5, 2001 to $58.7 million in the 40 weeks ended November 4, 2002. The decrease in revenues was primarily attributable to declines in comparable same store sales and fewer stores in operation this year. Management believes the same store sales decrease is primarily due to the slower economy and increased competition in certain areas.

        Even though actual food costs decreased $990,000 during the 12 week period ended November 4, 2002, food costs as a percentage of total revenues increased from 33.0% during the 12-week period ended November 5, 2001 to 33.5% during the 12 weeks ended November 4, 2002, and from 32.5% during the 40-week period ended November 5, 2001 to 34.7% during the 40 weeks ended November 4, 2002. The increase as a percentage of total revenues was primarily attributable to higher food costs from the transition 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 balance of fiscal year 2003 as the Company secures more competitive suppliers. Management believes the impact for the remainder of the year will be less than in the first and second quarters primarily due to retaining more competitive suppliers for the third and fourth quarters.

        Labor costs as a percentage of total revenues increased from 35.4% during the 12-week period ended November 5, 2001 to 36.0% during the 12-week period ended November 4, 2002 even though actual labor costs decreased by $498,000. Labor costs as a percentage of total revenues increased from 33.8% during the 40-week period ended November 5, 2001 to 34.3% during the 40-week period ended November 4, 2002 while actual labor costs declined by $2,084,000 during the 40 week period ended November 4, 2002 and compared to the same 40 week period of the prior year. The increase as a percentage of total revenues was primarily attributable to decreased revenues and fewer stores in operation this year.

        Occupancy and other expenses as a percentage of total revenues increased from 22.0% during the 12-week period ended November 5, 2001 to 22.7% during the 12-week period ended November 4, 2002. Occupancy and other expenses as a percentage of total revenues increased from 20.5% during the 40-week period ended November 5, 2001 to 21.2% during the 40-week period ended November 4, 2002. The increase as a percentage of total revenues was primarily attributable to a decrease in revenues even though actual occupancy and other expense decreased by $256,000 and $997,000 for the 12 week and 40 week periods ended November 4, 2002, respectively.

        General and administrative costs as a percentage of revenues increased from 3.5% during the 12-week period ended November 5, 2001 to 5.7% during the 12-week period ended November 4, 2002. The increase as a percentage of total revenues for the 12-week period ended November 4, 2002 was primarily attributable to higher gross insurance expense, up $216,000 net of normal allocation to operating units, and a $44,000 impact from the non-recurrence of a credit adjustment last year associated with reduced corporate bonus accruals. General and administrative costs as a percentage of revenues increased from 4.2% during the 40-week period ended November 5, 2001 to 4.8% during the 40-week period ended November 4, 2002. The increase as a percentage of total revenues for the 40-week period ended November 4, 2002 was due to a $79,000 higher net insurance expense at the corporate level plus $119,000 of additional corporate legal costs and increased consulting fees of $45,000 almost fully offset by reduced corporate bonus accruals of $46,000 and lower royalty expenses of $155,000.

        Depreciation and amortization as a percentage of total revenues remained at 5.0% during the 12-week period ended November 5, 2001 and November 4, 2002. Depreciation and amortization as a percentage of total revenues increased from 4.3% during the 40-week period ended November 5, 2001 to 4.4% during the 40-week period ended November 4, 2002. The increase is primarily attributable to the 10.7 percent decrease in revenues.

        Impairment of long-lived assets as a percentage of total revenues was 0.0% and 1.8% for the 12 and 40 weeks ended November 4, 2002. Impairment of long-lived assets as a percentage of total revenues was 4.6% and 1.2% for the 12 and 40 weeks ended November 5, 2001. The impairment in fiscal 2003 was a result of the lease termination of one restaurant in Florida, the pending sale of one owned restaurant, and one leased restaurant where projected undiscounted cash flow is less than the net book value of assets. The impairment also included consideration for one leased JJ North's Country Buffet for leasehold improvements and projected shortfalls in rental income should the Company decide to sub-lease the facility. The impairment in fiscal 2002 was a result of the closure of two Florida restaurants resulting in restaurant closing costs and the abandonment of leasehold improvements.

        Interest expense as a percentage of total revenues decreased from 1.4% during the 12-week period ended November 5, 2001 to 1.2% during the 12-week period ended November 4, 2002, and from 1.3% during the 40-week period ended November 5, 2001 to 1.0% during the 40-week period ended November 4, 2002. The decrease as a percentage of total revenues was primarily attributable to the decline in debt balances of approximately $6,100,000 and the decrease of approximately 1.2% in interest rates on the $20 million syndicated bank financing agreement led by FleetBoston Financial Corporation.

        Interest income decreased from $68,000 for the 12-week period ended November 5, 2001 to $50,000 for the 12-week period ended November 4, 2002. Interest income decreased from $208,000 for the 40-week period ended November 5, 2001 to $186,000 for the 40-week period ended November 4, 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 as a percentage of revenue even though overall labor costs decreased. 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.

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 November 4, 2002, the Company had $675,000 cash and cash equivalents for a decrease of $52,000 during the 40 weeks ended November 4, 2002. Total cash provided by operations was approximately $3.3 million. The Company used approximately $578,000 on capital improvements and a net amount of approximately $3.1 million to reduce long term debt and capitalized lease obligations.

        The Company intends to modestly expand operations through the acquisition of regional buffet chains or 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 than new construction. 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 Fleet Boston 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 3.6 percent and 6.2 percent for the 40 weeks ending November 4, 2002 and November 5, 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 $5,500,000 and $6,000,000 on November 4, 2002 and December 12, 2002, respectively. The Company has $200,000 in letters of credit against the Revolving Credit Facility leaving $800,000 available for borrowing on December 12, 2002.

        The Company believes that available cash, anticipated cash flow from operations and amounts available under the Revolving Credit Facility will be sufficient to satisfy its working capital, and capital expenditure requirements during the next 12 months. 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.

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 Account Policies, included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2002. 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 results of operation 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 polices regarding land, buildings and equipment include certain management judgments 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 judgments 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.

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 December 12, 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 3.6% for the first three quarters 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 December 12, 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        The Company's principal executive officer and its chief accounting officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-Q, have concluded that the Company's disclosure controls and procedures are adequate and effective for the purposes set forth in the definition in Exchange Act rules.

Changes in Internal Controls and Procedures

        There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of their evaluation.

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 $2,066,927 for this alleged amount owed in relation to this litigation in accounts payable-trade at November 4, 2002 net of any amounts receivable from Alliant. 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.

        On July 17, 2002, JB's Family Restaurants, Inc. ("JBFR") filed a complaint in the United States Bankruptcy Court District of Arizona against the Company, Case No. 02-03349-ECF-CGC, Adversary No. 02-815, alleging various claims arising from an alleged breach of a franchise agreement. JBFR sought injunctive relief prohibiting the Company's use of various JB's trademarks together with monetary damages.

        On November 8, 2002, the Company reached an accord with JBFR that settles all alleged breaches of the franchise agreement. Under this accord, JBFR has granted the Company a license agreement for the use of the JB's trademark from February 23, 2000 until August 31, 2012 in exchange for certain cash payments with an option for an additional ten years. This accord is subject to approval by the United States Bankruptcy Court District of Arizona. To date, all license and marketing expenses related to this accord have been expensed in the periods incurred with no additional amounts required.

        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 above the amount provided for 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:

(b)

Current Reports on Form 8-K:

        None.

There were no other items to be reported under Part II of this report.

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.

CERTIFICATIONS

I, Robert E. Wheaton, President and Chief Executive Officer of Star Buffet, Inc., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Star Buffet, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Ronald E. Dowdy, Group Controller, Treasurer, Secretary and Principal Accounting Officer of Star Buffet, Inc., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Star Buffet, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

QuickLinks

PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures

PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K