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STAR BUFFET, INC. AND SUBSIDIARIES INDEX

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 0-6054

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

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 18, 2003, there were 2,950,000 shares of Common Stock, $.001 par value, outstanding.

STAR BUFFET, INC. AND SUBSIDIARIES
INDEX

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PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

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

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STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

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

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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 27, 2003. 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 2003 consolidated financial statements to conform to the fiscal 2004 presentation. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company's operations. Certain estimates, assumptions and allocations were made in preparing such financial statements.

        The following is a summary of the Company's restaurant properties as of August 11, 2003. The HomeTown Buffet segment includes the Company's 16 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The North's Star segment includes five JJ North's Country Buffet restaurants and one North's Star Buffet Restaurant. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also included four non-operating properties. The JB's Restaurants segment includes the Company's eight JB's Restaurants. This segment also included one non-operating property.

        As of August 11, 2003, the Company's restaurants are located in the following states:

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        As of August 11, 2003, the Company's non-operating restaurants are located in the following states:

        Three of the non-operating restaurants in Florida are leased to third parties.

        The operating results for the 12-week period ended August 11, 2003 included operations shown in the tables above and the fixed charges for seven restaurants closed for the entire quarter. During the quarter ended August 11, 2003, one operating store was closed resulting from a dispute with a landlord. The Company does not expect to incur any expenses as a result of this restaurant closure. Two non-operating stores continue to be closed at the end of the second quarter of fiscal 2004 for repositioning. Three closed restaurant have been leased.

        The following is a summary of the Company's restaurant properties as of August 12, 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 seven JJ North's Country Buffet restaurants, one of which is non-operating, 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 Florida Buffets Division also included five non-operating properties. The JB's Restaurants segment includes the Company's ten JB's Restaurants and one JJ North's Family Restaurant.

        As of August 12, 2002, the Company's restaurants are located in the following states:

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        As of August 12, 2002, the Company's non-operating restaurants are located in the following states:

        One of the non-operating restaurants in Florida was leased to a third party and one was under contract to be sold and was reported as property held for sale.

        The operating results for the 12-week period ended August 12, 2002 include operations shown in the tables above and the fixed charges for five restaurants closed for the entire quarter. One property was acquired and opened during the quarter. One restaurant was closed and the lease terminated during the quarter. Four restaurants remain closed at the end of the second quarter of fiscal 2003 for remodeling and repositioning. One closed restaurant was leased and another one was under contract to be sold and was reported as property held for sale.

        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 Transaction

        In connection with the Company's employment contract with Mr. Robert E. Wheaton, the Company's President and Chief Executive Officer, the Company agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company's common stock prior to the enactment of Sarbanes-Oxley Act of 2002. 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 3.6% for the second quarter of fiscal 2004. At August 11, 2003, the loans totaled $1,330,000 ($1,330,000 at January 27, 2003).

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 aggregated based on brand similarities of operating segments.

        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.

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        Summarized financial information concerning the Company's reportable segments is shown in the following table. The other assets presented in the consolidated balance sheet and not in the reportable segments relate to the Company as a whole, and not individual segments. Also certain corporate overhead income and expenses in the consolidated statements of operations are not included in the reportable segments.

(Dollars in Thousands)

(1)

Included in the reportable segment for the 28 weeks ended August 11, 2003 is one location closed for the entire 28-week period and one location opened for 12 weeks during the first quarter. These locations represent $245,000 and $0 of net book value of equipment and leasehold improvements included in total assets, respectively, and incurred $69,000 in depreciation and amortization expense. The location opened for 12 weeks had revenues of $138,000 and had $166,000 in impairment of long-lived assets. Both location leases expired prior to August 11, 2003.

Included in the reportable segment for the 28 weeks ended August 12, 2002 is one location closed during the second quarter. This location contributed revenues of $167,000, and incurred $32,000 of depreciation and amortization, and $300,000 in impairment of long-lived assets. This location represents $86,000 and $0 of net book value of equipment and leasehold improvements included in total assets, respectively, at August 12, 2002.

(2)

Included in the reportable segment for the 28 weeks ended August 11, 2003 are four locations closed for the entire 28 weeks, two locations closed during the first half of fiscal 2004. These six locations contributed revenues of $291,000, incurred $255,000 of depreciation and amortization, and represented $14,000 in impairment of long-lived assets. These closed locations comprised a net book value of equipment of $1,557,000, buildings of $2,346,000 and land of $2,126,000 included in total assets.

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Included in the reportable segment for the 28 weeks ended August 12, 2002 are four locations closed for the entire 28 weeks and two locations closed during the first half of fiscal 2003. These six locations contributed revenues of $381,000, incurred $208,000 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 $1,576,000, buildings of $2,565,000 and land of $2,126,000 included in total assets and $1,211,000 included in property held for sale.

(3)

Included in the reportable segment for the 28 weeks ended August 11, 2003 is one location closed for the entire 28-week period and two closed locations were operated for one and five weeks, respectively, during the quarter. These locations represent $56,000 and $545,000 of net book value of equipment and buildings included in total assets, respectively, and incurred $21,000 in depreciation and amortization expense. The two locations closed during the first half of fiscal 2004 had revenues of $69,000.

Included in the reportable segment for the 28 weeks ended August 12, 2002 is one location opened during the second quarter. This location contributed revenues of $81,000 and incurred $1,000 of depreciation and amortization. This location has $18,000 of net book value of equipment and leasehold improvements included in total assets, at August 12, 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 calculating 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 income per share for the 12 week and 28 week periods ended August 11, 2003, does not include 732,000 in outstanding options due to the market price of the underlying stock being less than the exercise price. The computation of diluted net (loss) per share for the 12 week and 28 week periods ended August 12, 2002, does not include 735,000 in outstanding options as they would be anti-dilutive for the loss periods.

Note (E) Goodwill

        Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. As of January 29, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of January 29, 2002. As a result, there is no charge for goodwill amortization expense contained in the Company's statements of operations for the year ended January 27, 2003.

        SFAS 142 required that goodwill initially be tested for impairment by comparing the fair value of goodwill on a reporting unit basis to the carrying amount of the goodwill as of January 29, 2002. The Company performed the transitional impairment test and determined that the carrying amount of goodwill was in excess of the fair value of the Company's net assets. This has resulted in a transitional

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impairment loss of $849,000 which has been reported as a cumulative effect of a change in accounting principle net of a tax benefit of $289,000 reported in the first quarter of fiscal 2003.

Note (F) Inventories

        Inventories consist of food, beverage, gift shop items and restaurant supplies and are valued at the lower of cost or market, determined by the first-in, first-out method.

Note (G) Properties, Buildings and Equipment and Real Property Under Capitalized Leases

        The property and equipment includes the following land, equipment and buildings and leaseholds currently in non-operating units.

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 sought $2,479,000 for alleged amounts owed by the Company plus attorneys' fees and costs. The Company included approximately $2,000,000 for this alleged amount owed in relation to this litigation in accounts payable-trade at January 27, 2003 net of any amounts receivable from Alliant. The Company denied the allegations and vigorously defended the alleged breach of contract. 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 sought over $7,250,000 in damages. On February 27, 2003, the Company and Alliant entered into a Settlement Agreement that dismissed charges against both parties and required the Company to pay Alliant $1,600,000 which resulted in a gain to the Company of $400,000 in the form of a reduction to the Company's accounts payable-trade in the first quarter of fiscal 2004.

        In connection with the Company's employment contract with Robert E. Wheaton, the Company's Chief Executive Officer and President, the Company has agreed to pay Mr. Wheaton six years salary and bonus if he resigns related to change of control of the Company or is terminated, unless the termination is for cause. Mr. Wheaton's employment contract also includes an annual bonus of $25,000.

        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.

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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 under performing 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.

        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 27, 2003, and other filings with the Securities and Exchange Commission.

        Consolidated net income for the 12-week period ended August 11, 2003 increased $1,087,000 to $469,000 or $0.16 per share on a diluted basis as compared with net loss of $618,000 for the comparable prior year period. Consolidated net income for the 28-week period ended August 11, 2003 increased $2,187,000 to $1,298,000 or $0.44 per share on a diluted basis as compared with net loss of $889,000 for the comparable prior year period. The increase in net income is primarily due to a $560,000 charge for the cumulative effect of change in accounting principle-net of taxes in the first quarter of last year and a $400,000 gain in the form of a reduction in the Company's accounts payable-trade due to a legal settlement with Alliant in the first quarter of this year. The first quarter of this year included impairment charges of $180,000 primarily related to closing one restaurant in the first quarter compared to $1,040,000 during the second quarter last year related to store closures. The increase in net income also included significant increased improvements in food costs, occupancy and other expenses and general and administrative expenses as a percentage of sales in the current quarter as compared to the same period in the prior year. The decrease in food costs was primarily due to the successful transition to new food suppliers after a former food supplier cancelled a food contract with the Company in the first quarter of last year. 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 expenses include major expenditures such as rent, insurance, property taxes, utilities, maintenance and advertising.

        The results of operations for the 12 and 28-week periods ended August 12, 2002 have been restated due to a cumulative change in accounting principle as reported in the Company's January 27, 2003 year-end Form 10-K.

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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 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 include depreciation on assets for closed stores that management is evaluating for future remodeling and repositioning.

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Results of Operations

        The following table summarizes the Company's results of operations as a percentage of total revenues for the 12 and 28 weeks ended August 11, 2003 and August 12, 2002.

        Total revenues decreased $1,701,000 or 9.5% from $18.0 million in the 12 weeks ended August 12, 2002 to $16.3 million in the 12 weeks ended August 11, 2003. Total revenues decreased $4.5 million or 10.3% from $43.2 million in the 28 weeks ended August 12, 2002 to $38.7 million in the 28 weeks ended August 11, 2003. The decrease in revenues was primarily attributable to declines in 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 decreased from 34.5% during the 12-week period ended August 12, 2002 to 33.5% during the 12 weeks ended August 11, 2003, and from 35.1% during the 28-week period ended August 12, 2002 to 33.5% during the 28 weeks ended August 11, 2003. The decrease as a percentage of total revenues was primarily attributable to the successful transition to new food suppliers after a former food supplier cancelled a food contract with the Company in the first quarter of fiscal 2003.

        Labor costs as a percentage of total revenues decreased from 34.3% during the 12-week period ended August 12, 2002 to 33.8% during the 12-week period ended August 11, 2003 and actual costs decreased by $669,000. Labor costs as a percentage of total revenues decreased from 33.7% during the 28-week period ended August 12, 2002 to 33.5% during the 28-week period ended August 11, 2003 and

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actual labor costs declined by $1,575,000. The decrease in labor dollars and as a percentage of revenue resulted from the elimination of labor inefficiencies from the now closed locations.

        Occupancy and other expenses as a percentage of total revenues decreased from 21.3% during the 12-week period ended August 12, 2002 to 20.3% during the 12-week period ended August 11, 2003. Occupancy and other expenses as a percentage of total revenues decreased from 20.7% during the 28-week period ended August 12, 2002 to 19.9% during the 28-week period ended August 11, 2003. The decrease as a percentage of total revenues was primarily attributable to the termination of one lease and the purchase of a leased property in the first quarter of this year.

        General and administrative costs as a percentage of revenues decreased from 4.7% during the 12-week period ended August 12, 2002 to 3.2% during the 12-week period ended August 11, 2003. General and administrative costs as a percentage of revenues decreased from 4.5% during the 28-week period ended August 12, 2002 to 3.5% during the 28-week period ended August 11, 2003. The decrease was primarily attributable to lower field overhead expenses of $50,000, lower corporate insurance costs of $152,000 and lower corporate legal expenses of $90,000 for the 12-week period ended August 11, 2003 as compared to the same period of the prior year. The decrease was primarily attributable to lower field overhead expenses of $94,000, lower corporate insurance costs of $241,000 and lower corporate legal expenses of $255,000 for the 28-week period ended August 11, 2003 as compared to the same period of the prior year.

        Depreciation and amortization as a percentage of total revenues remained approximately the same as a percentage of revenues during the 12-week period ended August 12, 2002 and August 11, 2003. Depreciation and amortization as a percentage of total revenues increased from 4.2% during the 28-week period ended August 12, 2002 to 4.5% during the 28-week period ended August 11, 2003. The increase is primarily attributable to decreased revenues.

        Impairment of long-lived assets as a percentage of total revenues was 5.8% for the 12 weeks ended August 12, 2002. There was no similar charge in the 12 weeks ended August 11, 2003. Impairment of long-lived assets as a percentage of total revenues decreased from 2.4% during the 28-week period ended August 12, 2002 to 0.5% during the 28-week period ended August 11, 2003. 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 2004 was a result of the closure of one JJ North's Country Buffet in the first quarter.

        Interest expense as a percentage of total revenues increased from 0.9% during the 12-week period ended August 12, 2002 to 1.0% during the 12-week period ended August 11, 2003, and from 0.9% during the 28-week period ended August 12, 2002 to 1.0% during the 28-week period ended August 11, 2003. The increase as a percentage of total revenues was primarily attributable to a decline in revenues while the interest expense remained relatively constant.

        Interest income decreased from $63,000 for the 12-week period ended August 12, 2002 to $48,000 for the 12-week period ended August 11, 2003. Interest income decreased from $136,000 for the 28-week period ended August 12, 2002 to $117,000 for the 28-week period ended August 11, 2003 relative to the decrease in interest rates and the decline in the note receivable balance. 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

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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 cost 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 August 11, 2003, the Company had $1,044,000 cash and cash equivalents for an increase of $611,000 during the 28 weeks ended August 11, 2003. Total cash provided by operations was approximately $2.8 million. The Company used approximately $1,535,000 on capital improvements and a net amount of approximately $530,000 to extinguish long term debt.

        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% and 3.4% for the 12 weeks ending August 11, 2003 and August 12, 2002, 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. In September 2003, the Company agreed to reduce the Revolving Credit Facility to $3,550,000. The Revolving Credit Facility balance was $3,800,000 and $3,500,000 on August 11, 2003 and September 18, 2003, respectively. The Company has $50,000 in letters of credit against the Revolving Credit Facility leaving $0 available for borrowing on September 18, 2003.

        Negotiations are in process to replace the existing Revolving Credit Facility. Alternatively, the Company may also seek long term financing of real estate properties and/or the disposition of non-operating properties to pay the revolving credit facilities.

        The Company believes that available cash and cash flow from operations will be sufficient to satisfy its working capital, and capital expenditure requirements. 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 debt financing and/or public or private equity or from other sources. There can be no assurance that additional financing will be available on acceptable terms or at all. There can

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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.

Critical Accounting Policies and Judgments

        The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company's consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1—Summary of Significant Accounting Policies of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended January 27, 2003. 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 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 and Real Property

        Property, buildings 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:

        Leasehold improvements are amortized over the lesser of the life of the lease or estimated economic life of the assets. The life of the lease includes renewal options determined by management at lease inception for which failure to renew options would result in a substantial economic penalty.

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

        The Company's accounting policies regarding 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 Goodwill

        Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. As of January 29, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of January 29, 2002. As a result, there is no charge for goodwill amortization expense contained in the Company's statement of operations for the year ended January 27, 2003.

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        SFAS 142 required that goodwill initially be tested for impairment by comparing the fair value of goodwill on a reporting unit basis to the carrying amount of the goodwill as of January 29, 2002. The Company performed the transitional impairment test and determined that the carrying amount of goodwill was in excess of the fair value of the Company's net assets. This has resulted in a transitional impairment loss of $849,000 which has been reported as a cumulative effect of a change in accounting principle net of a tax benefit of $289,000 reported in the first quarter of fiscal 2003.

        Impairment of Long-Lived Assets

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

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

        New Accounting Pronouncements

        In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company is currently evaluating the effect of the adoption of SFAS No. 149 on its financial position and results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 clarifies the classification and measurement of certain financial instruments with characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003, or otherwise for the first interim period beginning after June 15, 2003. We do not believe the adoption of SFAS No. 150 will have a material impact on our net earnings, cash flows or financial position.

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 $3,500,000 remained outstanding as of September 18, 2003. 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% in the second quarter of fiscal 2004). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $35,000 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 September 18, 2003. 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.

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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 chief executive officer and its principal accounting officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the quarterly period covered by this 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 Over Financial Reporting

        There was no change in the Company's internal control over financial reporting that occurred during the quarterly period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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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 sought $2,479,000 for alleged amounts owed by the Company plus attorneys' fees and costs. The Company included approximately $2,000,000 for this alleged amount owed in relation to this litigation in accounts payable-trade at January 27, 2003 net of any amounts receivable from Alliant. The Company denied the allegations and vigorously defended the alleged breach of contract. 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 sought over $7,250,000 in damages. On February 27, 2003, the Company and Alliant entered into a Settlement Agreement that dismissed charges against both parties and required the Company to pay Alliant $1,600,000 which resulted in a gain to the Company of $400,000 in the form of a reduction to the Company's accounts payable-trade in the first quarter of fiscal 2004.

        The Company is from time to time the subject of complaints or litigation from customers alleging injury on properties operated by the Company, illness or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from employees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company's business, financial condition or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against the Company that could have a material adverse effect on the Company's business, financial condition and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

        The annual meeting of stockholders was held on June 27, 2003. Of the 2,950,000 shares of the Company's common stock issued and outstanding and entitled to vote at the meeting, there were present at the meeting, in person or by proxy, the holders of 2,627,142 common shares, representing 89.06% of the total number of shares entitled to vote at the meeting. This percentage represents a quorum. The following matters were voted upon at the stockholders' meeting:

        1.     Each of the six nominees to the Board of Directors was elected to serve a one-year term expiring at the annual meeting of stockholders to be held in 2004 or until their successors are elected and qualified:

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        2.     The ratification of the selection of Grant Thornton LLP as independent public accountants of the Company for the current fiscal year was approved by the following vote:

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.

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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.

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