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UNITED STATES
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

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of June 24, 2004, 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

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

        (Continued)

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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)

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 26, 2004. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been reflected herein. Results of operations for such interim periods are not necessarily indicative of results to be expected for the full fiscal year or for any future periods. Certain reclassifications have been made to the fiscal 2004 consolidated financial statements to conform to the fiscal 2005 presentation. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company's operations. Certain estimates, assumptions and allocations were made in preparing such financial statements.

        The following is a summary of the Company's restaurant properties as of May 17, 2004. 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.

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        As of May 17, 2004, the Company's operating and non-operating restaurants are located in the following states:

        As of May 17, 2004, the Company's non-operating restaurants are located in the following states:

        The operating results for the 16-week period ended May 17, 2004 included operations shown in the tables above and the fixed charges for five restaurants closed for the entire quarter. One non-operating store continues to be closed at the end of the first quarter of fiscal 2004 for repositioning and one non-operating restaurant is for sale and is recorded as property held for sale. The three remaining closed restaurants have been leased.

        The following is a summary of the Company's restaurant properties as of May 19, 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, four BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also included four non-operating

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

        As of May 19, 2003, the Company's restaurants are located in the following states:

        As of May 19, 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 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 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 M&I Marshall & Ilsley Bank. The current

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rate is approximately 3.25% for the first quarter of fiscal 2005. At May 17, 2004, the loans totaled $1,330,000 ($1,330,000 at January 26, 2004). Mr. Wheaton made a principal payment on June 7, 2004, reducing the loan balance to approximately $698,000.

Note (C) Segment and Related Reporting

        The Company has five reporting segments: HomeTown Buffet, Casa Bonita, North's Star, Florida Buffets 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 before income taxes.

        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.

(1)

Included in the reportable segment for the quarter ended May 19, 2003 is one location closed for the entire quarter and one location opened for 12 weeks during the quarter. These locations represent $273,000 and $0 of net book value of equipment and leasehold improvements included in total assets, respectively, and incurred $45,000 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.

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(2)

Included in the reportable segment for the quarter ended May 17, 2004 are four locations closed for the entire quarter. These four locations incurred $94,000 of depreciation and amortization in the quarter ended May 17, 2004. These locations also have a net book value of equipment of $833,000, buildings of $1,914,000 and land of $1,559,000 included in total assets at May 17, 2004.

Included in the reportable segment for the quarter ended May 19, 2003 are five locations closed for the entire quarter and one location opened for two weeks during the quarter. These six locations incurred $78,000 of depreciation and amortization in the quarter ended May 19, 2003. These locations also have a net book value of equipment of $1,607,000, buildings of $2,388,000 and land of $2,126,000 included in total assets at May 19, 2003. The location that was opened for two weeks had $16,000 of revenue and $14,000 in impairment of long-lived assets.

(3)

Included in the reportable segment for the quarter ended May 17, 2004 is one location closed for the entire quarter. This location represents $33,000 and $533,000 of net book value of equipment and buildings included in total assets, respectively, and incurred $10,000 in depreciation and amortization expense.

Included in the reportable segment for the quarter ended May 19, 2003 is one location closed for the entire quarter and two closed locations were operated for one and five weeks, respectively, during the quarter. These locations represent $59,000 and $547,000 of net book value of equipment and buildings included in total assets, respectively, and incurred $40,000 in depreciation and amortization expense. The two locations closed during the quarter had revenues of $69,000.

Note (D) Net Income per Common Share

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

        Basic net income per common share is the amount of net income for the period available to each share of common stock outstanding during the reporting period. Diluted net income per common share is the amount of net income for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. The following is a reconciliation of the denominators used to calculate diluted earnings per share on net income for the respective fiscal periods:

        Average shares used in the sixteen weeks ended May 17, 2004 and May 19, 2003 diluted earnings per share computations exclude stock options to purchase 496,000 shares and 733,000 shares, respectively, of common stock due to the market price of the underlying stock being less than the exercise price.

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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.

        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. SFAS 142 also requires goodwill and indefinite life intangible assets to be tested for impairment on an annual basis. There were not any goodwill impairment losses for the 16-week periods ended May 17, 2004 and May 19, 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 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. The Company recorded a fixed asset impairment loss of $523,000 for the 52-week period ended January 26, 2004.

        The property and equipment includes the following land, equipment and buildings and leaseholds currently in non-operating units at May 17, 2004:

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        The property and equipment includes the following land, equipment and buildings and leaseholds currently in non-operating units at May 19, 2003:

Note (H) Contingencies

        On November 25, 1998, the Company filed an action against North's in the United States District Court, District of Utah, Case No. 2-98-CV-893, seeking damages for breach of a promissory note and an Amended and Restated Credit Agreement (collectively, the "Credit Agreements") in the amount of $3,570,935. On December 31, 1998, North's filed an answer to the Company's Complaint, denying generally the allegations, and filed counterclaims against the Company alleging (1) the Company fraudulently induced North's to enter into various agreements with the Company relating to the Company's acquisition of seven JJ North's Grand Buffet Restaurants and an option to acquire nine additional restaurants operated by North's and (2) the Company had breached the Business Services Agreement. On January 26, 2001, the parties entered into a Settlement Agreement (the "Settlement Agreement"). The Settlement Agreement provides, among other things, that the Credit Agreement and Revolving Note terminate concurrently with the execution of the Settlement Agreement, that the Term Note be amended and restated, that the terms of the Term Note have no further force or effect and that the security interest transferred to the Company pursuant to the Assignment Agreement dated September 30, 1997 between the Company and U.S. Bank National Association be amended and restated pursuant to an Amended and Restated Star Buffet Security Agreement (the "Security Agreement"). The Company and North's have agreed that the Star Buffet Debt be reduced to a total amount of $3,500,000 and that such reduced obligation be payable by North's pursuant to the terms of the Amended and Restated Promissory Note ("Star Buffet Promissory Note"). The Company recorded no gain or loss on the settlement as the recorded balance of the note was approximately $3.5 million at the time of the settlement. The Company and North's have agreed that the Company's existing liens encumbering certain property of North's remain in place and continue to secure North's obligations to the Company, and the Company and North's reserve all rights, claims and defenses with respect to the extent and validity of such existing liens.

        On March 2, 2004, the Company filed an action against North's in the United States District Court, District of Utah, Central Division, Case No. 2:04CV00211, demanding judgment against North's for failure to repay obligations under the Star Buffet Promissory Note in a total amount not less than $2,934,453 plus interest at the default rate as set forth in the Star Buffet Promissory Note. At May 17, 2004, the note receivable is recorded as a long-term receivable. The Company has not recorded approximately $168,000 of interest income due from North's. The Company has not provided an allowance for bad debts for the note as of May 17, 2004 as it has been determined that the note is adequately collateralized.

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        On February 20, 2004, the Board of Directors approved the Company's first annual dividend of $0.25 per common share and a special dividend of $0.25 per common share. Both were paid on June 1, 2004 to shareholders of record on May 7, 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.

Note (I) Taxes

        The Company is able to take advantage of the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips resulting in a lower effective tax rate of approximately 35% as of May 17, 2004 and May 19, 2003.

Note (J) Insurance Programs

        The Company is self-insured for general liability claims. The Company has commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Self-insurance accruals include estimates based on historical information and expected future development factors. If actual claims differ from estimates and assumptions, our actual accrual requirements may be materially different from the calculated accruals. The Company had general liability insurance reserves of $24,500 and $60,000 for the 16-week periods ended May 17, 2004 and May 19, 2003, respectively.

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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 26, 2004, and other filings with the Securities and Exchange Commission.

        Consolidated net income for the 16-week period ended May 17, 2004 decreased $194,000 to $628,000 or $0.20 per share on a diluted basis as compared with net income of $829,000 or $0.28 per share for the comparable prior year period. The decrease in net income is primarily due to 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 last year. The first quarter last year included impairment charges of $180,000 primarily related to closing one restaurant in the first quarter. Total revenues decreased $886,000 or 3.9% from $22.4 million in the 16 weeks ended May 19, 2003 to $21.6 million in the 16 weeks ended May 17, 2004. The decrease in revenues was attributable to declines in comparable same store sales primarily in the HomeTown Buffet and the North's Star divisions and the result of five fewer restaurants in operation this year versus the same period of the prior year. The decline in sales significantly impacts net income 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.

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.

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        Occupancy and other expenses are primarily fixed in nature and generally do not vary with restaurant sales volume. Rent, insurance, property taxes, utilities, maintenance and advertising account for the major expenditures in this category.

        General and administrative expenses include all corporate and administrative functions that serve to support the existing restaurant base and provide the infrastructure for future growth. Management, supervisory and staff salaries, employee benefits, data processing, training and office supplies are the major items of expense in this category.

        Depreciation and amortization includes depreciation on assets for closed stores that management is evaluating for future remodeling and repositioning.

Results of Operations

        The following table summarizes the Company's results of operations as a percentage of total revenues for the 16 weeks ended May 17, 2004 and May 19, 2003.

        Total revenues decreased $886,000 or 3.9% from $22.4 million in the 16 weeks ended May 19, 2003 to $21.6 million in the 16 weeks ended May 17, 2004. The decrease in revenues was attributable to declines in comparable same store sales primarily in the HomeTown Buffet and the North's Star divisions and the result of five fewer restaurants in operation this year versus the same period of the prior year.

        Food costs as a percentage of total revenues increased from 33.5% during the 16-week period ended May 19, 2003 to 34.4% during the 16-week period ended May 17, 2004. The increase as a percentage of total revenues was primarily attributable to higher wholesale food prices in all major food categories, especially meats and dairy, as compared to the same period last year. Each restaurant segment experienced a higher food cost than the same period last year.

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        Labor costs as a percentage of total revenues decreased from 33.3% during the 16-week period ended May 19, 2003 to 32.8% during the 16-week period ended May 17, 2004. The decrease as a percentage of total revenues was primarily attributable to the elimination of labor inefficiencies.

        Occupancy and other expenses as a percentage of total revenues decreased from 19.6% during the 16-week period ended May 19, 2003 to 19.2% during the 16-week period ended May 17, 2004. The decrease as a percentage of total revenues was primarily attributable to lower controllable costs at the restaurant level, specifically repairs and supplies which decreased $112,000 from the 16-week period ended May 19, 2003.

        General and administrative expense as a percentage of total revenues increased from 3.7% during the 16-week period ended May 19, 2003 to 4.5% during the 16-week period ended May 17, 2004. The increase as a percentage of total revenues was primarily attributable to higher corporate insurance costs of $244,000 partially offset by lower corporate payroll of $50,000 and lower audit costs of $35,000.

        Depreciation and amortization expense as a percentage of total revenues decreased from 4.6% during the 16-week period ended May 19, 2003 to 4.1% during the 16-week period ended May 17, 2004. The decrease as a percentage of total revenues was primarily attributable to certain equipment and impaired assets being fully depreciated for the 16-week period ended May 17, 2004.

        Impairment of long-lived assets as a percentage of total revenues decreased from 0.8% during the 16-week period ended May 19, 2003 to 0.0% during the 16-week period ended May 17, 2004. 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 decreased from 1.0% during the 16-week period ended May 19, 2003 to 0.9% during the 16-week period ended May 17, 2004. The decrease as a percentage of total revenues was primarily attributable to lower debt balances. The average balance was approximately $5,489,000 and approximately $8,919,000 for the 16-week periods ended May 17, 2004 and May 19, 2003, respectively.

        Interest income decreased from $69,000 for the 16-week period ended May 19, 2003 to $4,000 for the 16-week period ended May 17, 2004. The interest income was generated by the Company's cash and outstanding notes receivable balances. The decrease in interest income is primarily attributable to the Company's decision not to record interest income on the note receivable with North's Restaurants, Inc. The Company has not recorded approximately $168,000 of interest income due from North's. The Company has not provided an allowance for bad debts for the note as of May 17, 1004 as it has been determined that the note is adequately collateralized.

        Other income is rental income from the Company's leased properties. Rental income was $81,000 for three properties leased for the entire 16-week period ended May 17, 2004. For the 16-week period ended May 19, 2003, rental income was $27,000 which included three properties leased for sixteen, six and two weeks, respectively.

Impact of Inflation

        The impact of inflation on the cost of food, labor, equipment and construction and remodeling of stores could affect the Company's operations. Many of the Company's employees are paid hourly rates related to the federal and state minimum wage laws. Legislation increasing the federal minimum wage has resulted in higher labor costs to the Company. In addition, the cost of food commodities utilized by the Company are subject to market supply and demand pressures. Shifts in these costs may have an impact on the Company's food costs. The Company anticipates that modest increases in these costs can be offset through pricing and other cost control efforts; however, there is no assurance that the Company would be able to pass more significant costs on to its customers or if it were able to do so, it could do so in a short period of time.

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Liquidity and Capital Resources

        The Company has historically financed operations through a combination of cash on hand, cash provided from operations and available borrowings under bank lines of credit.

        As of May 17, 2004, the Company had $81,000 in cash. Cash and cash equivalents decreased by $364,000 during the 16 weeks ended May 17, 2004. Total cash provided by operations was approximately $1,500,000 as compared to approximately $650,000 in the 16 weeks ended May 19, 2003. The Company used approximately $196,000 on capital expenditures and $1,651,000 for property acquisitions. Total debt decreased by approximately $3,000 in the first quarter of fiscal 2005, net of repayments.

        The Company intends to modestly expand operations through the acquisition of regional buffet chains or through the purchase of existing restaurants which would be converted to one of the Company's existing restaurant concepts. In many instances, management believes that existing restaurant locations can be acquired and converted to the Company's prototype at a lower cost. Management estimates the cost of acquiring and converting a leased property to one of the existing concepts to be approximately $150,000 to $450,000. These costs consist primarily of exterior and interior appearance modifications, new tables, chairs and food bars and the addition of certain kitchen and food service equipment. There can be no assurance that the Company will be able to acquire additional restaurant chains or locations or, if acquired, that these restaurants will have a positive contribution to the Company's results of operations.

        On October 28, 2003, the Company entered into a $3.0 million 1-year Revolving Line of Credit with M&I Marshall & Ilsley Bank (the "Revolving Line of Credit"). The Revolving Line of Credit refinanced a revolving credit facility the Company previously had with FleetBoston Financial Corporation and provides working capital for the Company. The Revolving Line of Credit bears interest at LIBOR plus two percent per annum. The Revolving Line of Credit requires the Company to maintain specified minimum levels of net worth, limits the amount of capital expenditures, maintain certain fixed charge coverage ratios, and to meet other financial covenants. The Company is currently in compliance with these covenants. All outstanding amounts under the Revolving Line of Credit become due October 31, 2004. The Company will seek to renew or replace the Revolving Line of Credit by October 2004. The Revolving Line of Credit balance was $800,000 and $1,750,000 on May 17, 2004 and June 24, 2004, respectively. The Company had $2,200,000 and $1,250,000 available for borrowing on May 17, 2004 and June 24, 2004, respectively.

        The Company believes that available cash and cash flow from operations will be sufficient to satisfy its working capital and capital expenditure requirements during the next 12 months. Further, the Company believes that it will spend less than $3 million a year on capital expenditures for the next few years. The Company believes that the combination of capital spending and an acquisition strategy that is not projected to require significant amounts of capital suggests that the Company may generate operating cash flow in excess of expected needs. In such event, the Company plans to consider the return of some capital to its stockholders through a stock repurchase program or a cash dividend or both. There can be no assurance that cash and cash flow from operations will be sufficient to satisfy its working capital and capital requirements for the next 12 months or beyond.

        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 or potential acquisitions of other events will not cause the Company to seek additional financing sooner than anticipated. There can be no assurance that additional financing will be available on acceptable terms or at all.

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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 included in the Company's Annual Report filed on Form 10-K. 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

        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:

        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 statements of operations for the years ended January 26, 2004 and 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 impairment loss of $849,000 which has been reported as a cumulative effect of a change in accounting

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principle net of a tax benefit of $289,000 reported in the first quarter of 2003. The Company evaluates goodwill for impairment each quarter.

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.

Insurance Programs

        The Company is self-insured for general liability claims. The Company has commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Self-insurance accruals include estimates based on historical information and expected future development factors. If actual claims differ from estimates and assumptions, our actual accrual requirements may be materially different from the calculated accruals. The Company had general liability insurance reserves of $24,500 and $60,000 for the 16-week periods ended May 17, 2004 and May 19, 2003, respectively.

New Accounting Pronouncements

        No significant items for disclosure.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

        The Company's principal exposure to financial market risks is the impact that interest rate changes could have on its $3.0 million Revolving Line of Credit, of which $1,750,000 remained outstanding as of June 24, 2004. The Revolving Line of Credit interest rate is LIBOR plus two percent per annum (averaging approximately 3.25% in the first quarter of fiscal 2005). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $17,500 in annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of the Company's line of credit and assumes no change in the volume, index or composition of debt at June 24, 2004. The balance outstanding on the Revolving Line of Credit at May 17, 2004 is $800,000. All of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company and are not expected to in the foreseeable future.

Commodity Price Risk

        The Company purchases certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. Typically the Company uses these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to

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hedge commodity prices. In many cases, the Company believes it will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting its menu pricing, menu mix or changing our product delivery strategy. However, increases in commodity prices could result in lower operating margins for our restaurant concepts.

Item 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 the rules under the Securities Exchange Act of 1934) 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 effective and sufficient to ensure that the Company records, processes, summarizes and reports information required to be disclosed by the Company in its periodic reports filed under the Securities and Exchange Act within the time period specified by the Securities and Exchange Commission's rules and forms.

Changes in Internal Control Over Financial Reporting

        The Company's chief executive officer and its principal accounting officer, in the course of evaluating the Company's disclosure controls and procedures, did not identify any change in the Company's internal control over financial reporting (as defined in the rules under the Securities Exchange Act of 1934) that occurred during the most recent fiscal quarter 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 November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand for Arbitration against the Company with the American Arbitration Association, Irvine, California (District No. 949-251-9840), alleging breach of contract in connection with the Company's failure to perform under a Business Services Agreement between North's and the Company dated July 24, 1997. On June 22, 1999, the parties agreed to dismiss the Arbitration Proceeding without prejudice since the issues related to the Business Service Agreement were being litigated in the Utah action described below.

        On November 25, 1998, the Company filed an action against North's in the United States District Court, District of Utah, Case No. 2-98-CV-893, seeking damages for breach of a promissory note and an Amended and Restated Credit Agreement (collectively, the "Credit Agreements") in the amount of $3,570,935. On December 31, 1998, North's filed an answer to the Company's Complaint, denying generally the allegations, and filed counterclaims against the Company alleging (1) the Company fraudulently induced North's to enter into various agreements with the Company relating to the Company's acquisition of seven JJ North's Grand Buffet Restaurants and an option to acquire nine additional restaurants operated by North's and (2) the Company had breached the Business Services Agreement. On January 26, 2001, the parties entered into a Settlement Agreement (the "Settlement Agreement"). The Settlement Agreement provides, among other things, that the Credit Agreement and Revolving Note terminate concurrently with the execution of the Settlement Agreement, that the Term Note be amended and restated, that the terms of the Term Note have no further force or effect and that the security interest transferred to the Company pursuant to the Assignment Agreement dated September 30, 1997 between the Company and U.S. Bank National Association be amended and restated pursuant to an Amended and Restated Star Buffet Security Agreement (the "Security Agreement"). The Company and North's have agreed that the Star Buffet Debt be reduced to a total amount of $3,500,000 and that such reduced obligation be payable by North's pursuant to the terms of the Amended and Restated Promissory Note ("Star Buffet Promissory Note"). The Company recorded no gain or loss on the settlement as the recorded balance of the note was approximately $3.5 million at the time of the settlement. The Company and North's have agreed that the Company's existing liens encumbering certain property of North's remain in place and continue to secure North's obligations to the Company, and the Company and North's reserve all rights, claims and defenses with respect to the extent and validity of such existing liens.

        On March 2, 2004, the Company filed an action against North's in the United States District Court, District of Utah, Central Division, Case No. 2:04CV00211, demanding judgment against North's for failure to repay obligations under a Settlement Agreement dated January 26, 2001 ("Star Buffet Promissory Note") in a total amount not less than $2,934,453 plus interest at the default rate as set forth in the Star Buffet Promissory Note.

        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

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charges against both parties and required the Company to pay Alliant $1,600,000 which resulted in a gain of $400,000 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 6. Exhibits and Reports on Form 8-K

(a)

The following exhibits are attached to this report:

(b)

Current Reports on Form 8-K:

A Current Report on Form 8-K dated February 20, 2004 was filed to report the Company's press release announcing that its Board of Directors declared the Company's initial annual dividend and also declared a special dividend. Both the annual and special dividends were payable on June 1, 2004 to stockholders of record on May 7, 2004. The information was reported under Items 5 and 7 of Form 8-K.

A Current Report on Form 8-K dated January 28, 2004 was filed to report the Company's change in certifying accountant. The information was reported under Items 4 and 7 of Form 8-K.

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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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