Item 1. Business
Overview
Star Buffet, Inc., a Delaware corporation ("Star" and collectively with its subsidiaries, the "Company"), is engaged in the restaurant industry. As of January 26, 2004, the Company owned and operated 16 franchised HomeTown Buffet restaurants, nine JB's Restaurants, nine BuddyFreddys restaurants, five JJ North's Country Buffet restaurants, two Holiday House restaurants, two Mexican-themed restaurants operated under the Casa Bonita name and one North's Star Buffet restaurant. As of January 26, 2004, one of the nine JB's restaurants was closed for remodeling and repositioning. Additionally, four of the nine BuddyFreddys restaurants were closed and three of those closed restaurants have been leased to third-party operators and the net assets of the other closed restaurant is reported as property held for sale. The Company's restaurants are located in nine western states, Oklahoma and Florida and are focused upon providing customers with a wide variety of fresh, high quality food at moderate prices.
Recent Developments
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, Case 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 of $400,000 in the first quarter of fiscal 2004.
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 are payable on June 1, 2004 to shareholders of record on May 7, 2004.
On March 2, 2004, the Company filed an action against North's Restaurants, Inc. ("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.
Business
The Company's objective is to become a leading operator of regional buffet restaurant brands through the acquisition of established regional concepts and subsequent development of additional restaurants within existing or new markets. The Company believes that certain uniformly applied business practices can be used successfully to improve the financial performance of its past and future acquisitions. Key elements of the Company's business practices are as follows:
Customer Focus. The Company believes that its ability to deliver high quality food to customers with superior service in clean and friendly environments has been central to its success at improving customer perceptions and sales at its buffet restaurants. Management's focus includes the following key elements:
•High Quality Food. The Company seeks to differentiate itself by providing higher quality and better tasting food than its competitors. In addition, each brand maintains its own unique recipes that cater to regional taste profiles of its customers. Management limits the number of items prepared each day and frequently rotates selected specialty items to maintain customer interest while ensuring that the Company's signature items are offered at the highest possible quality.
•Superior Service. The Company provides a level of customer service which it believes has helped it establish a higher level of customer satisfaction than its competitors. Restaurant managers are encouraged to visit each customer's table during meal periods to ensure guest satisfaction. To help assure superior service levels, the Company utilizes a number of methods to monitor guest satisfaction, including an independent mystery shopper survey and a formalized customer comment card program.
•Clean and Friendly Environment. The Company strives to offer a pleasant, customer friendly environment at its restaurants by providing attractive, updated restaurant decors and by emphasizing cleanliness in all areas of its operations.
Management Practices. The Company's management team utilizes a series of uniform management practices to operate the acquired restaurants. The key elements of these management practices are:
•Performance Measurements. The Company has developed food, labor and customer service management practices and reporting mechanisms that allow management to effectively monitor restaurant-level operations, benchmark restaurant performance statistics and communicate best-practices across its restaurant operations. Through the use of its restaurant-level incentive and bonus programs oriented toward motivating employees, as well as its traditional recognition programs, the Company seeks to motivate its employees and foster an environment where employees are encouraged to share their ideas and cost saving suggestions with management.
•Cost Control. The Company has been able to maintain a lean corporate management structure by expanding the number of restaurants supervised by field managers, having corporate personnel oversee multiple administrative functions and appropriate outsourcing of certain
functions when cost effective. The Company's corporate infrastructure provides purchasing, information systems, finance, accounting and payroll so that restaurant managers can focus on restaurant operations and guest satisfaction.
Brand Management. The Company's strategy is to separately manage each of its restaurant brands to create a unique presence in the marketplace. Although each subsidiary and its brands are positioned somewhat differently in the market, the Company utilizes many of the same marketing techniques such as local store marketing, radio advertising and promotional mailers to increase customer awareness and loyalty.
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 based on brand similarities. The HomeTown Buffet segment includes the Company's 16 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The North's Star segment includes five JJ North's Country Buffet restaurants and one North's Star Buffet Restaurants. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffet Division also includes four non-operating units. The JB's Restaurants segment includes the Company's eight JB's Restaurants. This segment also includes one non-operating JB's Restaurant. In addition, segment reporting results include 19 and 2 weeks for two BuddyFreddys Country Buffet restaurants closed during the fiscal year 2004. Results for 2004 also include 12 weeks of operations for one JJ North's Country Buffet restaurant and 5 weeks of operations for one JB's Restaurant. (See Item 15, Financial Statements, Note 7.)
Growth Strategy
The Company's objective is to become a leading operator of regional buffet restaurant brands through (1) acquisitions of existing buffet restaurant chains which management believes can benefit from the Company's management practices, (2) the acquisitions of exiting restaurant properties that can be converted to buffet brands operated or under development by the Company and (3) minority investments in or strategic alliances with other restaurant chains. The Company's growth strategy is designed to capitalize on the opportunities management perceives in the fragmented buffet segment of the restaurant industry.
Acquisition Strategy. The Company believes that it will be able to capitalize on the successful attributes of acquired buffet chains while increasing their focus on operations, customer service and quality. The Company believes that a number of acquisition opportunities exist due to the fragmentation of the buffet, cafeteria and grill-buffet segments of the restaurant industry, which are comprised of a substantial number of regional chains. The Company believes that many of these regional chains are privately owned and may be available for acquisition because they lack the financial and operational structure to compete with larger regional and national chains.
Restaurant Conversions. In recent years, a number of chains in the family dining and budget steakhouse segments of the restaurant industry have experienced operational difficulties and declining performance. The Company believes that these difficulties are the result of increasing competition from casual dining chains and casual steakhouses which offer superior product quality and service at only moderately higher prices. Many of these family dining restaurants and budget steakhouses occupy desirable locations and provide opportunities to acquire desirable restaurant locations at attractive prices. The Company believes that these locations can be acquired and converted at lower prices or leased at rates lower than those available when compared to the cost of new construction.
Minority Investments and Strategic Alliances. The Company intends to seek minority investments in, or strategic alliances with, other restaurant chains. The Company believes that minority investments can provide an attractive investment opportunity for the Company and may lower the acquisition cost of such chains should the Company ultimately seek to acquire those chains. The Company believes that strategic alliances can be an excellent corporate arrangement to facilitate (1) more productive use of under-performing restaurant properties at lower cost and less risk than outright acquisition and (2) reduce corporate overhead or improve purchasing economies.
Restaurant Concepts
HomeTown Buffet Restaurants
General. The Company, through its subsidiary HTB Restaurants, Inc. ("HTB"), has a franchise agreement with HomeTown Buffet, Inc., a wholly-owned subsidiary of Buffets, Inc., under which HTB operates 16 HomeTown Buffet restaurants in Arizona, Colorado, New Mexico, Utah and Wyoming.
HTB entered into a franchise agreement for each location which requires among other items, the payment of a continuing royalty fee paid to HomeTown Buffet, Inc. The royalty fee is based on the aggregate gross sales of all the Company's HomeTown Buffet restaurants. Each of the franchise agreements has a 20-year term (with two five-year renewal options). HTB provides weekly sales reports to the HomeTown franchisor as well as periodic and annual financial statements. HTB is obligated to operate its Hometown Buffet restaurants in compliance with the franchisor's requirements.
The HomeTown franchisor may terminate a franchise agreement for a number of reasons, including HTB's failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. Generally, a franchisor may terminate a franchise agreement only if the franchisee violates a material and substantial provision of the agreement and fails to remedy the violation within a specified period.
Concept and Menu. HomeTown Buffet restaurants are located both in shopping "strip centers" and as freestanding restaurants. HTB's typical restaurant format is approximately 10,200 square feet with seating for approximately 375 customers. The restaurant design is based upon standardized construction plans, with modifications made for each particular site. The restaurants offer fixed price lunch, dinner and breakfast menus that entitle each customer to unlimited servings of all menu items and beverages. The average check price is approximately $6.20 per person. The restaurants offer reduced prices to children under age 12 and to senior citizens.
Operations. The HomeTown Buffet restaurants are supervised directly by a vice president of operations, who reports to the Company's President. Each HomeTown Buffet restaurant has a general manager and at least three co-managers or assistant managers. Managers are required to attend formal training sessions in management and operations of the restaurant. In addition, each restaurant manager is required to comply with specific franchisor-provided guidelines to assure uniformity of operations and consistent high quality of products. The Company has a performance-based incentive program covering its general and assistant managers in addition to a competitive base salary.
Individual restaurants typically employ between 40 and 80 non-management hourly employees, made up of a mix of part-time and full-time workers, depending on restaurant size and traffic.
Casa Bonita Restaurants
Concept and Menu. The Company's two Casa Bonita restaurants are located in Denver, Colorado and Tulsa, Oklahoma. The Denver restaurant is approximately 52,000 square feet, and the Tulsa restaurant is approximately 26,000 square feet. The restaurants are designed to recreate the atmosphere of a Mexican village at night. The restaurants also feature entertainment daily, including strolling
mariachis, authentic Mexican dancers, magicians, games and cliff divers. The restaurants' entertainment, combined with high quality, authentic Mexican food, is designed to attract a diverse customer base, including tourists and local customers. In addition to typical Mexican menu offerings, these restaurants feature all-you-can-eat dinners which offer customers unlimited servings of selected menu items.
The Company focuses on three primary target audiences in its advertising and promotional programs for its Casa Bonita restaurants: (1) local customers, (2) tourists and (3) groups and parties. The Company markets over a broad regional territory to attract tourists by placing advertisements in tourist and special event guides and by otherwise promoting each Casa Bonita restaurant as a major destination attraction. With its large dining areas and private rooms, the Company also promotes Casa Bonita as an ideal setting for banquets, private parties and other group events. The average check for the Casa Bonita restaurant in Denver, Colorado is approximately $11.10 per person. The average check for the Casa Bonita restaurant in Tulsa, Oklahoma is approximately $9.60 per person.
Operations. The two Casa Bonita restaurants are supervised by a vice president of operations who reports directly to the Company's President. Each Casa Bonita restaurant has a general manager and at least three assistant managers. Each restaurant employs between 150 and 270 hourly employees, made up of a mix of part-time and full-time workers, depending on restaurant size and traffic.
North's Star Division
General. The North's Star Division consists of five JJ North's Country Buffet restaurants and one North's Star Buffet restaurant. The Company's five JJ North's Country Buffet restaurants are located in Idaho (2), Washington (2) and Oregon (1). The restaurants are approximately 6,500 to 9,000 square feet and seat approximately 210 to 320 customers. The Company's North's Star Buffet restaurant is located in Arizona.
Concept and Menu. The JJ North's Country Buffet restaurants and the North's Star Buffet restaurant offer fixed price lunch, dinner and weekend breakfast menus that entitle each customer to unlimited servings of all menu items and beverages. Prices are approximately $5.59 for lunch and approximately $7.99 for dinner, and may vary depending on restaurant location. The average check for JJ North's Country Buffet is approximately $6.50 per person. The average check in North's Star Buffet is approximately $6.00 per person. The restaurants offer reduced prices to children under age 12 and to senior citizens.
Both JJ North's Country Buffet and North's Star Buffet restaurants seek to differentiate themselves from other buffet and cafeteria restaurants by the quality and variety of their food offerings. The restaurants feature a "scatter bar" buffet system with separate food islands in an "all-you-can-eat" format. Menus emphasize traditional American "home cooking" and include soups, salads, entrees, vegetables, non-alcoholic beverages and desserts. Customers can choose from multiple entree choices, including fried and baked chicken and fish, roast beef, turkey and ham. Additional entrees, such as lasagna, barbecued ribs and other regional or seasonal dishes, are featured on particular days of the week. In addition to entrees, each meal period includes freshly-prepared soups, assorted vegetable and potato dishes, hot bread and an extensive salad bar. Dessert selections include pudding, assorted cobblers, cakes, cookies and soft-serve frozen dairy desserts with various sundae toppings.
Operations. The five JJ North's Country Buffet restaurants and one North's Star Buffet are supervised by the President of the Company. Each JJ North's restaurant has a general manager and at least two assistant managers. Each restaurant employs between 25 and 50 hourly employees, made up of a mix of part-time and full-time workers, depending on restaurant size and traffic.
Florida Buffets Division
General. The Company, through several transactions, has acquired 11 properties in Florida which currently operate under the brand names BuddyFreddys Country Buffet (7), BuddyFreddys (2) and Holiday House (2). Four of the seven BuddyFreddys Country Buffet restaurants have been closed for repositioning. Three closed restaurants have been leased to third-party operators and the net assets of the other closed restaurant is property held for sale. BuddyFreddys restaurants average approximately 10,000 square feet with seating for approximately 350 guests. Holiday House restaurants average approximately 5,500 square feet with seating for approximately 170 guests.
Concept and Menu. The BuddyFreddys Country Buffet restaurants offer a buffet menu specializing in local dishes and southern-style cooking. Each location also offers a small gift shop selling a variety of BuddyFreddys apparel, snacks and specialty merchandise. The two BuddyFreddys differ from BuddyFreddys Country Buffets in that they offer a full a la carte menu in addition to the "all-you-can-eat" buffet. The two Holiday House restaurants also operate in a buffet format and specialize in offering the customer a wide variety of meat entrees including ham, roast beef, turkey and its signature leg of lamb. The average check price for BuddyFreddys and Holiday House is approximately $6.60 per person.
Operations. The Florida restaurants are supervised by a vice president of operations who reports directly to the Company's President. Each Florida restaurant has a general manager and at least two assistant managers. Each restaurant employs between 25 and 60 hourly employees, made up of a mix of part-time and full-time workers, depending on restaurant size and traffic.
JB's Restaurants Division
General. The Company, through its subsidiary Summit Family Restaurants, Inc. ("Summit"), operates nine JB's Restaurants in Arizona, Montana, New Mexico, Utah and Wyoming. One of the nine JB's Restaurants was closed for repositioning at January 26, 2004. The restaurants are approximately 4,300 to 5,600 square feet and seat approximately 110 to 180 customers.
In connection with the acquisition of certain JB's Restaurants in 1998 from JB's Family Restaurants, Inc., a subsidiary of CKE Restaurants, Inc., the Company entered into a one-year franchise agreement for each location requiring among other items, the payment of royalty fees. After the acquisition of certain JB's Restaurants, the Company negotiated a ten-year option for annual renewable franchise agreements for each of the JB's Restaurants the Company operates. In February 2000, the annual renewable franchise agreement expired and the Company elected not to renew these franchise agreements. The Company entered into a License Agreement with the JB's Licensor for each JB's Restaurant in November 2002. The license agreement is being amortized as an intangible asset and allows the Company to use the JB's trademarks through August 31, 2012 with an option for an additional ten years.
Concept and Menu. JB's Restaurants offer a variety of breakfast, lunch and dinner selections at moderate prices. The breakfast menu features an "all-you-can-eat" breakfast buffet along with other traditional breakfast fare. The lunch and dinner menus have a variety of sandwiches as well as steak, chicken, pasta and seafood entrees. All JB's Restaurants offer an "all-you-can-eat" soup and salad bar during lunch and dinner. With the exception of the breakfast buffet and the "all-you-can-eat" soup and salad bar, all entrees are cooked to order and are served by a wait staff. The average check is approximately $6.20 per person.
Operations. The JB's Restaurants are supervised by a vice president of operations who reports to the Company's President. Each restaurant has a general manager and at least two assistant managers. Each restaurant employs between 25 and 50 hourly employees, made up of a mix of part-time and full-time workers depending on restaurant size and traffic.
Licenses, Trademarks and Service Marks
The Company owns the trademarks and service marks for Casa Bonita, BuddyFreddys and Holiday House and has a license agreement with CKE Restaurants, Inc. for use of the "Star" name and design. The Company has an agreement with North's Restaurants, Inc. for a royalty-free, transferable license to use the intangible property of JJ North's. The Company utilizes the HomeTown Buffet mark pursuant to various franchise agreements. The Company has a transferable license agreement to use the JB's trademark through August 31, 2012 with an option for an additional ten years.
Competition
The Company competes on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience. The Company's competitors include a large and diverse group of restaurant chains and individually owned restaurants, including chains and individually owned restaurants that use a buffet format. The number of buffet restaurants with operations generally similar to the Company's has grown considerably in the last several years and the Company believes competition among buffet-style restaurants is increasing. As the Company and its principal competitors expand operations in various geographic areas, competition, including competition among buffet-style restaurants, can be expected to intensify. Such intensified competition could increase the Company's operating costs or adversely affect its revenues or operating margins. A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than does the Company. In addition, the restaurant industry has few noneconomic barriers to entry and is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The Company's significant investment in, and long term commitment to, each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Company's operations.
Seasonality
The Company's business is moderately seasonal in nature based on locations in the northern and southern states. For the majority of the Company's restaurants, the highest volume periods are in the first and second fiscal quarters and lowest volume periods typically occur during the third and fourth fiscal quarters.
Employees
As of April 15, 2004, the Company employed approximately 2,085 persons, of whom approximately 1,970 were restaurant employees, and approximately 115 were restaurant management, supervisory and corporate personnel. Restaurant employees include both full-time and part-time workers paid on an hourly basis. No Company employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are generally good.
Directors and Executive Officers
The following table sets forth certain information regarding the Company's directors and executive officers:
Robert E. Wheaton has served as the Chief Executive Officer and President and as a director of the Company since its formation in July 1997. Mr. Wheaton has been Chairman of the Board since September 1998. Mr. Wheaton served as Executive Vice President of CKE Restaurants, Inc. from January 1996 through January 1999. From April 1995 to January 1996, he served as Vice President and Chief Financial Officer of Denny's Inc., a subsidiary of Flagstar Corporation. From 1991 to 1995, Mr. Wheaton served as President and Chief Executive Officer, and from 1989 to 1991 as Vice President and Chief Financial Officer of The Bekins Company. Mr. Wheaton is the brother of Craig B. Wheaton, a director of the Company.
Ronald E. Dowdy has served as the Group Controller since June 1998 and as Treasurer and Secretary since February 1999. Mr. Dowdy served as Controller to Holiday House Corporation for 19 years prior to joining the Company.
Thomas G. Schadt has served as a director of the Company since the completion of the Company's initial public offering in September 1997. Mr. Schadt has been the Chief Executive Officer of a privately-held beverage distribution company, Bear Creek, L.L.C., since 1995. From 1976 to 1994, he held several positions with PepsiCo, Inc., most recently, Vice President of Food Service.
Jack M. Lloyd has served as a director of the Company since the completion of the Company's initial public offering in September 1997. Mr. Lloyd served as Chairman of the Board of DenAmerica Corporation from July 1996 until September 2000, and as President, Chief Executive Officer and a director of DenAmerica Corporation from March 1996 until September 2000. DenAmerica Corporation changed its name to Phoenix Restaurant Group in June 1999. Mr. Lloyd served as Chairman of the Board and Chief Executive Officer of Denwest Restaurant Corp. ("DRC") from 1987 until the March 1996 merger of DRC and DenAmerica and as President of DRC from 1987 until November 1994. Mr. Lloyd engaged in commercial and residential real estate development and property management as President of First Federated Investment Corporation during the early and mid-1980's.
Phillip "Buddy" Johnson has served as a director of the Company since February 1999. Mr. Johnson has served as the Supervisor of Elections of Hillsborough County since March 2003. From March 2001 until March 2003, he served as the Director of the Division of Real Estate in the Florida Department of Business and Professional Regulations. Mr. Johnson served as President of the BuddyFreddys Division from April 1998 until March 2001. From 1980 until 1998, he was the founding Chairman and CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnson served as Republican floor leader in the Florida House of Representatives. Mr. Johnson also served on the executive committee of The Foundation for Florida's Future, a non-profit corporation established in 1995 by now governor, Jeb Bush.
Craig B. Wheaton has served as a director of the Company since February 1999. Mr. Wheaton is a partner in the law firm Kilpatrick Stockton LLP. His main areas of practice include employee benefits, executive compensation and general corporate law. Mr. Wheaton received his B.A. degree, with honors, from the University of Virginia and his J.D. degree from Wake Forest University. From 1993 to 1998, Mr. Wheaton was a member of the Tax Council of the North Carolina Bar Association Section on Taxation and chair of its Employee Benefits Committee from 1995 to 1997. He is a member and former president of the Triangle Benefits Forum. He is a member of the Southern Employee Benefits Conference, the Employee Benefits Committee of the American Bar Association's Section of Taxation, the National Pension Assistance Project's National Lawyers Network, and the National Association of Stock Plan Professionals. Mr. Wheaton is the brother of Robert E. Wheaton, the Company's Chairman of the Board, Chief Executive Officer and President.
B. Thomas M. Smith, Jr. has served as a director of the Company since June 2002. Mr. Smith was a consultant with ITT Corp. from January 1996 to December 1996 and is now retired. From 1988 until 1995, he was Vice President and Director of Corporate Purchasing for ITT Corp. Mr. Smith has served as director of Republic Bancorp since June 1999.
The audit committee is comprised of Jack M. Lloyd, Thomas G. Schadt and B. Thomas M. Smith, Jr., of which Jack M. Lloyd is the audit committee financial expert. All three members of the audit committee are "independent" as contemplated by Item 401(h)(iii) to Regulation S-K.
Risks
Growth Strategy Depends Upon Ability to Acquire and Successfully Integrate Additional Restaurants Through Acquisitions. The Company intends to pursue a strategy of moderate growth, primarily through acquisitions. The success of this strategy will depend in part on the ability of the Company to acquire additional buffet restaurants or to convert acquired sites into buffet restaurants, within both existing and new markets. The success of the Company's growth strategy is dependent upon numerous factors, many of which are beyond the Company's control, including the availability of suitable acquisition opportunities, the availability of appropriate financing and general economic conditions. The Company must compete with other restaurant operators for acquisition opportunities and with other restaurant operators, retail stores, companies and developers for desirable site locations. Many of these entities have substantially greater financial and other resources than the Company. Many of its acquired restaurants may be located in geographic markets in which the Company has limited or no operating experience. There can be no assurance that the Company will be able to identify, negotiate and consummate acquisitions of additional buffet restaurants or that acquired restaurants or converted restaurants can be operated profitably and successfully integrated into the Company's operations.
Acquisitions involve a number of special risks that could adversely affect the Company's business, results of operations and financial condition, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired restaurants and the potential loss of key employees. In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during expansion could materially and adversely affect the Company's business, financial condition and results of operations. There can be no assurance that any acquisition will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. Furthermore, the Company is unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future.
A strategy of growth through acquisitions requires access to significant capital resources. If the Company determines to make a sizeable acquisition, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. At present, the Company has only limited availability under its credit facility which expires on October 31, 2004. There can be no assurance that this credit facility will be replaced or a new credit facility will be established to the Company for any such acquisition.
From February 1998 to January 2001, the Company acquired 27 restaurants in seven states, including 15 restaurants in Florida. The Company has only acquired one new restaurant from January 2001 to January 2004. As a result of these acquisitions, the Company is complex and diverse, and the integration of the acquisitions has presented difficult challenges for the Company requiring increased management time and resources. In order to improve profitability, the Company needs to continue successfully integrating and streamlining restaurant functions. The difficulties of such integration have been increased by the necessity of coordinating geographically separate organizations. The integration of certain operations following the acquisitions required the dedication of management resources resulting in a temporary distraction from the day-to-day business of the Company. The Company continues to reduce costs and integrate functions. The failure to continue effectively integrating the operations of the Company or improving the results of operations of the acquired restaurants could have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence Upon and Restrictions Resulting from Franchisors. The Company operates its 16 HomeTown Buffet Restaurants through its wholly-owned subsidiary, HTB Restaurants, Inc., which is a party to a Franchise Agreement with the HomeTown Franchisor for each such restaurant.
The performance of the Company's HomeTown Buffet restaurant operations is directly related to the success of the HomeTown Buffet restaurant system, including the management and financial condition of HomeTown as well as restaurants operated by HomeTown and their other franchisees. The inability of such restaurants to compete effectively could have a material adverse effect on the Company's operations. The success of the Company's HomeTown Buffet restaurants depends in part on the effectiveness of the HomeTown franchisor's marketing efforts, new product development programs, quality assurance and other operational systems over which the Company has little or no control. For example, adverse publicity involving HomeTown restaurants operated by the franchisor or their other franchisees could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's operations with respect to its HomeTown restaurants are subject to certain restrictions imposed by policies and procedures of HomeTown currently in effect and which, from time to time, change. These restrictions limit the Company's ability to modify the menu items and decor of its restaurants and may have the effect of limiting the Company's ability to pursue its business plan. Furthermore, the franchise agreement with the HomeTown franchisor imposes substantial restrictions on the Company's ability to operate certain restaurant formats and to open additional restaurants in certain geographical areas.
Dependence Upon and Restrictions Resulting from Licensors. The Company, through its subsidiary Summit, operates eight JB's Restaurants in Arizona, Montana, New Mexico, Utah and Wyoming. In connection with the acquisition of certain JB's Restaurants in 1998 from JB's Family Restaurants, Inc., a subsidiary of CKE Restaurants, Inc., the Company entered into a one-year franchise agreement for each location which required among other items, the payment of royalty fees. After the acquisition of certain JB's Restaurants, the Company negotiated a ten-year option for annual renewable franchise agreements for each of the JB's Restaurants the Company operates. In February 2000, the annual renewable franchise agreement expired and the Company elected not to renew these franchise agreements. The Company entered into a License Agreement with the JB's Licensor for each such restaurant in November 2002. The license agreement allows the Company to use the JB's trademarks through August 31, 2012 with an option for an additional ten years.
The performance of the Company's JB's Restaurant operations is directly related to the success of the JB's Restaurant system, including the management and financial condition of the JB's Licensor as well as the number of restaurants operated by the JB's Licensor and their other licensees or franchisees. The inability of such restaurants to compete effectively could have a material adverse effect
on the Company's operations as well as the number of restaurants. The success of the Company's JB's Restaurants depends in part on the effectiveness of the JB's Licensor's marketing efforts, new product development programs, quality assurance and other operational systems over which the Company has little or no control. For example, adverse publicity involving JB's Restaurants operated by the licensor or their other licensees or franchisees could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's operations with respect to its JB's Restaurants are subject to certain restrictions imposed by policies and procedures of JB's currently in effect and which, from time to time, change. The licensor, JB's Family Restaurants, Inc. filed for bankruptcy on March 20, 2002. The licensor's bankruptcy has had no significant impact on the Company's restaurant operations.
The Company's Quarterly Results are Likely to Fluctuate. The Company has in the past experienced, and expects to continue to experience, significant fluctuations in restaurant revenues and results of operations from quarter to quarter. In particular, the Company's quarterly results can vary as a result of acquisitions, costs incurred to integrate newly acquired entities and seasonal patterns. A large number of the Company's restaurants are located in areas which are susceptible to severe winter weather conditions or tropical storm patterns which may have a negative impact on customer traffic and restaurant revenues. Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. There can be no assurance that future seasonal and quarterly fluctuations will not have a material adverse effect on the Company's business, results of operation and financial condition.
The Restaurant Industry is Highly Competitive. The Company competes on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience. The Company's competitors include a large and diverse group of restaurant chains and individually owned restaurants, including chains and individually owned restaurants that use a buffet format. The number of buffet restaurants with operations generally similar to the Company's has grown considerably in the last several years and the Company believes competition among buffet-style restaurants is increasing. As the Company and its principal competitors expand operations in various geographic areas, competition, including competition among buffet-style restaurants, can be expected to intensify. Such intensified competition could increase the Company's operating costs or adversely affect its revenues or operating margins. A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than does the Company. In addition, the restaurant industry has few noneconomic barriers to entry and is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The Company's significant investment in, and long term commitment to, each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Company's operations.
The Restaurant Industry is Complex and Volatile. Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants. Multi-unit food service businesses such as the Company's can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses such as the Company's to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. The Company's profitability is highly sensitive to increases in food, labor and other operating costs that cannot always be passed on to its guests in the form of
higher prices or otherwise compensated for. In addition, unfavorable trends or developments concerning factors such as inflation, increased food, labor, employee benefits, including increases in hourly wage and unemployment tax rates and utility costs, increases in the number and locations of competing buffet-style restaurants, regional weather conditions and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company's business, financial condition and results of operations in particular. Changes in economic conditions affecting the Company's guests could reduce traffic in some or all of the Company's restaurants or impose practical limits on pricing, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. The success of the Company will depend in part on the ability of the Company's management to anticipate, identify and respond to changing conditions. There can be no assurance that management will be successful in this regard. The impact and uncertainty created by the September 11, 2001 terrorist attack and the consequences of any future terrorist attacks, as well as other events affecting the national and world economies, may affect the Company's business.
The Company is Dependent on Its Key Personnel. The Company believes that its success will depend in part on the services of its key executives, including Robert E. Wheaton, Chairman of the Board, Chief Executive Officer and President. The Company does not maintain key man life insurance. The loss of the services of Mr. Wheaton could have a material adverse effect upon the Company's business, financial condition and results of operations, as there can be no assurances that a qualified replacement would be available in a timely manner if at all. The Company's continued growth will also depend in part on its ability to attract and retain additional skilled management personnel.
The Restaurant Industry is Subject to Substantial Government Regulation. The restaurant industry is subject to federal, state and local government regulations, including those relating to the preparation and sale of food as well as building and zoning requirements. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. The failure to obtain or retain food licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could have a material adverse effect on the Company's business, financial condition and results of operations. Many of the Company's employees are paid hourly rates based upon the federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to the Company.
Effect of Certain Charter and Bylaw Provisions. Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Certificate of Incorporation allows the Company to issue up to 1,500,000 shares of currently undesignated Preferred Stock, to determine the powers, preferences, rights, qualifications and limitations or restrictions granted to or imposed on any unissued series of that Preferred Stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the Common Stock. The Certificate of Incorporation also eliminates the ability of stockholders to call special meetings. The Company's Bylaws require advance notice to nominate a director or take certain other actions. Such provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, the Company has not elected to be excluded from the provisions of Section 203 of the Delaware General Corporation Law, which imposes certain limitations on transactions between a corporation and "interested" stockholders, as defined in such provisions.
Possible Volatility of Stock Price. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Factors such as fluctuations in the Company's operating results, failure of such operating results to meet the expectations of stock market analysts and investors, changes in stock market analyst recommendations regarding the Company, its competitors and other companies in the restaurant industry as well as changes in general economic or market conditions and changes in the restaurant industry may have a significant adverse effect on the market price of the Common Stock.
Sale of a Substantial Number of Shares of Our Common Stock Could Cause the Market Price to Decline. Sales of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock. As of April 15, 2004, 2,950,000 shares of common stock were outstanding and 731,000 shares were issuable upon exercise of outstanding options at exercise prices ranging from $5.00 to $12.00. The Company cannot predict the effect, if any, that sales of shares of the Company's common stock or the availability of such shares for sale will have on prevailing market prices. However, substantial amounts of the Company's common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock.
Control by One Principal Stockholder. Robert E. Wheaton, Chairman of the Board, Chief Executive Officer and President, currently beneficially owns approximately 49% of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 49% of the total voting power. Thus Mr. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of our directors. Sales of a substantial number of shares of our common stock by Mr. Wheaton in the public market could substantially reduce the prevailing market price of our common stock.
Item 2.
Item 2. Properties
The Company's corporate headquarters are located in Salt Lake City, Utah, and other executive offices are located in Scottsdale, Arizona.
The Company's restaurants are primarily freestanding locations. As of January 26, 2004 most of the Company's restaurant facilities were leased. The leases expire on dates ranging from 2004 to 2013 with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments including periodic rent escalation terms in certain instances, and most call for additional rent based upon revenue volume. Most leases require the Company to maintain the property and pay taxes and other related expenses.
The following is a summary of the Company's restaurant properties as of January 26, 2004:
As of January 26, 2004, the Company's restaurants are located in the following states:
As of January 26, 2004, the Company's non-operating restaurants are located in the following states:
Three of the non-operating restaurants have been leased to third-party operators and the net assets of one closed restaurant is property held for sale.
Item 3.
Item 3. Legal Proceedings
On November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand for Arbitration against the Company with the American Arbitration Association, Irvine, California (District No. 949-251-9840), alleging breach of contract in connection with the Company's failure to perform under a Business Services Agreement between North's and the Company dated July 24, 1997. On June 22, 1999, the parties agreed to dismiss the Arbitration Proceeding without prejudice since the issues related to the Business Service Agreement were being litigated in the Utah action described below.
On November 25, 1998, the Company filed an action against North's 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 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 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Market Information and Holders. The Company's Common Stock is listed on the NASDAQ smallcap market under the symbol "STRZ". As of April 15, 2004, there were approximately 550 record holders of the Company's Common Stock. The following table sets forth the high and low bid quotations for the Common Stock, as reported by NASDAQ.
Dividends. 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 are payable on June 1, 2004 to stockholders of record on May 7, 2004.
Equity Compensation Plan Information.
The following table gives information about our shares of Common Stock that may be issued under our equity compensation plans.
The exercise price of the options granted and exercisable at January 26, 2004 is $5.00 for 235,000 options and $12.00 for 496,000 options.
Item 6.
Item 6. Selected Financial Data
The following paragraphs sets forth selected consolidated financial data for our Company for the periods indicated. The selected consolidated financial data for each of the five fiscal years ended January 26, 2004, has been derived from our consolidated financial statements, which have been audited by (1) KPMG LLP, our former independent accountants, for each of the two fiscal years in the period ended January 29, 2001 (not included herein) (2) Grant Thornton LLP, our former independent accountants, for each of the two fiscal years in the period ended January 27, 2003 (included herein), and (3) Mayer Hoffman McCann P.C., our independent accountants, for the fiscal year ended January 26, 2004 (included herein).
The selected financial information and other data presented below should be read in conjunction with the "Consolidated Financial Statements", and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
The operating results for the 52-week period ended January 26, 2004 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, eight JB's restaurants, five BuddyFreddys restaurants (three of the five BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants), five JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two
Holiday House restaurants and one North's Star Buffet restaurant. In addition, operating results include 19 and 2 weeks for two BuddyFreddys Country Buffet restaurants closed during the fiscal year 2004. Results also include 12 weeks of operations for one JJ North's Country Buffet restaurant and 5 weeks of operations for one JB's Restaurant. Five restaurants were closed at the end of the 2004 fiscal year for repositioning. Three of the five closed restaurants have been leased to third-property operators and one closed restaurant is property held for sale. Additionally, another property was sold during fiscal 2004.
The operating results for the 52-week period ended January 27, 2003 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, nine JB's restaurants, seven BuddyFreddys restaurants (five of the seven BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants), six JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, operating results include 23 and 9 weeks for two BuddyFreddys Country Buffet restaurants closed during the fiscal year 2003. Results also include 19 weeks of operations for one JJ North's Country Buffet restaurant and 30 weeks of operations for one JJ North's Family Restaurant opened July 2002. Seven restaurants were closed at the end of the 2003 fiscal year for repositioning. Two of the seven closed restaurants have been leased and the property of another one is under contract to be sold and is reported as property held for sale. During the first quarter of fiscal 2004, three restaurants were closed that resulted in an impairment of leasehold improvements of $188,000 included in the fourth quarter of 2003.
The operating results for the 52-week period ended January 28, 2002 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, ten JB's restaurants, nine BuddyFreddys restaurants, seven of which are BuddyFreddys Country Buffet restaurants, six JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, the results include 36, 35, 24, 19 and 3 weeks respectively for five BuddyFreddys Country Buffet restaurants. Results also include 30 weeks of operations for one JJ North's Country Buffet restaurant which reopened in July 2001. Four restaurants were closed at the end of the 2002 fiscal year for remodeling and repositioning. The fiscal year 2002 included impairment charges for a restaurant closed in the first quarter of 2003.
The operating results for the 52-week period ended January 29, 2001 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, ten JB's restaurants, ten BuddyFreddys Country Buffet restaurants, six JJ North's Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. The results also include 14 weeks for one North's Star Buffet restaurant which was closed for remodeling and 15 weeks for one JB's restaurant which closed when the lease terminated. In addition, results include 49, 31, 18, 12 and 12 weeks respectively for five BuddyFreddys Country Buffet restaurants. Two restaurants were closed at the end of the 2001 fiscal year for remodeling and repositioning. The fiscal year 2001 included impairment charges for a restaurant closed in the first quarter of 2002.
The operating results for the 53-week period ended January 31, 2000 included 53 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, nine franchised JB's restaurants, six JJ North's Country Buffet restaurants, five BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two North's Star Buffet restaurants, two Casa Bonita restaurants and two Holiday House restaurants. The results also included 3 weeks of operations for 2 North's Star Buffet restaurants that were converted back to JB's Restaurants operating for 28 and 13 weeks respectively in fiscal 2000; 17 weeks of operations for one Holiday House that was converted to a BuddyFreddys Country Buffet restaurant operating for 34 weeks; and 46, 45, 40, 32, 25, 21 and 14 weeks respectively for seven BuddyFreddys Country Buffet restaurants. In addition, two restaurants were closed at the end of the 2000 fiscal year-one due to impassable road construction, the other was awaiting conversion to a BuddyFreddys Country Buffet restaurant.
SELECTED FINANCIAL DATA
(In thousands except per share amounts and restaurant unit data)
(1)At the end of the respective periods.
Supplemental Quarterly Financial Data (Unaudited). Quarterly financial results for the 52 weeks ended January 26, 2004, January 27, 2003, and January 28, 2002, are summarized below.
Amounts indicated may not foot due to quarterly rounding.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements, and the notes thereto, presented elsewhere in this Form 10-K. The operating results for the 52-week periods ended January 26, 2004, January 27, 2003, and January 28, 2002 are based on the composition of restaurant operations as discussed in Item 6 - Selected Financial Data.
The implementation of the Company's acquisition and strategic alliance strategies, and the costs associated with integrating new, under performing or unprofitable restaurants, acquired or otherwise operated by the Company may affect the comparability of future periods and have a material adverse effect on the Company's results of operations.
We conduct business in the buffet segment of the restaurant industry and the operating performance of our restaurants is directly and heavily influenced by the overall state of the national and local economies where our restaurants are located. When overall economic conditions negatively impact the financial performance of an individual restaurant, we periodically consider all the factors influencing that restaurant, such as operational efficiencies, local demographic changes, local construction activity, competition and other related factors. We then assess the prospect that we can improve both the short-term and long-term financial results, at least to a level sufficient to recover our investment in the leasehold improvements and equipment assets. There have been and likely will continue to be situations where we will make the decision that an asset is impaired and a write-down in required.
Results of Operations
The following table summarizes the Company's results of operations as a percentage of total revenues for the fifty-two weeks ended January 26, 2004 ("fiscal 2004"), January 27, 2003 ("fiscal 2003"), and January 28, 2002 ("fiscal 2002").
Comparison of Fiscal 2004 to Fiscal 2003
Total revenues decreased $6.7 million or 9.0% from $74.8 million in fiscal 2003 to $68.1 million in fiscal 2004. The decrease was primarily attributable to lower same store sales due to the sluggish economic conditions and increased competition in certain areas in fiscal 2004 as compared to fiscal 2003.
Food costs as a percent of total revenues decreased from 34.6% in fiscal 2003 to 34.2% in fiscal 2004. 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. Additional improvements in food contracts compared to last year were offset by higher beef and dairy prices in the third and fourth quarters of fiscal 2004.
Labor costs as a percent of total revenues decreased from 34.4% in fiscal 2003 to 33.8% in fiscal 2004. The decrease as a percentage of revenue resulted from the elimination of labor inefficiencies in locations that were closed.
Occupancy and other expenses as a percent of total revenues decreased from 21.3% in fiscal 2003 to 20.5% in fiscal 2004. The decrease as a percentage of revenue is primarily attributable to the
termination of seven leases resulting in a savings of approximately $439,000. The fixed portion of occupancy costs is primarily fixed costs for property leases and related common area maintenance and property taxes.
General and administrative expenses as a percentage of total revenues decreased from 5.0% in fiscal 2003 to 3.6% in fiscal 2004. The decrease as a percentage of revenue is primarily attributable to lower field overhead expenses of $260,000, lower corporate insurance costs of $690,000 and lower corporate legal expenses of $198,000 as compared to the same period of the prior year. The lower field expense is primarily attributed to fewer field personnel and an increase in costs charged directly to the restaurants. Lower corporate insurance costs are attributed to a change to self-insurance for general liability coverage and a worker's compensation insurance refund. Lower corporate legal expenses are attributed to a reduction in legal activity.
Depreciation and amortization as a percent of total revenues increased from 4.5% in fiscal 2003 to 4.7% in fiscal 2004. The increase as a percentage of revenue is primarily attributable to decreased revenues while depreciation and amortization expense remained relatively constant.
Impairment of long-lived assets decreased from 2.4% in fiscal 2003 to 0.8% in fiscal 2004. The impairment in fiscal 2004 was a result of the lease termination of one restaurant in Idaho and two leased restaurants where projected undiscounted cash flow is less than the net book value of assets. The impairment in fiscal 2003 was a result of the lease termination of two restaurants in Florida, the pending sale of one owned restaurant and two leased restaurants 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. Also included in fiscal 2003 impairments are two JB's Restaurants in which the lease agreements were terminated subsequent to year-end and the write-down of one closed restaurant assets to fair market value.
Interest expense as a percent of total revenues decreased from 1.0% in fiscal 2003 to 0.8% in fiscal 2004. The decrease is primarily attributable to lower interest rates decreasing from 3.5% in fiscal 2003 to 3.2% in fiscal 2004 on the Term Loan Facility and Revolving Credit Facility financed by Fleet National Bank as discussed in Note 4 of the notes to the consolidated financial statements and lower outstanding balances on those facilities.
Income taxes increased to 35.4% of earnings before taxes in fiscal 2004 from a benefit of 38.5% of earnings before taxes in fiscal 2003 due to the loss for fiscal 2003.
Comparison of Fiscal 2003 to Fiscal 2002
Total revenues decreased $8.4 million or 10.1% from $83.2 million in fiscal 2002 to $74.8 million in fiscal 2003. The decrease was primarily attributable to lower same store sales due to the sluggish economic conditions and a decrease in the number of restaurants open and operating in fiscal 2003 as compared to fiscal 2002.
Food costs as a percent of total revenues increased from 32.4% in fiscal 2002 to 34.6% in fiscal 2003 although actual food costs decreased by $1,153,000. The increase as a percentage of total revenues was primarily attributable to higher food costs from the transition to several new food suppliers during the first quarter when the former supplier cancelled a food contract with the Company.
Labor costs as a percent of total revenues increased from 34.0% in fiscal 2002 to 34.4% in fiscal 2003. The increase as a percentage of total revenues was primarily attributable to decreased revenues and fewer stores in operation this year even though actual labor costs decreased by $2,596,000.
Occupancy and other expenses as a percent of total revenues increased from 20.8% in fiscal 2002 to 21.3% in fiscal 2003. The increase as a percentage of revenue is primarily attributable to decreased
revenues while the fixed portion of occupancy costs remained relatively constant. The fixed portion of occupancy costs is primarily fixed costs for property leases and related common area maintenance and property taxes. The actual occupancy and other expenses decreased by $1,401,000.
General and administrative expenses as a percentage of total revenues increased from 4.3% in fiscal 2002 to 5.0% in fiscal 2003. The increase as a percentage of revenue is primarily attributable to decreased revenue while expenses increased. The increases in expenses were primarily higher net insurance costs at the corporate level of approximately $165,000, $141,000 of additional corporate legal costs and increased consulting fees of approximately $56,000. The increased expenses were partially offset by reduced corporate bonus accruals of approximately $46,000 and lower royalty expenses of $163,000.
Depreciation and amortization as a percent of total revenues increased from 4.4% in fiscal 2002 to 4.5% in fiscal 2003. The increase as a percentage of revenue is primarily attributable to decreased revenues while depreciation and amortization expense decreased by $324,000.
Impairment of long-lived assets increased from 1.0% in fiscal 2002 to 2.4% in fiscal 2003. The impairment in fiscal 2003 was a result of the lease termination of two restaurants in Florida, the pending sale of one owned restaurant and two leased restaurants 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. Also included in fiscal 2003 impairments are two JB's Restaurants in which the lease agreements were terminated subsequent to year-end and the write-down of one closed restaurant assets to fair market value. The impairment in fiscal 2002 was a result of the closure of two Florida restaurants resulting in closing costs and the abandonment of leasehold improvements.
Interest expense as a percent of total revenues decreased from 1.3% in fiscal 2002 to 1.0% in fiscal 2003. The decrease is primarily attributable to lower interest rates decreasing from 5.8% in fiscal 2002 to 3.5% in fiscal 2003 on the Term Loan Facility and Revolving Credit Facility financed by Fleet National Bank as discussed in Note 4 of the notes to the consolidated financial statements and lower outstanding balances on those facilities.
Income taxes decreased from 15.2% of earnings before taxes in fiscal 2002 to a benefit of 38.5% of earnings before taxes in fiscal 2003 due to the loss for fiscal 2003. The Company amended prior tax returns and received a credit for excess social security tax on tips exceeding minimum wage in fiscal 2002 resulting in a low rate for that year.
Liquidity and Capital Resources
The Company has historically financed operations through a combination of cash on hand, cash provided from operations and available borrowings under bank lines of credit. As of January 26, 2004, the Company had $445,000 in cash, and as of January 27, 2003, the Company had $433,000 in cash and cash equivalents. During fiscal 2004, the Company used approximately $1.3 million to fund capital improvements to existing restaurants.
Cash provided by operations was approximately $3.1 million for fiscal 2004 and approximately $3.7 million for fiscal 2003.
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 one 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. The Company has some of this equipment available from stores closed in previous periods. 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. There can be no assurance the Revolving Line of Credit can be refinanced on acceptable terms or at all. The Revolving Line of Credit balance was $1,900,000 and $650,000 on January 26, 2004 and April 15, 2004, respectively. The Revolving Line of Credit had $2,350,000 available for borrowing on April 15, 2004.
On February 1, 2001, the Company completed a promissory note secured by a first mortgage with Victorium Corporation for $460,000 to purchase the real estate of the BuddyFreddys Country Buffet in Ocala, Florida. The fixed rate (7.5%) mortgage requires monthly payments of $4,264 including interest and matures in 15 years. The balance at January 26, 2004 and January 27, 2003 was $406,000 and $426,000, respectively.
On October 9, 2001, the Company completed a $773,000 15 year first real estate mortgage with First National Bank of Wyoming. The mortgage has monthly payments including interest of $7,253 and has an October 1, 2016 maturity date with a fixed interest rate of 7.625%. The mortgage requires the Company to maintain specified minimum levels of net worth, limits the amount of capital expenditures, maintain certain fixed charge coverage ratios and requires a minimum shareholder ownership percentage. The proceeds were used to pay the FleetBoston Term Loan Facility as required by the Company's agreement with FleetBoston. The mortgage is secured by the Company's JB's Restaurant in Laramie, Wyoming. The balance at January 26, 2004 and January 27, 2003 was $698,000 and $729,000, respectively.
On May 2, 2002, the Company completed a $1,500,000 ten year first real estate mortgage with M&I Marshall & Ilsley Bank. The mortgage has monthly payments including interest of $17,894 and matures on May 2, 2012 with a fixed interest rate of 7.5% for the first five years with interest for years six to ten calculated at the five year LIBOR rate plus 250 basis points with a floor of 7.5%. The proceeds were used to pay the FleetBoston Term Loan Facility as required by the Company's agreement with FleetBoston. The mortgage is secured by the Company's HomeTown Buffet restaurant in Scottsdale, Arizona. The balance at January 26, 2004 and January 27, 2003 was $1,319,000 and $1,430,000, respectively.
On March 7, 2003, the Company completed a $500,000 five year first real estate mortgage with Naisco Investments, L.C. The mortgage has monthly payments including interest of $9,901 and matures on March 15, 2008 with a fixed interest rate at 7%. The mortgage is secured by the Company's HomeTown Buffet restaurant in Layton, Utah. The balance at January 26, 2004 is $428,000.
On December 19, 2003, the Company completed a $1,470,000 six year first real estate mortgage with Platinum Bank. The mortgage has monthly payments including interest of $12,678 through November 19, 2009 with a balloon payment of $475,000 due on December 19, 2009. The mortgage bears interest at a fixed rate of 6.25% for the first three years with interest for years four to six
calculated at the three year Atlanta Federal Home Loan Bank advance rate for fixed rate credits plus 325 basis points with a floor of 6.0%. The mortgage is secured by the Company's BuddyFreddys restaurant in Plant City, Florida and a $500,000 personal guarantee of a shareholder. The balance at January 26, 2004 is $1,465,000.
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.
Off-balance Sheet Arrangements
As of January 26, 2004, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Commitments and Contractual Obligations
The Company's contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and future minimum operating and capital lease obligations as set forth in the following table:
(1)See Note 4 to the consolidated financial statements for additional information.
(2)See Note 5 to the consolidated financial statements for additional information. Impact of Inflation
Management recognizes that inflation has an impact on food, construction, labor and benefit costs, all of which can significantly affect the Company's operations. Historically, the Company has been able to pass any associated higher costs due to these inflationary factors along to its customers because those factors have impacted nearly all restaurant companies. However, management has emphasized
cost controls rather than price increases given the competitive pressure within the quick-service restaurant industry.
Critical Accounting Policies and Judgments
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company's consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1-Summary of Significant Accounting Policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported 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; whereas the Company's statements of operations for the year ended January 28, 2002 do contain charges for goodwill amortization expense.
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 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. Differences in estimates and assumptions could result in accrual requirements materially different from the calculated accruals.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses accounting and reporting standards for acquired goodwill and other intangible assets. Under the new standards, goodwill and indefinite life intangible assets are no longer amortized but will be subject to annual impairment tests. Finite life intangible assets such as franchise agreements will continue to be amortized over their useful lives. The provisions of SFAS 142 were required to be applied starting with fiscal years beginning after December 15, 2001.
The Company adopted SFAS 142 effective January 29, 2002. As a result, the Company ceased amortization of goodwill and indefinite life intangible assets which increased income before income taxes by approximately $100,000 in fiscal 2003. Annual amortization expense related to goodwill was $106,000 for the 52 weeks ended January 28, 2002. During fiscal 2003, the Company performed the required transitional impairment tests of goodwill and indefinite life intangible assets as of January 29, 2002. The Company's impairment charge as a result of the transitional impairment test in fiscal 2003 was $849,000 before a tax benefit of $289,000.
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 does not have any derivative instruments or hedging activities as of January 26, 2004.
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. The Company does not have any financial instruments with characteristics of both liabilities and equity as of January 26, 2004.
In December 2003, the FASB issued Statement No. 132 (revised 2003), "Employers' Disclosures About Pensions and Other Postretirement Benefits," that requires additional financial statement disclosures for defined benefit plans. This revised standard requires more disclosure about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The Company does not have any pensions or other post retirement benefits.
In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 replaces the earlier version of this interpretation issued in January 2003. FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined. Application of FIN 46 is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application of FIN 46 to all other types of entities is required in financial statements for periods ending after March 15, 2004 with earlier application permitted if the original interpretation was previously adopted. The Company adopted the original interpretation and FIN 46 as of January 26, 2004 which did not have a material effect on the Company's financial statements.
Item 7A.
Item 7A. 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 $650,000 remained outstanding as of April 15, 2004. The Revolving Line of Credit interest rate is LIBOR plus two percent per annum (averaging approximately 3.5% in fiscal 2004). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $6,500 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 April 15, 2004. The balance outstanding on the Revolving Line of Credit at January 26, 2004 is $1,900,000. 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 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 8.
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements included at "Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K."
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
In January 2004, pursuant to the recommendation and approval of the board of directors and the audit committee of the board, the Company dismissed Grant Thornton LLP as principal accountants and appointed Mayer Hoffman McCann P.C. as the Company's independent public auditors for the year ended January 26, 2004. Grant Thornton LLP was the Company's prior independent public audit firm. The reports of Grant Thornton LLP on the Company's financial statements for the years ended January 27, 2003 and January 28, 2002 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. There were no reporting disagreements between the Company and Grant Thornton LLP on any matter of accounting principle, practice, financial statement disclosure or auditing scope or procedure during the years covered by these reports or the interim periods through January 26, 2004. Prior to their engagement, we had not consulted with Mayer Hoffman McCann P.C. on either the application of accounting principles or the type of opinion Mayer Hoffman McCann P.C. might issue on our consolidated financial statements.
Item 9A.
Item 9A. 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 annual period covered by this report on Form 10-K, 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 Security 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-K that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information concerning the current directors and executive officers of the Company is contained in Item 1 of Part I of this Annual Report on Form 10-K.
The information pertaining to the Company's code of ethics is filed as an exhibit to this Annual Report on Form 10-K. The Company hereby undertakes to provide to any person without charge, upon request, a copy of such code of ethics. Any such request shall be made in writing and addressed to the Company at its principal executive offices shown on the cover page to this Annual Report on Form 10-K, attention: Secretary.
The information pertaining to compliance with Section 16(a) of the Exchange Act is hereby incorporated by reference to the Company's Proxy Statement to be used in connection with the Company's 2004 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 26, 2004.
Item 11.
Item 11. Executive Compensation
The information pertaining to executive compensation is hereby incorporated by reference to the Company's Proxy Statement to be used in connection with the Company's 2004 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 26, 2004.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information pertaining to security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to the Company's Proxy Statement to be used in connection with the Company's 2004 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 26, 2004.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information pertaining to certain relationships and related transactions is hereby incorporated by reference to the Company's Proxy Statement to be used in connection with the Company's 2004 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 26, 2004.
Item 14.
Item 14. Principal Accountant Fees and Services
The information with respect to principal accountant fees and services is hereby incorporated by reference to the Company's Proxy Statement to be used in connection with the Company's 2004 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 26, 2004.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)
Index to Consolidated Financial Statements:
(a)(2)
Index to Financial Statement Schedules:
All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
(a)(3)
Exhibits:
An "Exhibit Index" has been filed as a part of this Form 10-K beginning on Page E-1 hereof and is incorporated herein by reference.
(b)
Current Reports on Form 8-K:
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 are payable on June 1, 2004 to stockholders of record on May 7, 2004.
A Current Report on Form 8-K dated January 28, 2004 was filed to report the Company's change in certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STAR BUFFET, INC.
(Registrant)
April 23, 2004
By:
/s/ ROBERT E. WHEATON Robert E. Wheaton
Chief Executive Officer and President
(principal executive officer)
April 23, 2004
By:
/s/ RONALD E. DOWDY Ronald E. Dowdy
Group Controller, Treasurer and Secretary
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ROBERT E. WHEATON Robert E. Wheaton
Chief Executive Officer, President and Director
April 23, 2004
/s/ RONALD E. DOWDY Ronald E. Dowdy
Group Controller, Treasurer and Secretary
April 23, 2004
JACK M. LLOYD Jack M. Lloyd
Director
/s/ THOMAS G. SCHADT Thomas G. Schadt
Director
April 19, 2004
/s/ PHILLIP "BUDDY" JOHNSON Phillip "Buddy" Johnson
Director
April 19, 2004
/s/ CRAIG B. WHEATON Craig B. Wheaton
Director
April 19, 2004
/s/ B. THOMAS M. SMITH, JR. B. Thomas M. Smith, Jr.
Director
April 19, 2004
REPORT OF MANAGEMENT RESPONSIBILITIES
The management of Star Buffet, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, using management's best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements.
Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded, and transactions are recorded accurately, in all material respects, in accordance with management's authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding utilization of Company assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees.
The Audit Committee of the Board of Directors meets regularly to determine that management and independent auditors are properly discharging their duties regarding internal control and financial reporting. The independent auditors and employees have full and free access to the Audit Committee at any time.
Mayer Hoffman McCann P.C., independent certified public accountants, are retained to audit the Company's consolidated financial statements. Their report follows.
/s/ Robert E. Wheaton
Robert E. Wheaton, Chairman of the Board and Chief Executive Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Star Buffet, Inc.:
We have audited the accompanying consolidated balance sheet of Star Buffet, Inc. and subsidiaries (a Delaware corporation) as of January 26, 2004 and the related consolidated statements of operations, stockholders' equity and cash flows for the 52-week period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of January 27, 2003, and for each of the two 52 week periods in the period ended January 27, 2003, were audited by other auditors whose report dated March 31, 2003, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Buffet, Inc. and subsidiaries as of January 26, 2004, and the consolidated results of their operations and their consolidated cash flows for the 52-week period then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Mayer Hoffman McCann P.C.
Salt Lake City, Utah
April 16, 2004
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
Star Buffet, Inc.:
We have audited the accompanying consolidated balance sheet of Star Buffet, Inc. and subsidiaries (a Delaware corporation) as of January 27, 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for the 52-week periods ended January 27, 2003 and January 28, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conduct our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Buffet, Inc. and subsidiaries as of January 27, 2003 and the consolidated results of their operations and their consolidated cash flows for each of the 52-week periods ended January 27, 2003 and January 28, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on January 29, 2002.
/s/ Grant Thornton LLP
Salt Lake City, Utah
March 31, 2003
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of certain significant accounting policies not disclosed elsewhere in the footnotes to the consolidated financial statements is set forth below.
Basis of Presentation
The accompanying 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"). The accompanying consolidated financial statements include the results of operations and assets and liabilities of the Company's operations. Certain estimates, assumptions and allocations were made in preparing such financial statements. Significant intercompany transactions and balances have been eliminated in consolidation.
Organization and Nature of Operations
The Company was formed by CKE Restaurants, Inc. ("CKE") in July 1997 in connection with the reorganization of CKE's buffet-style restaurant business. Pursuant to a contribution agreement among the Company and CKE and certain respective subsidiaries, CKE transferred to Summit the net assets of its two Casa Bonita Mexican theme restaurants, and Summit transferred substantially all of its assets and liabilities (primarily those relating to the JB's Restaurant system and Galaxy Diner restaurants, but excluding 16 HomeTown Buffet restaurants operated by HTB) to a newly formed subsidiary of CKE. All of the parties to the foregoing transactions (the "Formation Transactions") were, upon completion thereof, direct or indirect wholly owned subsidiaries of CKE, and such Formation Transactions were accounted for as a reorganization among companies under common control.
The operating results for the 52-week period ended January 26, 2004 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, eight JB's restaurants, five BuddyFreddys restaurants (three of the five BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants), five JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, operating results include 19 and 2 weeks, respectively, for two BuddyFreddys Country Buffet restaurants closed during the fiscal year 2004. Results also include 12 weeks of operations for one JJ North's Country Buffet restaurant and 5 weeks of operations for one JB's Restaurant. Five restaurants remain closed at the end of the 2004 fiscal year for repositioning. Three of the five closed restaurants have been leased to third-party operators and the property of one closed restaurant is property held for sale.
The operating results for the 52-week period ended January 27, 2003 included 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, nine JB's restaurants, seven BuddyFreddys restaurants (five of the seven BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants), six JJ North's Country Buffet restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, operating results include 23 and 9 weeks respectively for two BuddyFreddys Country Buffet restaurants closed during the fiscal year 2003. Results also include 19 weeks of operations for one JJ North's Country Buffet restaurant and 30 weeks of operations for one JJ North's Family Restaurant opened July 2002. Seven restaurants were closed at the end of the 2003 fiscal year for repositioning. Two of the seven closed restaurants have been leased and the property of another one is under contract to be sold and is reported as property held for sale. During the first quarter of fiscal 2004, three restaurants were closed, of which one was
closed for repositioning that resulted in an impairment of leasehold improvements of $188,000 included in the fourth quarter of 2003.
The operating results for the 52-week period ended January 28, 2002 includes 52 weeks of operations for the Company's 16 franchised HomeTown Buffet restaurants, ten JB's restaurants, seven BuddyFreddys Country Buffet restaurants, six JJ North's Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita restaurants, two Holiday House restaurants and one North's Star Buffet restaurant. In addition, the results include 36, 35, 24, 19 and 3 weeks respectively for five BuddyFreddys Country Buffet restaurants that were closed during the year, two of which were permanently closed. Results also include 30 weeks of operations for one JJ North's Country Buffet restaurant reopened in July 2001. Four restaurants remained closed at the end of the 2002 fiscal year for remodeling and repositioning.
Fiscal Year
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 except in the 53 week fiscal year, when the fourth quarter has 13 weeks.
Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are considered cash equivalents. The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value.
Receivables
The Company records an allowance for bad debts on accounts and notes receivable based on the collection history of the specific account or note receivable.
Inventories
Inventories consist of food, beverage, gift shop items and restaurant supplies and are valued the lower of cost or market, determined by the first-in, first-out method.
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.
Property and equipment placed on the market for sale is not depreciated and is reclassed on the balance sheet as property held for sale. Property and equipment in non-operating units for remodeling or repositioning continue to be depreciated.
Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized.
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; whereas the Company's statement of operations for the year ended January 28, 2002 contains charges for goodwill amortization expense.
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 2003. The Company evaluates goodwill for impairment each quarter.
The following is the Company's disclosure of what reported net earnings (loss) and earnings (loss) per share would have been in all periods presented if the Company had accounted for goodwill consistent with the provisions of SFAS 142 effective at the beginning of fiscal 2002.
Other Intangible Assets
Other intangible assets are comprised of franchise fees, loan acquisition costs, and JB's license agreement. Franchise fees are amortized using the straight-line method over the terms of the franchise agreements, which range typically from 8 to 20 years. Loan costs are amortized using the straight-line method over the lesser of the life of the loan or five years. The JB's license agreement is being amortized using the straight-line method over 11 years.
The table below shows expected amortization for purchased intangibles as of January 26, 2004 for the next five years:
The Company acquired the JB's license agreement in November 2002 for $773,000.
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 undiscounted 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 exceeds the fair value of the assets.
Fair Value Of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments.
The carrying amounts of the Company's notes receivable, long-term debt and capital lease obligations approximate fair value and are based on discounted cash flows using market rates at the balance sheet date. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
Pre-Opening Costs
Pre-opening costs are expensed when incurred. The Company incurred and charged to operations approximately $0, $63,000 and $168,000 of pre-opening costs during fiscal 2004, 2003 and 2002, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. An allowance against deferred tax assets is recorded in whole or in part when it is more likely than not that such tax benefits will not be realized.
Advertising Expenses
Advertising costs are charged to operations as incurred. Amounts charged to operations totaled $785,000, $853,000 and $976,000, for the 52 weeks ended January 26, 2004, January 27, 2003 and January 28, 2002, respectively.
Insurance Programs
Effective January 14, 2003, 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. Differences in estimates and assumptions could result in accrual requirements materially different from the calculated accruals.
Leases
The Company has various lease commitments on store locations. Expenses of operating leases with escalating payment terms are recognized on a straight-line basis over the lives of the related leases. Contingent rental expense is accrued on a monthly basis for those stores where contingent rent expense is probable.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
Earnings (Loss) per Share
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share assumes the exercise of stock options using the treasury stock method, if dilutive. The following is a reconciliation of the denominators used to calculate diluted earnings (loss) per share on net income (loss) for the respective fiscal years:
Average shares used in the fifty-two weeks ended January 26, 2004 diluted earnings per share computations exclude stock options to purchase 496,000 shares of common stock due to the market price of the underlying stock being less than the exercise price. Average shares used in the fifty-two weeks ended January 27, 2003 diluted loss per share computations exclude stock options to purchase 733,000 shares of common stock which are considered to be antidilutive due to the market price of the underlying stock being less than the exercise price. Average shares used in the fifty-two weeks ended January 28, 2002 diluted earnings per share computations exclude stock options to purchase 735,000 shares of common stock due to the market price of the underlying stock being less than the exercise price.
Segment Reporting
The Company's reportable segments are based on brand similarities. Business results are based on the Company's management accounting practices.
Comprehensive Income
The Company does not have any components of comprehensive income other than net income (loss) and, therefore, comprehensive income equaled net income (loss) for all periods presented.
Stock-Based Compensation
The Company uses the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25 when recognizing expense for employee stock compensation plans. As such, compensation expense is generally only recognized on the date of grant when the current market price of the stock exceeds the exercise price. Had the Company determined compensation cost based on the fair value method at the grant date for its stock options, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
For purposes of the preceding pro forma disclosures, the fair value of each stock option has been estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no projected annual dividends, expected volatility of 15%, a risk free interest rate of 5.98% for grants in fiscal 2000 and an expected life of five years for grants in fiscal 2000.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses accounting and reporting standards for acquired goodwill and other intangible assets. Under the new standards, goodwill and indefinite life intangible assets are no longer amortized but will be subject to annual impairment tests. Finite life intangible assets such as franchise agreements will continue to be
amortized over their useful lives. The provisions of SFAS 142 were required to be applied starting with fiscal years beginning after December 15, 2001.
The Company adopted SFAS 142 effective January 29, 2002. As a result, the Company ceased amortization of goodwill and indefinite life intangible assets which increased income before income taxes by approximately $100,000 in fiscal 2003. Annual amortization expense related to goodwill was $106,000 for the 52 weeks ended January 28, 2002. During fiscal 2003, the Company performed the required transitional impairment tests of goodwill and indefinite life intangible assets as of January 29, 2002. The Company's impairment charge as a result of the transitional impairment test in fiscal 2003 was $849,000 before a tax benefit of $289,000.
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 does not have any derivative instruments or hedging activities as of January 26, 2004.
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. The Company does not have any financial instruments with characteristics of both liabilities and equity as of January 26, 2004.
In December 2003, the FASB issued Statement No. 132 (revised 2003), "Employers' Disclosures About Pensions and Other Postretirement Benefits," that requires additional financial statement disclosures for defined benefit plans. This revised standard requires more disclosure about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The Company does not have any pensions or other post retirement benefits.
In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 replaces the earlier version of this interpretation issued in January 2003. FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined. Application of FIN 46 is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application of FIN 46 to all other types of entities is required in financial statements for periods ending after March 15, 2004 with earlier application permitted if the original interpretation was previously adopted. The Company adopted the original interpretation and FIN 46 as of January 26, 2004 which did not have a material effect on the Company's financial statements.
Reclassifications
Certain non-material amounts in fiscal 2002 have been reclassed to conform with the fiscal 2003 presentation.
NOTE 2-NOTES RECEIVABLE
Notes receivable consist of the following:
The receivable from North's Restaurants, Inc. ("North's") originally included $3,123,000 for a term note and $371,000 on a line of credit that was converted to a note receivable. As a result of a dispute with North's, management stopped accruing interest pending resolution of the dispute with North's (Note 12). As part of a Settlement Agreement entered on January 26, 2001, North's promises to pay the Company the principal sum of $3,500,000 with an interest rate of 8% per annum. North's paid the Company $295,000 pursuant to the terms of the Settlement Agreement and such payment was applied to reduce the principal amount owing. The $3.5 million note receivable stipulates that monthly payments of principal and interest be made in the amount of $39,954. The loan calls for monthly payments to start on February 26, 2001 and continue on the 26th day of each month thereafter, with a final payment of all remaining unpaid principal, accrued interest and other sums due under the note due and payable on September 26, 2010.
The Company accommodated North's request for working capital and remodeling expenditures by reducing the principal payments due from June 26, 2002 through July 26, 2003 from $303,000 to $65,000. Full principal and interest payments were to resume August 2003 through January 2011 with the final payment due in February 2011. No payments have been received from North's subsequent to the July 2003 payment. The Company has not recorded approximately $112,000 of interest income due from North's. The Company has not provided an allowance for bad debts for the note as of January 26, 2004 as it has been determined that the note is adequately collateralized.
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.
NOTE 3-PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES
The components of property, buildings and equipment and real property under capitalized leases are as follows:
The property and equipment includes the following land, equipment and buildings and leaseholds currently in five non-operating units. Three of the five units are leased to third-party operators and one unit is included in property held for sale at January 26, 2004.
NOTE 4-LONG-TERM DEBT
On October 23, 1998, the Company entered into a $20 million syndicated bank financing agreement led by FleetBoston Financial Corporation (formerly known as BankBoston, N.A.). The credit facility consists of a $13 million, 5-year term loan (the "Term Loan Facility") and a $7 million, 5-year revolving credit facility (the "Revolving Credit Facility"). Principal payments under the Term Loan Facility were due in quarterly installments beginning 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 bore interest at approximately 3.5% for fiscal 2004. All outstanding amounts under the Revolving Credit Facility became due in October 2003 and were paid timely.
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 $1,900,000 on January 26, 2004. The Revolving Line of Credit had $1,100,000 available for borrowing on January 26, 2004.
On February 1, 2001, the Company completed a promissory note secured by a first mortgage with Victorium Corporation for $460,000 to purchase the real estate of the BuddyFreddys Country Buffet in Ocala, Florida. The fixed rate (7.5%) mortgage requires monthly payments of $4,264 including interest and matures in 15 years. The balance at January 26, 2004 and January 27, 2003 was $406,000 and $426,000, respectively.
On October 9, 2001, the Company completed a $773,000 15 year first real estate mortgage with First National Bank of Wyoming. The mortgage has monthly payments including interest of $7,253 and has an October 1, 2016 maturity date with a fixed interest rate of 7.625%. The mortgage requires the Company to maintain specified minimum levels of net worth, limits the amount of capital expenditures, maintain certain fixed charge coverage ratios and requires a minimum shareholder ownership percentage. The proceeds were used to pay the FleetBoston Term Loan Facility as required by the Company's agreement with FleetBoston. The mortgage is secured by the Company's JB's Restaurant in Laramie, Wyoming. The balance at January 26, 2004 and January 27, 2003 was $698,000 and $729,000, respectively.
On May 2, 2002, the Company completed a $1,500,000 ten year first real estate mortgage with M&I Marshall & Ilsley Bank. The mortgage has monthly payments including interest of $17,894 and matures on May 2, 2012 with a fixed interest rate of 7.5% for the first five years with interest for years six to ten calculated at the five year LIBOR rate plus 250 basis points with a floor of 7.5%. The proceeds were used to pay the FleetBoston Term Loan Facility as required by the Company's agreement with FleetBoston. The mortgage is secured by the Company's HomeTown Buffet restaurant in Scottsdale, Arizona. The balance at January 26, 2004 and January 27, 2003 was $1,319,000 and $1,430,000, respectively.
On March 7, 2003, the Company completed a $500,000 five year first real estate mortgage with Naisco Investments, L.C. The mortgage has monthly payments including interest of $9,901 and matures on March 15, 2008 with a fixed interest rate at 7%. The mortgage is secured by the Company's HomeTown Buffet restaurant in Layton, Utah. The balance at January 26, 2004 is $428,000.
On December 19, 2003, the Company completed a $1,470,000 six year first real estate mortgage with Platinum Bank. The mortgage has monthly payments including interest of $12,678 through November 19, 2009 with a balloon payment of $475,000 due on December 19, 2009. The mortgage bears interest at a fixed rate of 6.25% for the first three years with interest for years four to six calculated at the three year Atlanta Federal Home Loan Bank advance rate for fixed rate credits plus 325 basis points with a floor of 6.0%. The mortgage is secured by the Company's BuddyFreddys restaurant in Plant City, Florida and a $500,000 personal guarantee of a shareholder. The balance at January 26, 2004 is $1,465,000.
Long term debt matures in fiscal years ending after January 26, 2004 as follows:
NOTE 5-LEASES
The Company occupies certain restaurants under long-term capital and operating leases expiring at various dates through 2013. Most restaurant leases have renewal options for terms of 5 to 20 years, and substantially all require payment of real estate taxes and insurance. Certain leases require the rent to be the greater of a stipulated minimum rent or a specified percentage of sales. Certain operating lease agreements contain scheduled rent escalation clauses which are being amortized over the terms of the lease, ranging from 5 to 12 years using the straight line method.
Minimum lease payments for all leases and the present value of net minimum lease payments for capital leases as of January 26, 2004 are as follows:
Aggregate rent expense under noncancelable operating leases during fiscal 2004, 2003 and 2002 are as follows:
In fiscal 2004, 2003 and 2002, the Company reduced the deferred rent payable for stores that were purchased or closed. The $206,000, $0 and $87,000 decrease in rent expense in 2004, 2003 and 2002, respectively, is recognized in the straight-line rentals disclosed above.
The Company currently leases three non-operating units to tenants under non-cancellable operating leases with terms of five to ten years. The rental income for fiscal 2004 and fiscal 2003 was $212,000 and $33,000, respectively. Rental income is recognized on a straight-line basis over the term of the lease.
Rental income in fiscal years ending after January 26, 2004 is as follows:
NOTE 6-INCOME TAXES
Income taxes (benefit) are comprised of the following:
A reconciliation of income taxes (benefit) at the federal statutory rate of 34% to the Company's provision for taxes on income is as follows:
Temporary differences give rise to a significant amount of deferred tax assets and liabilities as set forth below:
While there can be no assurance that the Company will generate any earnings or any specific level of earnings in the future years, management believes it is more likely than not that the Company will be able to realize the benefit of the deferred tax assets existing at January 26, 2004 based on the Company's current and future pre-tax earnings.
A valuation allowance has been recognized for a state loss carryforward as cumulative losses create uncertainty about the realization of the tax benefits in future years. The Company has state net operating loss carryforwards of approximately $7,455,000 which expire in the years 2018 through 2023 at January 26, 2004.
NOTE 7-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.
At January 26, 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 Restaurants. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The JB's Restaurants segment includes the Company's eight JB's Restaurants.
The accounting policies of the reportable segments are the same as those described in Note 1. 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.
NOTE 8-STOCKHOLDERS' EQUITY
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and do not have cumulative voting rights. Subject to preferences that may be applicable to the holders of outstanding shares of Preferred Stock, if any, at the time, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock shall be entitled to assets of the Company remaining after payment of the Company's liabilities and the liquidation preference, if any, of any outstanding Preferred Stock. All outstanding shares of Common Stock, are fully paid and
nonassessable. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock, which the Company may designate and issue in the future.
Preferred Stock
The Board of Directors has the authority, without further vote or action by the stockholders, to provide for the issuance of up to 1,500,000 shares of Preferred Stock from time to time in one or more series with such designations, rights, preferences and privileges and limitations as the Board of Directors may determine, including the consideration received therefor. The Board of Directors also will have the authority to determine the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights without approval by the holders of Common Stock. Although it is not possible to state the effect that any issuance of Preferred Stock might have on the rights of holders of Common Stock, the issuance of Preferred Stock may have one or more of the following effects: (i) to restrict the payment of dividends on the Common Stock, (ii) to dilute the voting power and equity interests of holders of Common Stock, (iii) to prevent holders of Common Stock from participating in any distribution of the Company's assets upon liquidation until any liquidation preferences granted to holders of Preferred Stock are satisfied, or (iv) to require approval by the holders of Preferred Stock for certain matters such as amendments to the Company's Certificate of Incorporation or any reorganization, consolidation, merger or other similar transaction involving the Company. As a result, the issuance of Preferred Stock may, under certain circumstances, have the effect of delaying, discouraging or preventing bids for the Common Stock at a premium over the market price thereof, or a change in control of the Company, and could have a material adverse effect on the market price for the Common Stock.
Officer's Notes Receivable
In connection with the Company's employment contract with Mr. Robert E. Wheaton, the Company's Chief Executive Officer and President, the Company agreed to provide Mr. Wheaton loans solely for the purchase of the Company's common stock. The last loan advance to Mr. Wheaton was on June 22, 2001. The loans were secured by the stock at the prevailing interest rate set forth in the Company's credit facility with FleetBoston. The average rate for fiscal 2004 and 2003 was approximately 3.5%. There is no interest income accrued on this note in the financial statements. The loans totaled $1,330,000 as of January 26, 2004 and January 27, 2003.
Common Stock Repurchase
On December 7, 1999, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Common Stock to be effected in the open market, in private transactions or through alternative repurchase transactions approved by the Board of Directors. As of January 26, 2004, no shares have been repurchased under the December 7, 1999 authorization.
NOTE 9-EMPLOYEE BENEFIT PLANS
401(k) Plan
In May 1998, the Company established a 401(k) plan available to certain employees who have attained age 21, work 30 hours or more per week, and have met certain minimum service requirements. The plan allows participants to allocate up to 15% of their annual compensation before taxes for
investment in several investment alternatives. Employer contributions are at the discretion of the Company. The Company's contributions to the plan were approximately $8,000, $8,000, and $13,000 in administration costs for fiscal 2004, 2003 and 2002, respectively.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"), was adopted by the Board of Directors on January 15, 1998, covering 750,000 shares of Common Stock. The Purchase Plan is intended to provide participants with incentives to acquire a proprietary interest in, and continue to provide services to, the Company. The Company's contributions to the plan were approximately $0, $0 and $21,000 for fiscal 2004, 2003 and 2002, respectively.
Employees are eligible to participate if they (i) are employed on an hourly basis as a restaurant employee for at least 30 hours per week and if they have been employed by the Company since September 30, 1997 or for at least one year, (ii) are employed on an hourly basis as a non-restaurant employee for at least 30 hours per week and have been so employed continuously during the preceding 90 days or (iii) are exempt from the overtime and minimum wage requirements under federal and state laws and have been so employed by the Company continuously during the preceding 90 days. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which range from 3% to 10% of the employee's base earnings as defined in the Purchase Plan. The price of stock purchased under the Purchase Plan shall be at the then current market value. Each participant who remains an employee of the Company for at least one year after the end of a particular quarterly offering period shall receive, on the one-year anniversary date of the end of such offering period, a matching contribution from the Company to purchase stock totaling one-half of a participating Officer's or Director's contribution and one-third of other participant's contributions. Employees may withdraw from the Purchase Plan, effective at the end of a quarterly offering period, by delivering a notice to the Company no later than the 15th day prior to the end of such quarterly offering period, and participation ends automatically on termination of employment. The Board of Directors may at any time amend or terminate the Purchase Plan, and upon such termination, each participant is entitled to receive the funds in such participant's account which have not been used to purchase Common Stock but shall not be entitled to any future matching contribution. The Board of Directors terminated the plan in fiscal 2002. The Company returned all of the funds to the participants.
1997 Stock Incentive Plan
In fiscal year 1998, the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"), which grants options to purchase up to 750,000 shares of Common Stock. The 1997 Plan provides for "incentive stock options," within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and non-statutory options to directors, officers, employees and consultants of the Company, except that incentive stock options may not be granted to non-employee directors or consultants. The 1997 Plan provides participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The Board of Directors has sole discretion and authority, consistent with the provisions of the 1997 Plan, to determine which eligible participants will receive options, time when options will be granted, terms of options granted and number of shares which will be subject to options granted under the 1997 Plan.
A summary of the status of the Company's stock options is presented below (shares in thousands):
The exercise price of the options granted and exercisable at January 26, 2004 is $5.00 for 235,000 options and $12.00 for 496,000 options.
NOTE 10-SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NOTE 11-RELATED PARTY TRANSACTIONS
The Company entered into an agreement with a company whose former chief executive officer is a member of the Company's Board of Directors. Under the agreement, the Company operated three of the related party's restaurants as BuddyFreddys Country Buffet restaurants. Revenues and expenses of the restaurants are included in the Company's financial statements. The Company and the related party divide income and losses based on an agreed upon formula. The joint venture was terminated in the first quarter of fiscal 2001. Included in receivables is $323,000 for fiscal 2002 due from the related party as a result of the agreement and an allowance for that receivable of $323,000 for fiscal 2002. During
fiscal 2003, management removed the receivable and corresponding allowance for bad debt when the receivable was deemed uncollectible.
The Company purchased a 1995 Volvo from Mr. Wheaton, Chairman of the Board, Chief Executive Officer and President of the Company in fiscal 2003 for $11,000.
In connection with the Company's employment contract with Mr. Robert E. Wheaton, the Company's Chief Executive Officer and President, the Company agreed to provide Mr. Wheaton loans solely for the purchase of the Company's common stock. The last loan advance to Mr. Wheaton was on June 22, 2001. The loans were secured by the stock at the prevailing interest rate set forth in the Company's credit facility with FleetBoston. The average rate for fiscal 2004 and 2003 was approximately 3.5%. There is no interest income accrued on this note in the financial statements. The loans totaled $1,330,000 as of January 26, 2004 and January 27, 2003.
NOTE 12-COMMITMENTS AND CONTINGENCIES
The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any resolution will require payments that will have a material effect on the Company's consolidated statements of operations or financial position or liquidity.
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 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.
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 are payable 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.
NOTE 13-SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial results for the 52 weeks ended January 26, 2004, January 27, 2003, and January 28, 2002, are summarized below.
Amounts indicated may not foot due to quarterly rounding.
The fiscal 2004 figures include a significant fourth quarter adjustment for asset impairment charges of $342,000.
The fiscal 2003 figures include certain significant fourth quarter adjustments including asset impairment charges of $982,000 and income tax benefit of $334,000 relating to the impairment charges and an increase in the deferred tax asset valuation.
The fiscal 2002 figures include a significant fourth quarter adjustment for income tax credits resulting from the Company amending prior year tax returns for social security taxes on tips exceeding minimum wage.
NOTE 14-SUBSEQUENT EVENTS
On January 30, 2004, the Company purchased the real estate property of the HomeTown Buffet in Yuma, Arizona, for $1,650,000. The Company paid cash. Subsequently on February 25, 2004, the Company secured a $1,250,000, seven year mortgage note from M&I Marshall & Ilsley Bank on the property in Yuma, Arizona. Terms of the agreement include payments of $18,396 monthly for 84 months, maturing on February 25, 2011. The note is secured by a mortgage on the building and accrues interest at a fixed rate of 6.14%. There is a prepayment penalty associated with the note.
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 are payable on June 1, 2004 to shareholders of record on May 7, 2004.
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.
EXHIBIT INDEX
Exhibit
No.
Description
3.1
Certificate of Incorporation*
3.2
Bylaws, as amended on September 22, 1997*
4.1
Form of Common Stock Certificate**
10.1
Star Buffet, Inc. 1997 Stock Incentive Plan (the "1997 Plan")**
10.2
Form of Stock Option Agreement for the 1997 Plan**
10.3
Form of Indemnification Agreement**
10.4
Management Services Agreement with CKE Restaurants, Inc.**
10.5
Form of Franchise Agreement with HomeTown Buffet, Inc.**
10.6
Asset Purchase Agreement with North's Restaurants, Inc. dated July 24, 1997**
10.6.1
Amendment No. 1 to Asset Purchase Agreement dated as of September 30, 1997 (incorporated by reference to the Company's filing on Form 8-K on October 17, 1997)
10.6.2
Amended and Restated Credit Agreement dated as of September 30, 1997 between the Company and North's Restaurants, Inc. (incorporated by reference to the Company's filing on Form 8-K on October 17, 1997)
10.7
Form of Credit Agreement with Stacey's Buffet, Inc.*
10.8
Form of Contribution Agreement among CKE Restaurants, Inc., Summit Family Restaurants Inc. and the Company*
10.9
Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita Incorporated)*
10.11
Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and JB's Restaurants, Inc.*
10.12
License Agreement with CKE Restaurants, Inc. (incorporated by reference to the Company's filing on Form 10-K on April 24, 1998)
10.13
Settlement Agreement with HomeTown Buffet, Inc. (incorporated by reference to the Company's filing on Form 10-K on April 24, 1998)
10.14
Asset Purchase Agreement among Summit Family Restaurants Inc. and JB's Family Restaurants, Inc., dated February 10, 1998 (incorporated by reference to the Company's filing on Form 8-K on March 9, 1998)
10.15
Stock Repurchase Agreement between Star Buffet, Inc. and CKE Restaurants, Inc., dated September 10, 1998 (incorporated by reference to the Company's filing on Form 10-K on September 28, 1998)
10.16
Credit Agreement with FleetBoston Financial Corporation dated October 23, 1998 (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application for confidential treatment under Rule 24b-2 of the Exchange Act.) (incorporated by reference to the Company's filing on Form 10-Q on December 17, 1998)
10.17
Revolving Line of Credit with M&I Marshall & Ilsley Bank dated October 28, 2003 (incorporated by reference to the Company's filing on Form 10-Q on December 15, 2003)
14.1
Code of Ethics
16.1
Letter from Grant Thornton LLP (incorporated by reference to the Company's filing on Form 8-K on January 28, 2004)
21.1
List of Subsidiaries*
23.1
Consent of Mayer Hoffman McCann P.C.
23.2
Consent of Grant Thornton LLP
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act Of 2002
E-1
31.2
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act Of 2002
32.2
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
*Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 1 (Registration No. 333- 32249).
**Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 2 (Registration No. 333- 32249). E-2