Item 1. Business
Chapter 11 Reorganization
On September 28, 2011, Star Buffet, Inc. (the “Company” or “Star”) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”), in the proceeding titled In re: Star Buffet, Inc., Case No.2:11-bk-27518-GBN (the “Chapter 11 Case”). Star’s wholly owned subsidiary, Summit Family Restaurants Inc. (“Summit”), also filed a voluntary petition for reorganization under Chapter 11 on September 29, 2011 in the Bankruptcy Court, in the proceeding titled In re: Summit Family Restaurants Inc., Case No. 2:11-bk-27713-GBN. The cases for Star Buffet, Inc. and Summit Family Restaurants Inc. (collectively the “Debtors”) were consolidated and jointly administered. None of the Company’s other subsidiaries were included in the bankruptcy filings. The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Under the Bankruptcy Code, certain claims against the Debtors that were in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization. The balance of the unresolved claims are reflected in the January 27, 2014 balance sheet as “Liabilities subject to compromise.”
On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Company’s plan of reorganization (the “Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Plan as confirmed are attached as Exhibits 2.1 and 2.2, to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2012. The Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Plan were estimated to be in excess of $10 million. The Plan provided for these obligations to be discharged from operating income derived from the restaurants operated by its affiliates, an exit loan of $300,000 from Suzanne H. Wheaton, the wife of CEO Robert E. Wheaton, and proceeds from sale of certain restaurant properties.
Since filing for reorganization, the Debtors have sold fifteen properties, $5.8 million of the proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full, $1.9 million was used to pay the other secured creditors and $801,000 was used to pay unsecured creditors, pursuant to the Plan. As of January 26, 2015, the Company has reduced its liabilities subject to compromise to $800,000 and has made all payments required under the Plan. Resolution and payment of the remaining liabilities subject to compromise will result of payment in full of all of the Company’s creditors at the time of the bankruptcy filing and a complete discharge of the Company.
Overview
Star Buffet, Inc., a Delaware corporation (“Star” and collectively with its subsidiaries, the “Company”), is a multi-concept holding company. As of January 27, 2014, the Company, through eight independently capitalized subsidiaries operated five 4B’s restaurants, four JB’s restaurants, two Barnhill’s Buffet restaurants, two Pecos Diamond Steakhouses, two Western Sizzlin restaurants, one BuddyFreddys restaurant, one Casa Bonita Mexican theme restaurant and one Bar-H Steakhouse. The Company also had seven restaurants closed for remodeling and repositioning of which two were used as warehouses, four restaurants were leased to third-party operators and one used as an office. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Tennessee, Texas and Utah. The Company has an executive and accounting office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah. As a result of the significant developments identified below, the Company’s holdings have changed significantly. The Company was incorporated on July 28, 1997 in Delaware.
Recent Developments
As a result of the continued weakness in the U.S. economy, the Company’s comparable restaurant sales declined in the fiscal year ended January 27, 2014. The Company continues to evaluate the local geographic markets in which it operates and individual restaurant units for trends and changes in operating metrics. Over the past four fiscal years, the Company has closed 34 restaurants that have experienced deteriorating operating results and for which our management has assessed a low probability of near term prospects of reversing such trends. The Company may rebrand restaurants where management believes that the local market remains desirable but that the existing brand is not performing well. There may be further restaurant unit closures in the future as our management continues to evaluate operating results. However, our management believes that it has closed and incurred impairment charges on the substantial number of restaurant units that have exhibited poor operating results. The Company continues to explore the expansion of its non-buffet brands as those recently have generally performed better. As a result of the store closings, the Company will experience significantly lower revenue levels than those in the recent past. Our management believes the Company will generate sufficient cash flows from operations at these lower revenue levels to support its operations and, together with the proceeds from the sale of certain of its properties, to pay its scheduled debt repayments.
On March 20, 2014, the Company sold the 4B’s Restaurant in Great Falls, Montana. Net proceeds of $157,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On March 28, 2014 the Company sold the property in South Daytona, Florida for net proceeds of $916,000 with all of the sales proceeds paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On April 28, 2014, the Company sold the Pecos Diamond Steakhouse in Artesia, New Mexico. Net proceeds of $367,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On July 14, 2014, the Company sold the former BuddyFreddys Restaurant in Kissimmee, Florida. Net proceeds of $449,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On August 4, 2014, the Company sold the JB’s Restaurant in Rexburg, Idaho. Net proceeds of $307,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On August 5, 2014 the Company closed the Barnhill’s Restaurant in Jackson, Tennessee. The Company accrued for all anticipated lease termination expenses.
On August 8, 2014, the Company sold the former BuddyFreddys Restaurant in Ocala, Florida. Net proceeds of $279,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On October 14, 2014, the Company sold the former Hometown Buffet building in Scottsdale, Arizona using seller financing of $1,550,000. The Company collected the mortgage in April 2015.
On October 31, 2014, the Company sold the JB’s Restaurant in Great Falls, Montana. Net proceeds of $232,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On November 1, 2014 the Company opened a 4B’s Restaurant in Dillon, Montana.
On November 19, 2014, the Company sold the JB’s Restaurant in Vernal, Utah. Net proceeds of $203,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On March 2, 2015, the Company sold the former Whistle Junction Restaurant in Titusville, Florida. Net proceeds of $1,044,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On April 24, 2015, the Company sold the BuddyFreddys Restaurant in Plant City, Florida. Net proceeds of $669,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On June 1, 2015 the Company opened a JB’s Restaurant in Evanston, Wyoming.
On June 15, 2015 the Company opened a 4 Aces in Lewistown, Montana.
On August 1, 2015 the Company opened a JB’s Restaurant in Kingman, Arizona.
On November 18, 2015 the Company opened the Original 4B’s Café in Deer Lodge, Montana.
On April 18, 2016 the Company purchased property in Missoula, Montana. The Company intends to open a 4B’s restaurant.
On May 3, 2016 the Company opened a Whistle Junction restaurant in Keystone, South Dakota.
On May 16, 2016 the Company opened a Finnegan’s Restaurant in Kalispell, Montana.
On June 1, 2016 the Company leased property in Billings, Montana. The Company intends to open a 4B’s restaurant.
Business Strategy
The Company’s business strategy is to operate a broadly diversified portfolio of well-established, family-oriented restaurants throughout the southeastern and western United States. The Company believes that a broad, diversified business base combined with a low field and corporate overhead cost structure will result in consistently positive cash flows.
Segment and Related Reporting
All of the brands the Company operates are in the U.S. within the full-service dining industry and provide similar products to similar customers and therefore, are considered to be one segment for reporting purposes. The brands also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. Sales to external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales. We believe we meet the criteria for aggregating our operating segments into a single reporting segment.
Growth Strategy
The Company has indicated that it plans moderate growth based primarily through acquisitions or re-opening existing closed stores. The Company supplements its program of acquisitions with the purchase of restaurant properties that can be converted to the Company’s existing brands and minority investments in, or strategic alliances with, other restaurant chains.
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Acquisitions. The Company believes that a number of acquisition opportunities exist in restaurant segments that include buffets, cafeterias, family dining and steakhouses. The Company believes that many restaurants in these segments are privately owned and may be available for acquisition particularly when the owners decide to retire. Other restaurants may become available for purchase when corporate owners decide to convert from a company store to a franchisor business model or when a company is faced with a financial reorganization.
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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 national casual dining and steakhouse chains which offer superior product quality and service at competitive prices. Many of these restaurants and steakhouses occupy desirable locations that the Company believes can be acquired and converted to one of its concepts at lower prices or leased at lower rates when compared to the cost of new construction.
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Minority Investments and Strategic Alliances. The Company intends to seek minority investments in, or strategic alliances with, other restaurant chains. The Company believes that these investments can provide an attractive opportunity for the Company and may facilitate the acquisition of restaurants at a later date.
Restaurant Concepts
As of January 27, 2014, the Company operated five 4B’s restaurants, four JB’s restaurants, two Barnhill’s Buffet restaurants, two Pecos Diamond Steakhouses, two Western Sizzlin restaurants, one BuddyFreddys restaurant, one Casa Bonita Mexican theme restaurant and one Bar-H Steakhouse. The Company also had seven restaurants closed for remodeling and repositioning of which two were used as warehouses, four restaurants were leased to third-party operators and one used as an office.
The Company, through its wholly-owned Barn Restaurants, Inc. (“Barn Rest”) subsidiary operated as of January 27, 2014 two Barnhill’s Buffets with a perpetual right to utilize the Barnhill’s name and related intellectual property. The restaurants are located in, Arkansas and Tennessee. The restaurants are approximately 10,000 square feet and seat approximately 375 customers.
The Company, through its wholly-owned 4B’s Holdings, Inc., (“4B’s”) subsidiary operated as of January 27, 2014 five 4B’S restaurants located in Montana. The 4B’s restaurants are approximately 4,000 to 5,500 square feet in size and seat approximately 110 to 175 customers. The Company closed one 4B’s restaurant in fiscal 2014.
The Company, through its wholly-owned JB’s Star Holdings, Inc., (“JB’s Star”) subsidiary, operated as of January 27, 2014 four JB’s restaurants in Idaho (2), Montana (1), and Utah (1). The JB’s restaurants are approximately 4,000 to 5,500 square feet in size and seat approximately 110 to 175 customers. The Company closed one JB’s in Montana in fiscal 2014.
The Company, through its wholly-owned StarTexas Restaurants, Inc., (“StarTexas”) subsidiary, operated as of January 27, 2014 one Pecos Diamond Steakhouse in Dumas, Texas and one in Artesia, New Mexico and a Bar-H Steakhouse in Dalhart, Texas. The Pecos Diamond Steakhouse and Bar-H Steakhouse are approximately 5,000 square feet with seating capacity for 150 customers.
The Company, through its wholly-owned Casa Bonita Denver, Inc., (“Casa Denver”) subsidiary, operated as of January 27, 2014 a Casa Bonita restaurant located in Colorado. The Casa Bonita facility is approximately 52,000 square feet with seating capacity for approximately 1,400 customers.
The Company also operated as of January 27, 2014 of one restaurant in Florida under the brand name BuddyFreddys. The BuddyFreddys is approximately 9,000 square feet and seats approximately 300 customers. In addition the Company has one Western Sizzlin restaurant located in Arkansas and one in Mississippi. These restaurants range from 5,000 to 7,000 square feet and seat approximately 150 to 250 customers.
Licenses, Trademarks and Service marks
The Company owns the trademarks and service marks for BuddyFreddys, Casa Bonita, Holiday House, Pecos Diamond Steakhouse, Bar-H Steakhouse, 4B’S Restaurants and Whistle Junction. The Company has agreements with North’s Restaurants, Inc. and Barnhill’s Buffets, Inc. for a perpetual, royalty-free, fully transferable license to use the intangible property of JJ North’s Country Buffet and Barnhill’s Buffet, respectively. The Company has a license agreement to use the JB’s trademark.
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. The number of restaurants with operations similar to those of the Company has grown considerably in recent years. As the Company and its principal competitors expand operations in various geographic areas, competition can be expected to increase.
Seasonality
The Company's business is moderately seasonal in nature. For the majority of the Company’s restaurants, the highest volume periods are in the first and second fiscal quarters.
Employees
As of August 8, 2016 the Company employed approximately 862 persons, of whom approximately 857 were restaurant employees. Restaurant employees include salaried management and 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. Robert E. Wheaton has been Chairman of the Board since September 1998. Mr. Robert E. 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. Robert E. 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. Robert E. 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.
Todd S. Brown has served as a director of the Company since June 2004. Mr. Brown has served Brown Capital Advisors, Inc. as the President since November 1999. From 1994 to November 1999, Mr. Brown served as Senior Vice President, Chief Financial Officer and Director of Phoenix Restaurant Group, Inc. (formerly DenAmerica Corp.). Mr. Brown served as Senior Manager in Audit and Consulting at Deloitte Touche LLP from 1980 to 1994. Mr. Brown received an MBA from the University of Missouri in 1980 and a BA from Southern Methodist University in 1978.
Craig B. Wheaton has served as a director of the Company since February 1999. Mr. Wheaton is a partner in the law firm Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, and L.L.P. 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.
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 served as director of Republic Bancorp from June 1999 until April 2005.
The audit committee is comprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., of which Todd S. Brown is the audit committee financial expert and chairman. All three members of the audit committee are “independent” as determined in accordance with Rule 5605(a)(2) of the NASDAQ Listing Standards.
Item 1A.
Item 1A. Risk Factors
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. As the Company and its principal competitors expand operations in various geographic areas, competition 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 the Company’s 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 non-economic 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. The Company’s business could be adversely affected by terrorist attacks directed toward the food supply chain or public concerns about the safety of the food supply chain. 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 utility and transportation costs, increases in the number and locations of competing 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 restaurant industry is subject to substantial government regulation.
The restaurant industry is subject to extensive federal, state, local and international laws and regulations. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to building, zoning, land use, environmental, traffic and other regulations and requirements. We are subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and the sale of alcoholic beverages. We are subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. We are subject to federal and state laws governing minimum wages, unionization and other labor issues. These include the Fair Labor Standards Act of 1938 and requirements concerning overtime, paid or family leave, tip credits, working conditions and safety standards. They also include the Immigration Reform and Control Act of 1986, which requires among other things the preparation of Form I-9 to verify that employees are authorized to accept employment in the United States. We are also reviewing the potential impacts of new laws associated with health care passed by various state and local governments.
We also are subject to federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the ADA. Compliance with these laws and regulations can be costly and increase our exposure to litigation and governmental proceedings, and a failure or perceived failure to comply with these laws could result in negative publicity that could harm our reputation. New or changing laws and regulations relating to union organizing rights and activities may impact our operations at the restaurant level and increase our labor costs.
We are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. There also has been increasing focus by United States governmental authorities on other environmental matters, such as climate change, the reduction of greenhouse gases and water consumption. This increased focus may lead to new initiatives directed at regulating a yet to be specified array of environmental matters, such as the emission of greenhouse gases, where “cap and trade” initiatives could effectively impose a tax on carbon emissions. Legislative, regulatory or other efforts to combat climate change or other environmental concerns could result in future increases in the cost of raw materials, taxes, transportation and utilities, which could decrease our operating profits and necessitate future investments in facilities and equipment.
We are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including social security numbers, financial information (including credit card numbers), and health information. Compliance with these laws and regulations can be costly, and any failure or perceived failure to comply with those laws or any breach of our systems could harm our reputation or lead to litigation, which could adversely affect our financial condition.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or an insufficient or ineffective response to significant regulatory or public policy issues, could increase our cost structure, operational efficiencies and talent availability, and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
There has been a marked increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information's accuracy.
Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
Securities Risk Factors
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 discourage 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 un-issued 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 prohibits 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. The volume of trading in the market for the Company's common stock is limited, which may make it difficult to liquidate an investment and can increase price volatility. Due to changes in the balance of buy and sell orders and other factors, the price of the Company's common stock can change for reasons unrelated to the performance of the business of the Company. 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’s analyst recommendations regarding the Company, the success or perceived success of competitors of the Company, as well as changes in general economic or market conditions and changes in the restaurant industry may also have a significant adverse affect 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 August 8, 2016, 3,213,075 shares of common stock were outstanding. 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 45.3% of our total equity securities and possesses approximately 45.3% of the total voting power. Thus Mr. Robert E. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of our directors. The control that Mr. Robert E. Wheaton has over Company matters may affect the willingness of certain investors to invest in the Company.
Item 2.
Item 2. Properties
The Company’s operating restaurants are primarily freestanding locations. As of January 27, 2014, nine of 25 of the Company’s restaurant facilities were leased. The leases expire on dates ranging from 2014 to 2038. The majority of the leases contain renewal options. All leases provide for specified periodic rental payments and many call for additional rent based upon revenue volume. Most leases provide for periodic rent increases and require the Company to maintain the property, carry property and general liability insurance and pay associated taxes and expenses. The Company has an executive and accounting office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah.
The following is a summary of the Company's restaurant properties as of January 27, 2014:
As of January 27, 2014, the Company’s restaurants are located in the following states:
As of January 27, 2014, the Company’s non-operating restaurants are located in the following states:
One of the seven non-operating restaurants was used as an office, four non-operating restaurants have been leased to a third-party operators and two non-operating restaurants were used as warehouses.
Item 3.
Item 3. Legal Proceedings
Prior to the Company’s bankruptcy filings, on August 4, 2010, Spirit Master Funding, LLC (‘Spirit”) , a landlord of a Company subsidiary, filed case number CV-2010-022169 in the Superior Court of the State of Arizona for the failure of the subsidiary to pay $3.7 million in rent and accelerated rent for four restaurants leased to the subsidiary. During the bankruptcy, Spirit filed a proof of claim as an unsecured creditor for approximately $1.5 million. The Company believes they owe Spirit less than their claim amount and has filed an objection to this claim with the bankruptcy court. The objection calculates the claim at approximately $500,000 or less. The outcome of this matter is still pending.
The Company is from time to time the subject of litigation regarding landlord disputes. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are adequately reserved 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.
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. Mine Safety Disclosures
There are no reportable events required pursuant to this item.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders. The Company’s Common Stock is quoted on the OTC Pink Sheets under the symbol “STRZ”. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of August 8, 2016, there were less than 300 holders of record. The following table sets forth the range of high and low bid information for the Common Stock for the fiscal years 2014 and 2013.
Dividends. The Reorganization does not allow payment of dividends until all creditors are paid in full.
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 27, 2014 is $6.70 for 22,000 options.
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.
This discussion and analysis may contain “forward-looking statements”. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements about the Company’s market opportunities, strategies, competition, and expected activities and expenditures and at times may be identified by the use of words such as “may,” “could,” “should,” “would,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue,” “seek,” “estimate,” “future,” “likely” and variations of these words or comparable words. Forward-looking statements inherently involve risks and uncertainties, including, but not limited to, uncertainties regarding our ability to comply with our remaining obligations under the Plan, our ability to maintain costs, the timing and receipt of revenues, future acquisitions and expansions of restaurants, the future success of our existing restaurants, our ability to raise additional financing to sustain our operations, and other risks described below as well as elsewhere in this Form 10-K, documents incorporated by reference and other documents and reports that we file periodically with the Securities and Exchange Commission. Accordingly, actual results may differ, and may differ materially, from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks described under “Risk Factors” in Item 1A. The Company undertakes no obligation to update any forward-looking statements for revisions or changes after the filing date of this Form 10-K.
Executive Summary
As noted above, the Chapter 11 Reorganization was filed on September 28 and September 29, 2011; the Plan was confirmed on December 17, 2012 and became effective on January 17, 2013. The Company’s payment obligations under the Plan are estimated to be in excess of $10.0 million. The Company intends to discharge all Plan obligations from operating income derived from the restaurants operated by the Company’s subsidiaries, an exit loan from Suzanne H. Wheaton, wife of CEO Robert E. Wheaton, and proceeds from liquidation of restaurant properties. Since filing for reorganization, the Debtors have sold fifteen properties, $5.8 million of the proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full, $1.9 million was used to pay the other secured creditors and $801,000 was used to pay unsecured creditors, pursuant to the Plan. As of January 26, 2015, the Company has reduced its Liabilities subject to compromise to $800,000 and has made all payments required under the Plan. Resolution and payment of the remaining Liabilities subject to compromise will result of payment in full of all of the Company’s creditors at the time of the bankruptcy filing and a complete discharge of the Company.
Operations
The operating results for the 52-week period ended January 27, 2014 and for the 52-week period ended January 28, 2013 are as follows:
The operating results for the 52-week period ended January 27, 2014 included 52 weeks of operations for the Company’s five 4B’s restaurants, four JB’s restaurants, two Barnhill’s Buffet restaurants, two Pecos Diamond Steakhouses, two Western Sizzlin restaurants, one BuddyFreddys restaurant, one Casa Bonita Mexican theme restaurant, and one Bar-H Steakhouse. The results also included the following restaurants that were closed at some point during the year, one JB’s restaurant for 34 weeks, one Barnhill’s Buffet restaurant for 25 weeks, one JB’s restaurant for 49 weeks and one for 40 weeks and one JJ North’s restaurant for 21 weeks and one for 17 weeks. The results also included three K-BOB’S Steakhouses for 13 weeks and one Big Rock Cafe for 15 weeks during the summer of fiscal 2014. The Company also had seven restaurants closed for remodeling and repositioning of which two were used as warehouses, four restaurants were leased to third-party operators and one used as an office.
The operating results for the 52-week period ended January 28, 2013 included 52 weeks of operations for the Company’s seven 4B’s restaurants, five JB’s restaurants, three Barnhill’s Buffet restaurants, two K-BOB’S Steakhouses, two franchised HomeTown Buffet restaurants converted in JJ North’s Country Buffets in the fourth quarter of fiscal 2013, one BuddyFreddys restaurant, one Casa Bonita Mexican theme restaurant, one Pecos Diamond Steakhouse for the full year and one that was converted in the fourth quarter of fiscal 2013, one Bar-H Steakhouse and one Western Sizzlin restaurant. The results also included the following restaurants that were closed at some point during the year, one JB’s restaurant for 28 weeks and one for 13 weeks, one Holiday House restaurant for 20 weeks, one Barnhill’s Buffet for 17 weeks, one JJ North’s restaurant for 19 weeks and one Whistle Junction restaurant for 24 weeks. The results also included one K-BOB’S Steakhouse for 49 weeks and one Western Sizzlin restaurant for 14 weeks that were opened during fiscal 2013. The Company also had eight restaurants closed for remodeling and repositioning of which two were used as warehouses and five restaurants were leased to third-party operators.
The consolidated net loss of $(1,244,000) of (0.39) per diluted share for fiscal 2014 was approximately $1.7 million less than the net loss of $(2,948,000) or $(0.92) per diluted share for the prior year. The decrease in the net loss is due primarily to $719,000 decrease in impairment expense, $551,000 decrease in goodwill impairment expense and $664,000 decrease in bankruptcy fees. Total revenues decreased approximately $7.2 million or 20.7% from $35.0 million in fiscal 2013 to $27.8 million in fiscal 2014. The decrease in revenues was primarily attributable to nine store closings during the year and six stores closed in the prior year resulting in a decrease of approximately $6.4 million and declines in comparable same store sales of approximately $1.0 million or 4.2%, partially offset by two new store openings resulting $200,000 in sales. The Company believes the decline in same store sales is a result of weaker economic conditions and new restaurant competition in certain markets. The decline in sales on a same store basis significantly impacts consolidated net income because occupancy, salaries, benefits, and other expenses are primarily fixed in nature and generally do not vary significantly with restaurant sales volume, especially in the near term. It is sometimes possible to lower occupancy, salaries and other expenses if given a longer period of time to adjust. For example, rent may be negotiated lower and the restaurant staff may be reduced if the decline in sales is more permanent. Occupancy and other expense include major expenditures such as rent, insurance, property taxes, utilities, maintenance and advertising.
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 27, 2014 (“fiscal 2014”), and for the fifty-two weeks ended January 28, 2013 (“fiscal 2013”).
Comparison of Fiscal 2014 to Fiscal 2013
Total revenues decreased approximately $7.2 million or 20.7% from $35.0 million in fiscal 2013 to $27.8 million in fiscal 2014. The decrease in revenues was primarily attributable to nine store closings during the year and six stores closed in the prior year resulting in a decrease of approximately $6.4 million and declines in comparable same store sales of approximately $1.0 million or 4.2%, partially offset by two new openings resulting $200,000 in sales.
Food costs as a percentage of total revenues decrease from 38.1% during in fiscal 2013 to 36.7% in fiscal 2014. Food costs decreased by approximately $3.2 million in fiscal 2014 primarily due to the closure of nine stores in the current year. The decrease in percentage for the fiscal year ending January 27, 2014 was primarily attributable to an increase in the percentage of our total revenues recognized from the Casa Bonita restaurant. The Casa Bonita restaurant has traditionally had a lower food costs as a percentage of revenues than the other restaurants.
Labor costs as a percentage of total revenues increased from 35.5% during fiscal 2013 to 36.4% in fiscal 2014. Labor costs decreased by approximately $2.3 million in fiscal 2014 primarily due to the closure of nine stores in the current year. The labor cost as a percentage of total revenues increased primarily due to higher minimum wages and lower same store sales.
Occupancy and other expenses as a percent of total revenues decreased from 17.4% in fiscal 2013 to 17.0% in fiscal 2014. Occupancy and other expenses decreased in fiscal 2014 by approximately $1.4 million primarily due to the closure of nine stores in the current year.
General and administrative expenses as a percentage of total revenues decreased from 4.5% in fiscal 2013 to 4.3% in fiscal 2014. The decrease as a percentage of revenue was primarily attributable to lower bankruptcy expense and lower revenue in fiscal 2014.
Depreciation and amortization expense decreased from $1,209,000 in fiscal 2013 to $1,020,000 in fiscal 2014. The decrease was primarily attributable to fewer stores in the current year coupled with less depreciation resulting from the impairment charges taken by the Company on its underperforming assets.
Goodwill expense decreased from 1.6% in fiscal 2013 to 0.0% in fiscal 2014. On August 31, 2012, the Company recorded $551,000 of impairments relating to the expiration of our JB’s license agreement. The triggering event required the write-off of goodwill on three JB’s restaurants. Goodwill expense charged to operations was $0 and $551,000 for the years ended January 27, 2014 and January 28, 2013, respectively.
Impairment expense decreased from 4.7% in fiscal 2013 to 3.4% in fiscal 2014. The impairment expense in fiscal 2014 and 2013 relates to stores where the carrying amount of the assets exceeded the estimated fair values of the related property and equipment. In addition to the above, the Company also had impairment expense of franchise and license $230,000 in the prior year with none in the current year. Total impairment expense related to property, building, equipment and franchise, license and other charged to operations was $942,000 and $1,661,000 for the years ended January 27, 2014 and January 28, 2013, respectively is as follows:
Interest expense as a percent of total revenues increased from 1.6% in fiscal 2013 to 3.8% in fiscal 2014 primarily as the result of higher interest charges during the Company’s post-bankruptcy on unsecured bankruptcy claims. Actual interest expense increased from $579,000 in fiscal 2013 to $1,049,000 in fiscal 2014.
Reorganization items expense decreased from (2.0%) in fiscal 2013 to (0.1%) in fiscal 2014. Star and Summit both filed for bankruptcy in September 2011. For the year ended January 27, 2014, the Company incurred professional fees and other bankruptcy costs related to the bankruptcy of $39,000. For the year ended January 28, 2013, the Company incurred professional fees and other bankruptcy cost related to the bankruptcy of $703,000.
The income tax provision totaled $19,000 or 0.1% of pre-tax income in fiscal 2014 as compared to $33,000 or 0.1 % of pre-tax income in fiscal 2013. The Company has deferred income tax assets of $0 on January 27, 2014 and January 28, 2013, respectively. Income taxes for fiscal 2014 and fiscal 2013 are:
Liquidity and Capital Resources
In recent years, the Company has financed operations through a combination of cash on hand, cash provided from operations and loans from our principal shareholder.
As of January 27, 2014, the Company had $285,000 in cash. Cash and cash equivalents increased by $42,000 during the fiscal year ended January 27, 2014. The net working capital deficit was $8.1 million and $7.0 million at January 27, 2014 and January 28, 2013, respectively. The Company generates cash flow daily from sales in its restaurants and manages its cash balances to meet its current operating obligations. The Company spent approximately $389,000 on capital expenditures in fiscal 2014. In fiscal 2014 the Company sold three properties netting approximately $3.1 million in proceeds all which was used to pay Wells Fargo and Bank of Utah.
Cash provided by operations was $653,000 for fiscal 2014 and $454,000 for fiscal 2013.
Cash used by financing activities was approximately $3.3 million. The Company made net debt payments of approximately $4.0 million and had loan costs of $10,000. The Company had loan proceeds of approximately $518,000.
The following table is a summary of the Company’s outstanding debt obligations.
The Company previously had a Credit Facility with Wells Fargo Bank, N.A. The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit. The Credit Facility was utilized to retire the Company’s unsecured revolving line of credit with M&I Marshall & Ilsley Bank; to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to provide additional working capital. On February 29, 2008 the Company amended its Credit Facility with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was used to fund the acquisition of four Barnhill’s Buffet restaurants by its newly formed, wholly-owned, subsidiary, Starlite Holdings, Inc. On December 1, 2009 the Company amended its Credit Facility, increasing the revolving line of credit from $2,000,000 to $2,500,000 to complete the purchase of the land and building of its Whistle Junction restaurant in South Daytona, Florida. The Credit Facility was guaranteed by Star Buffet’s subsidiaries and bore interest at Wells Fargo’s base rate plus 0.75%. The Credit Facility was secured by a first priority lien on all of the Company’s assets, except for those assets that were previously pledged as security for existing obligations, in which case Wells Fargo had a second lien. On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Confirmation Order required the Company to pay the Wells Fargo Secured Claim. The Credit Facility was to be paid in full according to the following schedule: (i) on the effective date of the Confirmation Order (the “Effective Date”), Wells Fargo was paid the principal amount of $327,000, plus all accrued but unpaid interest, calculated at the non-default interest rate specified in the Wells Fargo Credit Agreement; (ii) beginning on the first day of the second full calendar quarter following the Effective Date, and on the first day of each calendar quarter thereafter, Wells Fargo was to be paid the principal amount of $328,000; and (iii) beginning on the first day of the second full calendar month following the Effective Date, and on the first day of each month thereafter, Wells Fargo was to be paid all accrued but unpaid interest, calculated at the non-default interest rate specified in the Wells Fargo Credit Agreement. The foregoing payments continued until the Credit Facility was paid in full in July 2014.
During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. This loan dated June 15, 2007 was subordinated to the obligation to Wells Fargo Bank, N.A. which was subsequently paid in full. The loan originally bore interest at 8.5%. In June 2008, the Company borrowed an additional $592,000 from Mr. Robert E. Wheaton under the same terms. This resulted in an increase in the note balance from $1,400,000 to $1,992,000, the balance as of January 27, 2014 and January 28, 2013. The Company expensed $77,000 and $0 to Mr. Robert E. Wheaton for interest during fiscal 2014 and fiscal 2013, respectively. The principal balance and any unpaid interest was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of the Company’s bankruptcy filing and pursuant to the approved Plan of Reorganization is not eligible to be repaid until all obligations owed to other creditors have been fully satisfied. Interest accrued on the principal amount of $1,991,936 and the interest of $196,957 from September 28, 2011 to January 16, 2013 at the bankruptcy plan rate. Interest will accrue on the principal amount of $1,991,936 and the interest of $196,957 from the January 17, 2013 until paid at the rate of 3.25%. The interest rate of 3.25% will increase 1% each year in January until paid per the Plan of Reorganization. Quarterly interest-only payments on the principal portion will commence when the principal amount owing on the Wells Fargo Loan has been reduced to $1.5 million and continue until paid, provided that Debtors are current on all payments required by the Plan. If Debtors are not current on all payments required by the Plan, the quarterly interest-only payments will not begin until Company bring such payments current. The Wells Fargo Loan has been paid in full and the Debtors are current all payments required by the Plan. The Company used the funds borrowed from Mr. Robert E. Wheaton for working capital requirements.
The Company filed Chapter 11 Reorganization on September 28 and September 29, 2011; the Plan was confirmed on December 17, 2012; and became effective on January 17, 2013. The Company’s payment obligations under the Plan are estimated to be in excess of $10.0 million. The Company intends to discharge all Plan obligations from income derived from the restaurants operated by the Company’s subsidiaries, an exit loan from Suzanne H. Wheaton, wife of CEO Robert E. Wheaton, and proceeds from sale of restaurant properties. Since filing for reorganization, the Debtors have sold fifteen properties, $5.8 million of the proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full, $1.9 million was used to pay the other secured creditors and $801,000 was used to pay unsecured creditors, pursuant to the Plan. As of January 26, 2015, the Company has reduced its liabilities subject to compromise to $800,000 and has made all payments required under the Plan. Resolution and payment of the remaining liabilities subject to compromise will result of payment in full of all of the Company’s creditors at the time of the bankruptcy filing and a complete discharge of the Company.
Off-Balance Sheet Arrangements
As of January 27, 2014, 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 commitments and contractual obligations 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 6 to the consolidated financial statements for additional information.
(2) Long-term debt includes note payable to officer.
(3) See Note 7 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 certain increased costs due to these inflationary factors along to its customers because those factors have impacted nearly all restaurant companies.
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 to the audited consolidated financial statements for the year ended January 27, 2014, included in this report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or may be subject to variations and may significantly affect the Company’s reported results and financial position for the current period or future periods. Changes in the 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 since the judgments effect a significant portion of the financial statements.
Receivables
Receivables are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts. Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances. A receivable is written off when it is determined that all collection efforts have been exhausted. The Company did not have a valuation allowance as of January 27, 2014 and January 28, 2013.
Notes Receivable
Notes receivable are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts. Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances. A note receivable is written off when it is determined that all collection efforts have been exhausted. Currently, the Company has one loan receivable outstanding and the loan is in default. The Company has provided a full reserve of $489,000 for the North’s Restaurant, Inc. note receivable based on a decline in value of the note’s collateral. The Company also had a note receivable of $215,000 forgiven as part of the April 4, 2013 settlement with the Tinsley group, this receivable had been fully reserved in fiscal 2013.
Income Taxes
Our current provision for income taxes is based on our estimated taxable income in each of the jurisdictions in which we operate, after considering the impact on our taxable income of temporary differences resulting from disparate treatment of items, such as depreciation, estimated liability for closed restaurants, estimated liabilities for self-insurance, tax credits and net operating losses (“NOL”) for tax and financial reporting purposes. Deferred income taxes are provided for the estimated future income tax effect of temporary differences between the financial and tax bases of assets and liabilities using the asset and liability method. Deferred tax assets are also provided for NOL and income tax credit carryforwards. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change. Currently, because there can be no assurance that the Company will generate any specific level of earnings in the future years to realize the benefit of the deferred tax assets existing as of January 27, 2014 and January 28, 2013 the Company has a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 requires recognition in the consolidated financial statements of the impact of an uncertain tax position, if it is more likely than not the tax position will be sustained upon examination based on the technical merits of the position. The Company does not have any uncertain tax positions that require recognition under ASC 740 as of January 27, 2014 and January 28, 2013. The continuing practice of the Company is to recognize interest and penalties related to income tax matters in the provision for income taxes.
Property, Buildings and Equipment
Property, building and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives:
Building and 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 as reasonably likely to be exercised. If a previously scheduled lease option is not exercised, any remaining unamortized leasehold improvements may be required to be expensed immediately, which could result in a significant charge to operating results in that period.
Property and equipment in non-operating units held for remodeling or repositioning is depreciated and is recorded on the balance sheet as property, building and equipment held for future use. Property and equipment placed on the market for sale is not depreciated and is recorded on the balance sheet as property held for sale and recorded at the lower of cost or market. Repairs and maintenance are charged to operations as incurred. Major equipment refurbishments and 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 than 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 primarily represents the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350. ASC 350 requires goodwill to be tested for impairment at the reporting unit level, or one level below a reporting segment. The Company considers each asset group to be a reporting unit and therefore reviews goodwill for possible impairment by restaurant.
The Company utilizes a two-part impairment test. First, the fair value of the reporting unit is compared to carrying value (including goodwill). If the carrying value is greater than the fair value, the second step is performed. In the second step, the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill. If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, and governmental and environmental factors in establishing the assumptions used to compute the fair value of each reporting unit. We also take into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts and data pertinent to valuing the reporting units in our impairment test.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment”. The Company assesses whether an impairment write-down is necessary 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 asset is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any impairment is recognized as a charge to earnings, which would adversely affect operating results in the affected period.
Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted net 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 net cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge and could adversely affect operating results in any period.
Insurance Programs
Historically, the Company has purchased first dollar insurance for workers’ compensation claims; high-deductible primary property coverage; and excess policies for casualty losses. Accruals for self-insured casualty losses include estimates of expected claims payments. Because of large, self-insured retention levels, actual liabilities could be materially different from calculated accruals.
Other Long-Term Liabilities
The Company has installments agreements with the Internal Revenue Service for past due taxes. The long-term portion is $1,662,000 and $2,144,000 for January 27, 2014 and January 28, 2013, respectively.
Application of New Accounting Standards
During 2014, the FASB issued Accounting Standards Update 2014-09 and 2015-14, Revenue from Contract with Customers (Topic 606), respectively, which revises previous revenue recognition standards to improve guidance on revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides additional disclosure requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
Item 8.
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements included at "Item 15. Exhibits and Financial Statement Schedules"
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Principal Accounting Officer, of the effectiveness and the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Principal Accounting Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. The filing of this Annual Report on Form 10-K for the year ended January 27, 2014 (“the fiscal 2014”) has been delayed primarily as a result of the voluntary filing for reorganization under Chapter 11 of the United Bankruptcy Code as described below under the heading “Chapter 11 Reorganization” and the Company’s lack of resources to address the regulatory requirements.
Management's Report on Internal Control over Financial Reporting
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and Notes to the consolidated financial statements. The financial statements were prepared in accordance with the accounting principles generally accepted in the U.S. and include certain amounts based on management’s judgment and best estimates. Other financial information presented is consistent with the financial statements.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed under the supervision of the Company’s principal executive and accounting officers in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;
(ii)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our principal executive officer and principal accounting officer assessed the effectiveness of the Company’s internal control over financial reporting as of January 27, 2014. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our principal executive officer and principal accounting officers have concluded that the internal control over financial reporting was not effective as of January 27, 2014 and that two material weaknesses and one significant deficiency existed for the periods covered. The material weaknesses and significant deficiency identified included:
●
Untimely account reconciliations (material weakness).
●
Record retention (material weakness).
●
Segregation of duties (significant deficiency).
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control Over Financial Reporting
We have undertaken certain measures to remediate the material weakness involving untimely account reconciliations and inadequate record retention that are discussed above.
We have been working to ensure that account reconciliations are completed earlier in the accounting cycle. The Company has dedicated staff to prepare account reconciliations prior to each quarter end. This measure is being implemented during fiscal year 2016, and is expected to materially affect, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company is also going to seek to eliminate its material weakness with regard to record retention by implementing a decentralized document management system to alleviate some of the challenges of retaining and locating paper documents. Given that the Company is decentralized with each of its restaurant locations generating source documents that are core to our accounting function, management believes that having the accounting documents stored at each restaurant location will provide the Company with better ability to properly manage, account, and provide appropriate support for its business activities.
The Company is a small public company. Effective internal control contemplates segregation of duties so that no one individual handles a transaction from inception to completion. Currently, there are not enough accounting personnel to permit an adequate segregation of duties in all respects and thus a significant deficiency in our internal control exists. The Company is developing more controls to mitigate segregation of duties issues. Management continues an evaluation of staffing levels and responsibilities so as to comply with the segregation of duties requirements.
Other than as described above, there have been no changes in our internal control over financial reporting during the fiscal year 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Director, Executive Officers and Corporate Governance
Directors
The board of directors currently consists of five members. Directors are elected at each annual stockholders' meeting to hold office until the next annual meeting or until their successors are elected and have qualified. The names and other information concerning the five directors are set forth in Item 1, Directors and Executive Officers, above.
CORPORATE GOVERNANCE
Board of Directors
Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., a majority of the Board of Directors, have been determined by the board of directors to be independent as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Standards. Thomas G. Schadt and B. Thomas M. Smith, Jr. serve on the Compensation Committee. Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr. serve on the Audit Committee, on which Todd S. Brown serves as the audit committee financial expert. Mr. Brown’s relevant experience is included with his biographical information set forth above. Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr. serve on the Nominating Committee. The board of directors held two meetings during the fiscal year ended January 27, 2014.
Risk Oversight
The Board and each of its committees are involved in overseeing risk associated with the Company and its operations. The Board and the Audit Committee monitor the Company's credit risk, liquidity risk, regulatory risk, operational risk and enterprise risk by regular reviews with management and external auditors and other advisors. In its periodic meetings with management and the Company's independent accountants, the Audit Committee discusses the scope and plan of its review of accounting and financial controls, assessment of business risks and legal and ethical compliance programs. The Board and the Nominating Committee monitor the Company's succession risk by regular review with management. The Board and the Compensation Committee monitor the Company's compensation policies and related risks by regular reviews with management. The Company has adopted the “Star Buffet, Inc. Code of Ethics” (the “Code of Ethics”), which constitutes a code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as defined in Item 406 of Regulation S-K under the Exchange Act. The Code of Ethics has been filed as Exhibit 14.1.
Executive Officers
The Company does not have any executive officers other than Mr. Robert E. Wheaton, Chairman of the Board and our Chief Executive Officer and President.
Committees of the Board of Directors
The board of directors has established an audit committee, a compensation committee and a nominating committee.
Audit Committee
The audit committee is currently comprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., of whom Todd S. Brown is the audit committee financial expert and is established in accordance with Section 3(a)(58)(B) of the Securities Exchange Act of 1934, as amended. All such persons are financially literate and are "independent" as contemplated by Item 401(h)(iii) to Regulation S-K and by applicable listing standards. The audit committee held one meeting during the fiscal year ended January 27, 2014.
The audit committee oversees our financial reporting processes and the audits of our financial statements. The audit committee monitors the independence, performance and qualifications of our independent auditors and also reviews any related party transaction. Our audit committee has a charter which is annually reviewed and reassessed for adequacy by the audit committee. The audit committee charter is available on our website, www.starbuffet.com.
Compensation Committee
The compensation committee (“Compensation Committee”) is comprised of Thomas G. Schadt and B. Thomas M. Smith, Jr., each of whom is “independent” as contemplated by applicable listing standards. The Compensation Committee considers the hiring and retention of corporate officers, salary and incentive compensation policies for officers and directors, and the granting of stock options to employees. The Compensation Committee held zero meeting during the fiscal year ending January 27, 2014 since the bankruptcy agreement prohibits changes to corporate officer’s salary until the unsecured creditors are paid. Additional information regarding the functions, procedures and authority of the Compensation Committee is provided in Item 11, Executive Compensation below. The Compensation Committee does not have a charter.
Nominating Committee
The nominating committee is comprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., each of whom is “independent” as contemplated by applicable listing standards. The nominating committee assists our board of directors by identifying individuals qualified to become board members, by recommending director nominees for election at the annual meeting of stockholders or for appointment to fill vacancies on the board of directors, and by developing and recommending corporate governance guidelines. The nominating committee held zero meeting during the fiscal year ended January 27, 2014. Our board of directors has adopted a charter for the nominating committee. The nominating committee charter is available on our website, www.starbuffet.com.
The nominating committee will consider candidates recommended by stockholders. Any such suggestions must be sent in writing and addressed to the Company at its principal executive offices shown on the cover page to this proxy statement, attention: Secretary, and must be accompanied by:
°
the name and address of the stockholder recommending the person to be nominated;
°
a representation that the stockholder is a holder of stock of the Company, including the number of shares held with a confirmation from the record holder if the shares are held in street name;
°
a description of all arrangements or understandings between the stockholder and the recommended nominee, if any;
°
detailed biographical and occupational data on the prospective nominee as would be required to be included in a proxy statement filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended; and
°
a signed consent of the recommended nominee to serve as a director of the Company if so elected.
The nominating committee considers the following minimum criteria when reviewing a nominee for director:
°
Each director should be an individual of the highest character and integrity and have an inquiring mind, diversity, vision and the ability to work well with others;
°
Each director should be free of any conflict of interest which would violate applicable law or regulations or interfere with the proper performance of the responsibilities of a director;
°
Each director should possess substantial and significant experience which would be of particular importance to the Company in the performance of the duties of a director;
°
Each director should have sufficient time available to devote to the affairs of the Company in order to carry out the responsibilities of a director; and
°
Each director should have the capacity and desire to represent the balanced, best interests of the stockholders of the Company as a whole and not primarily a special interest group or constituency.
The Nominating Committee is responsible for reviewing the requisite skills and characteristics of new Board members as well as the composition of the Board as a whole. Nominees for director will include individuals who, taking into account their diversity, skills, and experience in the context of the needs of the Board, as well as other relevant factors such as conflicts of interest and other commitments, would enhance the Board’s ability to manage and direct our affairs and business. Diversity relates to diversity of experience and background in an effort to ensure that the composition of our directors provides a strong and well balanced foundation of skill and experience.
The nominating committee, as necessary, will seek candidates qualified to serve on the board of directors or committees of the board of directors. The nominating committee, as necessary, will also review, investigate and screen candidates recommended by stockholders. The nominating committee and Robert E. Wheaton, our President and Chief Executive Officer, will select nominees that best suit the Company’s requirements and make recommendations to the full board of directors. Each of the nominees proposed for election at the annual meeting are currently directors of the Company.
Director Independence
The board of directors has determined that all of the nominees for director, except for Robert E. Wheaton and Craig B. Wheaton, are “independent” as contemplated by Rule 5605(a)(2) of the NASDAQ Listing Standards.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of these forms received by us, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that, during Fiscal 2014, all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10% stockholders were timely satisfied.
Item 11.
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
The following discussion and analysis provides information regarding the Company's executive compensation objectives and principles, procedures, practices and decisions, and is provided to help give perspective to the numbers and narratives that follow in the tables in this section. This discussion focuses on the Company's objectives, principles, practices and decisions with regards to the compensation of Robert E. Wheaton, Chief Executive Officer, Chief Financial Officer, President and Chairman of the Company (the “CEO”). The Company has no other executive officers.
Executive Compensation Objectives
The Company’s philosophy is that compensation paid to executive and other officers should be closely aligned with the values, objectives and performance of the Company on both a short- and long-term basis. The Company’s executive compensation program is designed to achieve the following objectives:
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Attract and retain highly qualified individuals who are capable of making significant contributions to the long-term success of the Company;
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Reward officers for long-term strategic management and the enhancement of shareholder value; and
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Promote a performance-oriented environment that encourages Company and individual achievement.
Executive Compensation Procedures
In an effort to attain the Company’s executive compensation objectives, the Company has established and implemented the following procedures.
Role of the Compensation Committee.
The Compensation Committee has responsibility for establishing and monitoring the executive compensation programs of the Company and for making decisions regarding the compensation of the CEO and other officers. The agenda for meetings of the Compensation Committee is determined by the Chairman of the Compensation Committee, in consultation with the CEO. Compensation Committee meetings are often attended by the CEO, although he does not attend meetings when his compensation is fixed. The Compensation Committee also meets in executive session. In determining compensation of the CEO, the Compensation Committee reviews data which it believes is representative of the restaurant industry, primarily by reviewing public disclosure of other public companies, as filed with the U.S. Securities and Exchange Commission, and from data published by compensation surveys. The Compensation Committee considers, among other factors, the Company’s performance and relative shareholder return, the value of similar incentive awards to executive officers at comparable companies, the awards given to the CEO in past years, and other factors considered relevant by the Committee.
The Compensation Committee also monitors, administers and approves awards under the Company’s incentive compensation plans for all levels within the Company, including awards under the Company’s 1997 Stock Incentive Plan (the “Stock Plan”).
The Compensation Committee typically meets toward the end or shortly after the end of the Company’s fiscal year to approve base salaries and annual bonus targets of the CEO for the coming year and to consider annual incentive bonus awards for the previous year for the CEO. At that meeting, the Compensation Committee also reviews the status of long-term incentives available to the CEO (historically limited to options to purchase shares of Common Stock) and considers whether any additional long-term incentive awards are appropriate.
The Compensation Committee relies on its experience and judgment in making executive compensation decisions after reviewing the performance of the Company for the applicable fiscal year and evaluating the executive’s performance and responsibilities with the Company, and current compensation arrangements. The compensation program for the CEO and the Compensation Committee assessment process are designed to be flexible so as to better respond to the evolving business environment and individual circumstances.
Role of Consultants.
The Company and the Compensation Committee has not engaged the services of compensation consultants, but either or both may do so upon a case-by-case basis as circumstances warrant. No compensation consultants were involved in settling the compensation of the CEO or other officers of the Company during the fiscal year ending January 27, 2014.
Executive Compensation Program
The following components of the Company’s executive compensation program and the policies that govern their implementation are outlined briefly below:
• Base Salary
• Annual Bonus
• Long-Term Equity Awards
• Other Personal Benefits
Base Salary. Pursuant to an Employment Agreement dated as of March 1, 1999 between the Company and the CEO (the “Employment Agreement”), the CEO is entitled to a base salary of not less than $250,000 a year, subject to such annual increases as the Company, acting through the Compensation Committee, deems appropriate. The base salary for the CEO is set at a level that the Compensation Committee believes is generally competitive with levels of compensation paid to chief executive officers of other comparably-sized restaurant operating companies. The overall performance of the Company, shareholder return, and the Company’s progress toward achieving specific objectives are also important factors in setting base salary for the CEO. The Compensation Committee also considers, among other factors, the value of similar incentive awards to chief executive officers at comparable restaurant companies, the awards given to the CEO in past years, and other factors considered relevant by the Committee.
Annual Bonus. The annual bonus component of the CEO’s compensation is intended to reward short-term performance and help the Company retain the CEO. The CEO’s annual bonus consists of two parts: (i) a fixed minimum annual bonus payable bi-weekly at the rate of $25,000 a year; plus (ii) a variable performance-based bonus amount payable after the conclusion of each year. The aggregate amount of the variable annual bonus payable to the CEO for each fiscal year is set at levels which the Compensation Committee believes are competitive with the Company’s peers such that the combination of base salary and bonuses results in an aggregate rate of cash salary and bonus compensation within competitive market standards when the Company meets the performance objectives set by the Compensation Committee. The Compensation Committee is authorized to approve a discretionary bonus when it is determined the total compensation of the CEO is not consistent with competitive market standards.
The amount of the performance-based annual bonus payable to the CEO each year is contingent on the degree to which the Company attains certain pre-established performance goals based on Company annual EBITDA established by the Compensation Committee for the year in question, and is offset dollar-for dollar by the $25,000 minimum bonus paid. For each fiscal year, the Compensation Committee establishes in writing shortly after the beginning of the year an annual range of Company EBITDA targets and corresponding performance bonus amounts which the CEO can earn for the year if the Company performs within or above the targeted range of net income. The CEO is eligible for a performance-based bonus ranging from $1 at the minimum established range of annual Company net income performance to 100% of his base salary in effect at the beginning of the year at or above the maximum established range of annual Company EBITDA performance, reduced in all cases by the $25,000 minimum bonus paid. If the Company fails to meet the minimum targeted level of net income performance set by the Compensation Committee, the performance-based bonus component is zero and the CEO only receives the guaranteed minimum $25,000 bonus. The Compensation Committee determines the actual amount of performance-based bonus payable to the CEO shortly after the close of the fiscal year to which the bonus relates, once financial results for the year are known. The performance-based bonus amount, if any, is paid within 60 days after year-end results are audited.
For the fiscal year ending January 27, 2014, the CEO earned the $25,000 minimum bonus plus an additional $0 in performance-based bonus based on the Company’s decision to temporarily suspend certain components of the executive bonus program for the fiscal year. The decision on the executive bonus was made in order to conserve cash, to ensure compliance with the Plan, and to align the executive bonus program with modifications made in store level bonus programs. The minimum annual bonus is reported in column (d) and the additional performance-based bonus is reported in column (e) in the Summary Compensation Table below.
Long-Term Equity Awards. Discretionary long-term equity awards, in the form of stock options are granted at the Compensation Committee’s discretion to the CEO and other officers from time to time in an effort to provide long-term performance-based compensation, to encourage the CEO and other officers to continue their engagement with the Company throughout the applicable option vesting periods and to align management and shareholder interests. In making awards under the Company’s Stock Plan, the Compensation Committee considers grant size and the appropriate combination of equity-based awards. In years in which stock options are granted, such options are granted with an exercise price equal to the closing price per share on the date of grant, (or if the market is closed, with the most immediately available recent closing price). Options vest upon grant or incrementally over time, as determined by the Compensation Committee at the time of grant. The Company does not grant options with an exercise price below 100% of the trading price of the underlying shares of common stock on the date of grant or grant options that are priced on a date other than the grant date (unless granted on a Saturday or day when the market is closed). Stock options only have a value to the extent the value of the underlying shares of common stock on the exercise date exceeds the exercise price. Accordingly, stock options provide compensation only if the underlying share price increases over the option term and the option holder’s employment continues with the Company until the vesting date, if any. In granting stock options to the CEO and other officers, the Company also considers the impact of the grant on the Company’s financial performance, as determined in accordance with the requirements of Accounting Standards Codification (“ASC” or “Codification”) 718. For long-term equity awards, the Company records expense in accordance with ASC 718. The amount of expense the Company records pursuant to ASC 718 may vary from the corresponding compensation value used by the Company in determining the amount of the awards.
In the fiscal year ending January 27, 2014, the Compensation Committee did not grant any stock options or other equity awards to the CEO or other officers or directors of the Company under the Stock Plan.
Other Personal Benefits. The Company also provides benefits, in the form of medical expense reimbursement, and limited perquisites, in the form of a $1,000 per month automobile allowance, to the CEO in order to achieve a competitive pay package. The Compensation Committee believes that those benefits are reasonable, competitive and consistent with the Company’s overall executive compensation objectives. The Company does not maintain any pension, retirement, deferred compensation, life insurance or other welfare benefit plans or programs for the CEO.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), imposes a $1 million annual limit on the amount that a public company may deduct for compensation paid to the company’s chief executive officer during a tax year or to any of the company’s four other most highly compensated executive officers who are still employed at the end of the tax year. The limit does not apply to compensation that meets the requirements of Code Section 162(m) for “qualified performance-based” compensation (i.e., compensation paid only if the executive meets pre-established, objective goals based upon performance criteria approved by the Company’s shareholders). The Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Code. In certain situations, the Compensation Committee may approve compensation that will not meet the requirements of Code Section 162(m) in order to ensure competitive levels of total compensation for its executive officer. The CEO’s compensation in the fiscal year ending January 27, 2014 did not exceed the $1 million deduction limit.
EXECUTIVE COMPENSATION TABLES AND DISCUSSION
Summary Compensation Table
The following Summary Compensation Table summarizes the total compensation paid or earned by the CEO of the Company for the three fiscal years ended January 27, 2014.
__________
(1)
The amount shown represents the annual minimum guaranteed bonus earned by and paid to the CEO for the fiscal years ending January 27, 2014, January 28, 2013 and January 30, 2012.
(2)
The amount shown represents the annual performance-based bonus award earned by the CEO for the fiscal years ending January 27, 2014, January 28, 2013 and January 30, 2012, which award, if any, is payable in the next fiscal year.
(3)
"Other Annual Compensation" consists of $12,000 in automobile reimbursement allowance and $23,495, $23,495 and $23,495, respectively, for the years ending January 27, 2014, January 28, 2013 and January 30, 2012, in medical expense reimbursement payments to the CEO.
Grants of Plan-Based Awards
The following table sets forth information concerning plan-based compensation awards granted to the CEO during the fiscal year ended January 27, 2014.
__________
(1)
In order to conserve cash, better ensure compliance with loan covenants, and to align the executive bonus program with modifications made in store level bonus programs, the Company has temporarily suspended certain components of the executive bonus program for fiscal years 2009 through 2014; therefore the Non-Equity Incentive Plan Award earned by the CEO in these years was $0. No stock options or other stock awards were granted to the CEO in the fiscal year ending January 27, 2014.
Outstanding Equity Awards at Year-End
The following table provides information on the holdings of stock options and other stock or equity awards by the CEO as of January 27, 2014.
Option Awards
The CEO did not exercise any Company stock options in the fiscal year ending January 27, 2014. As of January 27, 2014, the CEO held no compensatory stock or equity awards in the Company.
Potential Payments Upon Termination or Change Of Control
Subject to earlier termination as described below, the CEO Employment Agreement continues for a rolling term of 80 months from November 1, 2006, with an automatic addition each November 1 of a further 12 months unless notice of non-extension is given by either party prior to the November 1 annual extension date. Notwithstanding the otherwise applicable term of the Employment Agreement, the Company may terminate the CEO for “cause” (as defined below) at any time or without “cause” upon 30 days advance written notice to the CEO. “Cause” is generally defined as (i) a material breach of the Employment Agreement by the CEO, (ii) habitual and material neglect of duties, (iii) fraud that substantially harms the Company, and (iv) commission of a felony that results in material harm to the Company.
Additionally, the Employment Agreement permits the CEO to voluntarily resign his employment at any time for “good reason” (as defined below) or without “good reason” at any time upon 60 days advance written notice. “Good reason” includes (i) a “change of control” (as defined below) of the Company, (ii) material breach of the Employment Agreement by the Company, (iii) non-consensual relocation by the Company of the CEO’s office, (iii) reduction in the CEO’s base salary or bonus, (iv) removal of the CEO from office or assignment of the CEO to duties inconsistent with his office, and (v) failure of any successor to the Company to assume the Employment Agreement. The Employment Agreement generally defines a “change of control” as: (i) certain changes in a majority of the board of directors of the Company; (ii) consummation of a merger or reorganization of the Company in which neither the Company nor another entity controlled by the Company’s shareholders is the surviving entity; or (iii) a sale or other disposition of all or substantially all of the Company’s assets to another entity that is not controlled by the Company’s shareholders.
If during the unexpired, remaining term of the Employment Agreement, the Company terminates the CEO’s employment without “cause” or the CEO terminates his employment for “good reason,” the CEO is entitled to receive within 30 days after termination a lump sum cash payment equal the sum of: (i) his base salary and unused vacation accrued through the date of termination, (ii) any accrued automobile allowance and medical expense reimbursement owed for period through the date of termination, (iii) three times his rate of annual base salary in effect immediately prior to termination, and (iv) the maximum annual bonus that the CEO would have earned for the year of his termination had all performance goals for that year been met. The CEO would also be entitled to three years of continued coverage under the Company’s retirement, health, disability and life insurance benefit plans, programs, practices or policies, if any. If the CEO’s employment terminates for any other reason (i.e., upon death, disability, resignation without “good reason” or involuntary termination for “cause,” he is entitled to receive the sum of the amounts described in clauses (i) and (ii) above only.
If the aggregate compensatory payments to the CEO that are contingent on a change of control (including the salary and bonus continuation payments described above) exceed 2.99 times the CEO‘s average W-2 compensation with the Company for the five taxable years preceding the year of the Change of Control (the “Base Period Amount”), the acceleration would result in an “excess parachute payment” under Code Section 280G. The CEO would be subject to a 20% excise tax, and the Company would be unable to deduct the amount by which such parachute payments to the CEO exceed one times the CEO’s Base Period Amount. The Company has not agreed to provide to the CEO any gross-up or reimbursement for excise taxes imposed on excess parachute payments.
Amounts Payable upon Termination of Employment Without Cause or Resignation For Good Reason
If the Company had terminated the CEO’s employment without “cause” on January 27, 2014 or the CEO had resigned his employment for “good reason” (including a change of control) on January 27, 2014, the CEO would have been entitled to the a lump sum cash payment from the Company in the amount of $1,000,000 plus three years of continued medical expense reimbursement coverage with an estimated value of $70,485.
Termination on Account of Death, Disability, Involuntary Termination For Cause or Voluntary Resignation Without Good Reason.
If the Company had terminated the CEO’s employment for “cause” on January 27, 2014 or the CEO had resigned his employment without “good reason,” or died on January 27, 2014, the CEO would have been entitled to a lump sum cash payment from the Company in the amount of $0. If CEO had become disabled on January 27, 2014, the CEO would have been entitled to a lump sum cash payment from the Company in the amount of $500,000 plus three years of continued medical expense reimbursement coverage with an estimated value of $70,485.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of August 1, 2016 by (1) each person who is known by us to beneficially own more than five percent of the outstanding shares of our common stock, (2) each of our directors, (3) each of the executive officers identified in the summary compensation table set forth elsewhere in this proxy statement and (4) all directors and executive officers of the Company as a group. To our knowledge and except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. Unless we indicate otherwise, each holder’s address is c/o Star Buffet, Inc., 2501 North Hayden Road, Suite 103, Scottsdale, AZ 85257.
__________
*
Less than one percent.
(1)
Calculated based on 3,213,075 shares of our common stock outstanding on August 1, 2016 with percentages rounded to the nearest one-tenth of one percent. Shares of common stock subject to options that are presently exercisable or exercisable within 60 days are deemed to be beneficially owned by the person holding the option for the purpose of computing the percentage ownership of that person but not treated as outstanding for computing the percentage of any other person.
(2) Opal Advisors, LLC reports having sole voting power with respect to 164,112 of these shares, and sole dispositive power with respect to all of these shares.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
DIRECTOR COMPENSATION
The Company uses cash compensation and equity-based incentive compensation to attract and retain qualified candidates to serve as directors. In setting director compensation, the Company considers the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill level required by the Company of directors.
Compensation Paid to Directors in 2014
For the year ended January 27, 2014, all directors, excluding employee directors, received $2,000 for each regularly scheduled board meeting attended, $1,500 for each regularly scheduled committee meeting attended and $500 for each specially-called telephonic board or committee meeting. Directors who are also full-time employees of the Company did not receive any director fees. All directors are also reimbursed by the Company for their out-of-pocket travel and related expenses incurred in attending all Board of Directors and committee meetings. For the fiscal year ending January 27, 2014, the Company did not grant any stock options or other equity-based compensation to non-employee directors. Nor did it recognize or incur any financial accounting expense under ASC 718 related to equity compensation awards granted to non-employee directors in the 2014 fiscal year or prior years.
Director Summary Compensation Table
The following table summarizes the compensation earned by or paid to the Company’s non-employee directors from the Company for the year ended January 27, 2014.
__________
(1)
As of January 27, 2014, the Company’s non-employee directors held options for the following number of Company common shares all of which were fully vested and exercisable on February 11, 2005:
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended January 27, 2014, none of the persons who served on our compensation committee had any interlocking relationship as defined by the Securities and Exchange Commission.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Robert E. Wheaton currently beneficially owns approximately 45.3% of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 45.3% of the total voting power of the Company. Thus Mr. Robert E. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of nominees to our board of directors. During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. This loan dated June 15, 2007 was subordinated to the obligation to Wells Fargo Bank, N.A. which was subsequently paid in full. In June 2008, the Company borrowed an additional $592,000 from Mr. Robert E. Wheaton under the same terms. This resulted in an increase in the subordinated note balance from $1,400,000 to $1,992,000, the balance as of January 27, 2014 and January 28, 2013. The principal balance and any unpaid interest was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of Star’s bankruptcy filing and pursuant to the approved Plan of Reorganization is not eligible to be repaid until all obligations owed to other creditors have been fully satisfied. Interest will accrue on the principal amount of $1,991,936 and the interest of $196,957 from the January 17, 2013 until paid at the rate of 3.25%. The interest rate of 3.25% will increase 1% each year on January 17 until paid per the Plan of Reorganization. Quarterly interest-only payments on the principal portion will commence when the principal amount owing on the Wells Fargo Loan has been reduced to $1.5 million and continue until paid, provided that Debtors are current on all payments required by the Plan. The Company expensed $77,000 and $0 to Mr. Robert E. Wheaton for interest during fiscal 2014 and fiscal 2013, respectively. If Debtors are not current on all payments required by the Plan, the quarterly interest-only payments will not begin until Company bring such payments current. The Wells Fargo Loan has been paid in full and the Debtors are current on all payments required by the Plan. The Company used the funds borrowed from Mr. Robert E. Wheaton for working capital requirements. As part of the Reorganization Plan, Suzanne H. Wheaton, the wife of Robert E. Wheaton, loaned the Company $300,000 as an exit loan which is secured by real estate in Artesia, New Mexico. Robert and Suzanne H. Wheaton purchased the real estate property in Polson, Montana in June 2013 from the prior landlord when the Company could not exercise its option to purchase and are now the landlord for our 4B’s restaurant. Subsequent to the fiscal year ending January 27, 2014, the Company sold six properties in fiscal year 2015 for a total of $4.2 million and one property in fiscal 2016 for $1.2 million to Robert and Suzanne H. Wheaton and leased the properties back. The Company paid to Robert E. and Suzanne H. Wheaton $45,000 in rent for the fiscal year ending January 27, 2014. The proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full and unsecured creditors, pursuant to the Plan.
Item 14.
Item 14. Principal Accountant Fees and Services
Fees Billed by Independent Auditors
The audit committee has appointed Larson and Company as our independent auditors for the fiscal year ending January 26, 2015.
Audit Fees
Audit fees consist of fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in our quarterly reports. Audit fees billed by Larson and Company were $95,000 and $0 for the fiscal years ended January 27, 2014 and January 28, 2013, respectively.
Audit-Related Fees
Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements that are not reported under “Audit Fees” and other services that are normally provided by our independent auditors in connection with statutory and regulatory filings or engagements. These services include accounting consultations in connection with acquisitions and consultations concerning financial accounting and reporting standards. The Company had no audit-related fees for the fiscal years ended January 27, 2014 and January 28, 2013.
Tax Fees
Tax fees consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include tax planning, assistance with the preparation of various tax returns, services rendered in connection with acquisitions and advice on other tax-related matters. Tax fees billed by CBIZ MHM, LLC were $16,000 in the fiscal year ended January 27, 2014, and were $53,000 in the fiscal year ended January 28, 2013.
All Other Fees
All other fees consist of fees billed for products and services not included above. The Company did not have any other fees for the fiscal years ended January 27, 2014 and January 28, 2013.
Audit Committee Pre-Approval
The audit committee’s policy is to pre-approve the fees and other compensation to be paid to our independent auditors, and to determine the scope of permitted non-audit services and pre-approve the provision of those services by our independent auditors. All non-audit services were pre-approved by the audit committee during fiscal 2014.
The Company expects its current auditors to have one or more representatives at annual meetings who will be able to make a statement, if they desire to do so, and are expected to be available to respond to appropriate questions.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(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.
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)
August 17, 2016
By: /s/ Robert E. Wheaton
Robert E. Wheaton
Chief Executive Officer and President
(Principal Executive Officer)
August 17, 2016
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
Chief Executive Officer,
August 17, 2016
Robert E. Wheaton
President and Director
/s/Ronald E. Dowdy
Group Controller, Treasurer
August 17, 2016
Ronald E. Dowdy
and Secretary
/s/Thomas G. Schadt
Director
August 17, 2016
Thomas G. Schadt
/s/Todd S. Brown
Director
August 17, 2016
Todd S. Brown
/s/Craig B. Wheaton
Director
August 17, 2016
Craig B. Wheaton
/s/B. Thomas M. Smith, Jr.
Director
August 17, 2016
B. Thomas M. Smith, Jr.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
STAR BUFFET, INC. AND SUBSIDIARIES
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Star Buffet, Inc. and Subsidiaries the (“Company”) as of January 27, 2014 and January 28, 2013, and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal years then ended. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to present fairly, in all material respects, the financial position of Star Buffet, Inc. and Subsidiaries as of January 27, 2014 and January 28, 2013, and the results of their operations and their cash flows for the fiscal years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ LARSON & COMPANY PC
Larson & Company PC
Sandy, Utah
August 17, 2016
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 - CHAPTER 11 REORGANIZATION AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chapter 11 Reorganization
On September 28, 2011, Star Buffet, Inc. (the “Company” or “Star”) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”), in the proceeding titled In re: Star Buffet, Inc., Case No.2:11-bk-27518-GBN (the “Chapter 11 Case”). Star’s wholly owned subsidiary, Summit Family Restaurants Inc. (“Summit”), also filed a voluntary petition for reorganization under Chapter 11 on September 29, 2011 in the Bankruptcy Court, in the proceeding titled In re: Summit Family Restaurants Inc., Case No. 2:11-bk-27713-GBN. The cases for Star Buffet, Inc. and Summit Family Restaurants Inc. (collectively the “Debtors”) were consolidated and jointly administered. None of the Company’s other subsidiaries were included in the bankruptcy filings. The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Under the Bankruptcy Code, certain claims against the Debtors that were in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization. The balance of the unresolved claims are reflected in the January 27, 2014 balance sheet as “Liabilities subject to compromise.”
On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Company’s plan of reorganization (the “Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Plan as confirmed are attached as Exhibits 2.1 and 2.2, to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2012. The Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Plan were estimated to be in excess of $10 million. The Plan provided for these obligations to be discharged from operating income derived from the restaurants operated by its affiliates, an exit loan of $300,000 from Suzanne H. Wheaton, the wife of CEO Robert E. Wheaton, and proceeds from sale of certain restaurant properties.
Since filing for reorganization, the Debtors have sold fifteen properties, $5.8 million of the proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full, $1.9 million was used to pay the other secured creditors and $801,000 was used to pay unsecured creditors, pursuant to the Plan. As of January 26, 2015, the Company has reduced its liabilities subject to compromise to $800,000 and has made all payments required under the Plan. Resolution and payment of the remaining liabilities subject to compromise will result of payment in full of all of the Company’s creditors at the time of the bankruptcy filing and a complete discharge of the Company.
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
Star Buffet, Inc., a Delaware corporation (“Star” and collectively with its subsidiaries, the “Company”), is a multi-concept restaurant holding company. The Company as of August 8, 2016 owns and operates 23 full-service restaurants located throughout the United States. At January 27, 2014 it owned and operated 18 full-service restaurants. The Company’s restaurants operate under trade names including 4B’s, JB’s, Casa Bonita and BuddyFreddys. The Company has an executive and an accounting office in Scottsdale, Arizona, and an accounting office in Salt Lake City, Utah.
The accompanying consolidated financial statements include the results of operations and assets and liabilities of the Company’s operations. Significant intercompany transactions and balances have been eliminated in consolidation.
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.
Organization and Nature of Operations
As of January 27, 2014, the Company, through eight independently capitalized subsidiaries operated three Buffet restaurants and 15 Non-Buffet restaurants. The Company also had seven restaurants closed for remodeling and repositioning of which two were used as warehouses, four restaurants were leased to third-party operators and one as an office. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Tennessee, Texas and Utah.
As of January 28, 2013, the Company, through eight independently capitalized subsidiaries operated six Buffet restaurants and 21 Non-Buffet restaurants. The Company also had eight restaurants closed for remodeling and repositioning of which two were used as warehouses and five restaurants were leased to third-party operators. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Tennessee, Texas and Utah.
Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are considered cash equivalents. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value. Checks written in excess of bank balances are recorded as a current liability on the accompanying consolidated balance sheets. The Company maintains cash in bank accounts which at times may exceed their federally insured limits of $250,000 set by the Federal Deposit Insurance Corporation. The accounts are held by banks that are well established and highly regarded. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk on these balances.
Revenue Recognition
The Company’s principal source of revenue is from customer dining transactions. Revenue is recognized at the time the meal is purchased, primarily by cash or credit card. Sales taxes are excluded from revenue and revenue is recorded on a net basis.
Receivables
Receivables are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts. Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances. A receivable is written off when it is determined that all collection efforts have been exhausted. The Company did not have a valuation allowance as of January 27, 2014 and January 28, 2013. The accounts receivable balances as of January 27, 2014 and January 28, 2013 were comprised of the following:
Notes Receivable
Notes receivable are stated at an amount management expects to collect and includes a provision for an adequate reserve for probable uncollectible amounts. Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances. A note receivable is written off when it is determined that all collection efforts have been exhausted. Currently, the Company has two loans receivable outstanding and both are in default. The Company has provided a full reserve of $489,000 for the North’s Restaurant, Inc. note receivable based on a decline in value of the note’s collateral. The Company has provided a full reserve of $215,000 as part of the April 4, 2013 settlement with the Tinsley group.
Consideration Received from Vendors
The Company records vendor rebates on products purchased as a reduction of food costs. The allowances are recognized as earned in accordance with written agreements with vendors.
Inventories
Inventories consist of food, beverage, gift shop items and restaurant supplies and are valued at the lower of cost or market, determined by the first-in, first-out method.
Property, Buildings and Equipment
Property, buildings and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives:
Building and 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 as reasonably likely to be exercised. If a previously scheduled lease option is not exercised, any remaining unamortized leasehold improvements may be required to be expensed immediately which could result in a significant charge to operating results in that period.
Property and equipment in non-operating units held for remodeling or repositioning is depreciated and is recorded on the balance sheet as property, building and equipment held for future use.
Property and equipment placed on the market for sale is not depreciated and is recorded on the balance sheet as property held for sale and recorded at the lower of cost or market.
Repairs and maintenance are charged to operations as incurred. Major equipment refurbishments and remodeling costs are generally capitalized.
Goodwill
Goodwill primarily represents the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350. ASC 350 requires goodwill to be tested for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. The Company aggregates stores by concept or by geographic region when determining reporting units.
The Company utilizes a two-part impairment test. First, the fair value of the reporting unit is compared to carrying value (including goodwill). If the carrying value is greater than the fair value, the second step is performed. In the second step, the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill. If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, and governmental and environmental factors in establishing the assumptions used to compute the fair value of each reporting unit. We also take into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts and data pertinent to valuing the reporting units in our impairment test. All goodwill was impaired in previous years and written off.
Other Intangible Assets
Other intangible assets consist of trademarks and the JB's license agreement. The Company has recorded a $33,000 and $25,000 value for the 4B’s trademark for the years ended January 27, 2014 and January 28, 2013, respectively. The Company impaired Whistle Junction trademark of $230,000 when the last Whistle Junction closed as a triggering event in fiscal 2013. These assets have an indefinite asset life and are subject to possible impairment on an annual basis or when triggering events occur in accordance with ASC 350. We also take into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts and data pertinent to valuing the reporting units in our impairment test. Management has conducted it annual impairment analysis and has concluded that the assets are not impaired as of January 27, 2014.
The table below shows expected amortization for finite-lived intangibles as of January 27, 2014 for the next five years:
Amortization of franchise and license fees amounted to $0 and $48,000 for the fiscal years ending January 27, 2014 and January 28, 2013, respectively.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment”. The Company assesses whether an impairment write-down is necessary 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 asset is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any impairment is recognized as a charge to earnings which would adversely affect operating results in the affected period.
Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted net 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 net cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge and could adversely affect operating results in any period. The Company recorded impairment losses associated with certain restaurant facilities of $942,000 and $1,431,000 for the years ended January 27, 2014 and January 28, 2013, respectively.
Fair Value of Financial Instruments
The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
●
Level 1 Inputs: Quoted prices for identical instruments in active markets.
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Level 2 Inputs: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuation in which all significant inputs and significant value drivers are observable in active markets.
●
Level 3 Inputs: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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 and long-term debt approximate fair value and are based on discounted cash flows using market rates at the balance sheet dates. The Company does not estimate the fair value of the note payable to officer because of the related party nature of the transaction.
Pre-Opening Costs
Pre-opening costs are expensed when incurred. The Company incurred and charged to operations approximately $20,000 and $251,000 of pre-opening costs during fiscal 2014 and 2013.
Income Taxes
Our current provision for income taxes is based on our estimated taxable income in each of the jurisdictions in which we operate, after considering the impact on our taxable income of temporary differences resulting from disparate treatment of items, such as depreciation, estimated liability for closed restaurants, estimated liabilities for self-insurance, tax credits and net operating losses (“NOL”) for tax and financial reporting purposes. Deferred income taxes are provided for the estimated future income tax effect of temporary differences between the financial and tax bases of assets and liabilities using the asset and liability method. Deferred tax assets are also provided for NOL and income tax credit carryforwards. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change. Currently, because there can be no assurance that the Company will generate any specific level of earnings in the future years to realize the benefit of the deferred tax assets existing as of January 27, 2014 and January 28, 2013 the Company has a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 requires recognition in the consolidated financial statements of the impact of an uncertain tax position, if it is more likely than not the tax position will be sustained upon examination based on the technical merits of the position. The Company does not have any uncertain tax positions that require recognition under ASC 740 as of January 27, 2014 and January 28, 2013. The continuing practice of the Company is to recognize interest and penalties related to income tax matters in the provision for income taxes.
Advertising Expenses
Advertising costs are charged to operations as incurred. Amounts charged to operations totaled $142,000 and $138,000, for the years ended January 27, 2014 and January 28, 2013, respectively.
Deferred Financing Fees
Deferred financing fees are amortized over of the life of the loan not exceed five years. Amounts charged to operations totaled $3,000 and $1,000, for the years ended January 27, 2014 and January 28, 2013, respectively.
Insurance Programs
Historically, the Company has purchased first dollar insurance for workers’ compensation claims; high-deductible primary property coverage; and excess policies for casualty losses. Accruals for self-insured casualty losses include estimates of expected claims payments. Because of large, self-insured retention levels, actual liabilities could be materially different from calculated accruals. Valuation reserves for the years ended January 27, 2014 and January 28, 2013, consisted of the following:
Leases
The Company has various lease commitments on restaurant locations. Expenses of operating leases with escalating payment terms are recognized on a straight-line basis over the term of the arrangements. The lives used to depreciate leasehold improvements on the leased properties conform to the related terms of the lease arrangements. Contingent rental payments are triggered when revenues exceed contractual thresholds. Contingent rental expense is recorded each period that revenue exceeds the contractual base. In situations where the contingent rent is based on annual sales or cumulative sales to date, contingent rental expense is recorded when it is determined probable that revenue will exceed the contractual thresholds.
Reclassification
None.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company routinely evaluates its estimates, including those related to bad debts, insurance claims, income taxes, long-lived assets, inventories and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Earnings (Loss) per Share
The Company applies ASC 260, which requires the calculation of basic and diluted income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the fiscal year. Diluted income (loss) per share is computed on the basis of the average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method.
Weighted average common shares used in the years ended January 27, 2014 and January 28, 2013 to calculate diluted earnings per share exclude stock options to purchase 22,000 shares of common stock as their effect was anti-dilutive.
Stock-Based Compensation
The Company recognizes compensation costs relating to share based payment transactions and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted.
NOTE 2 - APPLICATION OF NEW ACCOUNTING STANDARDS
During 2014, the FASB issued Accounting Standards Update 2014-09 and 2015-14, Revenue from Contract with Customers (Topic 606), respectively, which revises previous revenue recognition standards to improve guidance on revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides additional disclosure requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
NOTE 3 - MANAGEMENT UPDATE
The Company filed Chapter 11 Reorganization on September 28 and September 29, 2011; the Plan was confirmed on December 17, 2012; and became effective on January 17, 2013. The Company’s payment obligations under the Plan are estimated to be in excess of $10.0 million. The Company intends to discharge all Plan obligations from income derived from the restaurants operated by the Company’s subsidiaries, an exit loan from Suzanne H. Wheaton, wife of CEO Robert E. Wheaton, and proceeds from sale of restaurant properties. Since filing for reorganization, the Debtors have sold fifteen properties, $5.8 million of the proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full, $1.9 million was used to pay the other secured creditors and $801,000 was used to pay unsecured creditors, pursuant to the Plan. As of January 26, 2015, the Company has reduced its liabilities subject to compromise to $800,000 and has made all payments required under the Plan. Resolution and payment of the remaining liabilities subject to compromise will result of payment in full of all of the Company’s creditors at the time of the bankruptcy filing and a complete discharge of the Company.
NOTE 4 - NOTES RECEIVABLE
Notes receivable consist of the following:
Since inception, the Company’s acquisition strategy has incorporated the utilization of loans to sellers to facilitate certain proposed transactions. In most cases, these loans are secured and include, as part of the terms and conditions, the Company’s right to convert the loan into ownership of the restaurants. Also, certain of these loans contain favorable interest rates and repayment terms if the loans are not converted to ownership for one or more reasons. This financing strategy entails significant risk. Notes receivable are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts. Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances. A note receivable is written off when it is determined that all collection efforts have been exhausted. Currently, the Company has one loan receivable outstanding and the loan is in default. The Company has provided a full reserve of $489,000 for the North’s Restaurant, Inc. note receivable based on a decline in value of the note’s collateral. The Company had a loan of $215,000 forgiven as part of the April 4, 2013 settlement with the Tinsley group.
NOTE 5 - PROPERTY, BUILDINGS AND EQUIPMENT
The components of property, buildings and equipment used in restaurant operations are as follows:
The Company also has property in seven non-operating units. Four of the seven non-operating restaurants have been leased to third-party operators and three are closed for remodeling and/or repositioning at January 27, 2014. The components are as follows:
Depreciation expense for fiscal 2014 and 2013 totaled $1,020,000 and $1,161,000, respectively. The Company had goodwill and trademark impairment of $781,000 in fiscal 2013. Total impairment expense related to property, building and equipment charged to operations was $942,000 and $1,431,000 for the years ended January 27, 2014 and January 28, 2013, respectively is as follows:
NOTE 6 - LONG-TERM DEBT
In recent years, the Company has financed operation and property acquisitions through a combination of cash on hand, bank borrowings, real estate mortgages and loans from the principal shareholder.
Credit Facility
The Company previously had a Credit Facility with Wells Fargo Bank, N.A. The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit. The Credit Facility was utilized to retire the Company’s unsecured revolving line of credit with M&I Marshall & Ilsley Bank; to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to provide additional working capital. On February 29, 2008 the Company amended its Credit Facility with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was used to fund the acquisition of four Barnhill’s Buffet restaurants by its newly formed, wholly-owned, subsidiary, Starlite Holdings, Inc. On December 1, 2009 the Company amended its Credit Facility, increasing the revolving line of credit from $2,000,000 to $2,500,000 to complete the purchase of the land and building of its Whistle Junction restaurant in South Daytona, Florida. The Credit Facility was guaranteed by Star Buffet’s subsidiaries and bore interest at Wells Fargo’s base rate plus 0.75%. The Credit Facility was secured by a first priority lien on all of the Company’s assets, except for those assets that were previously pledged as security for existing obligations, in which case Wells Fargo had a second lien. On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Confirmation Order required the Company to pay the Wells Fargo Secured Claim. The Credit Facility was to be paid in full according to the following schedule: (i) on the effective date of the Confirmation Order (the “Effective Date”), Wells Fargo was paid the principal amount of $327,000, plus all accrued but unpaid interest, calculated at the non-default interest rate specified in the Wells Fargo Credit Agreement; (ii) beginning on the first day of the second full calendar quarter following the Effective Date, and on the first day of each calendar quarter thereafter, Wells Fargo was to be paid the principal amount of $328,000; and (iii) beginning on the first day of the second full calendar month following the Effective Date, and on the first day of each month thereafter, Wells Fargo was to be paid all accrued but unpaid interest, calculated at the non-default interest rate specified in the Wells Fargo Credit Agreement. The foregoing payments continued until the Credit Facility was paid in full in July 2014.
Note Payable to Officer
During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. This loan dated June 15, 2007 was subordinated to the obligation to Wells Fargo Bank, N.A. which was subsequently paid in full. The loan originally bore interest at 8.5%. In June 2008, the Company borrowed an additional $592,000 from Mr. Robert E. Wheaton under the same terms. This resulted in an increase in the note balance from $1,400,000 to $1,992,000, the balance as of January 27, 2014 and January 28, 2013. The Company expensed $77,000 and $0 to Mr. Robert E. Wheaton for interest during fiscal 2014 and fiscal 2013, respectively. The principal balance and any unpaid interest was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of the Company’s bankruptcy filing and pursuant to the approved Plan of Reorganization is not eligible to be repaid until all obligations owed to other creditors have been fully satisfied. Interest accrued on the principal amount of $1,991,936 and the interest of $196,957 from September 28, 2011 to January 16, 2013 at the bankruptcy plan rate. Interest will accrue on the principal amount of $1,991,936 and the interest of $196,957 from the January 17, 2013 until paid at the rate of 3.25%. The interest rate of 3.25% will increase 1% each year in January until paid per the Plan of Reorganization. Quarterly interest-only payments on the principal portion will commence when the principal amount owing on the Wells Fargo Loan has been reduced to $1.5 million and continue until paid, provided that Debtors are current on all payments required by the Plan. If Debtors are not current on all payments required by the Plan, the quarterly interest-only payments will not begin until Company bring such payments current. The Wells Fargo Loan has been paid in full and the Debtors are current all payments required by the Plan. The Company used the funds borrowed from Mr. Robert E. Wheaton for working capital requirements.
Mortgages described in the following table are secured by the underlying real estate. Certain mortgages have interest rates that will change from fixed to variable in a future year.
Long term debt and note payable to officer matures in fiscal years ending after January 27, 2014 as follows:
NOTE 7 - LEASES
The Company occupies certain restaurants under long-term operating leases expiring at various dates through 2038. Many restaurant leases have renewal options to extend for terms of 2 to 17 years from the terms of the original agreement. Substantially all require payment of real estate taxes, insurance and certain maintenance expenses. 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 11 years using the straight line method.
Minimum lease payments for all leases as of January 27, 2014 are as follows:
Aggregate rent expense under non-cancelable operating leases during fiscal 2014 and 2013 are as follows:
The Company reduces the deferred rent liability for stores in the year that were purchased or closed. The $0 and $8,000 decrease in rent expense for stores purchased or closed in 2014 and 2013, respectively, is recognized in the straight-line rentals disclosed above.
The rental income for the property, buildings and equipment leased to third parties (Note 5) in fiscal 2014 and fiscal 2013 was $287,000 and $243,000, respectively. The Company leased five and three non-operating units to tenants in fiscal 2014 and fiscal 2013, respectively. Rental income is recognized over the term of the lease and is included in other income in the accompanying statements of operations.
Future minimum lease payments receivable in fiscal years ending after January 27, 2014 are as follows:
NOTE 8 - INCOME TAXES
Income tax provision (benefit) is comprised of the following:
A reconciliation of income tax provision (benefit) at the federal statutory rate of 34% to the Company's provision (benefit) 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 not be able to realize the benefit of the deferred tax assets existing at January 27, 2014 based on the Company's expected future pre-tax earnings. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
NOTE 9 - 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 therefore. In the event of 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 non-assessable. 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. On February 20, 2009, the Board of Directors voted to suspend its annual dividend indefinitely.
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 therefore. The Board of Directors also has 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 all of the effects 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.
NOTE 10 - STOCK INCENTIVE PLAN
1997 Stock Incentive Plan
In fiscal year 1998, the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"), which authorizes the grant of options to purchase up to 750,000 shares of Common Stock. The 1997 Plan provides for the award of "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. A special committee appointed by 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, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options granted under the 1997 Plan.
The Company accounts for stock-based compensation in accordance with ASC 718. ASC 718 requires the recognition of compensation costs relating to share based payment transactions in the financial statements. Our stock-based compensation plans are summarized in the table below:
Stock options issued under the terms of the plans have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2015.
The stock option transactions and the options outstanding are summarized as follows:
The following summarizes information about stock options outstanding at January 27, 2014:
The intrinsic value of options outstanding was $0 as of fiscal years ending January 27, 2014 and January 28, 2013. There is no further compensation cost to recognize under this plan for any future years.
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NOTE 12 - RELATED PARTY TRANSACTIONS
Mr. Robert E. Wheaton currently beneficially owns approximately 45.3% of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 45.3% of the total voting power of the Company. Thus Mr. Robert E. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of nominees to our board of directors. During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. This loan dated June 15, 2007 was subordinated to the obligation to Wells Fargo Bank, N.A. which was subsequently paid in full. In June 2008, the Company borrowed an additional $592,000 from Mr. Robert E. Wheaton under the same terms. This resulted in an increase in the subordinated note balance from $1,400,000 to $1,992,000, the balance as of January 27, 2014 and January 28, 2013. The principal balance and any unpaid interest was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of Star’s bankruptcy filing and pursuant to the approved Plan of Reorganization is not eligible to be repaid until all obligations owed to other creditors have been fully satisfied. Interest accrued on the principal amount of $1,991,936 and the interest of $196,957 from September 28, 2011 to January 16, 2013 at the bankruptcy plan rate. Interest will accrue on the principal amount of $1,991,936 and the interest of $196,957 from the January 17, 2013 until paid at the rate of 3.25%. The interest rate of 3.25% will increase 1% each year on January 17 until paid per the Plan of Reorganization. Quarterly interest-only payments on the principal portion will commence when the principal amount owing on the Wells Fargo Loan has been reduced to $1.5 million and continue until paid, provided that Debtors are current on all payments required by the Plan. The Company expensed $77,000 and $0 to Mr. Robert E. Wheaton for interest during fiscal 2014 and fiscal 2013, respectively. If Debtors are not current on all payments required by the Plan, the quarterly interest-only payments will not begin until Company bring such payments current. The Wells Fargo Loan has been paid in full and the Debtors are current on all payments required by the Paln. The Company used the funds borrowed from Mr. Robert E. Wheaton for working capital requirements. As part of the Reorganization Plan, Suzanne H. Wheaton, the wife of Robert E. Wheaton, loaned the Company $300,000 as an exit loan which is secured by real estate in Artesia, New Mexico. Robert and Suzanne H. Wheaton purchased the real estate property in Polson, Montana in June 2013 from the prior landlord when the Company could not exercise its option to purchase and are now the landlord for our 4B’s restaurant. Subsequent to the fiscal year ending January 27, 2014, the Company sold six properties in fiscal year 2015 for a total of $4.2 million and one property in fiscal 2016 for $1.2 million to Robert and Suzanne H. Wheaton and leased the properties back. The Company paid to Robert E. and Suzanne H. Wheaton $45,000 in rent for the fiscal year ending January 27, 2014. The proceeds were used to pay off the obligation to Wells Fargo, the Company’s primary secured creditor in full and unsecured creditors, pursuant to the Plan.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
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. Robert E. Wheaton six years salary and bonus if he resigns related to a change of control of the Company or is terminated, unless the termination is for cause.
On August 4, 2010 Spirit Master Funding, LLC (‘Spirit”) , a landlord of a Company subsidiary, filed case number CV-2010-022169 in the Superior Court of the State of Arizona for the failure of the subsidiary to pay $3.7 million in rent and accelerated rent for four restaurants leased to the subsidiary. The Company believes that this lawsuit is without merit and plans to vigorously defend against the claims. However, there is no assurance the Company will prevail and an adverse decision could have a material impact on the Company’s financial condition and operating results. During the bankruptcy, Spirit filed a proof of claim as an unsecured creditor for approximately $1.5 million. The Company believes they owe Spirit less than their claim amount and has filed an objection to this claim with the bankruptcy court. The objection calculates the claim at approximately $500,000. The outcome of this matter is still pending.
In addition, the Company and its subsidiaries are engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that the resolution of any of these matters will require payments that will have a material effect on the Company's consolidated statements of operations or financial position or liquidity.
NOTE 14 - ACQUISITIONS
The Company did not have any major purchases in fiscal 2014 or fiscal 2013.
NOTE 15- SUBSEQUENT EVENTS
On March 20, 2014, the Company sold the 4B’s Restaurant in Great Falls, Montana. Net proceeds of $157,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On March 28, 2014 the Company sold the property in South Daytona, Florida for net proceeds of $916,000 with all of the sales proceeds paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On April 28, 2014, the Company sold the Pecos Diamond Steakhouse in Artesia, New Mexico. Net proceeds of $367,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On July 14, 2014, the Company sold the former BuddyFreddys Restaurant in Kissimmee, Florida. Net proceeds of $449,000 from this sale were paid to Wells Fargo pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On August 4, 2014, the Company sold the JB’s Restaurant in Rexburg, Idaho. Net proceeds of $307,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On August 5, 2014 the Company closed the Barnhill’s Restaurant in Jackson, Tennessee. The Company accrued for all anticipated lease termination expenses.
On August 8, 2014, the Company sold the former BuddyFreddys Restaurant in Ocala, Florida. Net proceeds of $279,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On October 14, 2014, the Company sold the former Hometown Buffet building in Scottsdale, Arizona using seller financing of $1,550,000. The Company collected the mortgage in April 2015.
On October 31, 2014, the Company sold the JB’s Restaurant in Great Falls, Montana. Net proceeds of $232,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On November 1, 2014 the Company opened a 4B’s Restaurant in Dillon, Montana.
On November 19, 2014, the Company sold the JB’s Restaurant in Vernal, Utah. Net proceeds of $203,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On March 2, 2015, the Company sold the former Whistle Junction Restaurant in Titusville, Florida. Net proceeds of $1,044,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On April 24, 2015, the Company sold the BuddyFreddys Restaurant in Plant City, Florida. Net proceeds of $669,000 from this sale were paid pursuant to the Company’s reorganization plan that was approved by the Bankruptcy Court.
On June 1, 2015 the Company opened a JB’s Restaurant in Evanston, Wyoming.
On June 15, 2015 the Company opened a 4 Aces in Lewistown, Montana.
On August 1, 2015 the Company opened a JB’s Restaurant in Kingman, Arizona.
On November 18, 2015 the Company opened the Original 4B’s Café in Deer Lodge, Montana.
On April 18, 2016 the Company purchased property in Missoula, Montana. The Company intends to open a 4B’s restaurant.
On May 3, 2016 the Company opened a Whistle Junction restaurant in Keystone, South Dakota.
On May 16, 2016 the Company opened a Finnegan’s Restaurant in Kalispell, Montana.
On June 1, 2016 the Company leased property in Billings, Montana. The Company intends to open a 4B’s restaurant.
EXHIBIT INDEX
Exhibit
No.
Description
2.1
Order Confirming Second Amended Joint Plan of Reorganization Dated October 17, 2012 (incorporated by reference to the Company’s filing on Form 8-K on December 20, 2012)
2.2
Debtor’s Second Amended Joint Plan Of Reorganization Dated October 17, 2012 (incorporated by reference to the Company’s filing on Form 8-K on December 20, 2012)
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 Contribution Agreement among CKE Restaurants, Inc., Summit Family Restaurants Inc. and the Company*
10.8
Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita Incorporated)*
10.9
Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and JB's Restaurants, Inc.*
10.10
License Agreement with CKE Restaurants, Inc. (incorporated by reference to the Company’s filing on Form 10-K on April 24, 1998)
10.11
Settlement Agreement with HomeTown Buffet, Inc. (incorporated by reference to the Company’s filing on Form 10-K on April 24, 1998)
10.12
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)
10.13
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)
10.14
Credit Agreement dated as of January 31, 2008 with Wells Fargo Bank N. A. including First Amendment (incorporated by reference to the Company’s filing on Form 10-K on April 25, 2008)
10.15
Loan Agreement dated June 15, 2007 with Robert E. Wheaton and Suzanne H. Wheaton (incorporated by reference to the Company’s filing on Form 10-K on April 25, 2008)
10.16
Asset Purchase Agreement dated December 2, 2007 with Barnhill’s Buffet, Inc. including First Amendment (incorporated by reference to the Company’s filing on Form 10-K on April 25, 2008)
10.17
Asset Purchase Agreement dated February 5, 2008 with Barnhill’s Buffet, Inc. including First Amendment (incorporated by reference to the Company’s filing on Form 10-K on April 30, 2009)
14.1
Star Buffet, Inc. Code of Ethics (incorporated by reference to the Company’s filing on Form 10-K on April 30, 2009)
23.1
Consent of Larson & Company PC, Certified Public Accountants
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
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
101.INS***
XBRL Instance Document
101.SCH***
XBRL Taxonomy Extension Schema Document
101.CAL***
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***
XBRL Taxonomy Extension Label Linkbase Document
101.PRE***
XBRL Taxonomy Extension Presentation Linkbase Document
__________
*
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).
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
E-1