Item 1. Business
Significant Events
On December 7, 2016, the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) entered into a Final Decree and Order Closing the proceeding titled In re: Star Buffet, Inc., Case No.2:11-bk-27518-GBN (the “Chapter 11 Case”) of Star Buffet, Inc.
Chapter 11 Reorganization
On September 28, 2011, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the Bankruptcy Court in the Chapter 11 Case. The Company’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.
On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Company’s plan of reorganization (the “Bankruptcy Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Bankruptcy 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 Bankruptcy Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Bankruptcy Plan were estimated to be in excess of $10 million. The Bankruptcy 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. On October 14, 2016, the Company settled the final unsecured creditor claim for $900,000.
Overview
Star Buffet, Inc. was incorporated on July 28, 1997 as a Delaware corporation to operate as a multi-concept restaurant holding company. At January 30, 2017 it owned and operated 24 full-service restaurants. The Company as of April 20, 2017 owned and operated 25 full-service restaurants located throughout the United States. During the Fiscal 2017, the Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The Company’s restaurants operate under trade names including 4B’s Restaurants, JB’s Restaurants, Barnhill’s Salads Buffet Desserts, Casa Bonita and BuddyFreddys. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming. The Company has an executive and accounting office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah.
The Company plans to continue to operate as a multi-concept restaurant holdings company, adding restaurants to its portfolio as proceeds become available to do so. Management believes the Company will generate sufficient cash flows from operations to support its operations and, together with the proceeds from the sale or refinancing of certain of its properties, to pay its scheduled debt repayments and grow its business.
Recent Developments
On March 21, 2017 the Company acquired the Rancher’s Grill Steakhouse in Deming, New Mexico. Robert E. and Suzanne H. Wheaton purchased the property and entered into a long-term lease with StarTexas Restaurants, Inc., a wholly-owned subsidiary of the Company, with respect to the property.
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 low facility costs and modest corporate overhead can result in consistently positive cash flows.
Growth Strategy
The Company’s strategy is to grow primarily through the acquisition of existing restaurants that currently operate in the family dining, steakhouse or buffet market segments. Depending on the circumstances, these restaurants may be converted to the Company’s existing brands or may remain branded as currently positioned in the market. The Company plans to supplement its acquisitions by purchasing or leasing restaurant real estate that can be converted to the Company’s existing brands. Additionally, the Company may make minority investments in, or enter into strategic alliances with other restaurant chains.
●
Acquisitions. The Company believes that a number of acquisition opportunities exist in the buffets, family dining and steakhouses market segments. The Company believes that many restaurants in these segments are privately owned and may be available for acquisition, particularly when an owner 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.
●
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.
●
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 in the acquisition of restaurants at a later date.
Licenses, Trademarks and Service Marks
The Company owns one or more trademarks and service marks for the following brands; BuddyFreddys ®, Casa Bonita®, Holiday House®, Pecos Diamond Steakhouse®, Bar-H Steakhouse®, 4B’S Restaurants® Barnhill’s Buffet® and Whistle Junction®. The Company also has a perpetual, royalty-free, fully transferable license to use the intangible property of JJ North’s Country Buffet. The Company has a license agreement to use the JB’s trademark. The Company does not have any patents or copyrights.
Restaurant Concepts
As of January 30, 2017, the Company operated eight 4B’s restaurants, six JB’s restaurants, two Pecos Diamond Steakhouses, one Western Sizzlin restaurant, one 4 Aces restaurant operated under the 4B’s brand, one Finnegan’s restaurant operated under the 4B’s brand, one Barnhill’s Buffet restaurant, one BuddyFreddys restaurant, one Casa Bonita Mexican theme restaurant and one Bar-H Steakhouse. In addition, the Company operated one seasonal 4Bs’ restaurant scheduled to reopen in May 2017. During Fiscal 2017, the Company also had three closed restaurants … one closed for remodeling and repositioning; one leased to a third-party operator; and one used as a warehouse.
The Company, through its wholly-owned Southern Barns, Inc. (“Southern Barns”) subsidiary operated as of January 30, 2017 one Barnhill’s Buffet restaurant in Arkansas. The restaurant is 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 30, 2017 eight 4B’S restaurants, one 4 Aces restaurant and one Finnegan’s restaurant all operated in Montana. In addition, the Company operated one seasonal 4Bs’ restaurant scheduled to reopen in May 2017. The 4B’s branded restaurants are approximately 3,500 to 5,500 square feet in size and seat approximately 110 to 175 customers.
The Company, through its wholly-owned JB’s Star Holdings, Inc. (“JB’s Star”) subsidiary, operated as of January 30, 2017 six JB’s restaurants with one each in Arizona, Montana, Utah and Wyoming and two in Idaho. The JB’s restaurants are approximately 4,000 to 5,500 square feet in size and seat approximately 110 to 175 customers.
The Company, through its wholly-owned StarTexas Restaurants, Inc. (“StarTexas”) subsidiary, operated as of January 30, 2017 one Pecos Diamond Steakhouse in Dumas, Texas and one Pecos Diamond Steakhouse in Artesia, New Mexico and a Bar-H Steakhouse in Dalhart, Texas. The Pecos Diamond Steakhouses and Bar-H Steakhouse are each approximately 5,000 square feet with seating capacity for 150 customers.
The Company, through its wholly-owned Summit Family Restaurants Inc. (“Summit”) subsidiary, operated as of January 30, 2017 one 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, through its wholly-owned Florida Buffet Holdings, Inc. (“Florida Buffet”) subsidiary, operated as of January 30, 2017 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 through its wholly-owned Sizzlin Star, Inc. (“Sizzlin Star”) subsidiary, operated as of January 30, 2017 one Western Sizzlin restaurant located in Mississippi, which is approximately 7,000 square feet and seats approximately 250 customers.
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.
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. Future changes to U.S. immigration laws may result in increased costs of compliance in the solicitation, hiring, and ongoing employment of employees, and correspondingly increase our operating costs. 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 Americans with Disabilities Act. Compliance with these laws and regulations can be costly and increase our exposure to litigation and governmental proceedings. 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. 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.
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 Company’s first and second fiscal quarters.
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, which are expected to achieve similar long-term financial performance. 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.
Employees
As of April 20, 2017 the Company employed approximately 820 persons, of whom approximately 815 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 of Directors (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 father of Mary-Whitney Wheaton, a director of the Company.
The Board has determined that Mr. Wheaton is qualified to serve as a director as a result of his extensive experience in the restaurant industry, his leadership experience and skills and his extensive experience with and knowledge of 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.
The Board has determined that Mr. Schadt is qualified to serve as a director as a result of his extensive experience in a related industry and his executive experience.
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.
The Board has determined that Mr. Brown is qualified to serve as a director as a result of knowledge and skills about financial and accounting matters, coupled with his experience in the restaurant industry.
Mary-Whitney “Mamie” Wheaton has served as a director since April 2017. Ms. Wheaton is a Certified Financial Planner professional. Since August 2016, Ms. Wheaton has been employed with LearnVest, a financial planning company. She currently holds the position of Manager of Advice Excellence and Brand Voice. Previously, Ms. Wheaton spent over eight years, beginning in July 2008, with The Vanguard Group, holding various positions including Senior Wealth Management Consultant. She has FINRA Series 6, 7 and 63 licenses. Ms. Wheaton graduated from the University of Arizona in 2008 with a BA degree in Communications, with a minor in Business. Ms. Wheaton is the daughter of Robert E. Wheaton, Chairman of the Board of Directors, Chief Executive Officer and President of the Company.
The Board has determined that Ms. Wheaton is qualified to serve as a director as a result of knowledge and skills about financial and management issues, as well as her general good judgment.
B. Thomas M. Smith, Jr. has served as a director of the Company since June 2002. From 1988 until 1995, he was Vice President and Director of Corporate Purchasing for ITT Corp. Mr. Smith was a consultant with ITT Corp. from January 1996 to December 1996. Mr. Smith served as director of Republic Bancorp from June 1999 until April 2005. Mr. Smith has been retired since December 1996.
The Board has determined that Mr. Smith is qualified to serve as a director as a result of his extensive experience in a related industry and his executive experience.
Key Employee
Ronald E. Dowdy, age 60, has served as the Group Controller since June 1998 and as Treasurer and Secretary since February 1999. Mr. Dowdy served as Controller of Holiday House Corporation for 19 years prior to joining the Company.
Item 1A.
Item 1A. Risk Factors
You should carefully consider the following risk factors before you decide to invest in our Company and our business because these risk factors may have a significant impact on our business, operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected.
Company Risk Factors
Our growth depends upon our ability to acquire and successfully integrate additional restaurants.
We intend to continue to pursue a strategy of moderate growth, primarily through acquisitions. The success of this strategy will depend in part on our ability to acquire additional restaurants or to convert acquired sites into restaurants. The success of our growth strategy is dependent upon numerous factors, including the availability of suitable acquisition opportunities, the availability of appropriate financing, and general economic conditions. We must compete with other restaurant operators for acquisitions and with other restaurant operators, retail companies and developers for desirable sites. Many of these entities have substantially greater financial and other resources than we do. Many of its acquired restaurants may be located in geographic markets in which we have limited or no operating experience. There is a risk that acquired restaurants or converted restaurants may not be operated profitably or successfully integrated into our operations.
We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating and remodeling of existing restaurants, which may adversely affect our results of operations.
Our revenues and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.
We will be unable to implement our growth strategy if we cannot generate sufficient capital and may be required to pay a high price for capital.
We require capital in order to implement the Company’s strategy to grow primarily through the acquisition of existing restaurants that currently operate in the family dining, steakhouse or buffet market segments. We have negative working capital as of January 30, 2017. We have recently been borrowing required growth capital from our Chief Executive Officer, Robert E. Wheaton, and his wife. We have no commitment from them to provide additional capital or assurance that they will voluntarily continue to provide capital as needed. We may need to seek outside capital through the issuance of common stock, preferred stock or debt. We may be unable to raise additional capital as needed and we will likely be required to pay a high price for capital. Factors affecting the availability and price of capital include the following:
●
the availability and cost of capital generally;
●
our financial results, including our liquidity situation;
●
the market price of our common stock;
●
the experience and reputation of our management team;
●
market interest, or lack of interest, in our industry and business plan;
●
the trading volume of, and volatility in, the market for our common stock;
●
our ongoing success, or failure, in executing our business plan and growth strategy;
●
the amount of our capital needs; and
●
the amount of debt we have outstanding.
Failure to protect our service marks or other intellectual property could harm our business.
We regard our BuddyFreddys, Casa Bonita, Holiday House, Pecos Diamond Steakhouse, Bar-H Steakhouse, 4B’s Restaurants Barnhill’s Buffet and Whistle Junction service marks, and other service marks and trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, trademarks, service marks and common law rights, such as trade secret and unfair competition laws, to protect our restaurants from infringement. Although our policy is to aggressively oppose any such infringement, unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. There can be no assurance that the steps we have taken or will take will be adequate to preserve our key intellectual property. Defending or enforcing our service marks and other intellectual property could result in the expenditures of significant resources and failure.
Operating results can be adversely impacted by the failure to renew facility leases or escalating rents.
The majority of our facilities are leased. Certain of these leases contain limited renewal options and other leases contain escalating or fair market increases for rents upon renewal. There can be no assurance that these facility leases can be renewed at lease rates that permit the restaurant to be operated profitably. Our leases expire on dates ranging from 2017 to 2041. If we close a restaurant, we may remain committed to performing our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Additionally, the potential losses associated with our inability to cancel leases may result in our keeping open restaurant locations that are performing significantly below targeted levels. As a result, ongoing lease obligations at closed or underperforming restaurant locations could impair our results of operations.
Increases in wages and benefits may harm our results of operations.
Our results of operations is sensitive to increases in food, labor and other operating costs that cannot always be passed on to our guests in the form of higher prices. Minimum wage increases took effect in states where our restaurants are located in January 2014, January 2015, January 2016 and January 2017. These increases and potential future changes in federal and state minimum wage laws and other laws relating to employee benefits, including the Affordable Care Act, could cause us to incur additional wage and benefits costs and may indirectly increase other costs as higher wage costs for service and commodity suppliers are passed on to us. In connection with higher energy prices, commodity suppliers have passed on higher wholesale prices and higher transportation costs. In anticipation of these past and future increases, we periodically increase menu prices with the desire of maintaining margins. However, market conditions may limit our ability to raise menu prices and, even if we raise prices, the increase may adversely affect the volume of our sales, reducing future revenues and profitability.
Our quarterly results are likely to fluctuate.
We have in the past experienced, and expect to continue to experience, fluctuations in restaurant revenues and results of operations from quarter to quarter. In particular, our quarterly results can vary as a result of acquisitions and costs incurred to integrate newly acquired entities. Conversely, our restaurant revenues and results of operations can vary due to restaurant closures and associated costs connected with these closures. A number of our restaurants are located in areas which are susceptible to severe winter weather conditions or tropical storm patterns which may have a negative impact on customer traffic and restaurant revenues. Accordingly, we believe that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. Seasonal and quarterly fluctuations can have an adverse effect on our business, results of operation and financial condition.
We are dependent on key personnel.
We believe that our success depends in part on the services of its key executives, including Robert E. Wheaton, Chairman of the Board, Chief Executive Officer and President. We do not presently maintain key man life insurance and the loss of the services of Mr. Robert E. Wheaton could have a material adverse effect upon our business, results of operation and financial condition.
We have significant indebtedness, and our various creditors have broad remedies in the event of default.
As of January 30, 2017, we had $5,104,000 in total indebtedness, the majority of which is indebtedness to our Chief Executive Officer, Robert E. Wheaten. If we experience flat or negative operating results, we may be unable to service our debt. If we default on our indebtedness, our creditors have broad remedies, including foreclosure on any pledged assets.
Industry Risk Factors
The restaurant industry is highly competitive.
We compete on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience. As we and our principal competitors expand operations in various geographic areas, competition can be expected to intensify. Such intensified competition could increase our operating costs or adversely affect its revenues or operating margins. A number of our competitors have been in existence longer than we have and have substantially greater financial, marketing and other resources and wider geographical diversity. 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. Our significant investment in, and long term commitment to, each of our restaurant sites limits our ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect our 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, and our operating results, may be harmed by multiple diverse factors, including the following:
●
traffic patterns, demographic considerations and the type, number and location of competing restaurants;
●
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;
●
terrorist attacks directed toward the food supply chain or public concerns about the safety of the food supply chain;
●
as a result of our dependence on frequent deliveries of fresh produce and other food, interruptions in supply, including those caused by adverse weather or other conditions;
●
increases in food, labor and other operating costs that we are unable to pass along to our customers;
●
transportation costs;
●
regional weather conditions;
●
the availability of experienced management and hourly employees; and
●
general adverse economic developments such as a recessions or stagnant (or declining) wages or relative wages among our target customers.
Any, or a combination of several of these events may harm our business, results of operation and financial condition.
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. Future changes to U.S. immigration laws may result in increased costs of compliance in the solicitation, hiring, and ongoing employment of employees, and correspondingly increase our operating costs. 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 Americans with Disabilities Act. 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 individual 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
Provisions in our certificate and bylaws could have the effect of preventing a change of control
Certain provisions of our 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 our Common Stock. Our 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. Our 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, we have 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.
The market price of our shares of common stock is volatile and may increase or decrease dramatically at any time.
The market price of our shares of common stock is volatile. Our stock price may change as the result of announcements of new products or innovations by us or our competitors, uncertainty regarding the viability of our business or our industry, significant litigation, our liquidity situation, revenues or losses, or other factors or events that would be expected to affect our business, financial condition, results of operations and future prospects.
The market price for our shares of common stock may be affected by various factors not directly related to our business or future prospects, including the following:
●
intentional manipulation of our stock price by existing or future shareholders or a reaction by investors to trends in our stock rather than the fundamentals of our business;
●
a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares, including by short sellers covering their position;
●
the interest, or lack of interests, of the market in our business sector, without regard to our financial condition, results of operations or business prospects;
●
positive or negative statements or projections about our company or our industry, by analysts, stock gurus and other persons;
●
the adoption of governmental regulations or government grant programs and similar developments in the United States or abroad that may enhance or detract from our ability to offer our products and services or affect our cost structure; and
●
economic and other external market factors, such as a general decline in market prices due to poor economic conditions, investor distrust or a financial crisis.
Sale of a substantial number of shares of our common stock could cause the market price to decline.
Sale of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock. As of April 20, 2017, 3,213,075 shares of common stock were outstanding. We cannot predict the effect, if any, that sales of shares of our common stock or the availability of such shares for sale will have on prevailing market prices. However, substantial amounts of our common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock.
There is a public market for our stock, but it is thin and subject to manipulation.
The volume of trading in our common stock is limited and can be dominated by a few individuals. The limited volume can make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time. An investor may find it difficult to dispose of shares of our common stock or obtain a fair price for our common stock in the market.
The market price of our common stock may be harmed by our need to raise capital.
We need to raise additional capital to grow our business and expect to raise such capital through the issuance of common stock, preferred stock or debt. Because securities in private placements and other transactions by a company are often sold at a discount to market prices, this need to raise additional capital may harm the market price of our common stock. In addition, the re-sale of securities issued in such capital-raising transactions, whether under Rule 144 or a re-sale registration statement, may harm the market price of our common stock.
A single stockholder, who is also Chairman and CEO, effectively controls our company.
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 all matters affecting the Company may limit the willingness of certain investors to invest in our common stock and the market price of our common stock.
We have not a paid cash dividend since 2008.
We currently intend to retain future earnings, if any, for use in our business. There are no current plans to resume dividend payments.
We are subject to various regulatory regimes, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and laws.
In light of our status as a public company and our lines of business, we are subject to a variety of laws and regulatory regimes in addition to those applicable to all businesses generally. For example, we are subject to the reporting requirements applicable to United States reporting issuers, such as the Sarbanes-Oxley Act of 2002, the rules of the applicable stock markets and certain other securities laws. We are also subject to state and federal environmental, health, safety and similar laws. Such laws and rules change frequently and are often complex. In connection with such laws, we are subject to periodic audits, inquiries and investigations. Any such audits, inquiries and investigations may divert considerable financial and human resources and adversely affect the execution of our business plan.
Through such audits, inquiries and investigations, we or a regulator may determine that we are out of compliance with one or more governing rules or laws. Remedying such non-compliance would divert additional financial and human resources. In addition, in the future, we may be subject to a formal charge or determination that we have materially violated a governing law, rule or regulation. We may also be subject to lawsuits as a result of alleged violation of the securities laws or governing corporate laws. Any charge or allegation, and particularly any determination, that we had materially violated a governing law would harm our ability to enter into business relationships, recruit qualified officers and employees and raise capital.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties
The Company’s restaurants are primarily freestanding locations. As of January 30, 2017, 20 of 27 of the Company’s restaurant facilities were leased. The leases expire on dates ranging from 2017 to 2041. 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 also has a leased administrative in Scottsdale, Arizona and a leased accounting office in Salt Lake City, Utah.
The following is a summary of the Company's restaurant properties as of January 30, 2017:
As of January 30, 2017, the Company’s restaurants are located in the following states:
As of January 30, 2017, the Company’s non-operating restaurants are located in the following states:
During Fiscal 2017, one of the three non-operating restaurants had been leased to a third-party operator, one was used as warehouse and one was closed for remodeling and repositioning.
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. On October 14, 2016, the Company settled the unsecured creditor claim for $900,000.
In addition to the matter set forth above, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position.
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. The following table sets forth the range of high and low bid information for the Common Stock for the fiscal years 2017 and 2016.
Dividends. We currently intend to retain future earnings, if any, for use in our business. There are no current plans to resume dividend payments.
Outstanding Shares and Number of Shareholders
As of April 20, 2017, the number of shares of common stock outstanding was 3,213,075 held by approximately 250 holders of record. In addition, as of the same date, we have reserved 529,000 shares of common stock for issuance upon exercise of options that have been, or may be, granted under our employee stock option plans and 0 shares of common stock for issuance upon exercise of outstanding warrants.
Recent Sales of Unregistered Securities
We did not sell any securities in transactions that were not registered under the Securities Act in the quarter ended January 30, 2017.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our shares of common stock is Computershare.
Item 6.
Item 6. Selected Financial Data
Smaller reporting companies are not required to provide the information required by this item.
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 Report.
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 Bankruptcy 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 Report, 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 Report.
Executive Summary
On December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc.
Operations
The operating results for the 53-week period ended January 30, 2017 (“Fiscal 2017”) and for the 52-week period ended January 25, 2016 (“Fiscal 2016”) are as follows:
The operating results for Fiscal 2017 included 53 weeks of operations for the Company’s six 4B’s restaurants, six JB’s restaurants, two Pecos Diamond Steakhouses, one Western Sizzlin restaurant, one BuddyFreddys restaurant, one Barnhill’s Buffet restaurant, one Casa Bonita Mexican theme restaurant, one 4 Aces restaurant and one Bar-H Steakhouse. The results included one 4B’s restaurant for 22 weeks and one 4B’s restaurant for 14 weeks. The results also included one Finnegan’s restaurant for 36 weeks. The results included one seasonal 4B’s restaurant for 48 weeks scheduled to reopen in May 2017. The results also included one seasonal Whistle Junction restaurant for 23 weeks that was closed. The Company also had three non-operating restaurants at year end. One of the three non-operating restaurants has been leased to a third-party operator, one was used as warehouse and one was closed for remodeling and repositioning.
The operating results for Fiscal 2016 included 52 weeks of operations for the Company’s six 4B’s restaurants, four JB’s restaurants, two Pecos Diamond Steakhouses, one Western Sizzlin restaurant, one BuddyFreddys restaurant, one Barnhill’s Buffet restaurant, one Casa Bonita Mexican theme restaurant, and one Bar-H Steakhouse. The results included one 4B’s restaurant for 32 weeks and one 4B’s restaurant for 10 weeks. The results also included one JB’s restaurant for 34 weeks and one JB’s restaurant for 25 weeks. The results also included one BuddyFreddys restaurant for 41 weeks that was closed. The Company also had three non-operating restaurants at year end. One of the three non-operating restaurants has been leased to a third-party operator, one was used as warehouse and one was closed for remodeling and repositioning.
Fiscal 2017
The consolidated net loss of $178,000 or $(0.06) per diluted share for Fiscal 2017 was approximately a net of $1.0 million less than the net income of $811,000 or $0.25 per diluted share for the prior year. The decrease in the results is due primarily to a decrease of $762,000 in gain on sale of assets in Fiscal 2016 to $0 in Fiscal 2017. In addition, income from operations decreased approximately $209,000 primarily as a result of higher occupancy and other expenses resulting from converting owned real estate to leased real estate, higher labor costs as a percentage of revenue, higher general and administrative expenses and higher depreciation and amortization expenses, which were partially offset by lower food costs as a percentage of revenue and lower impairment expense. Total revenues increased approximately $1.6 million or 6.3% from $24.5 million for the 52-weeks in Fiscal 2016 to $26.1 million for the 53-weeks in Fiscal 2017. The increase in revenues was primarily attributable to four new stores openings in both Fiscal 2017 and Fiscal 2016 resulting in an increase of approximately $2.2 million. Please note one new store opening in Fiscal 2017 was only opened in the summer season of Fiscal 2017. The increased sales were offset by decreases in comparable same store sales of approximately $400,000 or (1.9)% and the closure of one restaurant in Fiscal 2016, which resulted in a decrease of approximately $200,000 in revenue in Fiscal 2017 as compared to Fiscal 2016.
Results of Operations
The following table summarizes the Company’s results of operations as a percentage of total revenues for the Fiscal 2017 and Fiscal 2016.
Comparison of Fiscal 2017 to Fiscal 2016
Total revenues increased approximately $1.6 million or 6.3% from $24.5 million for the 52-weeks in Fiscal 2016 to $26.1 million for the 53-weeks in Fiscal 2017. The increase in revenues was primarily attributable to four new stores openings in both Fiscal 2017 and Fiscal 2016 resulting in an increase of approximately $2.2 million. Please note one new store opening in Fiscal 2017 was only opened in the summer season of Fiscal 2017. The increased sales were offset by decreases in comparable same store sales of approximately $400,000 or (1.9)% and the closure of one restaurant in Fiscal 2016, which resulted in a decrease of approximately $200,000 in revenue in Fiscal 2017 as compared to Fiscal 2016.
Food costs as a percentage of total revenues decreased from 34.6% during in Fiscal 2016 to 33.5% in Fiscal 2017. The decrease in percentage for Fiscal 2017 was primarily attributable to stable wholesale food prices and slightly higher menu prices.
Labor costs as a percentage of total revenues increased from 36.7% during Fiscal 2016 to 37.7% in Fiscal 2017. Labor costs increased by approximately $818,000 in Fiscal 2017 primarily due to the net increase of three stores in Fiscal 2017 compared to Fiscal 2016. The labor cost as a percentage of total revenues increased primarily due to increases in minimum wages in many of the states in which we operate.
Occupancy and other expenses as a percent of total revenues increased from 20.1% in Fiscal 2016 to 21.2% in Fiscal 2017. Occupancy and other expenses increased in Fiscal 2017 by approximately $595,000 primarily due to the net increase of three stores in Fiscal 2017 compared to Fiscal 2016. The occupancy and other expenses as a percentage of total revenues increased primarily as a result of converting owned real estate to leased real estate.
General and administrative expenses as a percentage of total revenues increased from 5.3% in Fiscal 2016 to 5.5% in Fiscal 2017. The general and administrative expenses increased from $1,307,000 in Fiscal 2016 to $1,422,000 in Fiscal 2017, an increase of approximately $115,000, which was primarily due to higher insurance costs as a result of the Affordable Care Act.
Depreciation and amortization expense increased from $407,000 in Fiscal 2016 to $523,000 in Fiscal 2017, an increase of approximately $116,000. The increase was primarily attributable new assets acquired in Fiscal 2017.
Impairment expense as a percentage of total revenues decreased from 0.6% in Fiscal 2016 to 0.0% in Fiscal 2017. The impairment expense in Fiscal 2016 related to stores where the carrying amount of the assets exceeded the estimated fair values of the related property and equipment. Total impairment expense related to property, building, equipment and franchise, license and other charged to operations was $0 and $146,000 for Fiscal 2017 and Fiscal 2016, respectively, a decrease of approximately $146,000, and is summarized as follows:
Interest expense as a percentage of total revenues increased from 1.2% in Fiscal 2016 to 1.4 % in Fiscal 2017 primarily as the result of the Company having higher outstanding debt balance in Fiscal 2017 as compared to Fiscal 2016. Actual interest expense increased from $288,000 in Fiscal 2016 to $372,000 in Fiscal 2017, an increase of approximately $84,000.
Reorganization items income (expense) was $102,000 in expenses in Fiscal 2016 and $67,000 in expenses in Fiscal 2017, a decrease in reorganization items expense of approximately $35,000. The Company and its subsidiary Summit both filed for bankruptcy in September 2011.
The income tax provision totaled $51,000 or 0.2% of pre-tax income, in Fiscal 2016 as compared to $22,000 or, 0.1% of pre-tax income, in Fiscal 2017, a decrease of approximately $29,000. The Company has deferred income tax assets of $0 for both Fiscal 2017 and Fiscal 2016. Income taxes for Fiscal 2017 and Fiscal 2016 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 Mr. Robert E. Wheaton, our principal shareholder.
As of January 30, 2017, the Company had $339,000 in cash. Cash and cash equivalents increased by $95,000 during Fiscal 2017. The net working capital deficit was $3.3 million and $2.2 million at January 30, 2017 and January 25, 2016, respectively. We need to raise additional capital to grow our business and expect to raise such capital through the issuance of common stock, preferred stock or debt. We have recently been borrowing required capital to grow our business from our Chief Executive Officer, Robert E. Wheaton, and his wife. We have no commitment from them to provide additional capital or assurance that they will voluntarily continue to provide capital as needed. We may be unable to raise additional capital as needed, and we will likely be required to pay a high price for capital. 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 $2.0 million on capital expenditures in Fiscal 2017 and approximately $1.3 million on capital expenditures in Fiscal 2016. In Fiscal 2016 the Company sold two properties netting approximately $3.0 million in proceeds which was used to pay unsecured creditors. The Company collected $1,550,000 from a note receivable as part of the sale of a property in Scottsdale, Arizona.
In Fiscal 2017, cash provided by operations was approximately $1.1 million for Fiscal 2017 and cash used by operations was approximately $2.5 million for Fiscal 2016, an increase in net cash provided of approximately $3.7 million.
Cash provided by financing activities was approximately $991,000. The Company made net debt payments of approximately $154,000, had loan costs of $5,000 and had checks written in excess of bank balance of $100,000. The Company also had loan proceeds of approximately $1,050,000 in Fiscal 2017. In Fiscal 2016, cash used by financing activities was approximately $789,000. The Company made net debt payments of approximately $1.9 million, had loan proceeds of approximately $1.4 million, had loan costs of $15,000 and had checks written in excess of bank balance of 0, a change of $250,000.
The following table is a summary of the Company’s outstanding debt obligations.
The Company finances certain restaurant properties with real estate mortgages. As of January 30, 2017, the Company had six properties mortgaged for total of $3.1 million. As of January 25, 2016, the Company had five properties mortgaged for total of $2.2 million.
During the fiscal year ended January 25, 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company, for working capital requirements. 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 30, 2017 and January 25, 2016, respectively. The Company expensed $154,000 and $123,000 to Mr. Robert E. Wheaton for interest during Fiscal 2017 and Fiscal 2016, respectively. The principal balance and any unpaid interest under the Robert E. Wheaton note was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of the Bankruptcy Plan and the principal balance was 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 December 7, 2016 at the Bankruptcy Plan rate. When the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. on December 7, 2016 the Company reverted back to the original interest rate of 8.5%.
On November 9, 2016, the Company borrowed $450,000 from Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton to remodel the 4B’ Restaurant in Missoula, Montana. This obligation is included in the Real Estate Mortgages in the table above. The three year fully amortized secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid approximately $21,200 in principal and $8,500 in interest to Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton under this mortgage in Fiscal 2017.
Off-Balance Sheet Arrangements
As of January 30, 2017, 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 companies in the restaurant industry.
Critical Accounting Policies and Judgments
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company’s consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1-Summary of Significant Accounting Policies to the audited consolidated financial statements for the year ended January 30, 2017, included in this Annual 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 30, 2017 and January 25, 2016.
Notes Receivable
The Company does not have note receivables as of January 30, 2017 or January 25, 2016.
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 30, 2017 and January 25, 2016 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. Accounting Standards Codification 740 (“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 30, 2017 and January 25, 2016. 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 Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with Accounting Standards Codification 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 settled Spirit’s unsecured creditor claim for $900,000. The payment terms are for level payments to be made over five years at five percent interest. The payments started October 1, 2016. The Company has booked the liability in Other Long-Term Liabilities as of January 30, 2017 except for the current portion. The long-term portion was $666,000 as of January 30, 2017. The Company had installments agreements with the Internal Revenue Service for past due taxes. The long-term portion was $843,000 as of January 25, 2016. The Company paid all of the installment agreements with the Internal Revenue Service in full in Fiscal 2017 and did not have any long-term tax liabilities related to the installments as of January 30, 2017.
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 February 2016, the FASB issued Accounting Standards Update 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 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Smaller reporting companies are not required to provide the information required by this item.
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 for the reasons described in “Management’s Report on Internal Control over Financial Reporting” below.
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 30, 2017. 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 30, 2017 and that one significant deficiency existed for the period covered. The significant deficiency identified was as follows:
●
Segregation of duties (significant deficiency).
A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with United States generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s consolidated financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. 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
There have been no changes in our internal control over financial reporting during the last quarter of Fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Director, Executive Officers and Corporate Governance
Directors
The Board 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.
Executive Officers
Mr. Robert E. Wheaton, Chairman of the Board and our Chief Executive Officer and President is the Company’s only executive officer.
CORPORATE GOVERNANCE
Directors Independence
Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., a majority of the Board, have been determined by the Board to be independent as that term is defined in Rule 5605(a)(2) of the listing standards of the NASDAQ Stock Market. The Board held three meetings during Fiscal 2017.
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 and principal financial officer 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.
Committees of the Board of Directors
The Board 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 has been determined to be an “audit committee financial expert” as such term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. The Audit Committee is established in accordance with Section 3(a)(58)(B) of the Securities Exchange Act of 1934, as amended. All members of the Audit Committee are financially literate and are "independent" under the standards described in Rule 5605(a)(2) and Rule 5605(c)(2) (for audit committee members) of the listing standards of the Nasdaq Stock Market. The Audit Committee held three meetings during Fiscal 2017.
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 periodically 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 is comprised of Thomas G. Schadt and B. Thomas M. Smith, Jr., each of whom is “independent” under Rule 5605(a)(2) of the listing standards of the Nasdaq Stock Market. 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 no meetings during Fiscal 2017 since while the Bankruptcy Plan was in effect, it prohibited changes to corporate officer’s salary until the unsecured creditors were 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” under NASDAQ independence standards. The Nominating Committee assists our Board 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, and by developing and recommending corporate governance guidelines. The Nominating Committee held no meetings during Fiscal 2017. Our Board 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.
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. Each of the nominees proposed for election at the annual meeting are currently directors of the Company.
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, if any, that no Forms 5 were required for those persons during Fiscal 2017. We believe that 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”) as 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:
●
Attract and retain highly qualified individuals who are capable of making significant contributions to the long-term success of the Company;
●
Reward individuals for the enhancement of shareholder value; and
●
Promote a performance-oriented environment that encourages Company and individual achievement.
Executive Compensation Procedures
The Company has established, and historically updated procedures to provide an appropriate creative compensation program. However, subsequent to the approval of the Bankruptcy Plan in 2012, the Company has been prohibited from modifying terms of the Chief Executive Officer’s compensation. On December 7, 2016 the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy case. Accordingly, the Compensation Committee is permitted to resume its activities effective for the fiscal year ending January 29, 2018.
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 Compensation Committee, in consultation with the CEO, determines the agenda for meetings of the Compensation Committee. 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 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 30, 2017.
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 Compensation 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 annualize 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 operating performance 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 operating performance 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 operating 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 Fiscal 2017, 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 in order to comply with the requirements of the Bankruptcy Plan. The decision on the executive bonus was made in order to conserve cash, to ensure compliance with the Bankruptcy 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.
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 718 (“ASC 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 Fiscal 2017, 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. 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 30, 2017 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 fiscal years ended January 30, 2017 and January 25, 2016.
__________
(1)
The amount shown represents the annual minimum guaranteed bonus earned by and paid to the CEO for the fiscal years ending January 30, 2017 and January 25, 2016.
(2)
The amount shown represents the annual performance-based bonus award earned by the CEO for the fiscal years ending January 30, 2017 and, January 25, 2016, 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 30, 2017 and January 25, 2016, in medical expense reimbursement payments to the CEO.
Robert E. Wheaton’s employment agreement has a base salary of not less than $250,000 per year. He was not eligible for a performance bonus under the terns if the Bankruptcy Plan. No stock options were granted in Fiscal 2017.
Grants of Plan-Based Awards
The following table sets forth information concerning plan-based compensation awards granted to the CEO during Fiscal 2017.
__________
(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 2017; 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 30, 2017.
Outstanding Equity Awards at Year-End
There are no equity awards held by the CEO as of January 30, 2017.
Options Exercises and Stock Vested in Fiscal 2017
The CEO did not hold or exercise any Company stock options and no equity awards vested in Fiscal 2017.
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 extension each November 1 of an additional 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, (iv) reduction in the CEO’s base salary or bonus, (v) 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; (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 to 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 30, 2017 or the CEO had resigned his employment for “good reason” (including a change of control) on January 30, 2017, 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 $75,000.
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 30, 2017 or the CEO had resigned his employment without “good reason,” or died on January 30, 2017, 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 30, 2017, 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.
Compensation Risks
The Company’s management and Compensation Committee have assessed the risks associated with our compensation policies and practices for all employees, including non-executive officers. Based on the results of this assessment, we do not believe that our compensation policies and practices for all employees, including non-executive officers, create risks that are reasonably likely to have a material adverse effect on the Company.
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 Fiscal 2017
For Fiscal 2017, 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 and committee meetings. For Fiscal 2017, the Company did not grant any stock options or other equity-based compensation to non-employee directors, or did it recognize or incur any financial accounting expense under ASC 718 related to equity compensation awards granted to non-employee directors in the 2017 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 Fiscal 2017.
__________
(1)
Mr. Craig Wheaton resigned as s director on April 18, 2017.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
See the table set forth in Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of April 20, 2017 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.
__________
*
Represents ownership of less than one half of one percent.
**
Excludes 5% owners who are officers or directors.
(1)
Calculated based on 3,213,075 shares of our common stock outstanding on April 20, 2017 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)
Based solely on Schedule 13D filed with the SEC on December 18, 2015, 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.
(3)
Based solely on Schedule 13G filed with the SEC on January 27, 2017, Peter J. Abrahamson reports having sole voting power with respect to 175,000 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
Certain Relationships and Related Party Transactions
Mr. Robert E. Wheaton currently beneficially owns approximately 45.3% of our total equity securities 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. During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. 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 30, 2017 and January 25, 2016. 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 Bankruptcy Plan and the principal balance was 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 December 7, 2016 at the Bankruptcy Plan rate. When the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. on December 7, 2016 the Company reverted back to the original interest rate of 8.5%. The Company expensed $154,000 and $123,000 to Mr. Robert E. Wheaton for interest during Fiscal 2017 and Fiscal 2016, respectively.
On November 9, 2016, the Company borrowed $450,000 from Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton to remodel the 4B’s restaurant in Missoula, Montana. The three year fully amortized secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid approximately $21,200 in principal and $8,500 in interest to Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton under this loan in Fiscal 2017.
As part of the Bankruptcy Plan, Suzanne H. Wheaton, the wife of Robert E. Wheaton, loaned the Company $300,000 as an exit loan was secured by real estate in Artesia, New Mexico. The exit loan has been repaid. 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. Additionally, the Company sold one property to Robert E. and Suzanne H. Wheaton during Fiscal 2016 for a total purchase price of $1.2 million and $200,000 loss on sale of assets. The Company entered into a lease agreement with Robert E. and Suzanne H. Wheaton for each of the properties sold. 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 Bankruptcy Plan. During Fiscal 2017, Robert E. and Suzanne H. Wheaton leased to the Company the Finnegan’s Restaurant in Kalispell, Montana. The Company paid to Robert E. and Suzanne H. Wheaton $601,000 and $545,000 in rent for the Fiscal 2017 and Fiscal 2016, respectively. The Company owes to Robert E. and Suzanne H. Wheaton $382,000 and $42,000 primarily for interest as of January 30, 2017 and January 25, 2016, respectively.
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 Fiscal 2017.
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 $107,000 in Fiscal 2017 and were $111,000 in Fiscal 2016.
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 $40,000 in Fiscal 2017 and were $63,000 in Fiscal 2016.
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 30, 2017 and January 25, 2016.
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 2017.
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)
April 28, 2017
By:
/s/ Robert E. Wheaton
Robert E. Wheaton
Chief Executive Officer and President
(Principal Executive Officer)
April 28, 2017 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,
April 28, 2017
Robert E. Wheaton
President and Director
/s/
Ronald E. Dowdy
Group Controller, Treasurer
April 28, 2017
Ronald E. Dowdy
and Secretary
/s/
Thomas G. Schadt
Director
April 28, 2017
Thomas G. Schadt
/s/
Todd S. Brown
Director
April 28, 2017
Todd S. Brown
/s/
Mary-Whitney Wheaton
Director
April 28, 2017
Mary-WhitneyWheaton
/s/
B. Thomas M. Smith, Jr.
Director
April 28, 2017
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 30, 2017 and January 25, 2016, 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 30, 2017 and January 25, 2016, 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
April 28, 2017
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 - SIGNIFICANT EVENTS, CHAPTER 11 REORGANIZATION AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Events
On December 7, 2016, the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) entered into a Final Decree and Order Closing the proceeding titled In re: Star Buffet, Inc., Case No.2:11-bk-27518-GBN (the “Chapter 11 Case”) of Star Buffet, Inc.
Chapter 11 Reorganization
On September 28, 2011, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the Bankruptcy Court in the Chapter 11 Case. The Company’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.
On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Company’s plan of reorganization (the “Bankruptcy Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Bankruptcy 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 Bankruptcy Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Bankruptcy Plan were estimated to be in excess of $10 million. The Bankruptcy 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. On October 14, 2016, the Company settled the final unsecured creditor claim for $900,000.
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. At January 30, 2017 it owned and operated 24 full-service restaurants. The Company as of April 20, 2017 owned and operated 25 full-service restaurants located throughout the United States. The Company’s restaurants operate under trade names including 4B’s Restaurants, JB’s Restaurants, Barnhill’s Salads Buffet Desserts, Casa Bonita and BuddyFreddys. The Company has an executive and 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 30, 2017, the Company, through eight independently capitalized subsidiaries operated two Buffet restaurants and 22 Non-Buffet restaurants. The Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming.
As of January 25, 2016, the Company, through eight independently capitalized subsidiaries operated two Buffet restaurants and 19 Non-Buffet restaurants. The Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming.
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 30, 2017 and January 25, 2016. The accounts receivable balances as of January 30, 2017 and January 25, 2016 were comprised of the following:
Notes Receivable
Notes receivable are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts. The Company does not have note receivables as of January 30, 2017 or January 25, 2016.
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.
Other Intangible Assets
Other intangible assets consist of trademarks. The Company has recorded a $33,000 value for trademarks for both the years ended January 30, 2017 and January 25, 2016. 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 30, 2017.
The table below shows expected amortization for finite-lived intangibles as of January 30, 2017 for the next five years:
Amortization of franchise and license fees amounted to $0 for both the fiscal years ending January 30, 2017 and January 25, 2016.
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 $0 and $146,000 for the years ended January 30, 2017 and January 25, 2016, 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.
●
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 $70,000 and $12,000 of pre-opening costs during fiscal 2017 and 2016.
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 30, 2017 and January 25, 2016 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 30, 2017 and January 25, 2016. 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 $192,000 and $162,000 for the years ended January 30, 2017 and January 25, 2016, 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 $15,000 for the years ended January 30, 2017 and January 25, 2016.
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 30, 2017 and January 25, 2016, 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.
There were no outstanding options at the end of Fiscal 2017 or Fiscal 2016.
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 February 2016, the FASB issued Accounting Standards Update 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
On December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc.
NOTE 4 - NOTES RECEIVABLE
The Company does not have note receivables as of January 30, 2017 or January 25, 2016.
NOTE 5 - PROPERTY, BUILDINGS AND EQUIPMENT
The components of property, buildings and equipment used in restaurant operations are as follows:
The Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The components are as follows:
Depreciation expense for Fiscal 2017 and 2016 totaled $523,000 and $407,000, respectively. Total impairment expense related to property, building and equipment charged to operations was $0 and $146,000 for the years ended January 30, 2017 and January 25, 2016, 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.
Real Estate Mortgages
The Company finances certain restaurant properties with real estate mortgages. As of January 30, 2017, the Company had six properties mortgaged for total of $3.1 million. As of January 25, 2016, the Company had five properties mortgaged for total of $2.2 million.
Note Payable to Officer
During the fiscal year ended January 25, 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company, for working capital requirements. 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 30, 2017 and January 25, 2016, respectively. The Company expensed $154,000 and $123,000 to Mr. Robert E. Wheaton for interest during Fiscal 2017 and Fiscal 2016, respectively. The principal balance and any unpaid interest under the Robert E. Wheaton note 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 Bankruptcy Plan the principal balance was 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 December 7, 2016 at the Bankruptcy Plan rate. When the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. on December 7, 2016 the Company reverted back to the original interest rate of 8.5%.
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 30, 2017 as follows:
NOTE 7 - LEASES
The Company occupies certain restaurants under long-term operating leases expiring at various dates through 2041. Many restaurant leases have renewal options to extend for terms of 2 to 16 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 30, 2017 are as follows:
Aggregate rent expense under non-cancelable operating leases during Fiscal 2017 and 2016 are as follows:
The Company reduces the deferred rent liability for stores in the year that were purchased or closed. There was not any in deferred rent expense for stores purchased or closed in 2017 and 2016.
The rental income for the property, buildings and equipment leased to third parties (Note 5) in Fiscal 2017 and Fiscal 2016 was $124,000 and $192,000, respectively. The Company leased three non-operating units to tenants in both Fiscal 2017 and Fiscal 2016. 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 30, 2017 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, accounting policies dictate until it is more likely than not that the Company will be able to realize the benefit of the deferred tax assets existing at January 30, 2017, the Company must provide a fully valuation allowance for the deferred tax assets. 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.
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.
The stock option transactions and the options outstanding are summarized as follows:
The there are no stock options outstanding at January 30, 2017. The intrinsic value of options outstanding was $0 as of fiscal year ending January 25, 2016. There is no further compensation cost to recognize under this plan for this year or 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. 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 30, 2017 and January 25, 2016. 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 Bankruptcy Plan the principal balance was 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 December 7, 2016 at the Bankruptcy Plan rate. When the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. on December 7, 2016 the Company reverted back to the original interest rate of 8.5%. The Company expensed $154,000 and $123,000 to Mr. Robert E. Wheaton for interest during Fiscal 2017 and Fiscal 2016, respectively.
On November 9, 2016, the Company borrowed $450,000 from Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton to remodel the 4B’ in Missoula, Montana. The three year secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid approximately $21,200 in principal and $8,500 in interest to Mr. Robert E. Wheaton and Mrs. Suzanne H. Wheaton in Fiscal 2017.
As part of the Bankruptcy 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. The exit loan has been repaid. 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. Additionally, the Company sold six properties to Robert E. and Suzanne H. Wheaton during Fiscal 2015 for a total purchase price of $4.2 million and $600,000 gain on sale of assets and one property to Robert E. and Suzanne H. Wheaton during Fiscal 2016 for a total purchase price of $1.2 million and $200,000 loss on sale of assets. The Company entered into a lease agreement with Robert E. and Suzanne H. Wheaton for the property sold. 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 Bankruptcy Plan. During Fiscal 2017, Robert E. and Suzanne H. Wheaton leased to the Company the Finnegan’s Restaurant in Kalispell, Montana. The Company paid to Robert E. and Suzanne H. Wheaton $601,000 and $545,000 in rent for the Fiscal 2017 and Fiscal 2016, respectively. The Company owes to Robert E. and Suzanne H. Wheaton $382,000 and $42,000 primarily for interest as of January 30, 2017 and January 25, 2016, respectively.
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.
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. On October 14, 2016, the Company settled the unsecured creditor claim for $900,000.
In addition to the matter set forth above, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position.
NOTE 14 - ACQUISITIONS
The Company did not have any major acquisitions in Fiscal 2017 or Fiscal 2016.
NOTE 15- SUBSEQUENT EVENTS
On March 21, 2017 the Company acquired the Rancher’s Grill Steakhouse in Deming, New Mexico. Robert E. and Suzanne H. Wheaton purchased the property and entered into a long-term lease with StarTexas Restaurants, Inc., a wholly-owned subsidiary of the Company, with respect to the property.
EXHIBIT INDEX
__________
(1)
Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 1 (Registration No. 333- 32249).
(2) Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 2 (Registration No. 333- 32249)
(3) Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended January 25, 2008
* Filed herewith
** Indicates management contract or compensatory plan or arrangement.
E-1