STAR BUFFET INC - Quarter Report: 2007 May (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549

FORM 10-Q

(Mark  One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  May 21, 2007

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to 

Commission File Number:  0-6054

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

1312 N. Scottsdale Road,
Scottsdale, AZ 85257
(Address of principal executive offices) (Zip Code)

(480) 425-0397
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  o

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer  o    Accelerated filer  o    Non-accelerated filer  x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of June 21, 2007, there were 3,170,675 shares of Common Stock, $ .001 par value, outstanding.

STAR BUFFET, INC. AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of May 21, 2007 (unaudited) and January 29, 2007
	Unaudited Condensed Consolidated Statements of Operations for the sixteen weeks ended May 21, 2007 and May 22, 2006
	Unaudited Condensed Consolidated Statements of Cash Flows for the sixteen weeks ended May 21, 2007 and May 22, 2006
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

2

PART I:  FINANCIAL INFORMATION

Item 1:   Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS		May 21, 2007			January 29, 2007
		(Unaudited)
Current assets:
Cash and cash equivalents		$	536,000		$	418,000
Current portion of notes receivable		20,000			58,000
Receivables		606,000			435,000
Inventories		594,000			548,000
Deferred income taxes		309,000			310,000
Prepaid expenses		480,000			320,000
Total current assets		2,545,000			2,089,000
Property, buildings and equipment:
Property, buildings and equipment, net		19,287,000			17,479,000
Property and equipment under capitalized leases, net		710,000			751,000
Property and equipment leased to third parties, net		4,221,000			4,291,000
Property, buildings and equipment held for future use, net		1,892,000			1,892,000
Property held for sale		931,000			931,000
Total property, buildings and equipment		27,041,000			25,344,000
Other assets:
Notes receivable, net of current portion		1,690,000			1,873,000
Deposits and other		260,000			245,000
Total other assets		1,950,000			2,118,000
Deferred income taxes, net		1,944,000			2,097,000
Intangible assets:
Goodwill		1,677,000			1,677,000
Other intangible assets, net		815,000			843,000
Total intangible assets		2,492,000			2,520,000
Total assets		$	35,972,000		$	34,168,000

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

3

---

 

LIABILITIES AND STOCKHOLDERS’ EQUITY		May 21, 2007			January 29, 2007
		(Unaudited)
Current liabilities:
Accounts payable-trade		$	2,894,000		$	2,657,000
Checks written in excess of cash in bank		505,000			—
Payroll and related taxes		1,355,000			1,281,000
Sales and property taxes		789,000			901,000
Rent, licenses and other		530,000			608,000
Dividend payable		1,902,000			—
Income taxes payable		253,000			628,000
Revolving line of credit		708,000			336,000
Current maturities of obligations under long-term debt		316,000			434,000
Current maturities of obligations under capital leases		164,000			157,000
Total current liabilities		9,416,000			7,002,000
Deferred rent payable		1,283,000			1,294,000
Note payable to officer		451,000			—
Capitalized lease obligations, net of current maturities		1,185,000			1,239,000
Long-term debt, net of current maturities		5,914,000			5,455,000
Total liabilities		18,249,000			14,990,000
Stockholders’ equity:
Preferred stock, $.001 par value; authorized 1,500,000 shares; none issued or outstanding		—			—
Common stock, $.001 par value; authorized 8,000,000 shares; issued and outstanding 3,170,675 and 3,170,675 shares		3,000			3,000
Additional paid-in capital		17,491,000			17,491,000
Retained earnings		229,000			1,684,000
Total stockholders’ equity		17,723,000			19,178,000
Total liabilities and stockholders’ equity		$	35,972,000		$	34,168,000

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

4

---

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

		Sixteen Weeks Ended
		May 21, 2007			May 22, 2006
Total revenues		$	22,037,000		$	18,762,000
Costs and expenses
Food costs		7,773,000			6,610,000
Labor costs		7,431,000			6,025,000
Occupancy and other expenses		4,568,000			3,873,000
General and administrative expenses		846,000			829,000
Depreciation and amortization		618,000			647,000
Total costs and expenses		21,236,000			17,984,000
Income from operations		801,000			778,000
Interest expense		(218,000		)	(179,000		)
Interest income		11,000			58,000
Other income		102,000			105,000
Gain on sale of assets		—			234,000
Income before income taxes		696,000			996,000
Income taxes		249,000			324,000
Net income		$	447,000		$	672,000
Net income per common share — basic		$	0.14		$	0.22
Net income per common share — diluted		$	0.14		$	0.21
Weighted average shares outstanding — basic		3,170,675			3,093,648
Weighted average shares outstanding — diluted		3,180,951			3,128,230

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

5

---

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

		Sixteen Weeks Ended
		May 21, 2007			May 22, 2006
Cash flows from operating activities:
Net income		$	447,000		$	672,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		581,000			607,000
Amortization of franchise and licenses		30,000			30,000
Amortization of loan cost		7,000			10,000
Gain on sale of assets		—			(234,000		)
Deferred income taxes		154,000			46,000
Change in operating assets and liabilities:
Receivables		(225,000		)	(173,000		)
Inventories		(46,000		)	(43,000		)
Prepaid expenses		(160,000		)	(182,000		)
Deposits and other		(15,000		)	(15,000		)
Deferred rent payable		(11,000		)	(1,000		)
Accounts payable-trade		237,000			(174,000		)
Income taxes payable		(375,000		)	(189,000		)
Other accrued liabilities		(118,000		)	58,000
Total adjustments		59,000			(260,000		)
Net cash provided by operating activities		506,000			412,000
Cash flows from investing activities:
Proceeds from sale of fixed assets		—			159,000
Interest income		(1,000		)	(2,000		)
Receipts from payments on notes receivable		—			20,000
Issuance of note receivable		—			(100,000		)
Acquisition of property, buildings and equipment		(2,002,000		)	(1,024,000		)
Purchase of license and trademarks		(5,000		)
Net cash used in investing activities		(2,008,000		)	(947,000		)
Cash flows from financing activities:
Check written in excess of cash in bank		505,000			—
Loan from officer		451,000			—
Proceeds from stock options exercised		—			872,000
Payments on long term debt		(559,000		)	(198,000		)
Proceeds from issuance of long-term debt		900,000			—
Proceeds on line of credit, net		372,000			—
Capitalized loan costs		(2,000		)	—
Principal payment on capitalized lease obligations		(47,000		)	(45,000		)
Net cash provided by financing activities		1,620,000			629,000
Net change in cash and cash equivalents		118,000			94,000
Cash and cash equivalents at beginning of period		418,000			491,000
Cash and cash equivalents at end of period		$	536,000		$	585,000

 

6

---

 

		Sixteen Weeks Ended
		May 21, 2007			May 22, 2006
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	79,000		$	177,000
Income taxes		$	463,000		$	468,000
Non cash investing and financing activities:
Accrued dividend payable		$	1,902,000		$	2,695,000
Exchange of notes receivable for equipment and leasehold improvements		$	276,000		$	1,285,500
Transfer of debt as a part of the sale of assets		$	—		$	616,000

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

7

STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note (A) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts for Star Buffet, Inc., together with its direct and indirect wholly-owned subsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc. (“HTB”), Northstar Buffet, Inc. (“NSBI”) and Star Buffet Management, Inc. (“SBMI”) (collectively the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q and Article 10 of Regulation S-X.  These financial statements should be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2007.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been reflected herein.  Results of operations for such interim periods are not necessarily indicative of results to be expected for the full fiscal year or for any future periods.  Certain reclassifications have been made to the fiscal 2007 consolidated financial statements to conform to the fiscal 2008 presentation.  In the Condensed Consolidated Statement of Cash Flows for the quarter ending May 22, 2006 the depreciation and amortization was $637,000. These amounts have been reclassifed as depreciation of $607,000 and amortization of franchise and licenses of $30,000.The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company’s operations.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.  Actual results could differ from those estimates.

The following is a summary of the Company’s restaurant properties as of May 21, 2007. The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurant Division. The Company’s reportable segments are based on brand similarities. The HomeTown Buffet segment includes the Company’s 14 franchised HomeTown Buffet restaurants. The North’s Star segment includes two Western Sizzlin restaurants, two JJ North’s Country Buffet restaurants and one North’s Star Buffet restaurant, of which one JJ North’s Country Buffet and one North’s Star Buffet are non-operating units. The Florida Buffets Division includes six Whistle Junction restaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants and three Holiday House restaurants. The Florida Buffet Division also includes four non-operating units. The Company closed one Whistle Junction restaurant that it managed on June 12, 2007 without incurring any costs. The Company did not own any assets related to this restaurant.  The Summit Restaurants segment includes the Company’s eight JB’s Restaurants of which two are non-operating JB’s Restaurants.  One of the two JB’s Restaurant non-operating units in Rexburg, Idaho opened on June 1, 2007 and the other non-operating unit is leased to a third party.  The Summit Restaurant Division also includes four K-BOB’S Steakhouse restaurants, one Pecos Diamond Steakhouse and one Casa Bonita restaurant.

 

8

---

As of May 21, 2007, the Company’s operating and non-operating restaurants are located in the following states:

Number of Restaurants

 

As of May 21, 2007, the Company’s non-operating restaurants are located in the following states:

Number of

Non-Operating Restaurants

 

As of May 22, 2006, the Company’s operating and non-operating restaurants were located in the following states:

Number of Restaurants

 

9

---

As of May 22, 2006, the Company’s non-operating restaurants were located in the following states:

Number of

Non-Operating Restaurants

 

The operating results for the 16-week period ended May 21, 2007 included operations shown in the tables above and fixed charges for eight restaurants closed during the entire quarter. The operating results for the 16-week period ended May 22, 2006 included operations shown in the tables above and the fixed charges for seven restaurants closed during the entire quarter. At the end of the first quarter of fiscal 2008, three non-operating stores were held for repositioning, one non-operating restaurant was held for sale and the four remaining closed restaurants were leased to third parties.

The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January.  The first quarter of each year contains 16 weeks while the other three quarters each contain 12 weeks, except the fourth quarter has 13 weeks if the fiscal year has 53 weeks.

Note (B) Related Party Transactions

In connection with the Company’s employment contract with Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, the Company agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company’s common stock prior to the enactment of the Sarbanes-Oxley Act of 2002. Mr. Wheaton owns approximately 48% of the Company’s outstanding common shares including options to purchase stock and may have the effective power to elect members of the board of directors and to control the vote on substantially all other matters, without the approval of the other stockholders. The loans were secured by the common stock and bore interest at the prevailing rate set forth in the Company’s credit facility with M&I Marshall & Ilsley Bank. Repayment terms stipulated that Mr. Wheaton would repay principal and interest on or before the later of the fifth anniversary date of the initial advance under the loan agreement, the date he received a lump sum payment per a termination clause or six month’s after the termination of his employment. Management elected not to record any interest income on the loans until the interest income was paid to the Company. On June 8, 2005, Mr. Wheaton paid the principal balance of $698,000 in full and paid $250,000 in interest. On May 27, 2006, Mr. Wheaton paid the last interest payment of $43,713.

In the first quarter ended May 21, 2007, the Company borrowed approximately $451,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company.  The loan is subordinated to the obligation to M&I Marshall & Ilsley Bank and bears interest at 8.5%. The Company accrued $1,244 for interest expense for the quarter ending May 21, 2007. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. Mr. Wheaton loaned the Company approximately $900,000 in the second quarter of fiscal 2008 on similar terms.

10

---

Note (C) Segment and Related Reporting

The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurants Division. The Company’s reportable segments are aggregated based on brand similarities of operating segments.

The accounting policies of the reportable segments are the same as those described in Note 1 of the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. The Company evaluates the performance of its operating segments based on income before income taxes.

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

(Dollars in Thousands)

16 Weeks Ended May 21, 2007		HomeTown Buffet			North’s Star(1)			Florida Buffet(2)			Summit Restaurants(3)			Other			Total
Revenues		$	8,465		$	1,349		$	6,485		$	5,738		$	—		$	22,037
Interest income		—			—			—			—			11			11
Interest expense		(47		)	—			—			—			(171		)	(218		)
Depreciation & amortization		291			28			114			164			21			618
Income (loss) before income taxes		200			27			354			391			(576		)	696
Total assets		11,306			4,527			8,140			8,863			3,136			35,972

 

16 Weeks Ended May 22, 2006
Revenues		$	9,177		$	726		$	3,775		$	5,084		$	—		$	18,762
Interest income		—			—			—			—			58			58
Interest expense		(52		)	—			—			—			(127		)	(179		)
Depreciation & amortization		306			27			140			150			24			647
Impairment of long-lived assets
Income (loss) before income taxes		472			(108		)	351			918			(637		)	996
Total assets		11,654			4,195			7,944			7,867			3,544			35,204

(1) Included in the reportable segment for the quarter ended May 21, 2007 are two locations closed for the entire quarter.  These locations incurred $12,000 of depreciation and amortization expense and $0 of impairment expense in the quarter ended May 21, 2007. These locations have a net book value of equipment of $48,000, buildings and leaseholds of $576,000 and land of $224,000 included in total assets at May 21, 2007.

11

---

Included in the reportable segment for the quarter ended May 22, 2006 are two locations closed for the entire quarter.  These locations incurred $0 of impairment expense in the quarter ended May 22, 2006. These locations have a net book value of equipment of $23,000, buildings and leaseholds of $510,000 and land of $224,000 included in total assets at May 22, 2006.

(2) Included in the reportable segment for the quarter ended May 21, 2007 are four locations closed for the entire quarter.  These four locations incurred $52,000 of depreciation and amortization and $0 of impairment expense in the quarter ended May 21, 2007. These locations have a net book value of equipment of $408,000, buildings of $1,669,000 and land of $1,559,000 included in total assets at May 21, 2007.

Included in the reportable segment for the quarter ended May 22, 2006 are four locations closed for the entire quarter.  These four locations incurred $52,000 of depreciation and amortization and $0 of impairment expense in the quarter ended May 22, 2006. These locations have a net book value of equipment of $536,000, buildings of $1,785,000 and land of $1,559,000 included in total assets at May 22, 2006.

(3) Included in the reportable segment for the quarter ended May 21, 2007 are two locations closed for the entire quarter. These locations represent $51,000, $823,000 and $328,000 of net book value of equipment, buildings and land included in total assets, respectively, and incurred $7,000 in depreciation and amortization expense and $0 of impairment expense.

Included in the reportable segment for the quarter ended May 22, 2006 are two locations closed for the entire quarter.  These locations represent $92,000, $517,000 and $228,000 of net book value of equipment, buildings and land included in total assets, respectively, and incurred $9,000 in depreciation and amortization expense and $0 of impairment expense.

Note (D) Net Income per Common Share

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

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

 

 

12

---

Average shares used in the sixteen weeks ended May 21, 2007 and May 22, 2006 to calculate diluted earnings per share exclude stock options to purchase 488,000 shares of common stock due to the market price of the underlying stock being less than the exercise price.

Note (E) Goodwill

Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with SFAS 142. Goodwill is tested for impairment at the reporting unit level. The Company reviews goodwill for possible impairment by restaurant.

The Company utilizes a two-part impairment test.  First, the fair value of the reporting unit is compared to carrying value (including goodwill).  If the carrying value is greater than the fair value, the second step is performed.  In the second step, the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill.  If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, governmental and environmental factors, in establishing the assumptions used to compute the fair value of each reporting unit.  We also take into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts and data pertinent to valuing the reporting units in our impairment test.

The Company has an independent evaluation of goodwill conducted every three years.  The most recent independent valuation was conducted as of February 1, 2005. There were not any goodwill impairment losses for the 16-week periods ended May 21, 2007 and May 22, 2006.

Note (F) Inventories

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

Note (G) Accounting for Long-Lived Assets

The Company evaluates impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company determines that an impairment write-down is necessary for locations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Note (H) Properties, Building and Equipment

The components of property, buildings and equipment used in restaurant operations, not including property under capitalized leases held for future use, leased to third parties and held for sale, are as follows:

 

13

---

The components of property under capitalized leases are as follows:

 

Total property, buildings and equipment includes the following land, equipment and buildings and leaseholds associated with eight non-operating units as of May 21, 2007 and as of January 29, 2007. As of May 21, 2007. four of the eight units are leased to third-party operators, three units are closed for remodeling and repositioning and one unit is included in property held for sale.    The components are as follows:

 

 

 

The Company did not record an impairment expense in the first quarter of fiscal 2008 or fiscal 2007.

14

Note (I) Stock-Based Compensation

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 grant 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. The Compensation Committee 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, terms of options granted and the number of shares which will be subject to options granted under the 1997 Plan.

On January 31, 2006 we adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (SFAS 123(R)).  SFAS 123(R) requires the recognition of compensation costs relating to share based payment transactions in the financial statements.  We have elected the modified prospective application method of reporting.  Prior to the adoption of SFAS 123(R) we elected to account for stock-based compensation plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized when the intrinsic value is zero or less and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted.  Our stock-based compensation plans are summarized in the table below:

Name of Plan		Shares Authorized		Shares Available		Plan Expiration
1997 Stock Incentive Plan		750,000		1,000		February 2015

 

Stock options issued under the terms of the plans have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2015.

The stock option transactions and the options outstanding are summarized as follows:

		16 Weeks Ended
		May 21, 2007						May 22, 2006
		Options			Weighted Average Exercise Price			Options			Weighted Average Exercise Price
Outstanding at beginning of period		528,000			$	11.56		696,000			$	8.90
Granted		—			—			—			—
Exercised		—			$	—		168,000			$	5.22
Forfeited		—			—			—			—
Outstanding at end of period		528,000			$	11.56		528,000			$	11.56
Exercisable at end of period		528,000			$	11.56		528,000			$	11.56
Weighted average fair value of options granted during the period		$	N/A					$	N/A

 

15

---

The following summarizes information about stock options outstanding at May 21, 2007:

		Options Outstanding							Options Exercisable
Range of Exercise Prices		Number Outstanding		Remaining Contractual Life		Weighted Average Exercise Price			Number Exercisable		Weighted Average Exercise Price
$  5.00		12,000		2.4		$	5.00		12,000		$	5.00
$  6.70		28,000		7.7		$	6.70		28,000		$	6.70
$12.00		488,000		0.3		$	12.00		488,000		$	12.00
		528,000							528,000

 

The Company did not grant any stock options in the first quarter of fiscal 2008 or fiscal 2007.

Note (J) Commitments and Contingencies

HTB entered into a franchise agreement for each HomeTown Buffet location which requires among other items, the payment of a continuing royalty fee to HomeTown Buffet, Inc. The royalty fee is based on 2% of the aggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each of the franchise agreements has a 20-year term (with two five-year renewal options). HTB provides weekly sales reports to the HomeTown franchisor as well as periodic and annual financial statements. HTB is obligated to operate its Hometown Buffet restaurants in compliance with the franchisor’s requirements. The franchisor requires HTB to operate each restaurant in conformity with Franchise Operating Manuals, Recipe Manuals and Menus, restricts operating restaurants within a geographic radius of the franchisor’s restaurants, requires HTB is to use it best efforts to achieve the highest practicable level of sales, and requires HTB to promptly make royalty payments. The HomeTown franchisor may terminate a franchise agreement for a number of reasons, including HTB’s failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. Generally, a franchisor may terminate a franchise agreement only if the franchisee violates a material and substantial provision of the agreement and fails to remedy the violation within a specified period.

The Company entered into a license agreement for certain K-BOB’S locations which requires among other items, the payment of certain fees to K-BOB’S. The fee, where applicable, is based on the aggregate gross sales. The Company provides sales reports to K-BOB’S as well as periodic and annual financial statements. The Company is obligated to operate its K-BOB’S restaurants in compliance with the K-BOB’S requirements.

16

---

The Company entered into an agreement for each Western Sizzlin location which requires among other items, the payment of license fees to Western Sizzlin Corporation. The license fee is based on the aggregate gross. The Company provides weekly sales reports to Western Sizzlin as well as periodic and annual financial statements. The Company is obligated to operate its Western Sizzlin restaurants in compliance with the Western Sizzlin’s requirements.

In 1998, the Company had previously sued North’s Restaurants, Inc. (“North’s”) which resulted in a negotiated settlement in favor of the Company represented by an Amended and Restated Promissory Note (the “Star Buffet Promissory Note).  As a result of North’s failing to live up to its obligations under the Star Buffet Promissory Note, on March 2, 2004, the Company filed a second action against North’s in the United States District Court, District of Utah, Central Division, Case No. 2:04CV00211, seeking not less than approximately $2,900,000 plus interest at the default rate as set forth in the Star Buffet Promissory Note.  In January 2005, the court granted the Company’s motion for summary judgment, ruling that North’s had failed to pay amounts owed to the Company.  The Company obtained a judgment against North’s in the amount of approximately $3,100,000, plus $16,000 in attorney’s fees and costs.

In a related proceeding, North’s other secured creditor, Pacific Mezzanine, initiated litigation against North’s seeking a monetary judgment and the appointment of a receiver. On October 4, 2004, the Circuit Court of the State of Oregon for the County of Jackson approved an order appointing a receiver.

Prior to August 2006, the receiver had remitted only approximately $56,000 in loan repayments. In April, 2006 the Company noticed all relevant parties of its intent to foreclose to seek to expedite the liquidation of North’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver moved to have the Company’s foreclosure of North’s assets set aside so that certain of North’s assets could be sold to a third party.  The motion was approved.  On August 7, 2006, the receiver paid the Company approximately $1,291,000 from a partial sale of the assets. The Company’s note, together with the obligation to the other significant creditor of North’s, is secured by the real and personal property, landlord leases, trademarks and all other intellectual property owned by North’s. The Company believes current and future cash flows including asset sales are adequate for recovery of the remaining principal amount of the note receivable. The Company has not recognized any interest income with respect to this note since August 2003.  The Company has not provided an allowance for bad debts for the note as of May 21, 2007.

In addition to the foregoing, the Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any resolution of any of these routine proceedings will require payments that will have a material effect on the Company’s consolidated statements of operations or financial position or liquidity.

On February 1, 2005, the Company announced in a press release that it had entered into a strategic alliance with K-BOB’S USA Inc. and related affiliates. In accordance with the terms of the strategic alliance, the Company agreed to lend K-BOB’S up to $1.5 million on a long-term basis. In exchange, K-BOB’S granted the Company an option to purchase as many as five corporate owned and operated K-BOB’S restaurants located in New Mexico and Texas, as well as rights to develop K-BOB’S in other areas in the United States.  On January 30, 2006, the Company exercised its option under the terms of the strategic alliance and purchased three K-BOB’S restaurants.

On April 21, 2006, the Company announced in a press release that it had entered into a strategic alliance with Western Sizzlin Corporation. In accordance with the terms of the strategic alliance, the Company plans to convert certain of its existing restaurants to the Western Sizzlin brand; test a newly developed Western Sizzlin buffet prototype; and seek to acquire selected Western Sizzlin franchised restaurants. Additionally, as an important element of the strategic alliance, the Company and Western Sizzlin will explore a number of identified opportunities to reduce operating and administrative expenses.

17

---

On April 22, 2007 the principal of Holiday House Corporation (“HHC”) notified the Company that he planned to turn control of the business and associated assets over to the Company.  On April 23, 2007 the Company began operating the business.  The Company hired HHC’s employees, notified HHC’s creditors of its intent to operate the business and commenced negotiations with HHC’s landlord to craft an acceptable facility lease.

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

Note (K) Taxes

The Company accounts for income taxes in accordance with SFAS No.109 Accounting for Income Taxes. The Company is able to take advantage of the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips resulting in a lower effective tax rate of approximately 35.8% and 32.6% as of May 21, 2007 and May 22, 2006, respectively. 

Note (L) Insurance Programs

The Company is self-insured for general liability claims. The Company has commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Self-insurance accruals include estimates based on historical information and expected future development factors. If actual claims differ from estimates and assumptions, our actual accrual requirements may be materially different from the calculated accruals. The Company had general liability insurance reserves of $51,000 and $53,500 at May 21, 2007 and May 22, 2006, respectively.

Note (M) Subsequent Events

On May 24, 2007 the US Congress’ minimum wage bill was signed into law by President Bush. The bill increases the minimum wage by $0.70 per hour on July 24, 2007, July 24, 2008 and July 24, 2009. In addition, the bill includes tax breaks for employers.

On May 29, 2007, the Company acquired the Bar H Steakhouse in Dalhart, Texas and entered into a $500,000 five year real estate mortgage with Dalhart Federal Savings and Loan Association.  The mortgage has monthly payments beginning July 1, 2007 of $5,903 per month with a balloon payment of $301,345 due on June 1, 2012.  The mortgage is secured by the acquired Bar H Steakhouse restaurant.

On June 1, 2007, the Company opened a new JB’s Family Restaurant in Rexburg, Idaho. The Company had purchased the building and land in 2005.

On June 4, 2007, the Company opened a new internally developed Oklahoma Steakhouse in Weatherford, Oklahoma.  The Company leases the facility. The facility lease is for two years with one five year option.

On June 6, 2007, the Company paid to shareholders of record on May 8, 2007 a dividend of $0.60 per common share. The Board of Directors had approved the dividend on February 23, 2007.

On June 19, 2007, the Company acquired the Western Sizzlin in Magnolia, Arkansas and entered into a $520,000 five year real estate mortgage with Farmers Bank and Trust.  The mortgage has monthly payments of $4,676

18

---

beginning July 19, 2007 with a balloon payment of $407,313 due on June 19, 2012.  The mortgage is secured by the acquired Western Sizzlin restaurant.

19