| The Company intends to pursue a strategy of moderate growth, primarily through acquisitions |
| The success of this strategy will depend in part on the ability of the Company to acquire additional buffet restaurants or to convert acquired sites into buffet restaurants, within both existing and new markets |
| The success of the Company’s growth strategy is dependent upon numerous factors, many of which are beyond the Company’s control, including the availability of suitable acquisition opportunities, the availability of appropriate financing, and general economic conditions |
| The Company must compete with other restaurant operators for acquisition opportunities and with other restaurant operators, retail stores, companies and developers for desirable site locations |
| Many of these entities have substantially greater financial and other resources than the Company |
| Many of its acquired restaurants may be located in geographic markets in which the Company has limited or no operating experience |
| There can be no assurance that the Company will be able to identify, negotiate and consummate acquisitions of additional buffet restaurants or that acquired restaurants or converted restaurants can be operated profitably and successfully integrated into the Company’s operations |
| Acquisitions involve a number of special risks that could adversely affect the Company’s business, results of operations and financial condition, including the diversion of management’s attention, the assimilation of the operations and personnel of the acquired restaurants and the potential loss of key employees |
| In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during expansion could materially and adversely affect the Company’s business, financial condition and results of operations |
| There can be no assurance that any acquisition will not materially and adversely affect the Company or that any such acquisition will enhance the Company’s business |
| Furthermore, the Company is unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future |
| A strategy of growth through acquisitions requires access to significant capital resources |
| If the Company determines to make a sizeable acquisition, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities |
| The sale of additional equity or convertible debt securities could result in additional dilution to the Company’s stockholders |
| At present, the Company has only limited availability under its credit facility which expires on May 31, 2006 |
| There can be no assurance that this credit facility will be replaced or a new credit facility will be established to the Company for any such acquisition |
| Since inception, the Company’s acquisition strategy has incorporated the utilization of loans to sellers to facilitate certain proposed transactions |
| In most cases, these loans are secured and include, as part of 10 ______________________________________________________________________ terms and conditions, the Company’s right to convert the loan into ownership of the restaurants |
| Also, certain of these loans contain favorable interest rates and repayment terms if the loans are not converted to ownership for one or more reasons |
| This financing strategy entails significant risk |
| Currently, the Company has three loans outstanding and one significant-sized loan is in default |
| However, because the Company anticipates full recovery of amounts outstanding through either repayment or conversion to ownership, historically no provision for doubtful accounts has been established |
| While estimates to date have been within our expectations, a change in the financial condition of specific restaurant companies or in overall industry trends may result in future adjustments to Company estimates of recoverability of receivables |
| From February 1998 to January 2001, the Company acquired 27 restaurants in seven states, including 15 restaurants in Florida |
| The Company has only acquired one new restaurant from January 2001 to January 2006 |
| On February 1, 2005, the Company entered into a strategic alliance with the option to purchase as many as five restaurants |
| On January 31, 2006 and February 28, 2006, the Company purchased four K-BOB’S restaurants |
| In addition, on April 21, 2006, the Company announced a Strategic Alliance with Western Sizzlin Corporation |
| In accordance with the terms of this agreement, Star Buffet, Inc |
| 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, Star Buffet, Inc |
| and Western Sizzlin will explore a number of identified opportunities to reduce operating and administrative expenses |
| As a result of these acquisitions, the Company is complex and diverse, and the integration of the acquisitions has presented difficult challenges for the Company requiring increased management time and resources |
| In order to improve profitability, the Company needs to continue successfully integrating and streamlining restaurant functions |
| The difficulties of such integration have been increased by the necessity of coordinating geographically separate organizations |
| The integration of certain operations following the acquisitions required the dedication of management resources resulting in a temporary distraction from the day-to-day business of the Company |
| The Company continues to reduce costs and integrate functions |
| The failure to continue effectively integrating the operations of the Company or improving the results of operations of the acquired restaurants could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Dependence Upon and Restrictions Resulting from Franchisors |
| The Company operates its 14 HomeTown Buffet Restaurants through its wholly-owned subsidiary, HTB Restaurants, Inc, which is a party to a Franchise Agreement with the HomeTown Franchisor for each such restaurant |
| The performance of the Company’s HomeTown Buffet restaurant operations is directly related to the success of the HomeTown Buffet restaurant system, including the management and financial condition of HomeTown as well as restaurants operated by HomeTown and their other franchisees |
| The inability of such restaurants to compete effectively could have a material adverse effect on the Company’s operations |
| The success of the Company’s HomeTown Buffet restaurants depends in part on the effectiveness of the HomeTown franchisor’s marketing efforts, new product development programs, quality assurance and other operational systems over which the Company has little or no control |
| For example, adverse publicity involving HomeTown restaurants operated by the franchisor or their other franchisees could have a material adverse effect on the Company’s business, financial condition and results of operations |
| The Company’s operations with respect to its HomeTown restaurants are subject to certain restrictions imposed by policies and procedures of HomeTown currently in effect and which may from time to time, change |
| These restrictions limit the Company’s ability to modify the menu items and decor of its restaurants and may have the effect of limiting the Company’s ability to pursue its business plan |
| Furthermore, the franchise agreement with the HomeTown franchisor imposes substantial restrictions on the Company’s ability to operate certain restaurant formats and to open additional restaurants in certain geographical areas |
| 11 ______________________________________________________________________ Dependence Upon and Restrictions Resulting from Licensors |
| The Company, through its subsidiary Summit, operates six JB’s Restaurants in Arizona, Montana, Utah and Wyoming |
| The Company entered into a License Agreement with the JB’s Licensor for each such restaurant in November 2002 |
| The license agreement allows the Company to use the JB’s trademarks through August 31, 2012 with an option for an additional ten years |
| The performance of the Company’s JB’s Restaurant operations is directly related to the success of the JB’s Restaurant system, including the management and financial condition of the JB’s Licensor as well as the number of restaurants operated by the JB’s Licensor and their other licensees or franchisees |
| The inability of such restaurants to compete effectively could have a material adverse effect on the Company’s operations as well as the number of restaurants |
| The success of the Company’s JB’s Restaurants depends in part on the effectiveness of the JB’s Licensor’s marketing efforts, new product development programs, quality assurance and other operational systems over which the Company has little or no control |
| For example, adverse publicity involving JB’s Restaurants operated by the licensor or their other licensees or franchisees could have a material adverse effect on the Company’s business, financial condition and results of operations |
| The Company’s operations with respect to its JB’s Restaurants are subject to certain restrictions imposed by policies and procedures of JB’s currently in effect and which, from time to time, change |
| filed for bankruptcy on March 20, 2002 |
| The licensor’s bankruptcy has had no significant impact on the Company’s restaurant operations to date |
| The Company’s Quarterly Results are Likely to Fluctuate |
| The Company has in the past experienced, and expects to continue to experience, significant fluctuations in restaurant revenues and results of operations from quarter to quarter |
| In particular, the Company’s quarterly results can vary as a result of acquisitions, costs incurred to integrate newly acquired entities and seasonal patterns |
| A large number of the Company’s restaurants are located in areas which are susceptible to severe winter weather conditions or tropical storm patterns which may have a negative impact on customer traffic and restaurant revenues |
| Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance |
| There can be no assurance that future seasonal and quarterly fluctuations will not have a material adverse effect on the Company’s business, results of operation and financial condition |
| The Restaurant Industry is Highly Competitive |
| The Company competes on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience |
| The Company’s competitors include a large and diverse group of restaurant chains and individually owned restaurants, including chains and individually owned restaurants that use a buffet format |
| The number of buffet restaurants with operations generally similar to the Company’s has grown considerably in the last several years and the Company believes competition among buffet-style restaurants is increasing |
| As the Company and its principal competitors expand operations in various geographic areas, competition, including competition among buffet-style restaurants, can be expected to intensify |
| Such intensified competition could increase the Company’s operating costs or adversely affect its revenues or operating margins |
| A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than does the Company |
| In addition, the restaurant industry has few noneconomic barriers to entry and is affected by changes in consumer tastes, national, regional and local economic conditions and market trends |
| The Company’s significant investment in, and long term commitment to, each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Company’s operations |
| The Restaurant Industry is Complex and Volatile |
| Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends |
| The 12 ______________________________________________________________________ performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants |
| Multi-unit food service businesses such as the Company’s can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants |
| The Company’s business could be adversely affected by terrorist attacks directed toward the food supply chain or public concerns about the safety of the food supply chain |
| Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses such as the Company’s to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients |
| The Company’s profitability is highly sensitive to increases in food, labor and other operating costs that cannot always be passed on to its guests in the form of higher prices or otherwise compensated for |
| In addition, unfavorable trends or developments concerning factors such as inflation, increased food, labor, employee benefits, including increases in hourly wage and unemployment tax rates and utility costs, increases in the number and locations of competing buffet-style restaurants, regional weather conditions and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company’s business, financial condition and results of operations in particular |
| Changes in economic conditions affecting the Company’s guests could reduce traffic in some or all of the Company’s restaurants or impose practical limits on pricing, either of which could have a material adverse effect on the Company’s business, financial condition and results of operations |
| The success of the Company will depend in part on the ability of the Company’s management to anticipate, identify and respond to changing conditions |
| There can be no assurance that management will be successful in this regard |
| The Company is Dependent on Its Key Personnel |
| The Company believes that its success will depend in part on the services of its key executives, including Robert E Wheaton, Chairman of the Board, Chief Executive Officer and President |
| The Company does not maintain key man life insurance |
| Wheaton could have a material adverse effect upon the Company’s business, financial condition and results of operations, as there can be no assurances that a qualified replacement would be available in a timely manner if at all |
| The Company’s continued growth will also depend in part on its ability to attract and retain additional skilled management personnel |
| The Restaurant Industry is Subject to Substantial Government Regulation |
| The restaurant industry is subject to federal, state and local government regulations, including those relating to the preparation and sale of food as well as building and zoning requirements |
| In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements |
| The failure to obtain or retain food licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Many of the Company’s employees are paid hourly rates based upon the federal and state minimum wage laws |
| Changes in federal, state or local requirements increasing the minimum wage may result in higher labor costs to the Company |
| Effect of Certain Charter and Bylaw Provisions |
| Certain provisions of the Company’s Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company |
| Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company’s Common Stock |
| The Company’s Certificate of Incorporation allows the Company to issue up to 1cmam500cmam000 shares of currently undesignated Preferred Stock, to determine the powers, preferences, rights, qualifications and limitations or restrictions granted to or imposed on any unissued series of that Preferred Stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders |
| The Preferred Stock could be issued with voting, liquidation, dividend 13 ______________________________________________________________________ and other rights superior to the rights of the Common Stock |
| The Certificate of Incorporation also eliminates the ability of stockholders to call special meetings |
| The Company’s Bylaws require advance notice to nominate a director or take certain other actions |
| Such provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company |
| In addition, the Company has not elected to be excluded from the provisions of Section 203 of the Delaware General Corporation Law, which imposes certain limitations on transactions between a corporation and “interested” stockholders, as defined in such provisions |
| Possible Volatility of Stock Price |
| The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| The volume of trading in the market for the Company’s common stock is limited, which may make it difficult to liquidate your investment and can increase price volatility |
| Due to changes in the balance of buy and sell orders and other factors, the price of the Company’s common stock can change for reasons unrelated to the performance of the business of the Company |
| Fluctuations in the Company’s operating results, failure of such operating results to meet the expectations of stock market analysts and investors, changes in stock market analyst recommendation regarding the Company, the success or perceived success of competitors of the Company, as well as changes in general economic or market conditions and changes in the restaurant industry may also have a significant adverse affect on the market price of the Common Stock |
| Sale of a Substantial Number of Shares of Our Common Stock Could Cause the Market Price to Decline |
| Sales of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock |
| As of April 18, 2006, 3cmam104cmam175 shares of common stock were outstanding and 696cmam000 shares were issuable upon exercise of outstanding options at exercise prices ranging from dlra5dtta00 to dlra12dtta00 |
| The Company cannot predict the effect, if any, that sales of shares of the Company’s common stock or the availability of such shares for sale will have on prevailing market prices |
| However, substantial amounts of the Company’s common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock |
| Control by One Principal Stockholder |
| Robert E Wheaton, Chairman of the Board, Chief Executive Officer and President, currently beneficially owns approximately 48prca of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 48prca of the total voting power |
| Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of our directors |
| Sales of a substantial number of shares of our common stock by Mr |
| Wheaton or other principal shareholders in the public market could substantially reduce the prevailing market price of our common stock |