**UNITEDSTATES**SECURITIES AND EXCHANGE COMMISSION

**Washington, D.C. 20549**

**FORM 10-K**

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**x**                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**For the fiscal year ended January 30, 2006**

**OR**

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

**Commission file number: 0-6054**

**STAR BUFFET, INC.**

(ExactName of Registrant as Specified in its Charter)

| **Delaware**                                                    |   | **84-1430786**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
| **1312 N.  Scottsdale Rd.  Scottsdale, Arizona**                |   | **85257**                             |
| (Address of Principal Executive  Offices)                       |   | (Zip Code)                            |

 

**Registrant’s Telephone Number, Including Area Code:(480) 425-0397**

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**Securities registered pursuant to Section 12(b) ofthe Act: None**Securities registered pursuant to Section 12(g) ofthe Act:

|            |                     | **(Title of Each Class):** | ** ** | ** ** |
|------------|---------------------|----------------------------|------------|------------|
| ** ** | **Common Stock**    | ** **                 |
| ** ** | **$.001 par value** | ** **                 |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x.

Indicateby check mark whether registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).Large Accelerated Filer o  Accelerated Filer o  Non-AcceleratedFiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.) Yes o No x

At August 15,2005, the last business day of the registrant’s second fiscal quarter, therewere outstanding 3,003,425 shares of the registrant’s common stock, $.001 parvalue. The aggregate market value of common stock held by nonaffiliates of theregistrant (1,179,530 shares) based on the last reported sale price of thecommon stock as reported on the Nasdaq Small Cap Market on August 15,2005, ($8.38 per share) was $9,884,461. For purposes of this computation, allexecutive officers, directors, and 10% beneficial owners of the registrant weredeemed to be affiliates. Such determination should not be deemed an admissionthat such executive officers, directors, or 10% beneficial owners are, in fact,affiliates of the registrant.

Thenumber of shares outstanding of the registrant’s common stock was 3,104,175shares as of April 18, 2006.

Documentsincorporated by reference: Portions of the registrant’s Proxy Statement for the2006 Annual Meeting of Stockholders, to be filed with the Securities andExchange Commission within 120 days after January 30, 2006, areincorporated by reference into Part III of this Form 10-K.

The Exhibit Indexis contained in Part IV herein on Page E-1.

 

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**STARBUFFET, INC., AND SUBSIDIARIES**

**Indexto Annual Report on Form 10-K**

**Forthe Fiscal Year Ended January 30, 2006**

|          | ** ** | ** **                                                                                                            | ** ** | ** ** | **Page** | ** ** | ** ** |
|----------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|------------|
|     |       | **PART I**                                                                                                       |       |       |     |       |       |
| ITEM 1.  |       | BUSINESS                                                                                                              |       |       | 1        |       |       |
| ITEM 1A. |       | RISK FACTORS                                                                                                          |       |       | 10       |       |       |
| ITEM 1B. |       | UNRESOLVED STAFF COMMENTS                                                                                             |       |       | 14       |       |       |
| ITEM 2.  |       | PROPERTIES                                                                                                            |       |       | 14       |       |       |
| ITEM 3.  |       | LEGAL PROCEEDINGS                                                                                                     |       |       | 15       |       |       |
| ITEM 4.  |       | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS                                                                  |       |       | 16       |       |       |
|     |       | **PART II**                                                                                                      |       |       |     |       |       |
| ITEM 5.  |       | MARKET FOR REGISTRANT’S  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY  SECURITIES |       |       | 17       |       |       |
| ITEM 6.  |       | SELECTED FINANCIAL DATA                                                                                               |       |       | 17       |       |       |
| ITEM 7.  |       | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                      |       |       | 21       |       |       |
| ITEM 7A. |       | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                                           |       |       | 31       |       |       |
| ITEM 8.  |       | FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA                                                                          |       |       | 31       |       |       |
| ITEM 9.  |       | CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                           |       |       | 31       |       |       |
| ITEM 9A. |       | CONTROLS AND PROCEDURES                                                                                               |       |       | 31       |       |       |
| ITEM 9B. |       | OTHER INFORMATION                                                                                                     |       |       | 31       |       |       |
|     |       | **PART III**                                                                                                     |       |       |     |       |       |
| ITEM 10. |       | DIRECTORS AND EXECUTIVE  OFFICERS OF THE REGISTRANT                                                                   |       |       | 33       |       |       |
| ITEM 11. |       | EXECUTIVE COMPENSATION                                                                                                |       |       | 33       |       |       |
| ITEM 12. |       | SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                  |       |       | 33       |       |       |
| ITEM 13. |       | CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS                                                                       |       |       | 33       |       |       |
| ITEM 14. |       | PRINCIPAL ACCOUNTANT FEES  AND SERVICES                                                                               |       |       | 33       |       |       |
|     |       | **PART IV**                                                                                                      |       |       |     |       |       |
| ITEM 15. |       | EXHIBITS AND FINANCIAL  STATEMENT SCHEDULES                                                                           |       |       | 34       |       |       |
|     |       | SIGNATURES                                                                                                            |       |       | 36       |       |       |
|     |       | EXHIBIT  INDEX                                                                                                        |       |       | E-1      |       |       |
|     |       | FINANCIAL  STATEMENTS                                                                                                 |       |       | F-1      |       |       |

 

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**Cautionary Statements Regarding Forward-Looking Statements**

Thisannual report on Form 10-K contains forward-looking statements, withinthe meaning of the Securities Exchange Act of 1934 and the Securities Act of1933, which are subject to known and unknown risks, uncertainties and otherfactors which may cause the actual results, performance or achievements of theCompany to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. In somecases, forward-looking statements are identified by words such as “believe,” “anticipate,”“expect,” “intend,” “plan,” “will,” “may” and similar expressions. You shouldnot place undue reliance on these forward-looking statements, which speak only asof the date of this annual report on Form 10-K. All these forward-lookingstatements are based on information available to the Company at this time, andthe Company assumes no obligation to update any of these statements. Actualresults could differ from those projected in these forward-looking statementsas a result of many factors, including those identified in the section titled “RiskFactors” under Item 1A and elsewhere. You should review and consider thevarious disclosures made by the Company in this report, and those detailed fromtime to time in the Company’s filings with the Securities and ExchangeCommission, that attempt to advise you of the risks and factors that may affectthe Company’s future results.

**PART I**

**Item 1.**                        *Business*

**Overview**

Star Buffet, Inc., aDelaware corporation (“Star” and collectively with its subsidiaries, the “Company”),is engaged in the restaurant industry. As of January 30, 2006, the Companyowned and operated 14 franchised HomeTown Buffet restaurants, six JB’sRestaurants, five BuddyFreddys restaurants, two JJ North’s Country Buffetrestaurants, two Holiday House restaurants and one Mexican-themedrestaurant operated under the Casa Bonita name. The Company also had fourrestaurants currently closed for remodeling and repositioning, threerestaurants leased to third-party operators and the net assets of anotherclosed restaurant reported as property held for sale. The Company’s restaurantsare located in nine western states and Florida. The Company purchased arestaurant facility in Rexburg, Idaho in September 2005, which it does notoperate, but leases to a JB’s franchisee.

**Recent Developments**

On April 21, 2006, the Companyannounced in a press release that it has entered into a StrategicAlliance with Western Sizzlin Corporation. In accordance with the terms of thisagreement, Star Buffet, Inc. plans to convert certain of its existingrestaurants to the Western Sizzlin brand; test a newly developed WesternSizzlin buffet prototype; and seek to acquire selected Western Sizzlinfranchised restaurants. Additionally, as an important element of the StrategicAlliance, Star Buffet, Inc. and Western Sizzlin will explore a number ofidentified opportunities to reduce operating and administrative expenses.

On March 16, 2006, the Companysold it’s JB’S restaurant property in Laramie, Wyoming for $780,000 and paidoff the real estate mortgage of approximately $622,000.

On February 28, 2006, theCompany announced in a press release that it has completed the acquisition ofK-BOB’S Steakhouse in Dumas, Texas. The Company purchased the equipment, thebuilding and the land for approximately $700,000.

On February 24, 2006, the Boardof Directors approved the Company’s third annual dividend of $0.60 percommon share, an increase of $0.10 per share from the prior year, and a specialdividend of $0.25 per common share. Both are payable on June 7, 2006 toshareholders of record on May 11, 2006.

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On February 1, 2006, the Companyannounced in a press release that it has completed the acquisition of threerestaurants from K-BOB’S USA, Inc. The restaurants, located in Tucumcari, NewMexico and Beeville and Lamesa, Texas, were acquired in accordance with certainprovisions of a strategic alliance entered into between the Company and K-BOB’Son February 1, 2005. The Company purchased the equipment and leaseholdimprovements for approximately $1,285,500. The purchase reduced the Company’sK-BOB’S USA, Inc. note receivable to $214,500.

On January4, 2006, the Company announced that it had received necessary approval from itslender to commence with a buyback program to purchase up to 250,000 commonshares. Star Buffet’s Board of Directors originally authorized the repurchaseof up to 500,000 in 1999, but covenants in effect in the loan agreementsrestricted the Company’s ability to implement the program. Under the currentagreement with its lender, Star Buffet may purchase shares on the open market,or through negotiated transactions, from time-to-time through May 31, 2006,unless otherwise extended. The timing and amount of shares purchased will bebased on prevailing market conditions and other factors. As of April 18, 2006,the Company had 3,104,175 common shares outstanding.

**Business**

The Company’s objective is tobecome a leading operator of regional buffet restaurant brands through theacquisition of established regional concepts and subsequent development ofadditional restaurants within existing or new markets. The Company believesthat certain uniformly applied business practices can be used successfully toimprove the financial performance of its past and future acquisitions. Keyelements of the Company’s business practices are as follows:

*Customer Focus.**  *The Company believes that its ability to deliverhigh quality food to customers with superior service in clean and friendlyenvironments has been central to its success at improving customer perceptionsand sales at its buffet restaurants. Management’s focus includes the followingkey elements:

·       *High Quality Food.  *TheCompany seeks to differentiate itself by providing higher quality and bettertasting food than its competitors. In addition, each brand maintains its ownunique recipes that cater to regional taste profiles of its customers.Management limits the number of items prepared each day and frequently rotatesselected specialty items to maintain customer interest while ensuring that theCompany’s signature items are offered at the highest possible quality.

·       *Superior Service.  *TheCompany provides a level of customer service which it believes has helped itestablish a higher level of customer satisfaction than its competitors.Restaurant managers are encouraged to visit each customer’s table during mealperiods to ensure guest satisfaction. To help assure superior service levels,the Company utilizes a number of methods to monitor guest satisfaction,including an independent mystery shopper survey and a formalized customercomment card program.

·       *Clean and Friendly Environment.  *The Company strives to offer a pleasant, customerfriendly environment at its restaurants by providing attractive, updatedrestaurant decors and by emphasizing cleanliness in all areas of itsoperations.

*Management Practices.**  *The Company’s management team utilizes a seriesof uniform management practices to operate the acquired restaurants. The keyelements of these management practices are:

·       *Performance Measurements.  *The Company has developed food, labor and customer service managementpractices and reporting mechanisms that allow management to effectively monitorrestaurant-level operations, benchmark restaurant performance statistics andcommunicate best-practices across its restaurant operations. Through theuse of its restaurant-level incentive and bonus programs oriented towardmotivating employees, as well as its traditional recognition 

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programs,the Company seeks to motivate its employees and foster an environment whereemployees are encouraged to share their ideas and cost saving suggestions withmanagement.

·       *Cost Control.  *TheCompany has been able to maintain a lean corporate management structure byexpanding the number of restaurants supervised by field managers, havingcorporate personnel oversee multiple administrative functions and appropriate outsourcingof certain functions when cost effective. The Company’s corporateinfrastructure provides purchasing, information systems, finance, accountingand payroll so that restaurant managers can focus on restaurant operations andguest satisfaction.

*Brand Management.**  *The Company’s strategy is to separately manageeach of its restaurant brands to create a unique presence in the marketplace.Although each subsidiary and its brands are positioned somewhat differently inthe market, the Company utilizes many of the same marketing techniques such aslocal store marketing, radio advertising and promotional mailers to increasecustomer awareness and loyalty.

**Segment and Related Reporting**

The Company has fourreporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division andSummit Restaurant Division. The Company’s reportable segments are based onbrand similarities. The HomeTown Buffet segment includes the Company’s 14franchised HomeTown Buffet restaurants. The North’s Star segment includes threeJJ 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 arenon-operating units. The Florida Buffets Division includes two BuddyFreddysrestaurants, three BuddyFreddys Country Buffet restaurants and two HolidayHouse restaurants. The Florida Buffet Division also includes four non-operatingunits. The Summit Restaurants Division includes the Company’s eight JB’sRestaurants, which includes two non-operating JB’s Restaurants. The non-operatingunit in Laramie, Wyoming was sold in March 2006. The Summit RestaurantsDivision also includes the Casa Bonita restaurant in Denver, Colorado. Resultsfor fiscal 2006 also include 34 weeks of operations for one Casa Bonitarestaurant and 10 weeks of operations for one JB’s Restaurant. (See Item 15,Financial Statements, Note 8.)

**Growth Strategy**

The Company’s objective is tobecome a leading operator of regional buffet restaurant brands through (1) acquisitionsof existing buffet restaurant chains which management believes can benefit fromthe Company’s management practices, (2) the acquisitions of existing restaurantproperties that can be converted to buffet brands operated or under developmentby the Company and (3) minority investments in or strategic alliances withother restaurant chains. The Company’s growth strategy is designed tocapitalize on the opportunities management perceives in the fragmented buffetsegment of the restaurant industry.

*AcquisitionStrategy.**  *The Company believes that it will be able tocapitalize on the successful attributes of acquired buffet chains whileincreasing their focus on operations, customer service and quality. The Companybelieves that a number of acquisition opportunities exist due to thefragmentation of the buffet, cafeteria and grill-buffet segments of therestaurant industry, which are comprised of a substantial number of regionalchains. The Company believes that many of these regional chains are privatelyowned and may be available for acquisition because they lack the financial andoperational structure to compete with larger regional and national chains.

*RestaurantConversions.*   Inrecent years, a number of chains in the family dining and budget steakhousesegments of the restaurant industry have experienced operational difficultiesand declining performance. The Company believes that these difficulties are theresult of increasing competition from casual dining chains and casualsteakhouses which offer superior product quality and service at only 

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moderatelyhigher prices. Many of these family dining restaurants and budget steakhousesoccupy desirable locations and provide opportunities to acquire desirablerestaurant locations at attractive prices. The Company believes that theselocations can be acquired and converted at lower prices or leased at rateslower than those available when compared to the cost of new construction.

*Minority Investments andStrategic Alliances.**  *The Companyintends to seek minority investments in, or strategic alliances with, otherrestaurant chains. The Company believes that minority investments can providean attractive investment opportunity for the Company and may lower theacquisition cost of such chains should the Company ultimately seek to acquirethose chains. The Company believes that strategic alliances can be an excellentcorporate arrangement to facilitate (1) more productive use of under-performingrestaurant properties at lower cost and less risk than outright acquisition and(2) reduce corporate overhead or improve purchasing economies.

**Restaurant Concepts**

**HomeTown Buffet Restaurants**

*General.**  *The Company, through its subsidiary HTB Restaurants, Inc.(“HTB”), has a franchise agreement with HomeTown Buffet, Inc., a wholly-ownedsubsidiary of Buffets, Inc., under which HTB operates 14 HomeTown Buffetrestaurants in Arizona (8), Colorado (1), New Mexico (2), Utah (2) and Wyoming(1).

HTB entered into a franchise agreement for eachlocation which requires among other items, the payment of a continuing royaltyfee paid to HomeTown Buffet, Inc. The royalty fee is based on 2% of theaggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each ofthe franchise agreements has a 20-year term (with two five-year renewaloptions). HTB provides weekly sales reports to the HomeTown franchisor as wellas periodic and annual financial statements. HTB is obligated to operate itsHometown Buffet restaurants in compliance with the franchisor’s requirements.The franchisor requires HTB to operate each restaurant in conformity withFranchise Operating Manuals, Recipe Manuals and Menus and HTB is to use itsbest efforts to achieve the highest practicable level of sales and promptlymake royalty payments. The franchise agreement restricts the Company fromoperating restaurants within a geographic radius of the franchisor’srestaurants.

The HomeTown franchisor mayterminate a franchise agreement for a number of reasons, including HTB’sfailure to pay royalty fees when due, failure to comply with applicable laws orrepeated failure to comply with one or more requirements of the franchiseagreement. Many state franchise laws limit the ability of a franchisor toterminate or refuse to renew a franchise. Generally, a franchisor may terminatea franchise agreement only if the franchisee violates a material andsubstantial provision of the agreement and fails to remedy the violation withina specified period.

*Conceptand Menu.**  *HomeTown Buffet restaurants are located both inshopping “strip centers” and as freestanding restaurants. HTB’s typicalrestaurant format is approximately 10,200 square feet with seating for approximately375 customers. The restaurant design is based upon standardized constructionplans, with modifications made for each particular site. The restaurants offerfixed price lunch, dinner and breakfast menus that entitle each customer tounlimited servings of all menu items and beverages. The average check price isapproximately $6.73 per person. The restaurants offer reduced prices tochildren under age 12 and to senior citizens.

*Operations.**  *The HomeTown Buffet restaurants are superviseddirectly by a vice president of operations, who reports to the Company’sPresident. Each HomeTown Buffet restaurant has a general manager and at leastthree co-managers or assistant managers. Managers are required to attend formaltraining sessions in management and operations of the restaurant. In addition,each restaurant manager is required to comply with specific franchisor-providedguidelines to assure uniformity of operations and 

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consistenthigh quality of products. The Company has a performance-based incentive programcovering its general and assistant managers in addition to a competitive basesalary. Our managers are compensated under a cash incentive plan based on abonus pool calculated on unit volume. The bonus pool is based on fourcategories (food cost, labor cost, controllable cost and unit profit). Eachbonus category has a target. The manager earns a bonus for each category if heor she meets or exceeds the target. The four possible categories are totaledand adjusted for any cash shortages. The total bonus is split among eachsalaried manager based on predetermined allocation. The bonus is calculated andpaid for each 28-day period. We account for the plan on the accrual basisof accounting.

Individualrestaurants typically employ between 40 and 80 non-management hourly employees,made up of a mix of part-time and full-time workers, depending on restaurantsize and traffic.

**North’s StarDivision**

*General.*   The North’s Star Division consists of threeJJ North’s Country Buffet restaurants and one North’s Star Buffet restaurant.The Company’s three JJ North’s Country Buffet restaurants are located in Idaho(1), Washington (1) and Oregon (1). The JJ North’s Country Buffet restaurant,located in Boise, Idaho, is closed for remodeling and repositioning. Therestaurants are approximately 6,500 to 9,000 square feet and seat approximately210 to 320 customers. The Company’s North’s Star Buffet restaurant is locatedin Arizona and is closed for remodeling and repositioning.

*Conceptand Menu.*   TheJJ North’s Country Buffet restaurants offer fixed price lunch, dinner andweekend breakfast menus that entitle each customer to unlimited servings of allmenu items and beverages. The average check for JJ North’s Country Buffet isapproximately $7.05 per person. The restaurants offer reduced prices tochildren under age 12 and to senior citizens.

The JJ North’s Country Buffetrestaurants seek to differentiate themselves from other buffet and cafeteriarestaurants by the quality and variety of their food offerings. The restaurantsfeature a “scatter bar” buffet system with separate food islands in an “all-you-can-eat”format. Menus emphasize traditional American “home cooking” and include soups,salads, entrees, vegetables, non-alcoholic beverages and desserts. Customerscan choose from multiple entree choices, including fried and baked chicken andfish, roast beef, turkey and ham. Additional entrees, such as lasagna,barbecued ribs and other regional or seasonal dishes, are featured onparticular days of the week. In addition to entrees, each meal period includesfreshly-prepared soups, assorted vegetable and potato dishes, hot bread and anextensive salad bar. Dessert selections include pudding, assorted cobblers,cakes, cookies and soft-serve frozen dairy desserts with various sundaetoppings.

*Operations.*   Thetwo operating JJ North’s Country Buffet restaurants are supervised by thePresident of the Company. Each JJ North’s restaurant has a general manager andat least two assistant managers. Each restaurant employs between 25 and 50hourly employees, made up of a mix of part-time and full-time workers,depending on restaurant size and traffic. TheCompany has a performance-based incentive program covering its general and assistantmanagers in addition to a competitive base salary. Our managers are compensatedunder a cash incentive plan based on a bonus pool calculated on unit volume. Thebonus pool is based on four categories (food cost, labor cost, controllablecost and unit profit). Each bonus category has a target. The manager earns abonus for each category if he or she meets or exceeds the target. The fourpossible categories are totaled and adjusted for any cash shortages. The totalbonus is split among each salaried manager based on predetermined allocation. Thebonus is calculated and paid for each 28-day period. We account for theplan on the accrual basis of accounting.

**Florida BuffetsDivision**

*General.*   The Company, through several transactions,has acquired 11 properties in Florida which currently operate under the brandnames BuddyFreddys Country Buffet (7), BuddyFreddys (2) and 

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HolidayHouse (2). Four of the seven BuddyFreddys Country Buffet restaurants have beenclosed for repositioning. Two of these closed restaurants have been leased tothird-party operators and the net assets of one closed restaurant areclassified as property held for sale. BuddyFreddys restaurants averageapproximately 10,000 square feet with seating for approximately 350 guests.Holiday House restaurants average approximately 5,500 square feet with seatingfor approximately 170 guests.

*Conceptand Menu.*   TheBuddyFreddys Country Buffet restaurants offer a buffet menu specializing inlocal dishes and southern-style cooking. Each location also offers a small giftshop selling a variety of BuddyFreddys apparel, snacks and specialtymerchandise. The two BuddyFreddys differ from BuddyFreddys Country Buffets inthat they offer a full a la carte menu in addition to the “all-you-can-eat”buffet. The two Holiday House restaurants also operate in a buffet format andspecialize in offering the customer a wide variety of meat entrees includingham, roast beef, turkey and its signature leg of lamb. The average check pricefor BuddyFreddys and Holiday House is approximately $7.61 per person.

*Operations.*   TheFlorida restaurants are supervised by a vice president of operations whoreports directly to the Company’s President. Each Florida operating restauranthas a general manager and at least two assistant managers. Each restaurantemploys between 25 and 60 hourly employees, made up of a mix of part-time andfull-time workers, depending on restaurant size and traffic. The Company has a performance-based incentiveprogram covering its general and assistant managers in addition to acompetitive base salary. Our managers are compensated under a cash incentiveplan based on a bonus pool calculated on unit volume. The bonus pool is basedon four categories (food cost, labor cost, controllable cost and unit profit). Eachbonus category has a target. The manager earns a bonus for each category if heor she meets or exceeds the target. The four possible categories are totaledand adjusted for any cash shortages. The total bonus is split among eachsalaried manager based on predetermined allocation. The bonus is calculated andpaid for each 28-day period. We account for the plan on the accrual basisof accounting.

**Summit RestaurantsDivision**

*General.*   TheCompany, through its subsidiary Summit Family Restaurants, Inc., (“Summit”),operates eight JB’s Restaurants in Arizona (1), Montana (2), Utah (4) andWyoming (1) and one Casa Bonita restaurant located in Denver, Colorado. On January31, 2006 Summit acquired three K-BOB’S Restaurant operations, two in Texas andone in Tucumcari, New Mexico. Subsequently on February 28, 2006 Summit acquireda fourth K-BOB’S Restaurant operation in Dumas, Texas. Two of the eight JB’srestaurants were closed for repositioning, at the end of fiscal 2006, with oneof the two being leased to a third-party operator. The other closed restaurantlocated in Laramie, Wyoming, was sold on March 16, 2006. In addition to theabove, the Company purchased in September 2005 a restaurant facility inRexburg, Idaho. The JB’s restaurants are approximately 4,300 to 5,600 squarefeet in size and seat approximately 110 to 180 customers. The Casa Bonitafacility is approximately 52,000 square feet with seating capacity forapproximately 4,000 customers. K-BOB’S Restaurants are approximately 4,800square feet with seating capacity for 155 customers.

In connection with the acquisition of certain JB’sRestaurants in 1998 from JB’s Family Restaurants, Inc., a subsidiary ofCKE Restaurants, Inc., the Company entered into a one-year franchise agreementfor each location requiring among other items, the payment of royalty fees.After the acquisition of certain JB’s Restaurants, the Company negotiated aten-year option for annual renewable franchise agreements for each of the JB’sRestaurants the Company operates. In February 2000, the Company elected not torenew these franchise agreements. The Company entered into a License Agreementwith the JB’s Licensor for each JB’s Restaurant in November 2002. The licenseagreement is being amortized as an intangible asset and allows the Company touse the JB’s trademarks through August 31, 2012 with an option for anadditional ten years. The Company acquired the JB’s license 

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agreement in November 2002for $773,000. Amortization expenses for fiscal 2006, 2005 and 2004 were $78,000each year.

During the fiscal year ending January 30, 2006 theCompany provided management and support services to K-BOB’S USA, Inc, for sixK-BOB’S Restaurant operations through a strategic alliance agreement enteredinto between the companies on February 1, 2005. Three of the operationsincluded in that strategic alliance agreement are those acquired January 31,2006, and a fourth was acquired February 28, 2006. The Company continuesto provide services to K-BOB’S USA, Inc. for the remaining two units. Theagreement expires in December 2006. The charge for services is one and a halfpercent of revenues.

*Conceptand Menu:*   All Summit operations combine amixture of buffet and cooked to order entries served by a wait staff.

JB’s Restaurants offer a variety of breakfast, lunchand dinner selections at moderate prices. The breakfast menu features an“all-you-can-eat” breakfast buffet along with other traditional breakfast fare.The lunch and dinner menus have a variety of sandwiches as well as steak,chicken, pasta and seafood entrees. All JB’s Restaurants offer an“all-you-can-eat” soup and salad bar during lunch and dinner. With theexception of the breakfast buffet and the “all-you-can-eat” soup and salad bar,all entries are cooked to order and are served by a wait staff. The averagecheck is approximately $6.68 per person.

The Casa Bonita restaurant is designed to recreate theatmosphere of a Mexican village at night featuring daily entertainmentincluding strolling mariachis, authentic Mexican dancer, magicians, games andcliff divers. The restaurant’s entertainment, combined with high quality,authentic Mexican food, is designed to attract a diverse customer base,including tourists and local customers. In addition to the typical Mexican menuofferings, Casa Bonita features “all-you-can-eat” dinners providing customerswith unlimited servings of selected menu items. Advertising and promotionalprograms for the restaurant are designed to focus on three primary targetaudiences: (1) local customers, (2) tourists and (3) groups andparties. Marketing covers a broad regional territory to attract tourists withadvertisements in tourist and special event guides and otherwise promoting CasaBonita as a major destination attraction. The restaurant has large dining areasand private rooms, which are promoted as an ideal setting for banquets, privateparties and other group events. The average check is approximately $12.64 perperson.

K-BOB’S Restaurants feature a steak house atmospherecombined with full menus and ‘all-you-can-eat” features for breakfast, lunchand dinner. Locations near major interstate highways and in conjunction withnon-affiliated motel facilities target a traveler customer base as well aslocal customers. Each operation has the capacity for private party rooms inaddition to open restaurant seating. The average check is approximately $9.89per person.

*Operations:*   Anon-site vice president or general manager of operations who reports directly tothe Company’s President supervises each Summit Restaurant. Each restaurant hasat least one assistant manager as well as additional service/kitchen managersdepending on location size. JB’s operations employ between 25 and 50 hourlyemployees, Casa Bonita employs anywhere from 150 to 270 hourly personnel andK-BOB’S operations average approximately 30 hourly employees all of which aremade up of a mix of part-time and full-time workers depending on restaurantsize and traffic characteristics. The Company has a performance-based incentiveprogram covering its management staff in addition to a competitive base salary.Managers are compensated under as cash incentive plan based on a bonus poolcalculated on unit volume. The bonus pool is based on four categories: foodcosts, labor costs, controllable cost and unit profit. Each bonus category hasa target. Managers earn bonuses for each category depending on meeting orexceeding those specific targets. The four possible categories are totaled andadjusted for any cash shortages. That total bonus is split among each salariedmanager at individual locations based on a predetermined allocation. Bonusesare calculated and paid for each 28-day period. The bonus plan is accounted foron an accrual basis.

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**Licenses, Trademarks and Service Marks**

TheCompany owns the trademarks and service marks for Casa Bonita, BuddyFreddys andHoliday House and has a license agreement with CKE Restaurants, Inc. foruse of the “Star” name and design. The Company has an agreement with North’sRestaurants, Inc. for a permanent, royalty-free, transferable license touse the intangible property of JJ North’s. The Company utilizes the HomeTownBuffet mark pursuant to various franchise agreements. The Company has atransferable license agreement to use the JB’s trademark through August 31,2012 with an option for an additional ten years.

**Competition**

The Company competes onthe basis of the quality and value of food products offered, price, service,location, ambiance and overall dining experience. The Company’s competitorsinclude a large and diverse group of restaurant chains and individually ownedrestaurants, including chains and individually owned restaurants that use abuffet format. The number of buffet restaurants with operations generallysimilar to the Company’s has grown considerably in the last several years andthe Company believes competition among buffet-style restaurants is increasing. Asthe Company and its principal competitors expand operations in variousgeographic areas, competition, including competition among buffet-stylerestaurants, can be expected to intensify. Such intensified competition couldincrease the Company’s operating costs or adversely affect its revenues oroperating margins. A number of competitors have been in existence longer thanthe Company and have substantially greater financial, marketing and otherresources and wider geographical diversity than does the Company. In addition,the restaurant industry has few noneconomic barriers to entry and is affectedby changes in consumer tastes, national, regional and local economic conditionsand market trends. The Company’s significant investment in, and long termcommitment to, each of its restaurant sites limits its ability to respondquickly or effectively to changes in local competitive conditions or otherchanges that could affect the Company’s operations.

**Seasonality**

TheCompany’s business is moderately seasonal in nature based on locations in thenorthern and southern states. For the majority of the Company’s restaurants,the highest volume periods are in the first and second fiscal quarters andlowest volume periods typically occur during the third and fourth fiscalquarters.

**Employees**

Asof April 18, 2006, the Company employed approximately 1,565 persons, ofwhom approximately 1,475 were restaurant employees, and approximately 90 wererestaurant management, supervisory and corporate personnel. Restaurantemployees include both full-time and part-time workers paid on an hourly basis.No Company employees are covered by collective bargaining agreements. TheCompany believes that its relations with its employees are generally good.

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**Directors and Executive Officers**

Thefollowing table sets forth certain information regarding the Company’sdirectors and executive officers:

| **Name**                           | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Position** |
|------------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------|
| Robert  E. Wheaton                 |       | 54         |       | Chief  Executive Officer, President and Chairman |
| Ronald  E. Dowdy                   |       | 49         |       | Group  Controller, Treasurer and Secretary       |
| Thomas  G. Schadt                  |       | 64         |       | Director                                         |
| Phillip  “Buddy” Johnson |       | 54         |       | Director                                         |
| Craig  B. Wheaton                  |       | 48         |       | Director                                         |
| B.  Thomas M. Smith, Jr.      |       | 71         |       | Director                                         |
| Todd S. Brown                      |       | 49         |       | Director                                         |

 

*Robert E. Wheaton*has served as the Chief Executive Officer and President and as a director ofthe Company since its formation in July 1997. Mr. Wheaton has beenChairman of the Board since September 1998. Mr. Wheaton served asExecutive Vice President of CKE Restaurants, Inc. from January 1996through January 1999. From April 1995 to January 1996, he servedas Vice President and Chief Financial Officer of Denny’s Inc., a subsidiary ofFlagstar Corporation. From 1991 to 1995, Mr. Wheaton served as Presidentand Chief Executive Officer, and from 1989 to 1991 as Vice President and ChiefFinancial Officer of The Bekins Company. Mr. Wheaton is the brother ofCraig B. Wheaton, a director of the Company.

*Ronald E. Dowdy*has served as the Group Controller since June 1998 and as Treasurer andSecretary since February 1999. Mr. Dowdy served as Controller toHoliday House Corporation for 19 years prior to joining the Company.

*Thomas G. Schadt*has served as a director of the Company since the completion of the Company’sinitial public offering in September 1997. Mr. Schadt has been theChief Executive Officer of a privately-held beverage distributioncompany, Bear Creek, L.L.C., since 1995. From 1976 to 1994, he held severalpositions with PepsiCo, Inc., most recently, Vice President of FoodService.

*Phillip “Buddy” Johnson*has served as a director of the Company since February 1999. Mr. Johnsonhas served as the Supervisor of Elections of Hillsborough County since March 2003.From March 2001 until March 2003, he served as the Director of theDivision of Real Estate in the Florida Department of Business and ProfessionalRegulations. Mr. Johnson served as President of the BuddyFreddys Divisionfrom April 1998 until March 2001. From 1980 until 1998, he was thefounding Chairman and CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnsonserved as Republican floor leader in the Florida House of Representatives. Mr. Johnsonalso served on the executive committee of The Foundation for Florida’s Future,a non-profit corporation established in 1995 by now governor, Jeb Bush.

*Craig B. Wheaton* has served as adirector of the Company since February 1999. Mr. Wheaton is a partnerin the law firm Kilpatrick Stockton LLP. His main areas of practice includeemployee benefits, executive compensation and general corporate law. Mr. Wheatonreceived his B.A. degree, with honors, from the University of Virginia and hisJ.D. degree from Wake Forest University. From 1993 to 1998, Mr. Wheatonwas a member of the Tax Council of the North Carolina Bar Association Section onTaxation and chair of its Employee Benefits Committee from 1995 to 1997. He isa member and former president of the Triangle Benefits Forum. He is a member ofthe Southern Employee Benefits Conference, the Employee Benefits Committee ofthe American Bar Association’s Section of Taxation, the National PensionAssistance Project’s National Lawyers Network, and the National Association ofStock Plan Professionals. Mr. Wheaton is the brother of Robert E. Wheaton,the Company’s Chairman of the Board, Chief Executive Officer and President.

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*B.Thomas M. Smith, Jr.* has served as a director of theCompany since June 2002. Mr. Smith was a consultant with ITT Corp.from January 1996 to December 1996 and is now retired. From 1988until 1995, he was Vice President and Director of Corporate Purchasing for ITTCorp. Mr. Smith served as director of Republic Bancorp from June 1999until April 2005.

*Todd S.Brown* has served as a director of the Company since June 2004.Mr. Brown has served Brown Capital Advisors, Inc. as the Presidentsince November 1999. From 1994 to November 1999, Mr. Brownserved as Senior Vice President, Chief Financial Officer and Director ofPhoenix Restaurant Group, Inc. (formerly DenAmerica Corp.). Mr. Brownserved as Senior Manager in Audit and Consulting at Deloitte Touche LLP from1980 to 1994. Mr. Brown received an MBA from the University of Missouri in1980 and a BA from Southern Methodist University in 1978.

The audit committee iscomprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr.,of which Todd S. Brown is the audit committee financial expert. All threemembers of the audit committee are “independent” as determined in accordancewith the Nasdaq listing standards.

**Item 1A.**                *Risk Factors*

*OurGrowth Strategy Depends Upon our Ability to Acquire and Successfully IntegrateAdditional Restaurants Through Acquisitions.*   TheCompany intends to pursue a strategy of moderate growth, primarily throughacquisitions. The success of this strategy will depend in part on the abilityof the Company to acquire additional buffet restaurants or to convert acquiredsites into buffet restaurants, within both existing and new markets. Thesuccess of the Company’s growth strategy is dependent upon numerous factors,many of which are beyond the Company’s control, including the availability ofsuitable acquisition opportunities, the availability of appropriate financing,and general economic conditions. The Company must compete with other restaurantoperators for acquisition opportunities and with other restaurant operators,retail stores, companies and developers for desirable site locations. Many ofthese entities have substantially greater financial and other resources thanthe Company. Many of its acquired restaurants may be located in geographicmarkets in which the Company has limited or no operating experience. There canbe no assurance that the Company will be able to identify, negotiate andconsummate acquisitions of additional buffet restaurants or that acquiredrestaurants or converted restaurants can be operated profitably andsuccessfully integrated into the Company’s operations.

Acquisitions involve a number of special risks thatcould adversely affect the Company’s business, results of operations andfinancial condition, including the diversion of management’s attention, theassimilation of the operations and personnel of the acquired restaurants andthe potential loss of key employees. In particular, the failure to maintainadequate operating and financial control systems or unexpected difficultiesencountered during expansion could materially and adversely affect the Company’sbusiness, financial condition and results of operations. There can be noassurance that any acquisition will not materially and adversely affect theCompany or that any such acquisition will enhance the Company’s business. Furthermore,the Company is unable to predict the likelihood of any additional acquisitionsbeing proposed or completed in the near future.

A strategy of growth through acquisitions requiresaccess to significant capital resources. If the Company determines to make asizeable acquisition, the Company may be required to sell additional equity ordebt securities or obtain additional credit facilities. The sale of additionalequity or convertible debt securities could result in additional dilution tothe Company’s stockholders. At present, the Company has only limited availabilityunder its credit facility which expires on May 31, 2006. There can be noassurance that this credit facility will be replaced or a new credit facilitywill be established to the Company for any such acquisition.

Since inception, the Company’s acquisition strategyhas incorporated the utilization of loans to sellers to facilitate certainproposed transactions. In most cases, these loans are secured and include, aspart of 

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terms and conditions, theCompany’s right to convert the loan into ownership of the restaurants. Also,certain of these loans contain favorable interest rates and repayment terms ifthe loans are not converted to ownership for one or more reasons. Thisfinancing strategy entails significant risk. Currently, the Company has threeloans outstanding and one significant-sized loan is in default. However,because the Company anticipates full recovery of amounts outstanding througheither repayment or conversion to ownership, historically no provision fordoubtful accounts has been established. While estimates to date have beenwithin our expectations, a change in the financial condition of specificrestaurant companies or in overall industry trends may result in futureadjustments to Company estimates of recoverability of receivables.

From February 1998 to January 2001, theCompany acquired 27 restaurants in seven states, including 15 restaurants inFlorida. The Company has only acquired one new restaurant from January 2001to January 2006. On February 1, 2005, the Company entered into astrategic 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 Alliancewith Western Sizzlin Corporation. In accordance with the terms of thisagreement, Star Buffet, Inc. plans to convert certain of its existingrestaurants to the Western Sizzlin brand; test a newly developed WesternSizzlin buffet prototype; and seek to acquire selected Western Sizzlinfranchised restaurants. Additionally, as an important element of the StrategicAlliance, Star Buffet, Inc. and Western Sizzlin will explore a number ofidentified opportunities to reduce operating and administrative expenses. As aresult of these acquisitions, the Company is complex and diverse, and theintegration of the acquisitions has presented difficult challenges for theCompany requiring increased management time and resources. In order to improveprofitability, the Company needs to continue successfully integrating andstreamlining restaurant functions. The difficulties of such integration havebeen increased by the necessity of coordinating geographically separateorganizations. The integration of certain operations following the acquisitionsrequired the dedication of management resources resulting in a temporarydistraction from the day-to-day business of the Company. The Company continuesto reduce costs and integrate functions. The failure to continue effectivelyintegrating the operations of the Company or improving the results ofoperations of the acquired restaurants could have a material adverse effect onthe Company’s business, financial condition and results of operations.

*DependenceUpon and Restrictions Resulting from Franchisors.*   TheCompany operates its 14 HomeTown Buffet Restaurants through itswholly-owned subsidiary, HTB Restaurants, Inc., which is a party to aFranchise Agreement with the HomeTown Franchisor for each such restaurant.

The performance of the Company’s HomeTown Buffetrestaurant operations is directly related to the success of the HomeTown Buffetrestaurant system, including the management and financial condition of HomeTownas well as restaurants operated by HomeTown and their other franchisees. Theinability of such restaurants to compete effectively could have a materialadverse effect on the Company’s operations. The success of the Company’sHomeTown Buffet restaurants depends in part on the effectiveness of theHomeTown franchisor’s marketing efforts, new product development programs,quality assurance and other operational systems over which the Company haslittle or no control. For example, adverse publicity involving HomeTownrestaurants operated by the franchisor or their other franchisees could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

The Company’s operations with respect to its HomeTownrestaurants are subject to certain restrictions imposed by policies andprocedures of HomeTown currently in effect and which may from time to time,change. These restrictions limit the Company’s ability to modify the menu itemsand decor of its restaurants and may have the effect of limiting the Company’sability to pursue its business plan. Furthermore, the franchise agreement withthe HomeTown franchisor imposes substantial restrictions on the Company’sability to operate certain restaurant formats and to open additionalrestaurants in certain geographical areas.

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*DependenceUpon and Restrictions Resulting from Licensors.*   TheCompany, through its subsidiary Summit, operates six JB’s Restaurants inArizona, Montana, Utah and Wyoming. The Company entered into a LicenseAgreement 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 Restaurantoperations is directly related to the success of the JB’s Restaurant system,including the management and financial condition of the JB’s Licensor as wellas the number of restaurants operated by the JB’s Licensor and their otherlicensees or franchisees. The inability of such restaurants to competeeffectively could have a material adverse effect on the Company’s operations aswell as the number of restaurants. The success of the Company’s JB’sRestaurants depends in part on the effectiveness of the JB’s Licensor’smarketing efforts, new product development programs, quality assurance andother operational systems over which the Company has little or no control. Forexample, adverse publicity involving JB’s Restaurants operated by the licensoror their other licensees or franchisees could have a material adverse effect onthe Company’s business, financial condition and results of operations.

The Company’s operations with respect to its JB’sRestaurants are subject to certain restrictions imposed by policies andprocedures of JB’s currently in effect and which, from time to time, change.The licensor, JB’s Family Restaurants, Inc. filed for bankruptcy on March 20,2002. The licensor’s bankruptcy has had no significant impact on the Company’srestaurant operations to date.

*TheCompany’s Quarterly Results are Likely to Fluctuate.*   TheCompany has in the past experienced, and expects to continue to experience,significant fluctuations in restaurant revenues and results of operations fromquarter to quarter. In particular, the Company’s quarterly results can vary asa result of acquisitions, costs incurred to integrate newly acquired entitiesand seasonal patterns. A large number of the Company’s restaurants are locatedin areas which are susceptible to severe winter weather conditions or tropicalstorm patterns which may have a negative impact on customer traffic andrestaurant revenues. Accordingly, the Company believes that period-to-periodcomparisons of its operating results are not necessarily meaningful and thatsuch comparisons cannot be relied upon as indicators of future performance. Therecan be no assurance that future seasonal and quarterly fluctuations will nothave a material adverse effect on the Company’s business, results of operationand financial condition.

*TheRestaurant Industry is Highly Competitive.**  *The Company competes on the basisof the quality and value of food products offered, price, service, location,ambiance and overall dining experience. The Company’s competitors include alarge and diverse group of restaurant chains and individually ownedrestaurants, including chains and individually owned restaurants that use abuffet format. The number of buffet restaurants with operations generallysimilar to the Company’s has grown considerably in the last several years andthe Company believes competition among buffet-style restaurants is increasing. Asthe Company and its principal competitors expand operations in variousgeographic areas, competition, including competition among buffet-stylerestaurants, can be expected to intensify. Such intensified competition couldincrease the Company’s operating costs or adversely affect its revenues oroperating margins. A number of competitors have been in existence longer thanthe Company and have substantially greater financial, marketing and otherresources and wider geographical diversity than does the Company. In addition,the restaurant industry has few noneconomic barriers to entry and is affectedby changes in consumer tastes, national, regional and local economic conditionsand market trends. The Company’s significant investment in, and long termcommitment to, each of its restaurant sites limits its ability to respondquickly or effectively to changes in local competitive conditions or otherchanges that could affect the Company’s operations.

*TheRestaurant Industry is Complex and Volatile.*   Foodservice businesses are often affected by changes in consumer tastes, national,regional and local economic conditions and demographic trends. The 

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performance of individualrestaurants may be adversely affected by factors such as traffic patterns,demographic considerations and the type, number and location of competingrestaurants. Multi-unit food service businesses such as the Company’s can alsobe materially and adversely affected by publicity resulting from poor foodquality, illness, injury or other health concerns or operating issues stemmingfrom one restaurant or a limited number of restaurants. The Company’s businesscould be adversely affected by terrorist attacks directed toward the foodsupply chain or public concerns about the safety of the food supply chain.Dependence on frequent deliveries of fresh produce and groceries subjects foodservice businesses such as the Company’s to the risk that shortages orinterruptions in supply, caused by adverse weather or other conditions, couldadversely affect the availability, quality and cost of ingredients. The Company’sprofitability is highly sensitive to increases in food, labor and otheroperating costs that cannot always be passed on to its guests in the form ofhigher prices or otherwise compensated for. In addition, unfavorable trends ordevelopments concerning factors such as inflation, increased food, labor,employee benefits, including increases in hourly wage and unemployment taxrates and utility costs, increases in the number and locations of competingbuffet-style restaurants, regional weather conditions and the availability ofexperienced management and hourly employees may also adversely affect the foodservice industry in general and the Company’s business, financial condition andresults of operations in particular. Changes in economic conditions affectingthe Company’s guests could reduce traffic in some or all of the Company’srestaurants or impose practical limits on pricing, either of which could have amaterial adverse effect on the Company’s business, financial condition andresults of operations. The success of the Company will depend in part on theability of the Company’s management to anticipate, identify and respond tochanging conditions. There can be no assurance that management will besuccessful in this regard.

*TheCompany is Dependent on Its Key Personnel.*   TheCompany believes that its success will depend in part on the services of itskey executives, including Robert E. Wheaton, Chairman of the Board, ChiefExecutive Officer and President. The Company does not maintain key man lifeinsurance. The loss of the services of Mr. Wheaton could have a materialadverse effect upon the Company’s business, financial condition and results ofoperations, as there can be no assurances that a qualified replacement would beavailable in a timely manner if at all. The Company’s continued growth willalso depend in part on its ability to attract and retain additional skilledmanagement personnel.

*TheRestaurant Industry is Subject to Substantial Government Regulation.*   Therestaurant industry is subject to federal, state and local governmentregulations, including those relating to the preparation and sale of food aswell as building and zoning requirements. In addition, the Company is subjectto laws governing its relationship with employees, including minimum wagerequirements, overtime, working and safety conditions and citizenshiprequirements. The failure to obtain or retain food licenses or an increase inthe minimum wage rate, employee benefit costs or other costs associated withemployees, could have a material adverse effect on the Company’s business,financial condition and results of operations. Many of the Company’s employeesare paid hourly rates based upon the federal and state minimum wage laws. Changesin federal, state or local requirements increasing the minimum wage may resultin higher labor costs to the Company.

*Effectof Certain Charter and Bylaw Provisions.*   Certainprovisions of the Company’s Certificate of Incorporation and Bylaws may havethe effect of making it more difficult for a third party to acquire, or ofdiscouraging a third party from attempting to acquire, control of the Company. Suchprovisions could limit the price that certain investors might be willing to payin the future for shares of the Company’s Common Stock. The Company’sCertificate of Incorporation allows the Company to issue up to 1,500,000 sharesof currently undesignated Preferred Stock, to determine the powers, preferences,rights, qualifications and limitations or restrictions granted to or imposed onany unissued series of that Preferred Stock, and to fix the number of sharesconstituting any such series and the designation of such series, without anyvote or future action by the stockholders. The Preferred Stock could be issuedwith voting, liquidation, dividend 

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and other rights superiorto the rights of the Common Stock. The Certificate of Incorporation alsoeliminates the ability of stockholders to call special meetings. The Company’sBylaws require advance notice to nominate a director or take certain otheractions. Such provisions may make it more difficult for stockholders to takecertain corporate actions and could have the effect of delaying or preventing achange in control of the Company. In addition, the Company has not elected tobe excluded from the provisions of Section 203 of the Delaware GeneralCorporation Law, which imposes certain limitations on transactions between acorporation and “interested” stockholders, as defined in such provisions.

*PossibleVolatility of Stock Price.*   The stock market hasfrom time to time experienced significant price and volume fluctuations thatare unrelated to the operating performance of particular companies. The volumeof trading in the market for the Company’s common stock is limited, which maymake it difficult to liquidate your investment and can increase pricevolatility. Due to changes in the balance of buy and sell orders and otherfactors, the price of the Company’s common stock can change for reasonsunrelated to the performance of the business of the Company. Fluctuations inthe Company’s operating results, failure of such operating results to meet theexpectations of stock market analysts and investors, changes in stock marketanalyst recommendation regarding the Company, the success or perceived successof competitors of the Company, as well as changes in general economic or marketconditions and changes in the restaurant industry may also have a significantadverse affect on the market price of the Common Stock.

*Saleof a Substantial Number of Shares of Our Common Stock Could Cause the MarketPrice to Decline.*   Sales of a substantial numberof shares of our common stock in the public market could substantially reducethe prevailing market price of our common stock. As of April 18, 2006,3,104,175 shares of common stock were outstanding and 696,000 shares were issuableupon exercise of outstanding options at exercise prices ranging from $5.00 to$12.00. The Company cannot predict the effect, if any, that sales of shares ofthe Company’s common stock or the availability of such shares for sale willhave on prevailing market prices. However, substantial amounts of the Company’scommon stock could be sold in the public market, which may adversely affectprevailing market prices for the common stock.

*Control by One PrincipalStockholder.*   Robert E. Wheaton, Chairman of theBoard, Chief Executive Officer and President, currently beneficially ownsapproximately 48% of our total equity securities, assuming exercise of vestedemployee stock options, and possesses approximately 48% of the total votingpower. Thus Mr. Wheaton has the ability to control or significantlyinfluence all matters requiring the approval of our stockholders, including theelection of our directors. Sales of a substantial number of shares of ourcommon stock by Mr. Wheaton or other principal shareholders in the publicmarket could substantially reduce the prevailing market price of our commonstock.

**Item 1B.**               *Unresolved Staff Comments*

TheCompany is not an accelerated filer, a large accelerated filer, or a well knownseasoned issuer and consequently is not subject to the requirements of thisitem 1B.

**Item 2.**                        *Properties*

The Company’s corporateheadquarters are located in Scottsdale, Arizona.

The Company’s restaurants are primarily freestandinglocations. As of January 30, 2006 most of the Company’s restaurantfacilities were leased. The leases expire on dates ranging from 2006 to 2013with the majority of the leases providing for renewal options. All leasesprovide for specified periodic rental payments including periodic rentescalation terms in certain instances, and most call for additional rent basedupon revenue volume. Most leases require the Company to maintain the propertyand pay taxes and other related expenses.

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The following is a summary of the Company’s restaurantproperties as of January 30,2006:

| ** ** | ** ** | **HomeTown  Buffet** | ** ** | **Casa  Bonita** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **JB’s** | ** ** | **Total** | ** ** |
|------------|------------|----------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|---------------|------------|-----------|------------|
| Owned      |       |                 | 3          |             |       |                   | —     |                 |       |          | 1          |      |       |   | 5 |   |   |   | 4 |   |   |   | 13 |   |   |
| Leased     |       |                 | 11         |             |       |                   | 1          |                 |       |          | 3          |      |       |   | 6 |   |   |   | 4 |   |   |   | 25 |   |   |
| Total      |       |                 | 14         |             |       |                   | 1          |                 |       |          | 4          |      |       |   | 11 |   |   |   | 8 |   |   |   | 38 |   |   |

 

Inaddition to the above summary, the Company purchased in September 2005 arestaurant facility in Rexburg, Idaho. The Company leases the restaurantfacility to a JB’s Franchisee.As of January 30, 2006, the Company’s restaurantsare located in the following states:

| ** ** | ** ** | **Number of Restaurants** | ** ** |                 |
|------------|------------|-------------------------------------|------------|----------------------|
| **State**  | ** ** | ** **                          | ** ** | **HomeTown  Buffet** | ** ** | **Casa  Bonita** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **JB’s** | ** ** | **Total** | ** ** |
| Arizona    |       |                                | 8          |                 |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | 1 |   |   |   | 10 |   |   |   |
| Colorado   |       |                                | 1          |                 |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   |
| Florida    |       |                                | —     |                 |   |   | — |   |   |   | — |   |   |   | 11 |   |   |   | — |   |   |   | 11 |   |   |   |
| Idaho      |       |                                | —     |                 |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   |
| Montana    |       |                                | —     |                 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   | 2 |   |   |   |
| New Mexico |       |                                | 2          |                 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   |
| Oregon     |       |                                | —     |                 |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   |
| Utah       |       |                                | 2          |                 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 4 |   |   |   | 6 |   |   |   |
| Washington |       |                                | —     |                 |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   |
| Wyoming    |       |                                | 1          |                 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 2 |   |   |   |
| Total      |       |                                | 14         |                 |   |   | 1 |   |   |   | 4 |   |   |   | 11 |   |   |   | 8 |   |   |   | 38 |   |   |   |
|            |            |                                     |            |                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of January 30,2006, the Company’s non-operating restaurants are located in the followingstates:

| ** ** | ** ** | **Number of Non-Operating Restaurants** | ** ** |
|------------|------------|--------------------------------------------------------|------------|
| **State**  | ** ** | ** **                                             | ** ** | **HomeTown  Buffet** | ** ** | **Casa  Bonita** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **JB’s** | ** ** | **Total** | ** ** |
| Arizona    |       |                                                   | —     |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |
| Florida    |       |                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | 4 |   |   |   | — |   |   |   | 4 |   |   |
| Idaho      |       |                                                   | —     |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |
| Utah       |       |                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 1 |   |   |
| Wyoming    |       |                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 1 |   |   |
| Total      |       |                                                   | —     |   |   |   | — |   |   |   | 2 |   |   |   | 4 |   |   |   | 2 |   |   |   | 8 |   |   |
|            |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Three of the non-operatingrestaurants have been leased to third-party operators, four remain closed forremodeling and repositioning and the net assets of one closed restaurant areclassified as property held for sale. Subsequent to January 30, 2006, theCompany sold one of the closed restaurants located in Laramie, Wyoming.

**Item 3.**                        *Legal Proceedings*

On November 25, 1998, the Company filed an actionagainst North’s in the United States District Court, District of Utah, Case No. 2-98-CV-893,seeking damages for breach of a promissory note and an Amended and RestatedCredit Agreement (collectively, the “Credit Agreements”) in the amount of$3,570,935. On December 31, 1998, North’s filed an answer to the Company’sComplaint, denying generally the allegations, and filed counterclaims againstthe Company. On January 26, 2001, the parties entered into a SettlementAgreement (the “Settlement Agreement”). The Company and North’s agreed toreduce the debt to a total amount of $3,500,000 and that such reducedobligation be payable by North’s 

15

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pursuant to the terms ofthe Amended and Restated Promissory Note (“Star Buffet Promissory Note”). TheCompany recorded no gain or loss on the settlement as the recorded balance ofthe note was approximately $3.5 million at the time of the settlement. TheCompany and North’s agreed that the Company’s existing liens encumberingcertain property of North’s remain in place and continue to secure North’sobligations to the Company, and the Company and North’s reserved all rights,claims and defenses with respect to the extent and validity of such existingliens. Since January 26, 2004 the note receivable has been recorded as along-term receivable. The Company has not recorded interest income due fromNorth’s since August 2003.

On March 2, 2004, the Company filed a secondaction against North’s in the United States District Court, District of Utah,Central Division, Case No. 2:04CV00211, demanding judgment against North’sfor failure to repay obligations under the Star Buffet Promissory Note in atotal amount not less than $2,934,453 plus interest at the default rate as setforth in the Star Buffet Promissory Note. In January 2005, the courtgranted the Company’s motion for summary judgment, ruling that North’s hadfailed to pay amounts owed to the Company. The Company obtained a judgmentagainst North’s in the amount of $3,059,905.78, plus $15,980.45 in attorney’sfees and costs.

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

Since his appointment, the receiver has remitted onlyapproximately $56,000 in loan repayments and no payments have been made since September of2005. Additionally, the receiver has failed to complete a planned sale of North’srestaurants and has presided over a significant deterioration in the operatingresults of North’s restaurants. Payments of fees to the receiver well exceededamounts paid to the Company during this period.

As a result of the receiver’s failure to remit anymeaningful principal repayments, the Company has initiated certain legalactions designed to expedite the liquidation of North’s assets and repayamounts owed to Star Buffet. First, on October 3, 2005, the Companyobtained an Order in United States District Court for the District of UtahDirecting Entry of Final Judgment. Next, on April 14, 2006, the Companyobtained the Registration of Foreign Judgment for recognition and enforcementin the United States Court for both the District of Oregon and NorthernDistrict of California, jurisdictions where North’s operates its restaurants. Finally,on April 25, 2006, the Company noticed all relevant parties of its intentto foreclose. With these steps complete, the Company plans to promptly seek theliquidation of assets and repayment of amounts owed. The Company believes thatif it can act quickly asset sales and operating cashflows will be sufficient torepay both secured creditors.

TheCompany is from time to time the subject of complaints or litigation fromcustomers alleging injury on properties operated by the Company, illness orother food quality, health or operational concerns. Adverse publicity resultingfrom such allegations may materially adversely affect the Company and itsrestaurants, regardless of whether such allegations are valid or whether theCompany is liable. The Company also is the subject of complaints or allegationsfrom employees from time to time. The Company believes that the lawsuits,claims and other legal matters to which it has become subject in the course ofits business are not material to the Company’s business, financial condition orresults of operations, but an existing or future lawsuit or claim could resultin an adverse decision against the Company that could have a material adverseeffect on the Company’s business, financial condition and results ofoperations.

**Item 4.**                        *Submission of Matters to a Voteof Security Holders*

Nomatters were submitted to the shareholders of the Compnay during the fourthquarter of fiscal 2006.

16

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**PART II**

**Item 5.**                        *Market for the Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases ofEquity Securities*

**Market Information andHolders.**   The Company’s Common Stock is listed onthe NASDAQ smallcap market under the symbol “STRZ”. As of April 18, 2006,there were approximately 512 record holders of the Company’s Common Stock. Thefollowing table sets forth the high and low bid quotations for the CommonStock, as reported by NASDAQ.

| ** **           | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------------|------------|------------|------------|----------|------------|
| **Fiscal Year** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First  Quarter       |       | $          | 8.75       |     | $          | 6.19 |   | $ | 7.70 |   | $ | 5.25 |   |
| Second  Quarter      |       | 9.24       |       | 6.53     |       | 6.95 |   | 5.30 |   |
| Third  Quarter       |       | 8.47       |       | 6.80     |       | 6.50 |   | 5.41 |   |
| Fourth Quarter       |       | 8.07       |       | 6.26     |       | 6.51 |   | 5.22 |   |
|                      |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

** **

**Dividends.**   On February 24, 2006, the Board ofDirectors approved the Company’s third annual dividend of $0.60 per commonshare, an increase of $0.10 per share from the prior year, and a specialdividend of $0.25 per common share. Both are payable on June 7, 2006 to shareholdersof record on May 11, 2006.

**Equity Compensation PlanInformation.**

The following table gives information about our sharesof Common Stock that may be issued under our equity compensation plans.

| ** **                                                         | ** ** | **(a)**                                                                                                              | ** ** | **(b)**                                                                     | ** ** | **(c)**                                                                                                                                                                                                      | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
| Equity  compensation plans  approved by  security holders     |       |                                                                                                                 | 696,000    |                                                                        |       |                                                                                                                                                                                                         | $          | 10.04 |   |   |   | 1,000 |   |   |
| Equity  compensation plans not  approved by  security holders |       |                                                                                                                 | —     |                                                                        |       |                                                                                                                                                                                                         | —     |   |   |   | — |   |   |
| Total                                                              |       |                                                                                                                 | 696,000    |                                                                        |       |                                                                                                                                                                                                         | $          | 10.04 |   |   |   | 1,000 |   |   |

 

Theexercise price of the options granted and exercisable at January 30, 2006is $5.00 for 158,000 options, $6.70 for 49,000 options and $12.00 for 489,000options.

**Item 6.**                        *Selected Financial Data*

The following paragraphsset forth selected consolidated financial data for our Company for the periodsindicated. The selected consolidated financial data for each of the five fiscalyears in the period ended January 30, 2006, has been derived from ourconsolidated financial statements, which have been audited by (1) GrantThornton LLP, our former independent accountants, for the fiscal year ended January 28,2002, and (2) Mayer Hoffman McCann P.C., our independent accountants, foreach of the four fiscal years in the period ended January 30, 2006.

The selected and otherdata presented below should be read in conjunction with the “ConsolidatedFinancial Statements”, and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this Form 10-K.

The operating results forthe 52-week period ended January 30, 2006 included 52 weeks ofoperations for the Company’s 14 franchised HomeTown Buffet restaurants, six JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), two JJ North’sCountry Buffet restaurants, two Holiday House restaurants and one Casa Bonitarestaurant. 

17

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Inaddition, operating results include 10 weeks for one JB’s restaurant closedduring the fiscal year 2006. Results also include 34 weeks for one Casa Bonitarestaurant closed during the fiscal year 2006. In addition to the above, theCompany purchased in September 2005 a restaurant facility in Rexburg,Idaho. The Company leases the restaurant facility to a JB’s Franchisee. Eightrestaurants were closed at the end of the 2006 fiscal year for repositioning.Three of the eight closed restaurants have been leased to third-propertyoperators, four restaurants remain closed for remodeling and repositioning andanother closed restaurant was reported as property held for sale. One of thefour restaurants closed for remodeling and repositioning in Laramie, Wyomingwas sold in March 2006.

The operating results forthe 53-week period ended January 31, 2005 included 53 weeks ofoperations for the Company’s 14 franchised HomeTown Buffet restaurants, seven JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), two JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, and two Holiday Houserestaurants. In addition, operating results include 30, 34 and 52 weeks forthree JJ North’s Country Buffet restaurants closed during the fiscal year 2005.Results also include 35 and 51 weeks for two HomeTown Buffet restaurants.Results for 2005 also include 34 weeks of operations for one North’s StarBuffet restaurant and 39 weeks of operations for one JB’s Restaurant. Eightrestaurants were closed at the end of the 2005 fiscal year for repositioning.Four of the eight closed restaurants have been leased to third-property operators,three restaurants remained closed for remodeling and repositioning and oneclosed restaurant is property held for sale.

The operating results forthe 52-week period ended January 26, 2004 included 52 weeks ofoperations for 16 franchised HomeTown Buffet restaurants, eight JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), five JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, two Holiday Houserestaurants and one North’s Star Buffet restaurant. In addition, operatingresults include 19 and 2 weeks for two BuddyFreddys Country Buffet restaurantsclosed during the fiscal year 2004. Results also include 12 weeks of operationsfor one JJ North’s Country Buffet restaurant and 5 weeks of operations for oneJB’s Restaurant. Five restaurants were closed at the end of the 2004 fiscalyear for repositioning. Three of the five closed restaurants were leased tothird-property operators and one closed restaurant was property held for sale.Additionally, another property was sold during fiscal 2004.

The operating results forthe 52-week period ended January 27, 2003 included 52 weeks ofoperations for 16 franchised HomeTown Buffet restaurants, nine JB’srestaurants, seven BuddyFreddys restaurants (five of the seven BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), six JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, two Holiday Houserestaurants and one North’s Star Buffet restaurant. In addition, operatingresults include 23 and 9 weeks for two BuddyFreddys Country Buffet restaurantsclosed during the fiscal year 2003. Results also include 19 weeks of operationsfor one JJ North’s Country Buffet restaurant and 30 weeks of operations for oneJJ North’s Family Restaurant opened July 2002. Seven restaurants wereclosed at the end of the 2003 fiscal year for repositioning. Two of the sevenclosed restaurants were leased and the property of another one was undercontract to be sold and was reported as property held for sale. During thefirst quarter of fiscal 2004, three restaurants were closed that resulted in animpairment of leasehold improvements of $188,000 included in the fourth quarterof 2003.

The operating results forthe 52-week period ended January 28, 2002 included 52 weeks ofoperations for 16 franchised HomeTown Buffet restaurants, ten JB’s restaurants,nine BuddyFreddys restaurants, seven of which are BuddyFreddys Country Buffetrestaurants, six JJ North’s Country Buffet restaurants, two Casa Bonitarestaurants, two Holiday House restaurants and one North’s Star Buffetrestaurant. In addition, the results include 36, 35, 24, 19 and 3 weeksrespectively for five BuddyFreddys Country Buffet restaurants. Results alsoinclude 30 weeks of operations for one JJ North’s Country Buffet restaurantwhich reopened in July 2001. Four restaurants were closed at the end ofthe 2002 fiscal year for remodeling and repositioning. The fiscal year 2002included impairment charges for a restaurant closed in the first quarter of2003.

18

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**SELECTED FINANCIAL DATA(In thousands except per share amounts and restaurant unit data)**

| ** **                                                                                                            | ** ** | **Fifty-Two**               | ** ** | **Fifty-Three**             | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                            | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** |
| ** **                                                                                                            | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                                                                                                            | ** ** | **Jan. 30, 2006** | ** ** | **Jan. 31, 2005** | ** ** | **Jan. 26, 2004** | ** ** | **Jan. 27, 2003** | ** ** | **Jan. 28, 2002** | ** ** |
| ** **                                                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** | **(As Restated)**      | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Consolidated  Statements of Operations Data:**                                                                      | ** ** |                        | ** ** | ** **                  |       |                        | ** ** | ** **                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total revenues                                                                                                        |       |                        | $          | 56,305                      |       |                        |       | $                           | 64,856     |                        |       |   | $ | 68,090 |   |   |   | $ | 74,798 |   |   |   | $ | 83,218 |   |   |
| Costs  and expenses                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Food costs                                                                                                            |       |                        | 19,429     |                        |       |                        | 22,336     |                        |       |                        | 23,275     |   |   |   | 25,867 |   |   |   | 27,020 |   |   |
| Labor costs                                                                                                           |       |                        | 18,260     |                        |       |                        | 21,712     |                        |       |                        | 23,015     |   |   |   | 25,695 |   |   |   | 28,291 |   |   |
| Occupancy and other expenses                                                                                          |       |                        | 11,763     |                        |       |                        | 12,963     |                        |       |                        | 14,042     |   |   |   | 15,960 |   |   |   | 17,391 |   |   |
| General and administrative  expenses                                                                                  |       |                        | 2,179      |                        |       |                        | 2,694      |                        |       |                        | 2,433      |   |   |   | 3,739 |   |   |   | 3,552 |   |   |
| Depreciation and amortization                                                                                         |       |                        | 2,120      |                        |       |                        | 2,440      |                        |       |                        | 2,670      |   |   |   | 3,485 |   |   |   | 3,804 |   |   |
| Impairment of long-lived assets                                                                                       |       |                        | 369        |                        |       |                        | 2,838      |                        |       |                        | 1,083      |   |   |   | 1,831 |   |   |   | 806 |   |   |
| Total costs and expenses                                                                                              |       |                        | 54,120     |                        |       |                        | 64,983     |                        |       |                        | 66,518     |   |   |   | 76,577 |   |   |   | 80,864 |   |   |
| Income (loss) from operations                                                                                         |       |                        | 2,185      |                        |       |                        | (127       | )                           |       |                        | 1,572      |   |   |   | (1,779 | ) |   |   | 2,354 |   |   |
| Interest expense                                                                                                      |       |                        | (648       | )                           |       |                        | (640       | )                           |       |                        | (569       | ) |   |   | (614 | ) |   |   | (935 | ) |   |
| Reversal of litigation accrual                                                                                        |       |                        | —     |                        |       |                        | —     |                        |       |                        | 400        |   |   |   | — |   |   |   | — |   |   |
| Other income, net                                                                                                     |       |                        | 680        |                        |       |                        | 427        |                        |       |                        | 319        |   |   |   | 272 |   |   |   | 289 |   |   |
| Income (loss) before income  taxes (benefit)                                                                          |       |                        | 2,217      |                        |       |                        | (340       | )                           |       |                        | 1,722      |   |   |   | (2,121 | ) |   |   | 1,708 |   |   |
| Income taxes (benefit)                                                                                                |       |                        | 420        |                        |       |                        | (168       | )                           |       |                        | 609        |   |   |   | (815 | ) |   |   | 245 |   |   |
| Income (loss) before cumulative  effect of a change in  accounting principle                                          |       |                        | 1797       |                        |       |                        | (172       | )                           |       |                        | 1,113      |   |   |   | (1,306 | ) |   |   | 1,463 |   |   |
| Cumulative effect of a change  in accounting principle—net of tax benefit                                        |       |                        | —     |                        |       |                        | —     |                        |       |                        | —     |   |   |   | (560 | ) |   |   | — |   |   |
| Net income (loss)                                                                                                     |       |                        | $          | 1797                        |       |                        |       | $                           | (172       | )                           |       |   | $ | 1,113 |   |   |   | $ | (1,866 | ) |   |   | $ | 1,463 |   |   |
| Income (loss) per common share  before cumulative effect of a change in accounting  principle—basic         |       |                        | $          | 0.60                        |       |                        |       | $                           | (0.06      | )                           |       |   | $ | 0.38 |   |   |   | $ | (0.44 | ) |   |   | $ | 0.50 |   |   |
| Income (loss) per common share  before cumulative effect of a change in accounting  principle—diluted  |       |                        | $          | 0.56                        |       |                        |       | $                           | (0.06      | )                           |       |   | $ | 0.38 |   |   |   | $ | (0.44 | ) |   |   | $ | 0.50 |   |   |
| Cumulative effect of a change  in accounting principle—net of tax benefit                                        |       |                        | —     |                        |       |                        | —     |                        |       |                        | —     |   |   |   | (0.19 | ) |   |   | — |   |   |
| Net income (loss) per common  share—basic                                                                        |       |                        | $          | 0.60                        |       |                        |       | $                           | (0.06      | )                           |       |   | $ | 0.38 |   |   |   | $ | (0.63 | ) |   |   | $ | 0.50 |   |   |
| Net income (loss) per common  share—diluted                                                                      |       |                        | $          | 0.56                        |       |                        |       | $                           | (0.06      | )                           |       |   | $ | 0.38 |   |   |   | $ | (0.63 | ) |   |   | $ | 0.50 |   |   |
| Weighted average shares  outstanding—basic                                                                       |       |                        | 2,990      |                        |       |                        | 2,950      |                        |       |                        | 2,950      |   |   |   | 2,950 |   |   |   | 2,950 |   |   |
| Weighted average shares  outstanding—diluted                                                                     |       |                        | 3,209      |                        |       |                        | 2,950      |                        |       |                        | 2,950      |   |   |   | 2,950 |   |   |   | 2,950 |   |   |
| **Balance sheet data:**                                                                                               | ** ** |                        | ** ** | ** **                  |       |                        | ** ** | ** **                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total assets                                                                                                          |       |                        | $          | 34,824                      |       |                        |       | $                           | 34,880     |                        |       |   | $ | 35,954 |   |   |   | $ | 39,446 |   |   |   | $ | 44,098 |   |   |
| Total debt and capital lease  obligations including current portion                                              |       |                        | 7,815      |                        |       |                        | 8,207      |                        |       |                        | 7,967      |   |   |   | 9,134 |   |   |   | 13,036 |   |   |
| Stockholders’ equity                                                                                             |       |                        | $          | 20,284                      |       |                        |       | $                           | 19,775     |                        |       |   | $ | 20,790 |   |   |   | $ | 19,677 |   |   |   | $ | 21,535 |   |   |
| **Other data:**                                                                                                       | ** ** |                        | ** ** | ** **                  |       |                        | ** ** | ** **                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating  units(1)                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| HomeTown Buffet                                                                                                       |       |                        | 14         |                        |       |                        | 14         |                        |       |                        | 16         |   |   |   | 16 |   |   |   | 16 |   |   |
| Casa Bonita                                                                                                           |       |                        | 1          |                        |       |                        | 2          |                        |       |                        | 2          |   |   |   | 2 |   |   |   | 2 |   |   |
| North’s Star                                                                                                     |       |                        | 2          |                        |       |                        | 2          |                        |       |                        | 6          |   |   |   | 7 |   |   |   | 8 |   |   |
| Florida Buffets                                                                                                       |       |                        | 7          |                        |       |                        | 7          |                        |       |                        | 7          |   |   |   | 9 |   |   |   | 11 |   |   |
| JB’s Restaurants                                                                                                 |       |                        | 6          |                        |       |                        | 7          |                        |       |                        | 8          |   |   |   | 10 |   |   |   | 10 |   |   |
| Non-Operating                                                                                                         |       |                        | 8          |                        |       |                        | 8          |                        |       |                        | 5          |   |   |   | 7 |   |   |   | 4 |   |   |
| **Total**                                                                                                             |       |                        | 38         |                        |       |                        | 40         |                        |       |                        | 44         |   |   |   | 51 |   |   |   | 51 |   |   |

----

(1)             At the end of the respective periods.

19

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*Supplemental QuarterlyFinancial Data (Unaudited).*   Quarterly financial results for the 52 weeks ended January 30,2006, and the 53 weeks ended January 31, 2005 are summarized below.

| ** **                        | ** ** | **For the 52 Weeks Ended January 30, 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| ** **                        | ** ** | **(In thousands except per share data)**                                       | ** ** |
| Revenues                          |       |                                                                           | $          | 18,869 |   |   |   | $ | 13,788 |   |   |   | $ | 11,493 |   |   |   | $ | 12,155 |   |   | $ | 56,305 |   |
| Income (loss) from operations     |       |                                                                           | 1,424      |   |   |   | 860 |   |   |   | (160 | ) |   |   | 61 |   |   | 2,185 |   |
| Income (loss) before income taxes |       |                                                                           | 1,338      |   |   |   | 1,050 |   |   |   | (156 | ) |   |   | (15 | ) |   | 2,217 |   |
| Income taxes (benefit)            |       |                                                                           | 462        |   |   |   | 342 |   |   |   | (54 | ) |   |   | (330 | ) |   | 420 |   |
| Net income (loss)                 |       |                                                                           | $          | 876 |   |   |   | $ | 708 |   |   |   | $ | (102 | ) |   |   | $ | 315 |   |   | $ | 1797 |   |
| Earnings (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                                                                           | $          | 0.30 |   |   |   | $ | 0.24 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.10 |   |   | $ | 0.60 |   |
| Diluted                           |       |                                                                           | $          | 0.27 |   |   |   | $ | 0.22 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.10 |   |   | $ | 0.56 |   |

 

| ** **                        | ** ** | **For the 53 Weeks Ended January 31, 2005** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| ** **                        | ** ** | **(In thousands except per share data)**                                       | ** ** |
| Revenues                          |       |                                                                           | $          | 21,551 |   |   |   | $ | 15,539 |   |   |   | $ | 13,269 |   |   |   | $ | 14,496 |   |   | $ | 64,856 |   |
| Income (loss) from operations     |       |                                                                           | 1,043      |   |   |   | 853 |   |   |   | (147 | ) |   |   | (1,876 | ) |   | (127 | ) |
| Income (loss) before income taxes |       |                                                                           | 940        |   |   |   | 780 |   |   |   | (247 | ) |   |   | (1,813 | ) |   | (340 | ) |
| Income taxes (benefit)            |       |                                                                           | 329        |   |   |   | 267 |   |   |   | (82 | ) |   |   | (682 | ) |   | (168 | ) |
| Net income (loss)                 |       |                                                                           | $          | 611 |   |   |   | $ | 513 |   |   |   | $ | (165 | ) |   |   | $ | (1,131 | ) |   | $ | (172 | ) |
| Earnings (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                                                                           | $          | 0.21 |   |   |   | $ | 0.17 |   |   |   | $ | (0.06 | ) |   |   | $ | (0.38 | ) |   | $ | (0.06 | ) |
| Diluted                           |       |                                                                           | $          | 0.20 |   |   |   | $ | 0.16 |   |   |   | $ | (0.06 | ) |   |   | $ | (0.38 | ) |   | $ | (0.06 | ) |

 

(In thousands except per sharedata)

20

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**Item 7.**                        *Management’s Discussion andAnalysis of Financial Condition and Results of Operations*

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the consolidated financial statements, and thenotes thereto, presented elsewhere in this Form 10-K. Theoperating results for the 52-week period ended January 30, 2006 andfor the 53-week period ended January 31, 2005 and the 52-weekperiod ended January 26, 2004 are based on the composition of restaurantoperations as discussed in Item 6—Selected Financial Data.

Star Buffet, Inc., a Delaware corporation (“Star”and collectively with its subsidiaries, the “Company”), is engaged in therestaurant industry. As of January 30, 2006, the Company owned andoperated 14 franchised HomeTown Buffet restaurants, six JB’s Restaurants, fiveBuddyFreddys restaurants, two JJ North’s Country Buffet restaurants, twoHoliday House restaurants and one Mexican-themed restaurants operated under theCasa Bonita name. The Company also had four restaurants currently closed forremodeling and repositioning, three restaurants leased to third-party operatorsand the net assets of another closed restaurant reported as property held forsale. The Company’s restaurants are located in nine western states and Florida.

The Company’s sales were $56.3 million in fiscal 2006,a 13.3 percent decrease from $64.9 million in fiscal 2005. On a 52-weekbasis, after adjusting for the $1.1 million of sales contributed by the additional53rd week in fiscal 2005, total sales would have been $63.8 million for fiscal2005, resulting in a 11.0 percent decrease in fiscal 2006 compared to fiscal2005. Sales lost from closed stores represented approximately $5.5 million ofthe decrease in fiscal 2006. Same store sales decreased approximately 3.4percent as adjusted for 52-weeks in both years. The net income for fiscal2006 was $1,797,000 ($0.56 per diluted share) compared with net loss for fiscal2005 of $172,000 ($0.06 per diluted share). Fiscal 2006 was impacted bynon-cash charges of $369,000 for impairment of long-lived assets compared to$2.8 million of non-cash charges for impairment of long-lived assets in fiscal2005.

The implementation of theCompany’s acquisition and strategic alliance strategies, and the costsassociated with integrating new, under performing or unprofitable restaurants,acquired or otherwise operated by the Company may affect the comparability offuture periods and have a material adverse effect on the Company’s results ofoperations.

Weconduct business in the buffet segment of the restaurant industry and theoperating performance of our restaurants is directly and heavily influenced bythe overall state of the national and local economies where our restaurants arelocated. When overall economic conditions negatively impact the financialperformance of an individual restaurant, we periodically consider all thefactors influencing that restaurant, such as operational efficiencies, localdemographic changes, local construction activity, competition and other relatedfactors. We then assess the possibility of whether we can improve both theshort-term and long-term financial results, at least to a level sufficient torecover our investment in the leasehold improvements and equipment assets.There have been and likely will continue to be situations where we will makethe decision that an asset is impaired and a write-down is required.

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**Results of Operations**

Thefollowing table summarizes the Company’s results of operations as a percentageof total revenues for the fifty-two weeks ended January 30, 2006 (“fiscal2006”), and for the fifty-three weeks ended January 31, 2005 (“fiscal 2005”)and the fifty-two weeks ended January 26, 2004 (“fiscal 2004”).

| ** **                                  | ** ** | **Fifty-Two  Weeks**       | ** ** | **Fifty-Three  Weeks**     | ** ** | **Fifty-Two  Weeks**       | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                  | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| Total revenues                              |       |                       | 100.0      | %                          |       |                       | 100.0      | % |   |   | 100.0 | % |   |
| Costs and expenses:                         |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Food costs                                  |       |                       | 34.5       |                       |       |                       | 34.4       |   |   |   | 34.2 |   |   |
| Labor costs                                 |       |                       | 32.4       |                       |       |                       | 33.5       |   |   |   | 33.8 |   |   |
| Occupancy and other expenses                |       |                       | 20.9       |                       |       |                       | 20.0       |   |   |   | 20.6 |   |   |
| General and administrative  expenses        |       |                       | 3.9        |                       |       |                       | 4.1        |   |   |   | 3.6 |   |   |
| Depreciation and amortization               |       |                       | 3.8        |                       |       |                       | 3.8        |   |   |   | 3.9 |   |   |
| Impairment of long-lived  assets            |       |                       | 0.7        |                       |       |                       | 4.4        |   |   |   | 1.6 |   |   |
| Total costs and expenses                    |       |                       | 96.1       |                       |       |                       | 100.2      |   |   |   | 97.7 |   |   |
| Income (loss) from operations               |       |                       | 3.9        |                       |       |                       | (0.2       | ) |   |   | 2.3 |   |   |
| Interest expense                            |       |                       | (1.2       | )                          |       |                       | (1.0       | ) |   |   | (0.8 | ) |   |
| Reversal of litigation accrual              |       |                       | —     |                       |       |                       | —     |   |   |   | 0.6 |   |   |
| Other income, net                           |       |                       | 1.2        |                       |       |                       | 0.7        |   |   |   | 0.5 |   |   |
| Income (loss) before income taxes (benefit) |       |                       | 3.9        |                       |       |                       | (0.5       | ) |   |   | 2.6 |   |   |
| Income taxes (benefit)                      |       |                       | 0.7        |                       |       |                       | (0.2       | ) |   |   | 0.9 |   |   |
| Net  income (loss)                          |       |                       | 3.2        | %                          |       |                       | (0.3       | )% |   |   | 1.7 | % |   |

 

Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following table. The other assets presented in the consolidated balancesheet and not in the reportable segments relate to the Company as a whole, andnot individual segments. Also certain corporate overhead income and expenses inthe consolidated statements of operations are not included in the reportablesegments.

| **52 Weeks Ended  January 30, 2006** | ** ** | ** **                           | ** ** | **HomeTown  Buffet(1)** | ** ** | **North’s  Star(2)** | ** ** | **Florida**  Buffets(3) | ** ** | **Summit  Restaurants(4)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                               | ** ** | **(Dollars in Thousands)** | ** ** |
| Revenues                                                 |       |                                 | $          | 28,210                  |       |                      | $          | 2,267                   |       |                       | $          | 10,841    |       |      |       | $ | 14,987 |   |   | $ | — |   | $ | 56,305 |   |
| Food cost                                                |       |                                 | 10,455     |                    |       | 927                       |       |                    | 3,919      |                       |       |      | 4,128      |      |       |   |   | 19,429 |   |
| Labor cost                                               |       |                                 | 8,572      |                    |       | 812                       |       |                    | 3,597      |                       |       |      | 5,279      |      |       |   |   | 18,260 |   |
| Interest income                                          |       |                                 | —     |                    |       | —                    |       |                    | —     |                       |       |      | —     |      |       | 361 |   | 361 |   |
| Interest expense                                         |       |                                 | (181       | )                       |       | —                    |       |                    | —     |                       |       |      | —     |      |       | (467 | ) | (648 | ) |
| Depreciation & amortization                     |       |                                 | 996        |                    |       | 86                        |       |                    | 588        |                       |       |      | 383        |      |       | 67 |   | 2,120 |   |
| Impairment of long-lived assets                          |       |                                 | 18         |                    |       | 74                        |       |                    | 202        |                       |       |      | 75         |      |       | — |   | 369 |   |
| Income  (loss) before income taxes                       |       |                                 | 1,441      |                    |       | (328                      | )          |                    | 429        |                       |       |      | 2,230      |      |       | (1,555 | ) | 2,217 |   |
|                                                          |            |                                      |            |                         |            |                           |            |                         |            |                            |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **53 Weeks Ended  January 31, 2005** | ** ** | ** ** | ** ** | **HomeTown  Buffet(1)** | ** ** | **North’s  Star(2)** | ** ** | **Florida  Buffets(3)** | ** ** | **Summit  Restaurants(4)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| Revenues                                                 |       |       | $          | 32,282                  |       |                      | $          | 4,290                   |       |                       | $          | 10,785    |       |      |       | $ | 17,499 |   |   | $ | — |   | $ | 64,856 |   |
| Food cost                                                |       |       | 11,752     |                    |       | 1,828                     |       |                    | 3,892      |                       |       |      | 4,864      |      |       | — |   | 22,336 |   |
| Labor cost                                               |       |       | 10,117     |                    |       | 1,684                     |       |                    | 3,644      |                       |       |      | 6,267      |      |       | — |   | 21,712 |   |
| Interest income                                          |       |       | —     |                    |       | —                    |       |                    | —     |                       |       |      | —     |      |       | 5 |   | 5 |   |
| Interest expense                                         |       |       | (192       | )                       |       | —                    |       |                    | —     |                       |       |      | —     |      |       | (448 | ) | (640 | ) |
| Depreciation & amortization                     |       |       | 1,084      |                    |       | 210                       |       |                    | 625        |                       |       |      | 457        |      |       | 64 |   | 2,440 |   |
| Impairment of long-lived assets                          |       |       | 798        |                    |       | 1,040                     |       |                    | 754        |                       |       |      | 246        |      |       | — |   | 2,838 |   |
| Income  (loss) before income  taxes                      |       |       | 1,142      |                    |       | (1,667                    | )          |                    | (24        | )                          |       |      | 2,411      |      |       | (2,202 | ) | (340 | ) |
|                                                          |            |            |            |                         |            |                           |            |                         |            |                            |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The samestore sales declined this year in the Hometown Buffet Division by $2.6 millionand labor improved by one percent. Impairment of long-lived assets was $780,000lower in fiscal 2006 as compared to fiscal 2005.

(2)          The samestore sales in the North’s Star Division declined by $117,000. Elimination ofunder performing stores resulted in an improvement in food and labor costs as apercentage of sales in fiscal 2006. Impairment of long-lived assets was$966,000 lower in fiscal 2006 as compared to fiscal 2005.

(3)          Samestore sales increased in the Florida Buffet Division by $56,000 and laborimproved over the prior year by 47,000. Impairment of long-lived assets was$552,000 lower in fiscal 2006 as compared to fiscal 2005.

(4)          Same store sales for Summit Restaurants decreased slightly in JB’sRestaurants and Casa Bonita Denver in the current year as compared to the prioryear. The Summit Restaurants Division had improvements in both food and laborcosts in fiscal 2006 as a percentage of sales. Impairment of long-lived assetswas $171,000 lower in fiscal 2006 as compared to fiscal 2005.

*Comparison of Fiscal 2006 to Fiscal 2005*

Total revenues decreased $8.6million or 13.3% from $64.9 million in fiscal 2005 to $56.3 million in fiscal2006. On a 52-week basis, after adjusting for the $1.1 million ofsales contributed by the additional 53rd week in fiscal 2005, total sales wouldhave been $63.8 million for fiscal 2005. There was an 11.0% decrease in 2006from 2005 on this basis. Sales lost from closed stores representedapproximately $5.5 million of the decrease. Same store sales decreasedapproximately 3.4% adjusted for 52-weeks in both years.

Food costs as a percent of total revenues increasedfrom 34.4% in fiscal 2005 to 34.5% in fiscal 2006. The increase as a percentageof total revenues was primarily attributable to lower same store sales.

Labor costs as a percent oftotal revenues decreased from 33.5% in fiscal 2005 to 32.4% in fiscal 2006. Thedecrease as a percentage of revenue resulted from the elimination of laborinefficiencies in locations that were closed. The Company closed two storesduring fiscal 2006 and closed seven stores during fiscal 2005.

Occupancy and other expenses asa percent of total revenues increased from 20.0% in fiscal 2005 to 20.9% infiscal 2006. The increase as a percentage of revenues for the 52-weekperiod ended January 30, 2006 was primarily attributable to decreasedrevenues in the stores opened during both years and expenses incurred inclosing one restaurant in the third quarter of fiscal 2006. The fixed portionof occupancy costs is primarily fixed costs for property leases and relatedcommon area maintenance and property taxes. The actual costs decreased by $1.2million in fiscal 2006 primarily attributable to not having rent and utilitiesin the stores that closed during the prior year.

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General and administrativeexpenses as a percentage of total revenues decreased from 4.1% in fiscal 2005to 3.9% in fiscal 2006 and actual costs decreased by $515,000. The decrease forthe 52-week period ended January 30, 2006 was primarily attributableto lower corporate insurance costs of $354,000, lower field administrative costsof $62,000, lower royalties cost of $81,000 and lower public fees of $49,000.

Depreciation and amortization asa percent of total revenues stayed at 3.8% in fiscal 2005 and 3.8% in fiscal2006. The no change as a percentage of revenue is primarily attributable tocertain equipment and impaired assets being fully depreciated for the 52-weekperiod ended January 30, 2006 as compared to the 53-week periodended January 31, 2005, which resulted in the same percentage of revenuesince the revenues declined in the current year. Actual depreciation andamortization decreased by $320,000.

Impairment of long-lived assetsdecreased from 4.4% in fiscal 2005 to 0.7% in fiscal 2006. The impairment infiscal 2006 totaled $78,000 for one store closure and the impairment of tworestaurants’ leasehold improvements where projected undiscounted cash flows areless than the net book value of the assets. Fiscal 2006 also included $291,000for impairment to equipment held for future use. The impairment in fiscal 2005was a result of the closure of one JJ North’s Country Buffet restaurant in thethird quarter, the closure of one JJ North’s Country Buffet restaurant in thefourth quarter, the closure of one HomeTown Buffet restaurant in the thirdquarter, the closure of one HomeTown Buffet restaurant in the fourth quarterand the impairment of four restaurants’ leasehold improvements where projectedundiscounted cash flows were less than the net book value of the assets. Fiscal2005 also included the goodwill impairment of $1,230,000 related to fiverestaurants. 

Interest expense as a percent oftotal revenues increased from 1.0% in fiscal 2005 to 1.2% in fiscal 2006. Theincrease is primarily attributable to lower sales in fiscal 2006.

Theincome tax provision totaled $420,000 in fiscal 2006 as compared to an incometax benefit of $168,000 in fiscal 2005. The income tax provision in fiscal 2006included more general business tax credits than in prior years due to InternalRevenue Service rulings on employment tax credits.

*Comparison of Fiscal 2005 to Fiscal 2004*

Total revenues decreased $3.2million or 4.8% from $68.1 million in fiscal 2004 to $64.9 million in fiscal2005. On a 52-week basis, after adjusting for the $1.1 million ofsales contributed by the additional 53rd week in fiscal 2005, total sales wouldhave been $63.7 million for fiscal 2005, a 6.5 percent decrease from fiscal2004. Sales from closed stores were approximately $3.0 million of the decrease.Same store sales decreased approximately two percent adjusted for 52-weeksin both years.

Food costs as a percent of total revenues increasedfrom 34.2% in fiscal 2004 to 34.4% in fiscal 2005. The increase as a percentageof total revenues was primarily attributable to higher wholesale food prices inmost major food categories as compared to the same period last year.

Labor costs as a percent oftotal revenues decreased from 33.8% in fiscal 2004 to 33.5% in fiscal 2005. Thedecrease as a percentage of revenue resulted from the elimination of laborinefficiencies in locations that were closed. The Company closed seven stores duringfiscal 2005 and closed five stores during fiscal 2004.

Occupancy and other expenses asa percent of total revenues decreased from 20.6% in fiscal 2004 to 20.0% infiscal 2005. The decrease as a percentage of revenue is primarily attributableto lower property rental costs of approximately $332,000 resulting fromoperating fewer stores, lower insurance costs of $135,000, lower othercontrollable costs consisting primarily of janitorial and supply costs of$161,000 and lower advertising of $100,000 due primarily to fewer locations andlower utilities of $111,000. The fixed portion of occupancy costs is primarilyfixed costs for property leases and related common area maintenance andproperty taxes.

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General and administrativeexpenses as a percentage of total revenues increased from 3.6% in fiscal 2004to 4.1% in fiscal 2005. The increase as a percentage of revenue is primarilyattributable to higher corporate insurance costs of $471,000 partially offsetby lower corporate payroll of $80,000 and lower public fees expenses of $39,000and lower royalty expense of $30,000.

Depreciation and amortization asa percent of total revenues decreased from 3.9% in fiscal 2004 to 3.8% infiscal 2005. The decrease as a percentage of revenue is primarily attributableto certain equipment and impaired assets being fully depreciated for the 53-weekperiod ended January 31, 2005 as compared to the 52-week periodended January 26, 2004.

Impairment of long-lived assetsincreased from 1.6% in fiscal 2004 to 4.4% in fiscal 2005. The impairment infiscal 2005 was a result of the closure of one JJ North’s Country Buffetrestaurant in the third quarter, the closure of one JJ North’s Country Buffetrestaurant in the fourth quarter, the closure of one HomeTown Buffet restaurantin the third quarter, the closure of one HomeTown Buffet restaurant in thefourth quarter and the impairment of four restaurants’ leasehold improvementswhere projected undiscounted cash flow is less than the net book value of theassets. Fiscal 2005 also included the goodwill impairment of $1,230,000 relatedto five restaurants. The impairment in fiscal 2004 was a result of the leasetermination of one restaurant in Idaho and two leased restaurants whereprojected undiscounted cash flow was less than the net book value of assets.

Interest expense as a percent oftotal revenues increased from 0.8% in fiscal 2004 to 1.0% in fiscal 2005. Theincrease is primarily attributable to higher interest rates increasing from3.2% in fiscal 2004 to 4.0% in fiscal 2005 on the Term Loan Facility andRevolving Credit Facility financed by M&I Marshall and Ilsley Bank asdiscussed in Note 5 of the notes to the consolidated financial statements andoffset by lower outstanding balances on those facilities.

Incometaxes decreased to a benefit of 49.4% of earnings before taxes due to the lossfor fiscal 2005 from 35.4% of earnings before taxes in fiscal 2004. Generalbusiness credits in fiscal 2005 increased the Company’s benefit.

**Liquidity and Capital Resources**

The Company has historicallyfinanced operations through a combination of cash on hand, cash provided fromoperations and available borrowings under bank lines of credit. As of January 30,2006, the Company had $491,000 in cash as compared to $692,000 in cash and cashequivalents at January 31, 2005.  The net working capital deficit was $(4,510,000) and $(4,296,000) at January 30,2006 and January 31, 2005, respectively. During fiscal 2006, the Companyused approximately $493,000 on capital expenditures for remodels and equipmentpurchases, approximately $1,640,000 in loans to strategic partners andapproximately $2,253,000 to pay dividends. The loans to strategic partnersincluded $1,400,000 to K-BOB’s USA Inc. and $240,000 to Holiday HouseCorporation. The loan to K-BOB’s USA Inc. was reduced on 1-31-2006 byapproximately $1,285,000 when the Company purchased three K-BOB’s restaurants. Long-termdebt decreased by approximately $277,000 during the 52 weeks ended January 30,2006. In addition, the Company purchased a $300,000 building in Rexburg, Idahousing seller’s financing. The Company received approximately $267,000 from theexercise of stock options and approximately $698,000 in principal and $250,000in interest from the repayment of a debt obligation by Mr. Wheaton, theCompany’s President and Chief Executive Officer.

Cash provided by operations was$3.9 million for fiscal 2006 and $3.8 million for fiscal 2005.

The Company intends to modestlyexpand operations through the acquisition of regional buffet chains or throughthe purchase of existing restaurants which would be converted to one of theCompany’s existing restaurant concepts. Subsequent to year end the Companyacquired four K-BOB’S restaurants and in April 2006 entered into astrategic alliance with Western Sizzlin’ Corporation to acquire certain 

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restaurants.In many instances, management believes that existing restaurant locations canbe acquired and converted to the Company’s prototype at a lower cost than toconstruct new restaurants. Management estimates the cost of acquiring andconverting one leased property to one of the existing concepts to beapproximately $150,000 to $450,000. These costs consist primarily of exteriorand interior appearance modifications, new tables, chairs and food bars and theaddition of certain kitchen and food service equipment. The Company has some ofthis equipment available from stores closed in previous periods. There can beno assurance that the Company will be able to acquire additional restaurantchains or locations or, if acquired, that these restaurants will have apositive contribution to the Company’s results of operations.

On October 31, 2004, theCompany continued with a $1.0 million 1-year Revolving Line of Creditwith M&I Marshall & Ilsley Bank (the “Revolving Line of Credit”).The Revolving Line of Credit provides working capital for the Company. TheRevolving Line of Credit bears interest at LIBOR plus two percent per annum.The Revolving Line of Credit requires the Company to maintain specified minimumlevels of net worth, limit the amount of capital expenditures, maintain certainfixed charge coverage ratios, and to meet other financial covenants. As of January 30,2006, the Company is in compliance with these covenants. The Company increasedthe Revolving Line of Credit on February 1, 2005 to $2.0 million andincreased the limit on to annual dividends to $2.5 million with no otherchanges in terms or covenants. On December 31, 2005, the Company’s Boardof Directors authorized the continuance of the stock repurchase program, originallyapproved by the board and announced in 1999, which provided for the repurchaseof up to 500,000 shares of common stock. On July 1, 2005, the Companyextended the Revolving Line of Credit due date from October 31, 2005 to May 31,2006. The Company will seek to renew or replace the Revolving Line of Credit byMay 2006. There can be no assurance the Revolving Line of Credit can berefinanced on acceptable terms or at all. The Revolving Line of Credit balancewas $0 on January 30, 2006 and $0 on April 18, 2006. As of April 18,2006, $2,000,000 was available on the Revolving Line of Credit. As of April 18,2006 the Company had not repurchased any shares under the 1999 authorization. Inaddition, the Board of Directors authorized management to request modificationsin the bank convenants to allow for the repurchase of up to 250,000 shares ofcommon stock. The bank agreed to this modification in January 2006.

On February 1, 2001, theCompany entered into a promissory note secured by a first mortgage with VictoriumCorporation for $460,000 to purchase the real estate of the BuddyFreddysCountry Buffet in Ocala, Florida. The fixed rate (7.5%) mortgage requiresmonthly payments of $4,264 including interest and matures in 15 years. Thebalance at January 30, 2006 and January 31, 2005 was $362,000 and$384,000, respectively.

On October 9, 2001, theCompany entered into a $773,000 15 year first real estate mortgage with FirstNational Bank of Wyoming. The mortgage has monthly payments including interestof $7,253 and has an October 1, 2016 maturity date with a fixed interestrate of 7.625%. The mortgage requires the Company to maintain specified minimumlevels of net worth, limits the amount of capital expenditures, requires themaintenance of certain fixed charge coverage ratios and requires a minimumshareholder ownership percentage. The proceeds were used to pay the FleetBostonTerm Loan Facility as required by the Company’s agreement with FleetBoston. Themortgage is secured by the Company’s JB’s Restaurant in Laramie, Wyoming. Thebalance at January 30, 2006 and January 31, 2005 was $623,000 and$663,000, respectively. The mortgage was paid in full on March 16, 2006when the property was sold.

On May 2, 2002, the Companyentered into a $1,500,000 ten year first real estate mortgage with M&IMarshall & Ilsley Bank. The mortgage has monthly payments includinginterest of $17,894 and matures on May 2, 2012 with a fixed interest rateof 7.5% for the first five years with interest for years six to ten calculatedat the five year LIBOR rate plus 250 basis points with a floor of 7.5%. Theproceeds were used to pay the FleetBoston Term Loan Facility as required by theCompany’s agreement with FleetBoston. 

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Themortgage is secured by the Company’s HomeTown Buffet restaurant in Scottsdale,Arizona. The balance at January 30, 2006 and January 31, 2005 as$1,066,000 and $1,205,000, respectively.

On December 19, 2003, theCompany entered into a $1,470,000 six year first real estate mortgage withPlatinum Bank. The mortgage has monthly payments including interest of $12,678through November 19, 2009 with a balloon payment of $475,000 due on December 19,2009. The mortgage bears interest at a fixed rate of 6.25% for the first threeyears with interest for years four to six calculated at the three year AtlantaFederal Home Loan Bank advance rate for fixed rate credits plus 325 basispoints with a floor of 6.0%. The mortgage is secured by the Company’sBuddyFreddys restaurant in Plant City, Florida and a $500,000 personalguarantee of a shareholder. The balance at January 30, 2006 and January 31,2005 was $1,339,000 and $1,404,000, respectively.

On February 25, 2004, theCompany entered into a $1,250,000 seven year first real estate mortgage withM&I Marshall & Ilsley Bank. The mortgage has monthly paymentsincluding interest of $18,396 and matures on February 25, 2011 with afixed interest rate of 6.1%. The proceeds were used to reduce the RevolvingLine of Credit with M&I Marshall & Ilsley Bank. The mortgage issecured by the Company’s HomeTown Buffet restaurant in Yuma, Arizona. Thebalance at January 30, 2006 and January 31, 2005 was $959,000 and$1,115,000.

On July 29, 2004, theCompany entered into a $550,000 ten year first real estate mortgage withHeritage Bank. The mortgage has monthly payments including interest of $6,319and matures on August 1, 2014 with a fixed interest rate of 6.75%. Themortgage is secured by the Company’s JB’s Restaurant in Great Falls, Montana.The balance at January 30, 2006 and January 31, 2005 was $490,000 and$531,000.

On October 27, 2004, theCompany entered into a $1,275,000 five year first real estate mortgage withBank of Utah. The mortgage has monthly payments including interest of $14,371and matures on October 26, 2009 with a balloon payment of $752,000 due on October 26,2009. The mortgage bears interest at a fixed interest rate of 6.25%. Themortgage requires the Company to maintain specified minimum levels of networth, limits the amount of capital expenditures and requires the maintenanceof certain fixed charge coverage ratios. The proceeds were used to pay NaiscoInvestments, L.C., the previous lien holder and to reduce the Revolving Line ofCredit with M&I Marshall & Ilsley Bank. The mortgage is secured bythe Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 30,2006 and January 31, 2005 was $1,154,000 and $1,251,000.

On September 16, 2005, theCompany entered into a $300,000 five year mortgage with Naisbitt InvestmentCompany. The mortgage has monthly payments including interest of $5,870 andmatures on September 15, 2010. The balance at January 30, 2006 was$283,000.

The Company believes thatavailable cash and cash flow from operations will be sufficient to satisfy itsworking capital and capital expenditure requirements during the next 12 months.Management does not believe the net working capital deficit will have anyeffect on the Company’s ability to operate the business and meet obligations asthey come due in the next 12 months. Further, the Company believes that it willspend less than $3 million a year on capital expenditures for the next fewyears. The Company believes that the combination of capital spending and anacquisition strategy that is not projected to require significant amounts ofcapital suggests that the Company may generate operating cash flow in excess ofexpected needs. In such event, the Company plans to consider the return of somecapital to its stockholders through a stock repurchase program or a cashdividend or both. There can be no assurance that cash and cash flow fromoperations will be sufficient to satisfy its working capital and capitalrequirements for the next 12 months or beyond.

Ifthe Company requires additional funds to support its working capitalrequirements or for other purposes, it may seek to raise such additional fundsthrough public or private equity and/or debt financing or from other sources.There can be no assurance, however, that changes in the Company’s operating 

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plans, the unavailability of a credit facility, theacceleration of the Company’s expansion plans, lower than anticipated revenues,increased expenses or potential acquisitions or other events will not cause theCompany to seek additional financing sooner than anticipated. There can be noassurance that additional financing will be available on acceptable terms or atall.

**Off-balance SheetArrangements**

Asof January 30, 2006, the Company did not have any off-balance sheetarrangements as defined in Item 303(a) (4) (ii) of RegulationS-K.

**Commitments and Contractual Obligations**

The Company’s contractual obligations and commitmentsprincipally include obligations associated with our outstanding indebtednessand future minimum operating and capital lease obligations as set forth in thefollowing table:

| **Contractual Obligations:**   | ** ** | ** **                           | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **One to  three years** | ** ** | **Three to  five years** | ** ** | **Greater than  five years** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Long-term debt(1)                   |       | $                                    | 6,276      |      |       | $                                 | 640        |                              |       |                               | $          | 1,412                                  |       |   |   | $ | 2,163 |   |   |   | $ | 2,061 |   |   |
| Operating leases(2)                 |       | 10,660                               |       |      | 2,426      |                              |       |                              | 4,138      |                               |       |                                   | 1,849      |   |   |   | 2,247 |   |   |
| Capital leases(2)                   |       | 2,300                                |       |      | 309        |                              |       |                              | 628        |                               |       |                                   | 609        |   |   |   | 754 |   |   |
| Purchase commitments                |       | —                               |       |      | —     |                              |       |                              | —     |                               |       |                                   | —     |   |   |   | — |   |   |
| Total  contractual cash obligations |       | $                                    | 19,236     |      |       | $                                 | 3,375      |                              |       |                               | $          | 6,178                                  |       |   |   | $ | 4,621 |   |   |   | $ | 5,062 |   |   |

----

(1)          See Note5 to the consolidated financial statements for additional information.

(2)          See Note 6 to the consolidated financial statements for additionalinformation.

**Impact of Inflation**

Managementrecognizes that inflation has an impact on food, construction, labor andbenefit costs, all of which can significantly affect the Company’s operations.Historically, the Company has been able to pass any associated higher costs dueto these inflationary factors along to its customers because those factors haveimpacted nearly all restaurant companies. However, management has emphasizedcost controls rather than price increases given the competitive pressure withinthe quick-service restaurant industry.

**Critical AccountingPolicies and Judgments**

TheCompany prepares its consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America. TheCompany’s consolidated financial statements are based on the application ofcertain accounting policies, the most significant of which are described in Note 1—Summaryof Significant Accounting Policies to the Consolidated Financial Statementsincluded herewith. Certain of these policies require numerous estimates andstrategic or economic assumptions that may prove inaccurate or subject tovariations and may significantly affect the Company’s reported results andfinancial position for the period or in future periods. Changes in underlyingfactors, assumptions or estimates in any of these areas could have a materialimpact on the Company’s future financial condition and results of operations.The Company considers the following policies to be the most critical inunderstanding the judgments that are involved in preparing its consolidatedfinancial statements.

28

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**Deferred TaxAssets**

Periodically, the Companyrecords (or reduces) the valuation allowance against deferred tax assets to theamount that is more likely than not to be realized based upon recent pastfinancial performance, tax reporting positions, and expectations of futuretaxable income. The Company expects to continue to record a full valuationallowance on any future tax benefits until it sustains profitable operations.

Property, Buildings andEquipment

Property and equipment and real property under capitalizedleases are carried at cost less accumulated depreciation and amortization.Depreciation and amortization are provided using the straight-line method overthe following useful lives:

| ** **                         | ** ** | **Years**    | ** ** |
|------------------------------------|------------|--------------|------------|
| Buildings                          |       | 40           |       |
| Building improvements              |       | 15 – 20 |       |
| Furniture,  fixtures and equipment |       | 5 –  8  |       |

 

Leasehold improvements areamortized over the lesser of the life of the lease or estimated economic lifeof the assets. The life of the lease includes renewal options determined bymanagement at lease inception for which failure to renew options would resultin a substantial economic penalty. If a lease option was not exercised in thefuture, any remaining unamortized leasehold improvements would be required tobe recognized immediately which could result in a significant charge adverselyaffecting the operating results of that period.

Repairs and maintenance arecharged to operations as incurred. Remodeling costs are generally capitalized.

TheCompany’s accounting policies regarding buildings and equipment include certainmanagement judgments regarding the estimated useful lives of such assets, theresidual values to which the assets are depreciated and the determination as towhat constitutes increasing the life of existing assets. These judgments andestimates may produce materially different amounts of depreciation andamortization expense that would be reported if different assumptions were used.As discussed further below, these judgments may also impact the Company’s needto recognize an impairment charge on the carrying amount of these assets as thecash flows associated with the assets are realized.

Impairment of Goodwill

Goodwill and other intangibleassets primarily represent the excess of the purchase price paid over the fairvalue of the net assets acquired in connection with business acquisitions. Asof January 29, 2002, the Company adopted SFAS No. 142, Goodwill andOther Intangible Assets (“SFAS 142”). In accordance with SFAS 142, the Companyhas ceased amortizing goodwill recorded in past business combinations effectiveas of January 29, 2002. As a result, there is no charge for goodwillamortization expense contained in the Company’s statements of operations forthe years ended January 30, 2006, January 31, 2005 and January 26,2004.

SFAS142 required that goodwill initially be tested for impairment by comparing thefair value of each reporting unit that included goodwill to the carrying amountof the reporting unit as of January 29, 2002. The Company performed thetransitional impairment test and determined that the carrying amount ofrelevant reporting units was in excess of the fair value of those units. Thisresulted in a transitional impairment loss of $849,000 which was reported as acumulative effect of a change in accounting principle, net of a tax benefit of$289,000 in the first quarter of 2003. Subsequent to adoption of SFAS, theCompany evaluates goodwill for impairment annually or when a triggering eventoccurs that indicates a potential 

29

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impairment may have occurred in accordance with SFAS 142.Future impairments of goodwill, if any, will adversely affect the results ofoperations in the periods recognized.

Impairment of Long-Lived Assets

The Company determines that animpairment write-down is necessary for locations whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceed the fair value of the assets, whichwould adversely affect operating results in the affected period.

Judgmentsmade by the Company related to the expected useful lives of long-lived assetsand the ability of the Company to realize undiscounted cash flows in excess ofthe carrying amounts of such assets are affected by factors such as the ongoingmaintenance and improvements of the assets, changes in economic conditions, andchanges in operating performance. As the Company assesses the ongoing expectedcash flows and carrying amounts of its long-lived assets, these factors couldcause the Company to realize a material impairment charge and could adverselyaffect operating results in any period.

Insurance Programs

TheCompany is self-insured for general liability claims. The Company hascommercial insurance for casualty claims in excess of $2 million per claim and$3 million per year as a risk reduction strategy. Self-insurance accrualsinclude estimates based on historical information and expected futuredevelopment factors. Differences in estimates and assumptions could result inactual liabilities materially different from the calculated accruals.

**New AccountingPronouncements**

In October 2005, the FASB issued Staff Position No. 13-1(“FSP 13-1”), *Accounting for RentalCosts Incurred During a Construction Period*. Generally, the staffposition requires companies to expense rental costs incurred during aconstruction period. We are required to adopt FSP 13-1 in our fiscal yearbeginning January 31, 2006. The Company does not believe the adoption ofthis staff position will have a material impact on our results of operations orfinancial position.

In December 2004, the Financial AccountingStandards Board (“FASB”) recently enacted Statement of Financial AccountingStandards 123-revised 2004 (“SFAS 123R”), “Share-Based Payment” whichreplaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”),Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25(“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires themeasurement of all employee share-based payments to employees, including grantsof employee stock options, using a fair-value-based method and the recording ofsuch expense in our consolidated statements of income. The accountingprovisions of SFAS 123R are effective for reporting periods beginning after December 15,2005. The Company is required to adopt SFAS 123R in the first quarter of fiscal2007. The pro forma disclosures previously permitted under SFAS 123 no longerwill be an alternative to financial statement recognition. See Note 1 to theNotes to Consolidated Financial Statements for the pro forma net income and netincome per share amounts, for fiscal 2004 through fiscal 2006, as if theCompany had used a fair-value-based method similar to the methods requiredunder SFAS 123R to measure compensation expense for employee stock incentiveawards. Although the Company has not yet determined whether the adoption ofSFAS 123R will result in amounts that are similar to the current pro formadisclosures under SFAS 123, the Company is evaluating the requirements 

30

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under SFAS 123R andexpects the adoption to potentially have a significant impact on ourconsolidated statements of operations and net income per share starting infiscal 2007.

In December 2004, theFASB issued FASB 151, Inventory Cost, an amendment of ARB No. 43, Chapter4. This Statement is effective for financial statements for fiscal yearsbeginning after June 15, 2005. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). The Company does not believe the adoption of FASB 151 will have amaterial impact on our consolidated financial statements.

**Item 7A.**                *Quantitative and QualitativeDisclosures about Market Risk*

**Interest Rate Risk**

The Company’s principalexposure to financial market risks is the impact that interest rate changescould have on its $2.0 million Revolving Line of Credit, of which $0 remainedoutstanding as of January 30 and April 18, 2006. The Revolving Lineof Credit interest rate is LIBOR plus two percent per annum (averagingapproximately 4.7% in fiscal 2006). A hypothetical increase of 100 basis pointsin short-term interest rates would result in a reduction of pre-tax earnings,the amount of which would depend on the amount outstanding on the line ofcredit. All of our business is transacted in U.S. dollars. Accordingly, foreignexchange rate fluctuations have never had a significant impact on the Companyand are not expected to in the foreseeable future.

**Commodity PriceRisk**

The Company purchasescertain products which are affected by commodity prices and are, therefore,subject to price volatility caused by weather, market conditions and otherfactors which are not considered predictable or within our control. Althoughmany of the products purchased are subject to changes in commodity prices,certain purchasing contracts or pricing arrangements contain risk managementtechniques designed to minimize price volatility. Typically the Company usesthese types of purchasing techniques to control costs as an alternative todirectly managing financial instruments to hedge commodity prices. In manycases, the Company believes it will be able to address commodity cost increaseswhich are significant and appear to be long-term in nature by adjusting itsmenu pricing, menu mix or changing our product delivery strategy. However,increases in commodity prices could result in lower operating margins for ourrestaurant concepts.

**Item 8.**                        *Financial Statements andSupplementary Data*

Seethe Index to Consolidated Financial Statements included at “Item 15. Exhibitsand Financial Statement Schedules”

**Item 9.**                        *Changes in and Disagreements withAccountants on Accounting and Financial Disclosure*

None.

**Item 9A.**                *Controls and Procedures*

The Company’s disclosure controls and procedures aredesigned to ensure that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934, as amended (the Exchange Act),is recorded, processed, summarized, and reported within the required timeperiods and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Principal AccountingOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure.

31

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As set forth in Note 2 to the consolidatedfinancial statements, the Company’s financial statements for the year endedJanuary 26, 2004, contained an error in the determination of the number ofshare equivalents to be included in the calculation of diluted earnings. TheCompany believes that this was simply an error and not the result of the designof the Company’s disclosure controls and procedures. However, such controls andprocedures were not effective to detect the error prior to the filing of suchfinancial statements. The Company’s accounting staff has received additionalinstruction on the calculation of diluted earnings and the Company does notbelieve that any further steps are needed to address this matter.

As required by Rule 13a-15(b) underthe Exchange Act, we conducted an evaluation, under the supervision and withthe participation of our management, including the Chief Executive Officer andthe Principal Accounting Officer, of the effectiveness and the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this report. Based on the foregoing, we determined that ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Securities Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSEC.

There was no change in ourinternal control over financial reporting during the year ended January 30,2006, or since that date, that has materially affected, or is reasonably likelyto materially affect, the Company’s internal control over financial reporting. Inaddition, other than as described above, since the most recent evaluation date,there have been no significant changes in our internal control structure,policies, and procedures or in other areas that could significantly affect theCompany’s internal control over financial reporting.

32

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**PART III**

**Item 10.**                 *Directors and Executive Officersof the Registrant*

The information concerning thecurrent directors and executive officers of the Company is contained in Item 1of Part I of this Annual Report on Form 10-K.

Theinformation pertaining to compliance with Section 16(a) of theExchange Act is hereby incorporated by reference to the Company’s ProxyStatement to be used in connection with the Company’s 2006 Annual Meeting ofStockholders, to be filed with the Commission within 120 days of January 30,2006.

**Item 11.**                 *Executive Compensation*

Theinformation pertaining to executive compensation is hereby incorporated byreference to the Company’s Proxy Statement to be used in connection with theCompany’s 2006 Annual Meeting of Stockholders, to be filed with the Commissionwithin 120 days of January 30, 2006.

**Item 12.**                 *Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters*

Theinformation pertaining to security ownership of certain beneficial owners andmanagement and equity compensation plan information is hereby incorporated byreference to the Company’s Proxy Statement to be used in connection with theCompany’s 2006 Annual Meeting of Stockholders, to be filed with the Commissionwithin 120 days of January 30, 2006.

**Item 13.**                 *Certain Relationships and RelatedTransactions*

Theinformation pertaining to certain relationships and related transactions ishereby incorporated by reference to the Company’s Proxy Statement to be used inconnection with the Company’s 2006 Annual Meeting of Stockholders, to be filedwith the Commission within 120 days of January 30, 2006.

**Item 14.**                 *Principal Accountant Fees andServices*

The information with respect to principal accountantfees and services is hereby incorporated by reference to the Company’s ProxyStatement to be used in connection with the Company’s 2006 Annual Meeting ofStockholders, to be filed with the Commission within 120 days of January 30,2006.

33

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**PART IV**

**Item 15.**                 *Exhibits and Financial StatementSchedules*

**(a)(1)   Index toConsolidated Financial Statements:**
|                                                                                                                                                                                                 | ** ** | Page  Number |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Report of Management  Responsibilities                                                                                                                                                          |       |         | F-1 |   |
| Report of Independent  Registered Public Accounting Firm                                                                                                                                        |       |         | F-2 |   |
| Consolidated Balance Sheets—as of  January 30, 2006 and January 31, 2005                                                                                                         |       |         | F-3 |   |
| Consolidated Statements of  Operations—for the 52-weeks ended January 30, 2006 and the 53-weeks  ended January 31, 2005 and  January 26, 2004                     |       |         | F-5 |   |
| Consolidated Statements of  Stockholders’ Equity—for the 52-weeks ended January 30, 2006  and the 53-weeks ended  January 30, 2005 and January 26, 2004 |       |         | F-6 |   |
| Consolidated Statements of  Cash Flows—for the 52-weeks ended January 30, 2006 and the 53-weeks  ended January 31, 2005 and  January 26, 2004                     |       |         | F-7 |   |
| Notes to Consolidated  Financial Statements                                                                                                                                                     |       |         | F-8 |   |

 

**(a)(2)**   Index to Financial Statement Schedules:

Allschedules are omitted since the required information is not present in amountssufficient to require submission of the schedule, or because the informationrequired is included in the consolidated financial statements or the notesthereto.

**(a)(3)**   Exhibits:

An “Exhibit Index”has been filed as a part of this Form 10-K beginning on Page E-1hereof and is incorporated herein by reference.

**(b)**      Current Reports on Form 8-K:

A Current Report on Form 8-Kdated February 28, 2006 was filed to report the Company’s press releaseannouncing that it has completed the acquisition of K-BOB’S Steakhouse inDumas, Texas.

A Current Report on Form 8-Kdated February 24, 2006 was filed to report the Company’s press releaseannouncing that the Board of Directors, at its February 24, 2006 meeting,authorized payment of the Company’s annual dividend of $0.60 per common shareand payment of a special dividend of $0.25 per common share. Both annual andspecial dividends are payable on June 7, 2006 to shareholders of record onMay 11, 2006. The annual dividend of $0.60 per common share represents a$0.10 per share, or 20%, increase from that paid last year.

A Current Report on Form 8-Kdated February 1, 2006 was filed to report the Company’s press releaseannouncing that it has completed the acquisition of three restaurants fromK-BOB’S USA, Inc. The restaurants, located in Tucumcari, New Mexico andBeeville and Lamesa, Texas, were acquired in accordance with certain provisionsof a strategic alliance entered into between the Company and K-BOB’S on February 1,2005.

34

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A Current Report on Form 8-Kdated January 4, 2006 was filed to report the Company’s press releaseannouncing that it had received necessary approval from its lender to commencewith a buyback program to purchase up to 250,000 common shares. Star Buffet’sBoard of Directors originally authorized the repurchase of up to 500,000 in1999, but covenants in effect in the loan agreements restricted the Company’sability to implement the program. Under the current agreement with its lender,Star Buffet may purchase shares on the open market, or through negotiatedtransactions, from time-to-time through May 31, 2006, unless otherwiseextended. The timing and amount of shares purchased will be based on prevailingmarket conditions and other factors. As of November 7, 2005, the Companyhad 3,003,425 common shares outstanding.

35

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**SIGNATURES**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                      | STAR  BUFFET, INC. |
|----------------------|--------------------|
|                 | (Registrant)       |
| April 28,  2006 | By:                | /s/ ROBERT E.  WHEATON |
|                 |               | Robert E. Wheaton |
| * *             |               | *Chief Executive Officer and President* |
| * *             |               | *(principal executive officer)* |
| April 28,  2006 | By:                | /s/ RONALD E.  DOWDY |
|                 |               | Ronald E. Dowdy |
| * *             |               | *Group Controller, Treasurer and Secretary* |
| * *             |               | *(principal accounting officer)* |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.
|                                            | **Signature** | ** **                         | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|--------------------------------------------|---------------|------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ ROBERT E. WHEATON                 |          | Chief Executive Officer, President |       | April 28, 2006 |
| Robert E. Wheaton                          |          | and Director                       |       |                |
| /s/ RONALD E. DOWDY                   |          | Group Controller, Treasurer        |       | April 28, 2006 |
| Ronald E. Dowdy                            |          | and Secretary                      |       |                |
| /s/ THOMAS G. SCHADT                  |          | Director                           |       | April 24, 2006 |
| Thomas G. Schadt                           |          |                               |       |                |
| /s/ PHILLIP “BUDDY” JOHNSON |          | Director                           |       | April 24, 2006 |
| Phillip “Buddy” Johnson          |          |                               |       |                |
| /s/ CRAIG B. WHEATON                  |          | Director                           |       | April 24, 2006 |
| Craig B. Wheaton                           |          |                               |       |                |
| /s/ B. THOMAS M. SMITH, JR.      |          | Director                           |       | April 24, 2006 |
| B. Thomas M. Smith, Jr.               |          |                               |       |                |
| /s/ TODD S. BROWN                     |          | Director                           |       | April 24, 2006 |
| Todd S. Brown                              |          |                               |       |                |

 

 

36

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**REPORT OFMANAGEMENT RESPONSIBILITIES**

The management of Star Buffet, Inc. isresponsible for the fairness and accuracy of the consolidated financialstatements. The consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America, using management’s best estimates and judgments where appropriate.The financial information throughout this report is consistent with ourconsolidated financial statements.

Management has established a system of internalcontrols that provides reasonable assurance that assets are adequatelysafeguarded, and transactions are recorded accurately, in all materialrespects, in accordance with management’s authorization. We maintain a strongaudit program that independently evaluates the adequacy and effectiveness ofinternal controls. Our internal controls provide for appropriate separation ofduties and responsibilities, and there are documented policies regardingutilization of Company assets and proper financial reporting. These formallystated and regularly communicated policies set high standards of ethicalconduct for all employees.

The Audit Committee of the Board of Directors meetsregularly to determine that management and independent auditors are properlydischarging their duties regarding internal control and financial reporting.The independent auditors and employees have full and free access to the AuditCommittee at any time.

MayerHoffman McCann P.C., independent registered public accountants, areretained to audit the Company’s consolidated financial statements. Their reportfollows.
| /s/ ROBERT  E. WHEATON                                                |   |
|-----------------------------------------------------------------------|--------|
| Robert E. Wheaton,*Chairman of the Board and Chief Executive Officer* |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders

STAR BUFFET, INC.

We have audited the accompanying consolidated balancesheets of Star Buffet, Inc. and subsidiaries (a Delaware Corporation) asof January 30, 2006 and January 31, 2005, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended January 30, 2006. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with auditingstandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Star Buffet, Inc. and subsidiaries as of January 30, 2006and January 31, 2005, and the results of their operations and their cashflows for each of the three years in the period ended January 30, 2006, inconformity with U.S. generally accepted accounting principles.

Asdiscussed in Note 2, management determined that the calculation of dilutedearnings per share for the year ended January 26, 2004 contained an error.The number of shares used in the calculation was overstated. The accompanyingconsolidated financial statements for the year ended January 26, 2004 havebeen restated for this correction.
| /s/ MAYER  HOFFMAN MCCANN P.C. |   |
|--------------------------------|--------|
| MAYER HOFFMAN MCCANN P.C.      |   |
| Phoenix, Arizona               |   |
| April 24, 2006            |   |

 

F-2

----

**STAR BUFFET, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                             | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current assets:                                        |       |                       |       |                       |       |
| Cash and cash equivalents                              |       | $                          | 491,000    |                       | $          | 692,000 |   |
| Current portion of notes  receivable                   |       | 39,000                     |       | 18,000                     |       |
| Receivables                                            |       | 297,000                    |       | 420,000                    |       |
| Inventories                                            |       | 429,000                    |       | 465,000                    |       |
| Deferred income taxes                                  |       | 258,000                    |       | 204,000                    |       |
| Prepaid expenses                                       |       | 132,000                    |       | 74,000                     |       |
| Total current assets                                   |       | 1,646,000                  |       | 1,873,000                  |       |
| Property, buildings and equipment:                     |       |                       |       |                       |       |
| Property, buildings and  equipment, net                |       | 15,358,000                 |       | 16,759,000                 |       |
| Property and equipment leased  to third parties, net   |       | 3,734,000                  |       | 4,361,000                  |       |
| Property, buildings and  equipment held for future use |       | 3,156,000                  |       | 2,574,000                  |       |
| Property and equipment under  capitalized leases, net  |       | 885,000                    |       | 1,019,000                  |       |
| Property held for sale                                 |       | 931,000                    |       | 931,000                    |       |
| Total property, buildings and  equipment               |       | 24,064,000                 |       | 25,644,000                 |       |
| Other Assets:                                          |       |                       |       |                       |       |
| Notes receivable                                       |       | 4,399,000                  |       | 2,860,000                  |       |
| Deposits and other                                     |       | 133,000                    |       | 224,000                    |       |
| Total other assets                                     |       | 4,532,000                  |       | 3,084,000                  |       |
| Deferred income taxes, net                             |       | 2,190,000                  |       | 1,805,000                  |       |
| Intangible assets:                                     |       |                       |       |                       |       |
| Goodwill                                               |       | 1,677,000                  |       | 1,677,000                  |       |
| Other intangible assets, net                           |       | 715,000                    |       | 797,000                    |       |
| Total intangible assets                                |       | 2,392,000                  |       | 2,474,000                  |       |
| Total assets                                           |       | $                          | 34,824,000 |                       | $          | 34,880,000 |   |

 

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

F-3

----

**STAR BUFFET, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Continued)**

| ** **                                                                                                          | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                |       |                       |       |                       |       |
| Accounts  payable-trade                                                                                             |       | $                          | 2,178,000  |                       | $          | 1,737,000 |   |
| Payroll  and related taxes                                                                                          |       | 1,131,000                  |       | 1,647,000                  |       |
| Sales  and property taxes                                                                                           |       | 666,000                    |       | 872,000                    |       |
| Rent,  licenses and other                                                                                           |       | 508,000                    |       | 533,000                    |       |
| Income  taxes payable                                                                                               |       | 891,000                    |       | 721,000                    |       |
| Revolving  line of credit                                                                                           |       | —                     |       | —                     |       |
| Current  maturities of obligations under long-term debt                                                             |       | 640,000                    |       | 543,000                    |       |
| Current  maturities of obligations under capital leases                                                             |       | 142,000                    |       | 116,000                    |       |
| Total  current liabilities                                                                                          |       | 6,156,000                  |       | 6,169,000                  |       |
| Deferred  rent payable                                                                                              |       | 1,317,000                  |       | 1,320,000                  |       |
| Other  long-term liability                                                                                          |       | 34,000                     |       | 68,000                     |       |
| Capitalized  lease obligations, net of current maturities                                                           |       | 1,397,000                  |       | 1,538,000                  |       |
| Long-term  debt, net of current maturities                                                                          |       | 5,636,000                  |       | 6,010,000                  |       |
| Total  liabilities                                                                                                  |       | 14,540,000                 |       | 15,105,000                 |       |
| 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 3,003,425 and 2,950,000 shares |       | 3,000                      |       | 3,000                      |       |
| Additional  paid-in capital                                                                                         |       | 16,618,000                 |       | 16,351,000                 |       |
| Officer’s  notes receivable                                                                                    |       | —                     |       | (698,000                   | )          |
| Retained  earnings                                                                                                  |       | 3,663,000                  |       | 4,119,000                  |       |
| Total  stockholders’ equity                                                                                    |       | 20,284,000                 |       | 19,775,000                 |       |
| Total  liabilities and stockholders’ equity                                                                    |       | $                          | 34,824,000 |                       | $          | 34,880,000 |   |

 

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

F-4

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**STAR BUFFET, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                        | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** |
| ** **                                        | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                        | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| ** **                                        | ** ** | ** **                 | ** ** | ** **                 | ** ** | **(As Restated)**     | ** ** |
| Total revenues                                    |       | $                          | 56,305,000 |                       | $          | 64,856,000                 |       | $ | 68,090,000 |   |
| Costs and expenses                                |       |                       |       |                       |       |                       |       |
| Food costs                                        |       | 19,429,000                 |       | 22,336,000                 |       | 23,275,000                 |       |
| Labor costs                                       |       | 18,260,000                 |       | 21,712,000                 |       | 23,015,000                 |       |
| Occupancy and other expenses                      |       | 11,763,000                 |       | 12,963,000                 |       | 14,042,000                 |       |
| General and administrative  expenses              |       | 2,179,000                  |       | 2,694,000                  |       | 2,433,000                  |       |
| Depreciation and amortization                     |       | 2,120,000                  |       | 2,440,000                  |       | 2,670,000                  |       |
| Impairment of long-lived  assets                  |       | 369,000                    |       | 2,838,000                  |       | 1,083,000                  |       |
| Total costs and expenses                          |       | 54,120,000                 |       | 64,983,000                 |       | 66,518,000                 |       |
| Income (loss) from operations                     |       | 2,185,000                  |       | (127,000                   | )          | 1,572,000                  |       |
| Interest expense                                  |       | (648,000                   | )          | (640,000                   | )          | (569,000                   | )          |
| Interest income                                   |       | 361,000                    |       | 5,000                      |       | 107,000                    |       |
| Reversal of litigation accrual                    |       | —                     |       | —                     |       | 400,000                    |       |
| Other income                                      |       | 319,000                    |       | 422,000                    |       | 212,000                    |       |
| Income (loss) before income taxes (benefit)       |       | 2,217,000                  |       | (340,000                   | )          | 1,722,000                  |       |
| Income tax provision (benefit)                    |       | 420,000                    |       | (168,000                   | )          | 609,000                    |       |
| Net income (loss)                                 |       | $                          | 1,797,000  |                       | $          | (172,000                   | )          | $ | 1,113,000 |   |
| Net income (loss) per common  share—basic    |       | $                          | 0.60       |                       | $          | (0.06                      | )          | $ | 0.38 |   |
| Net income (loss) per common share—diluted   |       | $                          | 0.56       |                       | $          | (0.06                      | )          | $ | 0.38 |   |
| Weighted average shares outstanding—basic    |       | 2,990,000                  |       | 2,950,000                  |       | 2,950,000                  |       |
| Weighted  average shares outstanding—diluted |       | 3,209,000                  |       | 2,950,000                  |       | 2,950,000                  |       |

 

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

F-5

----

**STAR BUFFET, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Officer’s** | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Notes**      | ** ** | **Retained**       | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Receivable**     | ** ** | **Earnings** | ** ** | **Stock**              | ** ** | **Equity** | ** ** |
| Balance at January 27, 2003  |       | 2,950,000             |       |        | $          | 3,000          |       |               | $          | 16,351,000   |       | $                      | (1,330,000 | )          | $          | 4,653,000 |   |   | $ | — |   |   | $ | 19,677,000 |   |
| Net income                        |       | —                |       |        | —     |           |       | —             |       | —       |       | 1,113,000              |       |       | —     |   |   | 1,113,000 |   |
| Balance at January 26,  2004 |       | 2,950,000             |       |        | 3,000      |           |       | 16,351,000         |       | (1,330,000   | )          | 5,766,000              |       |       | —     |   |   | 20,790,000 |   |
| Dividend                          |       | —                |       |        | —     |           |       | —             |       | —       |       | (1,475,000             | )          |       | —     |   |   | (1,475,000 | ) |
| Payment by officer                |       | —                |       |        | —     |           |       | —             |       | 632,000      |       | —                 |       |       | —     |   |   | 632,000 |   |
| Net loss                          |       | —                |       |        | —     |           |       | —             |       | —       |       | (172,000               | )          |       | —     |   |   | (172,000 | ) |
| Balance at January 31,  2005 |       | 2,950,000             |       |        | 3,000      |           |       | 16,351,000         |       | (698,000     | )          | 4,119,000              |       |       | —     |   |   | 19,775,000 |   |
| Exercised Stock Options           |       | 53,000                |       |        | —     |           |       | 267,000            |       | —       |       | —                 |       |       | —     |   |   | 267,000 |   |
| Dividend                          |       | —                |       |        | —     |           |       | —             |       | —       |       | (2,253,000             | )          |       | —     |   |   | (2,253,000 | ) |
| Payment by officer                |       |                  |       |        | —     |           |       | —             |       | 698,000      |       |                   |       |       |       |   |   | 698,000 |   |
| Net Income                        |       | —                |       |        | —     |           |       | —             |       | —       |       | 1,797,000              |       |       | —     |   |   | 1,797,000 |   |
| Balance at January 30, 2006  |       | 3,003,000             |       |        | $          | 3,000          |       |               | $          | 16,618,000   |       | $                      | —     |       | $          | 3,663,000 |   |   | $ | — |   |   | $ | 20,284,000 |   |

 

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

F-6

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**STAR BUFFET, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                | ** ** | **Fifty-Two  Weeks Ended  January 30,  2006** | ** ** | **Fifty-Three  Weeks Ended  January 31,  2005** | ** ** | **Fifty-Two  Weeks Ended  January 26,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Cash  flows from operating activities:                                                    |       |                                                    |       |                                                      |       |                                                    |       |
| Net income (loss)                                                                         |       | $                                                       | 1,797,000  |                                                      | $          | (172,000                                                | )          | $ | 1,113,000 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                                    |       |                                                      |       |                                                    |       |
| Depreciation and amortization                                                             |       | 2,097,000                                               |       | 2,415,000                                                 |       | 2,569,000                                               |       |
| Impairment of long-lived  assets                                                          |       | 369,000                                                 |       | 2,838,000                                                 |       | 1,083,000                                               |       |
| Amortization of loan costs                                                                |       | 23,000                                                  |       | 25,000                                                    |       | 101,000                                                 |       |
| Deferred income taxes, net                                                                |       | (439,000                                                | )          | (1,087,000                                                | )          | 126,000                                                 |       |
| Change in operating assets and liabilities:                                               |       |                                                    |       |                                                      |       |                                                    |       |
| Receivables                                                                               |       | 123,000                                                 |       | (43,000                                                   | )          | (10,000                                                 | )          |
| Inventories                                                                               |       | 36,000                                                  |       | 29,000                                                    |       | 125,000                                                 |       |
| Prepaid expenses                                                                          |       | (58,000                                                 | )          | 50,000                                                    |       | 155,000                                                 |       |
| Deposits and other                                                                        |       | 91  ,000                                                |       | 52,000                                                    |       | (56,000                                                 | )          |
| Deferred rent payable                                                                     |       | (3,000                                                  | )          | (61,000                                                   | )          | (102,000                                                | )          |
| Accounts payable-trade                                                                    |       | 441,000                                                 |       | (1,061,000                                                | )          | (1,247,000                                              | )          |
| Income taxes payable                                                                      |       | 170,000                                                 |       | 365,000                                                   |       | 356,000                                                 |       |
| Other accrued liabilities                                                                 |       | (781,000                                                | )          | 459,000                                                   |       | (1,145,000                                              | )          |
| Total adjustments                                                                         |       | 2,069,000                                               |       | 3,981,000                                                 |       | 1,955,000                                               |       |
| Net cash provided by operating activities                                                 |       | 3,866,000                                               |       | 3,809,000                                                 |       | 3,068,000                                               |       |
| Cash  flows from investing activities:                                                    |       |                                                    |       |                                                      |       |                                                    |       |
| Payments on notes receivable                                                              |       | 82,000                                                  |       | 20,000                                                    |       | 85,000                                                  |       |
| Acquisition of property,  buildings and equipment                                         |       | (493,000                                                | )          | (2,947,000                                                | )          | (1,283,000                                              | )          |
| Interest income                                                                           |       | (1,000                                                  | )          | (3,000                                                    | )          | —                                                  |       |
| Issuance of note receivable                                                               |       | (1,640,000                                              | )          | —                                                    |       | —                                                  |       |
| Proceeds from the sale of  assets                                                         |       | —                                                  |       | —                                                    |       | 1,160,000                                               |       |
| Purchase of license agreement                                                             |       | (25,000                                                 | )          | —                                                    |       | —                                                  |       |
| Payments by officer                                                                       |       | 698,000                                                 |       | 632,000                                                   |       | —                                                  |       |
| Net cash used in investing activities                                                     |       | (1,379,000                                              | )          | (2,298,000                                                | )          | (38,000                                                 | )          |
| Cash  flows from financing activities:                                                    |       |                                                    |       |                                                      |       |                                                    |       |
| Checks written in excess of  cash in bank                                                 |       | —                                                  |       | —                                                    |       | (1,306,000                                              | )          |
| Payments on long-term debt                                                                |       | (577,000                                                | )          | (838,000                                                  | )          | (7,389,000                                              | )          |
| Proceeds from stock options  exercised                                                    |       | 267,000                                                 |       | 3,075,000                                                 |       | 3,920,000                                               |       |
| Proceeds from line of credit,  net                                                        |       |                                                    |       | (1,900,000                                                | )          | 1,900,000                                               |       |
| Capitalized loan costs                                                                    |       | (10,000                                                 | )          | (29,000                                                   | )          | (43,000                                                 | )          |
| Principal payments on capital  leases                                                     |       | (115,000                                                | )          | (97,000                                                   | )          | (100,000                                                | )          |
| Dividends paid                                                                            |       | (2,253,000                                              | )          | (1,475,000                                                | )          | —                                                  |       |
| Net cash used in financing activities                                                     |       | (2,688,000                                              | )          | (1,264,000                                                | )          | (3,018,000                                              | )          |
| Net increase (decrease) in  cash and cash equivalents                                     |       | (201,000                                                | )          | 247,000                                                   |       | 12,000                                                  |       |
| Cash and cash equivalents at beginning of period                                          |       | 692,000                                                 |       | 445,000                                                   |       | 433,000                                                 |       |
| Cash  and cash equivalents at end of period                                               |       | $                                                       | 491,000    |                                                      | $          | 692,000                                                 |       | $ | 445,000 |   |

 

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

F-7

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**STAR BUFFET, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

Asummary of certain significant accounting policies not disclosed elsewhere inthe footnotes to the consolidated financial statements is set forth below.

**Basis of Presentation**

Theaccompanying consolidated financial statements include the accounts for StarBuffet, Inc., together with its direct and indirect wholly ownedsubsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc.(“HTB”), Northstar Buffet, Inc. (“NSBI”) and Star Buffet Management, Inc.(“SBMI”) (collectively the “Company”). The accompanying consolidated financialstatements include the results of operations and assets and liabilities of theCompany’s operations. Certain estimates, assumptions and allocations were madein preparing such financial statements. Significant intercompany transactionsand balances have been eliminated in consolidation.

**Organization and Nature of Operations**

The Company was formed by CKERestaurants, Inc. (“CKE”) in July 1997 in connection with thereorganization of CKE’s buffet-style restaurant business. Pursuant to acontribution agreement among the Company and CKE and certain respectivesubsidiaries, CKE transferred to Summit the net assets of its two Casa BonitaMexican theme restaurants, and Summit transferred substantially all of itsassets and liabilities (primarily those relating to the JB’s Restaurant systemand Galaxy Diner restaurants, but excluding 16 HomeTown Buffet restaurantsoperated by HTB) to a newly formed subsidiary of CKE. All of the parties to theforegoing transactions (the “Formation Transactions”) were, upon completionthereof, direct or indirect wholly owned subsidiaries of CKE, and suchFormation Transactions were accounted for as a reorganization among companiesunder common control.

The operating results for the 52-week periodended January 30, 2006 included operations for the Company’s 14 franchisedHomeTown Buffet restaurants, six JB’s restaurants, five BuddyFreddysrestaurants (three of the five BuddyFreddys restaurants are BuddyFreddysCountry Buffet restaurants), two JJ North’s Country Buffet restaurants, twoHoliday House restaurants and one Casa Bonita restaurant. In addition,operating results include 10 weeks for one JB’s restaurant closed during thefiscal year 2006. Results also include 34 weeks for one Casa Bonita restaurantclosed during the fiscal year 2006. Eight restaurants were closed at the end ofthe 2006 fiscal year for repositioning. Three of the eight closed restaurantshave been leased to third-property operators, four restaurants remain closedfor remodeling and repositioning and the closed restaurant in Laramie, Wyoming,was sold in March 2006. In addition, the Company purchased a restaurantfacility in Rexburg, Idaho in September 2005. The Company leases therestaurant facility to a JB’s franchisee.

The operating results for the 53-week periodended January 31, 2005 included operations for the Company’s 14 franchisedHomeTown Buffet restaurants, seven JB’s restaurants, five BuddyFreddysrestaurants (three of the five BuddyFreddys restaurants are BuddyFreddysCountry Buffet restaurants), two JJ North’s Country Buffet restaurants, twoCasa Bonita restaurants, and two Holiday House restaurants. In addition,operating results include 30, 34 and 52 weeks for three JJ North’s CountryBuffet restaurants closed during the fiscal year 2005. Results also include 35and 51 weeks for two HomeTown Buffet restaurants. Results for 2005 also include34 weeks of operations for one North’s Star Buffet restaurant and 39 weeks ofoperations for one JB’s Restaurant. Eight restaurants were closed at the end ofthe 2005 fiscal year for repositioning. Four of the eight closed restaurantswere leased to third-property 

F-8

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operators, threerestaurants remained closed for remodeling and repositioning and one closedrestaurant was property held for sale.

The operating results forthe 52-week period ended January 26, 2004 included operations forthe Company’s 16 franchised HomeTown Buffet restaurants, eight JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), five JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, two Holiday Houserestaurants and one North’s Star Buffet restaurant. In addition, operatingresults include 19 and 2 weeks, respectively, for two BuddyFreddys CountryBuffet restaurants closed during the fiscal year 2004. Results also include 12weeks of operations for one JJ North’s Country Buffet restaurant and 5 weeks ofoperations for one JB’s Restaurant. Five restaurants remained closed at the endof the 2004 fiscal year for repositioning. Three of the five closed restaurantswere leased to third-party operators and the property of one closed restaurantwas property held for sale.

**Fiscal Year**

TheCompany utilizes a 52/53 week fiscal year which ends on the last Monday inJanuary. The first quarter of each year contains 16 weeks while the other threequarters each contain 12 weeks except in the 53 week fiscal year, when thefourth quarter has 13 weeks.

**Cash Equivalents**

Highlyliquid investments with original maturities of three months or less whenpurchased are considered cash equivalents. The carrying amounts reported in theconsolidated balance sheets for these instruments approximate their fair value.

**Revenue Recognition**

TheCompany’s principal source of revenue is from customer dining transactions. Revenueis recognized at the time the meal is paid for by the customer, in the form ofcash or credit card.

**Receivables**

Receivablesare stated at an amount management expects to collect and provides for anadequate reserve for probable uncollectible amounts. Amounts deemed to beuncollectible are written off through a charge to earnings and a credit to avaluation allowance based on management’s assessment of the current status ofindividual balances. A receivable is written off when it is determined that allcollection efforts have been exhausted.

**ConsiderationReceived from Vendors**

TheCompany records vendor rebates on products purchased as a reduction in the costof sales as earned. The allowances are recognized as earned in accordance withthe underlying agreement with the vendor.

**Inventories**

Inventoriesconsist of food, beverage, gift shop items and restaurant supplies and arevalued at the lower of cost or market, determined by the first-in, first-outmethod.

F-9

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**Property, Buildings and Equipment**

Property and equipment and real property undercapitalized leases are carried at cost less accumulated depreciation andamortization. Depreciation and amortization are provided using thestraight-line method over the following useful lives:

| ** **                         | ** ** | **Years**    | ** ** |
|------------------------------------|------------|--------------|------------|
| Buildings                          |       | 40           |       |
| Building improvements              |       | 15 – 20 |       |
| Furniture,  fixtures and equipment |       | 5 –  8  |       |

 

Leasehold improvements areamortized over the lesser of the life of the lease or estimated economic lifeof the assets. The life of the lease includes renewal options determined bymanagement at lease inception for which failure to renew options would resultin a substantial economic penalty.

Property and equipment placed onthe market for sale is not depreciated and is reclassed on the balance sheet asproperty held for sale. Property and equipment in non-operating units held for remodelingor repositioning is not depreciated.

Repairsand maintenance are charged to operations as incurred. Remodeling costs aregenerally capitalized.

**Goodwill**

Goodwill and other intangibleassets primarily represent the excess of the purchase price paid over the fairvalue of the net assets acquired in connection with business acquisitions.

The Company reviews goodwill forpossible impairment on an annual basis or when triggering events occur inaccordance with SFAS 142. Goodwill is tested for impairment at the reportingunit level. Because SFAS 142 defines a reporting unit as an operating segmentor one level below an operating segment, Star Buffet reviews goodwill forpossible impairment at the individual restaurant level. Six reporting units(restaurants) had recorded goodwill associated with them for fiscal 2006 andfiscal 2005.

The Company utilizes a two-partimpairment test. First, the fair value of the reporting unit is compared tocarrying value (including goodwill). If the carrying value is greater than thefair value, the second step is performed. In the second step, the implied fairvalue of the reporting unit goodwill is compared to the carrying amount ofgoodwill. If the carrying value is greater, a loss is recognized. The goodwillimpairment test considers the impact of current conditions and the economicoutlook for the restaurant industry, the general overall economic outlookincluding market data, governmental and environmental factors, in establishingthe assumptions used to compute the fair value of each reporting unit. We alsotake into account the historical, current and future (based on probability)operating results of the eleven reporting units and any other facts and datapertinent to valuing the reporting units in our impairment test. Managementdetermined there was no impairment after reviewing all of the data of oureleven reporting units with recorded goodwill for 2004. In fiscal 2005, theCompany impaired the goodwill associated with four reporting units afterevaluating all pertinent data in its annual impairment review and impaired thegoodwill associated with one additional reporting unit resulting from atriggering event (store closure). The amount of the impairment charge was$1,230,000 in fiscal 2005. In fiscal 2006 and fiscal 2004, the Companydetermined that there was no goodwill impairment.

TheCompany has an independent evaluation of goodwill conducted every three years. Themost recent independent valuation was conducted as of February 1, 2006.

F-10

----

**Other Intangible Assets**

Other intangible assets are comprised of franchise fees,loan acquisition costs, and the JB’s license agreement. Franchise fees areamortized using the straight-line method over the terms of the franchiseagreements, which typically range from 8 to 20 years. Loan costs areamortized using the straight-line method over the lesser of the life of theloan or five years (which approximates the effective interest method). The JB’slicense agreement is being amortized using the straight-line method over 11years.

| ** **                 | ** ** | **Gross**             | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|
| ** **                 | ** ** | **Carrying Amt** | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| ***Fiscal 2006***          |       |                  |       |             |       |       |       |   |   |   |   |
| Franchise and license fees |       |                  | $          | 1,148,000        |       |       |       | $ | (485,000 | ) |   | $ | 663,000 |   |
| Loan acquisition costs     |       |                  | 120,000    |             |       |       | (68,000    | ) |   | 52,000 |   |
| Total                      |       |                  | $          | 1,268,000        |       |       |       | $ | (553,000 | ) |   | $ | 715,000 |   |
| ***Fiscal  2005***         |       |                  |       |             |       |       |       |   |   |   |   |
| Franchise and license fees |       |                  | $          | 1,123,000        |       |       |       | $ | (391,000 | ) |   | $ | 732,000 |   |
| Loan acquisition costs     |       |                  | 110,000    |             |       |       | (45,000    | ) |   | 65,000 |   |
| Total                      |       |                  | $          | 1,233,000        |       |       |       | $ | (436,000 | ) |   | $ | 797,000 |   |

 

The table below shows expected amortization forpurchased intangibles as of January 31, 2005 for the next five years:

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | 115,000    |       |
| 2008                 |       | 103,000    |       |
| 2009                 |       | 103,000    |       |
| 2010                 |       | 100,000    |       |
| 2011                 |       | 95,000     |       |
| Thereafter           |       | 199,000    |       |
| Total                |       | $          | 715,000    |       |
|                      |            |            |            |            |            |  |

 

TheCompany acquired the JB’s license agreement in November 2002 for $773,000.Amortization expenses for fiscal 2006, 2005 and 2004 were $78,000 for eachyear.

**Impairment of Long-Lived Assets**

The Company determinesthat an impairment write down is necessary for locations whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Impairmentexpense charged to operations was $369,000, $2,838,000 and $1,083,000 for theyears ended January 30, 2006, January 31, 2005 and January 26,2004, respectively.

**Fair Value OfFinancial Instruments**

The carrying amounts of the Company’s cash and cashequivalents, receivables, accounts payable and accrued expenses approximatesfair value because of the short maturity of these instruments.

The carrying amounts ofthe Company’s notes receivable, long-term debt and capital lease obligationsapproximate fair value and are based on discounted cash flows using marketrates at the balance sheet 

F-11

----

date.The use of discounted cash flows can be significantly affected by theassumptions used, including the discount rate and estimates of future cashflows. The derived fair value estimates cannot be substantiated by comparisonto independent markets and, in many cases, could not be realized in immediatesettlement of the instrument.

**Pre-Opening Costs**

Pre-opening costs areexpensed when incurred. The Company incurred and charged to operationsapproximately $0 of pre-opening costs during fiscal 2006, 2005 and 2004.

**Income Taxes**

TheCompany utilizes the liability method of accounting for income taxes. Under theliability method, deferred tax assets and liabilities are determined based onthe difference between the financial statement and tax bases of assets andliabilities using enacted tax rates in effect during the years in which thedifferences are expected to reverse. An allowance against deferred tax assetsis recorded in whole or in part when it is more likely than not that such taxbenefits will not be realized.

**Advertising Expenses**

Advertisingcosts are charged to operations as incurred. Amounts charged to operationstotaled $602,000, $687,000 and $785,000, for the years ended January 30,2006, January 31, 2005 and January 26, 2004, respectively.

**Insurance Programs**

The Company is self-insured for general liabilityclaims. 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 andexpected future development factors. Differences in estimates and assumptionscould result in actual liabilities materially different from the calculatedaccruals. Valuation reserves for the years ended January 30, 2006, January 31,2005, and January 26, 2004, consisted of the following:

| **Insurance and claims reserves  (prepaids):** | ** ** | ** ** | ** ** | **Balance at Beginning  of Period** | ** ** | **Expense  Recorded** | ** ** | **Payments  Made** | ** ** | **Balance at End  of Period** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------------------------------------|------------|
| Year ended January 30, 2006                              |       |       | $          | 40,500                                             |       |                  |       | $                  | 22,500     |                                         |       |   | $ | (13,000 | ) |   |   | $ | 50,000 |   |   |
| Year ended January 31, 2005                              |       |       | $          | 32,000                                             |       |                  |       | $                  | 24,500     |                                         |       |   | $ | (16,000 | ) |   |   | $ | 40,500 |   |   |
| Year ended  January 26, 2004                             |       |       | $          | 51,000                                             |       |                  |       | $                  | (2,000     | )                                            |       |   | $ | (17,000 | ) |   |   | $ | 32,000 |   |   |

 

**Leases**

TheCompany has various lease commitments on store locations. Expenses of operatingleases with escalating payment terms are recognized on a straight-line basisover the lives that conform to the related term used to depreciate leaseholdimprovements on the leased property. Contingent rental payments are triggeredby surpassing annual base revenue levels set forth in certain of our leaseagreements. Contingent rental expense is recorded in each month that ourrevenue exceeds the monthly base revenue levels as set forth in certain of ourlease agreements. In situations where the contingent rent is based on annualsales or cumulative sales to date, contingent rental expense is recorded whenit is determined probable that we will exceed the established threshold.

**Use of Estimates**

Inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management is required tomake estimates and assumptions that affect the 

F-12

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reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and revenue and expenses during the reporting period. Actual resultscould differ from those estimates.

**Earnings (Loss) per Share**

The Company applies Statement of Financial AccountingStandards No. 128 (SFAS No. 128), which requires the calculation ofbasic and diluted loss per share. Basic income (loss) per share is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding during the fiscal year. Diluted income (loss) per share is computedon the basis of the average number of common shares outstanding plus thedilutive effect of outstanding stock options and warrants using the “treasurystock” method. The following is a reconciliation of the denominators used tocalculate diluted earnings (loss) per share on net income (loss) for therespective fiscal years:

| ** **                                                     | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** |
| ** **                                                     | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                     | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| ** **                                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** | **(As Restated)**     | ** ** |
| Weighted average common shares outstanding—  basic        |       |                       | 2,989,686  |                       |       |                       | 2,950,000  |   |   |   | 2,950,000 |   |   |
| Dilutive effect of stock options                               |       |                       | 219,557    |                       |       |                       | 211,875    |   |   |   | — |   |   |
| Anti-dilutive stock options                                    |       |                       | —     |                       |       |                       | (211,875   | ) |   |   | — |   |   |
| Weighted  average common shares outstanding—diluted  |       |                       | 3,209,243  |                       |       |                       | 2,950,000  |   |   |   | 2,950,000 |   |   |

 

Weightedaverage common shares used in the year ended January 30, 2006 dilutedearnings per share computations exclude stock options to purchase 489,000shares of common stock due to the market price of the underlying stock beingless than the exercise price. Weighted average common shares used in the yearended January 31, 2005 diluted loss per share computations exclude stockoptions to purchase 701,000 shares of common stock as their effect wasanti-dilutive. Weighted average common shares used in the year ended January 26,2004 diluted loss per share computations exclude stock options to purchase731,000 shares of common stock which are considered to be anti-dilutive due tothe market price of the underlying stock being less than the exercise price.

**Segment Reporting**

The Company’s reportablesegments are based on brand similarities. Business results are based on theCompany’s management accounting practices.

**ComprehensiveIncome**

The Company does not haveany components of comprehensive income other than net income (loss) and,therefore, comprehensive income equaled net income (loss) for all periodspresented.

F-13

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**Stock-BasedCompensation**

TheCompany uses the intrinsic value method prescribed by Accounting PrinciplesBoard (APB) Opinion No. 25 when recognizing expense for employee stockcompensation plans. As such, compensation expense is generally only recognizedon the date of grant when the current market price of the stock exceeds theexercise price. Had the Company determined compensation cost based on the fairvalue method at the grant date for its stock options, the Company’s net income(loss) and earnings (loss) per share would have reflected the pro forma amountsindicated below:

| ** **                                                                          | ** ** | **Fifty-Two**                                                                     | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                          | ** ** | **Weeks Ended**                                                              | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** |
| ** **                                                                          | ** ** | **January 30,  2006**                                                        | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| ** **                                                                          | ** ** | ** **                                                                        | ** ** | ** **                 | ** ** | **(As Restated)**     | ** ** |
| ** **                                                                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| Net  income (loss) attributable to  common stockholders                             |       |                                                                              |       |                       |       |                       |       |   |   |   |   |   |   |
| As reported                                                                         |       |                                                                              | $          | 72                         |       |                       |       | $ | (172 | ) |   |   | $ | 1,113 |   |   |
| Employee stock compensation expense included in net income (loss)  as reported |       |                                                                              | —     |                       |       |                       | —     |   |   |   | — |   |   |
| Pro forma compensation expense                                                      |       |                                                                              | (61        | )                          |       |                       | —     |   |   |   | — |   |   |
| Pro forma net income (loss)                                                         |       |                                                                              | $          | 11                         |       |                       |       | $ | (172 | ) |   |   | $ | 1,113 |   |   |
| Per  share—basic                                                               |       |                                                                              |       |                       |       |                       |       |   |   |   |   |   |   |
| As reported                                                                         |       |                                                                              | $          | .02                        |       |                       |       | $ | (.06 | ) |   |   | $ | .38 |   |   |
| Pro forma compensation expense                                                      |       |                                                                              | .02        |                       |       |                       | —     |   |   |   | — |   |   |
| Pro forma net income (loss)                                                         |       |                                                                              | $          | .00                        |       |                       |       | $ | (.06 | ) |   |   | $ | .38 |   |   |
| Per  share—diluted                                                             |       |                                                                              |       |                       |       |                       |       |   |   |   |   |   |   |
| As reported                                                                         |       |                                                                              | $          | .02                        |       |                       |       | $ | (.06 | ) |   |   | $ | .38 |   |   |
| Pro forma compensation expense                                                      |       |                                                                              | .02        |                       |       |                       | —     |   |   |   | — |   |   |
| Pro forma net income (loss)                                                         |       |                                                                              | $          | .00                        |       |                       |       | $ | (.06 | ) |   |   | $ | .38 |   |   |

 

For purposes of pro formadisclosures, the fair value of stock options are estimated when applicable onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions: estimated annual dividends, expected volatility, a riskfree interest rate and other factors.

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions that do not have vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because the Company’sstock options have characteristics significantly different from those of tradedoptions and because changes in the subjective input assumptions can materiallyaffect the value of an estimate, in management’s opinion, the existing modelsdo not necessarily provide a reliable single measure of the fair value of itsemployee stock options.

**New Accounting Pronouncements**

In October 2005, the FASB issued Staff Position No. 13-1(“FSP 13-1”), *Accounting for RentalCosts Incurred during a Construction Period*. Generally, the staffposition requires companies to expense rental costs incurred during aconstruction period. We are required to adopt FSP 13-1 in our fiscal yearbeginning January 31, 2006. We adopted FSP 13-1 on January 31,2006, the beginning of our 2007 fiscal year. The Company does not believe theadoption of this staff position will have a material impact on our results ofoperations or financial position.

F-14

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In December 2004, the Financial AccountingStandards Board (“FASB”) enacted Statement of Financial Accounting Standards 123-revised2004 (“SFAS 123R”), “Share-Based Payment” which replaces Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), Accounting for Stock-BasedCompensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accountingfor Stock Issued to Employees.” SFAS 123R requires the measurement of allemployee share-based payments to employees, including grants of employee stockoptions, using a fair-value-based method and the recording of such expense inour consolidated statements of income. The accounting provisions of SFAS 123Rare effective for reporting periods beginning after December 15, 2005. TheCompany is required to adopt SFAS 123R in the first quarter of fiscal 2007. Thepro forma disclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. See “Stock-Based Compensation”above for the pro forma net income and net income per share amounts, for fiscal2004 through fiscal 2006, as if the Company had used a fair-value-based methodsimilar to the methods required under SFAS 123R to measure compensation expensefor employee stock incentive awards. Although the Company has not yetdetermined whether the adoption of SFAS 123R will result in amounts that aresimilar to the current pro forma disclosures under SFAS 123, the Company isevaluating the requirements under SFAS 123R and expects the adoption topotentially have a significant impact on our consolidated statements ofoperations and net income per share starting in fiscal 2007.

In December 2004, theFASB issued FASB 151, Inventory Cost, an amendment of ARB No. 43, Chapter4. This Statement is effective for financial statements for fiscal yearsbeginning after June 15, 2005. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). The Company is evaluating the requirements under FASB 151 todetermine the impact, if any, on the consolidated financial statements.

**Reclassifications**

Certain non-materialamounts in fiscal 2004 and fiscal 2005 have been re-classed to conform with thefiscal 2006 presentation.

**NOTE 2—Restatementof Diluted Earnings Per Share**

Managementdetermined that the calculation of diluted earnings per share for the yearended January 26, 2004 contained an error. The number of shares used inthe calculation was overstated. Thus, the diluted earnings per share for theyear ended January 26, 2004 should have been $0.38 rather than thepreviously reported $0.35. The accompanying consolidated financial statementsfor the year ended January 26, 2004 have been restated for this correction.The following summarizes the changes to the fiscal 2004 financial statements:

| ** **                                        | ** ** | **As Previously Reported** | ** ** | **As Restated** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| Net income (loss)  per common share—diluted  |       |                                 | $          | .35                  |       |   | $ | .38 |   |
| Weighted average shares  outstanding—diluted |       |                                 | 3,185,000  |                 |       | 2,950,000 |   |
|                                                   |            |                                      |            |                      |            |  |  |  |  |

 

F-15

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**NOTE 3—NOTESRECEIVABLE**

Notes receivable consist of the following:

| ** **                                                | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Notes receivable from North’s Restaurants, Inc. |       | $                          | 2,767,000  |                       | $          | 2,823,000 |   |
| Notes receivable from strategic partners                  |       | 1,634,000                  |       | —                     |       |
| Notes receivable from landlord                            |       | 37,000                     |       | 55,000                     |       |
| Total notes receivable                                    |       | 4,438,000                  |       | 2,878,000                  |       |
| Less current portion                                      |       | 39,000                     |       | 18,000                     |       |
| Notes  receivable, net of current portion                 |       | $                          | 4,399,000  |                       | $          | 2,860,000 |   |

 

Since inception, the Company’s acquisition strategyhas incorporated the utilization of loans to sellers to facilitate certainproposed transactions. In most cases, these loans are secured and include, aspart of terms and conditions, the Company’s right to convert the loan intoownership of the restaurants. Also, certain of these loans contain favorableinterest rates and repayment terms if the loans are not converted to ownershipfor one or more reasons. This financing strategy entails significant risk. Currently,the Company has three loans outstanding and one significant-sized loan is indefault. However, because the Company anticipates full recovery of amountsoutstanding through either repayment or conversion to ownership, historicallyno provision for doubtful accounts has been established. While estimates todate have been within our expectations, a change in the financial condition ofspecific restaurant companies or in overall industry trends may result infuture adjustments to Company estimates of recoverability of receivables.

The note receivable fromstrategic partners was reduced by approximately $1,285,000 as the Companyconverted the loan into ownership of three K-BOB’S restaurants on January 31,2006.

The receivable from North’sRestaurants, Inc. (“North’s”) originally included $3,123,000 for a termnote and $371,000 on a line of credit that was converted to a note receivable.As a result of a dispute with North’s, management stopped accruing interestpending resolution of the dispute with North’s (Note 13). As part of aSettlement Agreement entered into on January 26, 2001, North’s promised topay the Company the principal sum of $3,500,000 with an interest rate of 8% perannum. North’s paid the Company $295,000 pursuant to the terms of theSettlement Agreement and such payment was applied to reduce the principalamount owing. The $3.5 million note receivable stipulates that monthly paymentsof principal and interest be made in the amount of $39,954. The loan calls formonthly payments to start on February 26, 2001 and continue on the 26th day ofeach month thereafter, with a final payment of all remaining unpaid principal,accrued interest and other sums due under the note due and payable onSeptember 26, 2010. Our collateral includes all real and personalproperty, landlord leases, trademarks and all other intellectual propertyassociated with seven restaurants. The Company is pari passu with the onlyother secured creditor. The other secured creditor is owed approximately$3,000,000 not including accrued interest. Since January 26, 2004, the notereceivable has been recorded as a long-term receivable. The Company has notrecorded interest income due from North’s since August 2003.

The Company accommodated North’srequest for working capital and remodeling expenditures by reducing theprincipal payments due from June 26, 2002 through July 26, 2003 from$303,000 to $65,000. Full principal and interest payments were to resumeAugust 2003 through January 2011 with the final payment due inFebruary 2011.

F-16

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On March 2, 2004, the Company filed a secondaction against North’s in the United States District Court, District of Utah,Central Division, Case No. 2:04CV00211, demanding judgment against North’sfor failure to repay obligations under the Star Buffet Promissory Note in atotal amount not less than $2,934,453 plus interest at the default rate as setforth in the Star Buffet Promissory Note. In January 2005, the courtgranted the Company’s motion for summary judgment, ruling that North’s hadfailed to pay amounts owed to the Company. The Company obtained a judgmentagainst North’s in the amount of $3,059,905.78, plus $15,980.45 in attorney’sfees and costs.

In a related proceeding, North’s other securedcreditor, Pacific Mezzanine, initiated litigation against North’s seeking amonetary 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 anorder appointing a receiver.

Since his appointment, the receiver has remitted only approximately$56,000 in loan repayments and no payments have been made since September of2005. Additionally, the receiver has failed to complete a planned sale ofNorth’s restaurants and has presided over a significant deterioration in theoperating results of North’s restaurants. Payments of fees to the receiver wellexceeded amounts paid to the Company during this period.

As a result of thereceiver’s failure to remit any meaningful principal repayments, the Companyhas initiated certain legal actions designed to expedite the liquidation ofNorth’s assets and repay amounts owed to Star Buffet. First, on October 3,2005, the Company obtained an Order in United States District Court for theDistrict of Utah Directing Entry of Final Judgment. Next, on April 14,2006, the Company obtained the Registration of Foreign Judgment for recognitionand enforcement in the United States Court for both the District of Oregon andNorthern District of California, jurisdictions where North’s operates itsrestaurants. Finally, on April 25, 2006, the Company noticed all relevantparties of its intent to foreclose. With these steps complete, the Companyplans to promptly seek the liquidation of assets and repayment of amounts owed.The Company believes that if it can act quickly asset sales and operatingcashflows will be sufficient to repay both secured creditors.

**NOTE 4—PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES**

The components of property, buildings and equipment usedin restaurant operations, not including property under capitalized leases, areas follows:

| ** **                            | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property,  buildings and equipment:   |       |                       |       |                       |       |
| Furniture, fixtures and  equipment    |       | $                          | 11,913,000 |                       | $          | 12,033,000 |   |
| Land                                  |       | 3,085,000                  |       | 3,085,000                  |       |
| Buildings and leasehold  improvements |       | 20,402,000                 |       | 20,653,000                 |       |
|                                  |       | 35,400,000                 |       | 35,771,000                 |       |
| Less accumulated depreciation         |       | (20,042,000                | )          | (19,012,000                | )          |
|                                  |       | $                          | 15,358,000 |                       | $          | 16,759,000 |   |

 

The components of property under capitalized leases areas follows:

| Property and equipment under capitalized leases |   | $          | 3,193,000 |       | $ | 3,193,000 |   |
|-------------------------------------------------|--------|------------|-----------|------------|---|-----------|--------|
| Less accumulated amortization                   |   | (2,308,000 | )         | (2,174,000 | ) |
|                                            |   | $          | 885,000   |       | $ | 1,019,000 |   |

 

F-17

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Total property, buildings and equipment includes thefollowing land, equipment and buildings and leaseholds currently in eightnon-operating units. Three of the eight units are leased to third-partyoperators, four units are closed for remodeling and repositioning and one unitis included in property held for sale at January 30, 2006. Inaddition to the above, the Company purchased in September 2005 arestaurant facility in Rexburg, Idaho. Thecomponents are as follows:

| ** **                                                            | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property and equipment leased to third parties:  Equipment  |       | $                          | 892,000    |                       | $          | 655,000 |   |
| Land                                                                  |       | 1,370,000                  |       | 1,787,000                  |       |
| Buildings and leaseholds                                              |       | 3,083,000                  |       | 3,290,000                  |       |
|                                                                  |       | 5,345,000                  |       | 5,732,000                  |       |
| Less accumulated depreciation                                         |       | (1,611,000                 | )          | (1,371,000                 | )          |
|                                                                  |       | $                          | 3,734,000  |                       | $          | 4,361,000 |   |

 

| ** **                                                             | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property, buildings and equipment held for future use:  Equipment |       | $                          | 6,431,000  |                       | $          | 6,153,000 |   |
| Land                                                                   |       | 899,000                    |       | 382,000                    |       |
| Buildings and leaseholds                                               |       | 1,935,000                  |       | 1,528,000                  |       |
|                                                                   |       | 9,265,000                  |       | 8,063,000                  |       |
| Less accumulated depreciation                                          |       | (6,109,000                 | )          | (5,489,000                 | )          |
|                                                                   |       | $                          | 3,156,000  |                       | $          | 2,574,000 |   |

 

| ** **              | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property held for sale: |       |                       | $          | 567,000                    |       |   |   | $ | 567,000 |   |   |
| Land                    |       |                       | 364,000    |                       |       |   | 364,000 |   |   |
| Buildings               |       |                       | $          | 931,000                    |       |   |   | $ | 931,000 |   |   |

 

Depreciationexpense for fiscal 2006, 2005 and 2004 totaled $2,003,000, $2,316,000 and$2,472,000, respectively.

**NOTE 5—LONG-TERM DEBT**

On October 31, 2004, theCompany continued with a $1.0 million 1-year Revolving Line of Creditwith M&I Marshall & Ilsley Bank (the “Revolving Line of Credit”).The Revolving Line of Credit provides working capital for the Company. TheRevolving Line of Credit bears interest at LIBOR plus two percent per annum.All outstanding amounts under the Revolving Line of Credit become due May 31,2006. The Company increased the Revolving Line of Credit on February 1,2005 to $2.0 million and modified the covenants to permit annual dividends of$2.5 million with no other changes in terms or covenants. The Company will seekto renew or replace the Revolving Line of Credit by May 31, 2006. Therecan be no assurance the Revolving Line of Credit can be refinanced onacceptable terms or at all. The Revolving Line of Credit balance was $0 on January 30,2006, January 31, 2005 and April 18, 2006. The Revolving Line ofCredit had $2,000,000 available for borrowing on April 18, 2006. TheRevolving Line of Credit requires the Company to maintain specified minimumlevels of net worth, limit the amount of capital expenditures, maintain certainfixed charge coverage ratios, and to meet other financial covenants. TheCompany is currently in compliance with these covenants.

F-18

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On February 1, 2001, theCompany entered into a promissory note secured by a first mortgage withVictorium Corporation for $460,000 to purchase the real estate of theBuddyFreddys Country Buffet in Ocala, Florida. The fixed rate (7.5%) mortgagerequires monthly payments of $4,264 including interest and matures in 15 years.The balance at January 30, 2006 and January 21, 2005 was    $362,000 and $384,000, respectively.

On October 9, 2001, theCompany entered into a $773,000 15 year first real estate mortgage with FirstNational Bank of Wyoming. The mortgage has monthly payments including interestof $7,253 and has an October 1, 2016 maturity date with a fixed interestrate of 7.625%. The mortgage requires the Company to maintain specified minimumlevels of net worth, limits the amount of capital expenditures, requires themaintenance of certain fixed charge coverage ratios and requires a minimumshareholder ownership percentage. The proceeds were used to pay the FleetBostonTerm Loan Facility as required by the Company’s agreement with FleetBoston. Themortgage is secured by the Company’s JB’s Restaurant in Laramie, Wyoming. Thebalance at January 30, 2006 and January 31, 2005 was $623,000 and$663,000, respectively. The mortgage was paid in full on March 16, whenthe property was sold.

On May 2, 2002, the Companyentered into a $1,500,000 ten year first real estate mortgage with M&IMarshall & Ilsley Bank. The mortgage has monthly payments includinginterest of $17,894 and matures on May 2, 2012 with a fixed interest rateof 7.5% for the first five years with interest for years six to ten calculatedat the five year LIBOR rate plus 250 basis points with a floor of 7.5%. Theproceeds were used to pay a prior obligation to FleetBoston Financial Corporationas required by the Company’s agreement with FleetBoston. The mortgage issecured by the Company’s HomeTown Buffet restaurant in Scottsdale, Arizona. Thebalance at January 30, 2006 and January 31, 2005 was $1,066,000 and$1,205,000, respectively.

On December 19, 2003, theCompany entered into a $1,470,000 six year first real estate mortgage withPlatinum Bank. The mortgage has monthly payments including interest of $12,678through November 19, 2009 with a balloon payment of $475,000 due on December 19,2009. The mortgage bears interest at a fixed rate of 6.25% for the first threeyears with interest for years four to six calculated at the three year AtlantaFederal Home Loan Bank advance rate for fixed rate credits plus 325 basispoints with a floor of 6.0%. The mortgage is secured by the Company’sBuddyFreddys restaurant in Plant City, Florida and a $500,000 personalguarantee of a shareholder. The balance at January 30, 2006 and January 31,2005 was $1,339,000 and $1,404,000, respectively.

On February 25, 2004, theCompany entered into a $1,250,000 seven year first real estate mortgage withM&I Marshall & Ilsley Bank. The mortgage has monthly paymentsincluding interest of $18,396 and matures on February 25, 2011 with afixed interest rate of 6.1%. The proceeds were used to reduce the RevolvingLine of Credit with M&I Marshall & Ilsley Bank. The mortgage issecured by the Company’s HomeTown Buffet restaurant in Yuma, Arizona. Thebalance at January 30, 2006 and January 31, 2005 was $959,000 and$1,115,000.

On July 29, 2004, theCompany entered into a $550,000 ten year first real estate mortgage withHeritage Bank. The mortgage has monthly payments including interest of $6,319and matures on August 1, 2014 with a fixed interest rate of 6.75%. Themortgage is secured by the Company’s JB’s Restaurant in Great Falls, Montana.The balance at January 30, 2006 and January 31, 2005 was $490,000 and$531,000.

On October 27, 2004, theCompany entered into a $1,275,000 five year first real estate mortgage withBank of Utah. The mortgage has monthly payments including interest of $14,371and matures on October 26, 2009 with a balloon payment of $752,000 due on October 26,2009. The mortgage bears interest at a fixed interest rate of 6.25%. Themortgage requires the Company to maintain specified minimum levels of networth, limits the amount of capital expenditures and requires the maintenanceof certain fixed charge coverage ratios. The proceeds were used to pay NaiscoInvestments, L.C., the previous lien holder, and to reduce the Revolving Lineof Credit with M&I Marshall & Ilsley Bank. The mortgage is 

F-19

----

securedby the Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 30,2006 and January 31, 2005 was $1,154,000 and $1,251,000.

On September 16, 2005, theCompany entered into a $300,000 5 year mortgage with Naisbitt InvestmentCompany. The mortgage has monthly payments including interest of $5,870 andmatures on September 15, 2010. The balance at January 30, 2006 was$283,000.

Long term debt matures in fiscal years ending after January 30,2006 as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | 640,000    |       |
| 2008                 |       | 683,000    |       |
| 2009                 |       | 729,000    |       |
| 2010                 |       | 2,515,000  |       |
| 2011                 |       | 588,000    |       |
| Thereafter           |       | 1,121,000  |       |
| Total                |       | $          | 6,276,000  |       |
|                      |            |            |            |            |            |  |

 

**NOTE 6—LEASES**

The Companyoccupies certain restaurants under long-term capital and operating leasesexpiring at various dates through 2013. Most restaurant leases have renewaloptions for terms of 5 to 20 years, and substantially all require payment ofreal estate taxes and insurance. Certain leases require the rent to be thegreater of a stipulated minimum rent or a specified percentage of sales.Certain operating lease agreements contain scheduled rent escalation clauseswhich are being amortized over the terms of the lease, ranging from 5 to 12years using the straight line method.

Minimumlease payments for all leases and the present value of net minimum leasepayments for capital leases as of January 30, 2006 are as follows:

| **Fiscal year**                                 | ** ** | ** ** | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------|------------|---------------|------------|
| 2007                                                 |       | 309,000    |       | 2,426,000   |       |
| 2008                                                 |       | 309,000    |       | 2,224,000   |       |
| 2009                                                 |       | 319,000    |       | 1,914,000   |       |
| 2010                                                 |       | 332,000    |       | 1,184,000   |       |
| 2011                                                 |       | 277,000    |       | 665,000     |       |
| Thereafter                                           |       | 754,000    |       | 2,247,000   |       |
| Total minimum lease payments:                        |       | 2,300,000  |       | $           | 10,660,000 |          |
| Less amount representing interest:                   |       | 761,000    |       |        |       |
| Present value of minimum lease payments:             |       | 1,539,000  |       |        |       |
| Less current portion                                 |       | 142,000    |       |        |       |
| Capital  lease obligations excluding current portion |       | $          | 1,397,000  |        |       |          |
|                                                      |            |            |            |             |            |               |            |  |  |

 

F-20

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Aggregate rent expense under noncancelable operatingleases during fiscal 2006, 2005 and 2004 are as follows:

| ** **            | ** ** | **Fifty-Two  Weeks Ended  January 30,  2006** | ** ** | **Fifty-Three  Weeks Ended  January 31,  2005** | ** ** | **Fifty-Two  Weeks Ended  January 26,  2004** | ** ** |
|-----------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Minimum rentals       |       |                                                    | $          | 2,702,000                                                 |       |                                                    |       | $ | 3,137,000 |   |   |   | $ | 3,350,000 |   |   |
| Straight-line rentals |       |                                                    | (3,000     | )                                                         |       |                                                    | (61,000    | ) |   |   | (101,000 | ) |   |
| Contingent rentals    |       |                                                    | 105,000    |                                                      |       |                                                    | 87,000     |   |   |   | 113,000 |   |   |
|                  |       |                                                    | $          | 2,804,000                                                 |       |                                                    |       | $ | 3,163,000 |   |   |   | $ | 3,362,000 |   |   |

 

In fiscal 2006, 2005 and 2004,the Company reduced the deferred rent payable for stores that were purchased orclosed. The $0, $108,000 and $176,000 decrease in rent expense in 2006, 2005and 2004, respectively, is recognized in the straight-line rentals disclosedabove.

The Company currently leasesfour non-operating units to tenants under non-cancellable operating leases withterms of five to ten years. The rental income for fiscal 2006, 2005 and 2004was $259,000, $292,000 and $212,000, respectively. Rental income is recognizedon a straight-line basis over the term of the lease and is included in otherincome in the accompanying statements of operations.

Future minimum lease payments receivable in fiscal yearsending after January 30, 2006 is as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | 261,000    |       |
| 2008                 |       | 264,000    |       |
| 2009                 |       | 157,000    |       |
| 2010                 |       | 80,000     |       |
| 2011                 |       | 60,000     |       |
| Thereafter           |       | 175,000    |       |
| Total                |       | $          | 997,000    |       |
|                      |            |            |            |            |            |  |

 

**NOTE 7—INCOME TAXES**

Incometax provision (benefit) are comprised of the following:

| ** ** | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** ** | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** |
| ** ** | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| Current:   |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Federal    |       |                       | $          | 708,000                    |       |                       |       | $ | 431,000 |   |   |   | $ | 383,000 |   |   |
| State      |       |                       | 147,000    |                       |       |                       | 105,000    |   |   |   | 100,000 |   |   |
|       |       |                       | 855,000    |                       |       |                       | 536,000    |   |   |   | 483,000 |   |   |
| Deferred:  |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Federal    |       |                       | (389,000   | )                          |       |                       | (592,000   | ) |   |   | 118,000 |   |   |
| State      |       |                       | (46,000    | )                          |       |                       | (112,000   | ) |   |   | 8,000 |   |   |
|       |       |                       | (435,000   | )                          |       |                       | (704,000   | ) |   |   | 126,000 |   |   |
|       |       |                       | $          | (420,000                   | )          |                       |       | $ | (168,000 | ) |   |   | $ | 609,000 |   |   |

 

F-21

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Areconciliation of income tax provision (benefit) at the federal statutory rateof 34% to the Company’s provision (benefit) for taxes on income is as follows:

| ** **                                       | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** |
| ** **                                       | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| Income tax provision (benefit) at statutory rate |       |                       | $          | 754,000                    |       |                       |       | $ | (116,000 | ) |   |   | $ | 585,000 |   |   |
| State income taxes                               |       |                       | 88,000     |                       |       |                       | (7,000     | ) |   |   | 68,000 |   |   |
| Nondeductible expenses                           |       |                       | 60,000     |                       |       |                       | 46,000     |   |   |   | 55,000 |   |   |
| Federal income tax credits                       |       |                       | (175,000   | )                          |       |                       | (175,000   | ) |   |   | (295,000 | ) |   |
| Adjustment of estimated income tax accruals      |       |                       | (307,000   | )                          |       |                       | 84,000     |   |   |   | 226,000 |   |   |
| (Decrease) increase in valuation allowance       |       |                       | —     |                       |       |                       | —     |   |   |   | (35,000 | ) |   |
| All other, net                                   |       |                       | —     |                       |       |                       | —     |   |   |   | 5,000 |   |   |
|                                             |       |                       | $          | 420,000                    |       |                       |       | $ | (168,000 | ) |   |   | $ | 609,000 |   |   |

 

Temporarydifferences give rise to a significant amount of deferred tax assets andliabilities as set forth below:

| ** **                                   | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Current deferred tax assets:                 |       |                       |       |                       |       |
| Accrued vacation                             |       | $                          | 81,000     |                       | $          | 93,000 |   |
| Accrued expenses and reserves                |       | 177,000                    |       | 111,000                    |       |
| Total deferred tax assets                    |       | 258,000                    |       | 204,000                    |       |
| Long-term deferred tax assets (liabilities): |       |                       |       |                       |       |
| Leases                                       |       | 1,061,000                  |       | 1,072,000                  |       |
| Depreciation, amortization and  impairments  |       | 1,116,000                  |       | 720,000                    |       |
| State NOL carryforwards                      |       | 193,000                    |       | 193,000                    |       |
| Total deferred tax assets, net               |       | 2,370,000                  |       | 1,985,000                  |       |
| Valuation allowance                          |       | (180,000                   | )          | (180,000                   | )          |
| Net long term asset                          |       | 2,190,000                  |       | 1,805,000                  |       |
| Net  deferred tax assets                     |       | $                          | 2,448,000  |                       | $          | 2,009,000 |   |

 

While there can be no assurancethat the Company will generate any earnings or any specific level of earningsin the future years, management believes it is more likely than not that theCompany will be able to realize the benefit of the deferred tax assets existingat January 30, 2006 based on the Company’s expected future pre-taxearnings. The determination of deferred tax assets is subject to estimates andassumptions. We periodically evaluate our deferred tax assets to determine ifour assumptions and estimates should change.

Avaluation allowance has been recorded for a state loss carryforward ascumulative losses create uncertainty about the realization of the tax benefitsin future years. The Company has state net operating loss carryforwards ofapproximately $7,455,000 which expire in the years 2018 through 2023 at January 30,2006.

**NOTE 8—SEGMENT AND RELATED REPORTING**

The Company has four reporting segments: HomeTownBuffet,,North’s Star, Florida Buffets Division and Summit Restaurant Division.The Company’s reportable segments are aggregated based on brand similarities ofoperating segments.

F-22

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At January 30, 2006, the HomeTown Buffet segmentincludes the Company’s 14 franchised HomeTown Buffet restaurants. The North’sStar segment includes two JJ North’s Country Buffet restaurants. The FloridaBuffets Division includes two BuddyFreddys restaurants, three BuddyFreddysCountry Buffet restaurants and two Holiday House restaurants. The SummitRestaurants Division includes the Company’s eight JB’s Restaurants, whichincludes two non-operating JB’s Restaurants. The non-operating unit in Laramie,Wyoming was sold in March 2006. The Summit Restaurants Division alsoincludes the Casa Bonita restaurant in Denver, Colorado.

The accounting policies of thereportable segments are the same as those described in Note 1. The Companyevaluates the performance of its operating segments based on income beforeincome taxes.

Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following table. The other assets presented in the consolidated balancesheet and not in the reportable segments relate to the Company as a whole, andnot individual segments. Also certain corporate overhead income and expenses inthe consolidated statements of operations are not included in the reportablesegments.

| **52 Weeks Ended  January 30, 2006** | ** ** | ** ** | ** ** | **HomeTown  Buffet**       | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| ** **                                               | ** ** | ** ** | ** ** | **(Dollars in Thousands)** | ** ** |
| Revenues                                                 |       |       | $          | 28,210                     |       |                   | $          | 2,267                |       | $                       | 10,841     |      |       | $         | 14,987     |   |   | $ | — |   | $ | 56,305 |   |
| Interest income                                          |       |       | —     |                       |       | —                 |       | —               |       |                    | —     |      |       | 361       |       | 361 |   |
| Interest expense                                         |       |       | (181       | )                          |       | —                 |       | —               |       |                    | —     |      |       | (467      | )          | (648 | ) |
| Depreciation & amortization                     |       |       | 996        |                       |       | 86                     |       | 588                  |       |                    | 383        |      |       | 67        |       | 2,179 |   |
| Impairment of long-lived assets                          |       |       | 18         |                       |       | 74                     |       | 202                  |       |                    | 75         |      |       | —    |       | 369 |   |
| Income (loss) before income taxes                        |       |       | 1,441      |                       |       | (328                   | )          | 429                  |       |                    | 2,230      |      |       | (1,555    | )          | 2,217 |   |
| Total  assets                                            |       |       | 11,642     |                       |       | 4,206                  |       | 8,365                |       |                    | 6,319      |      |       | 4,292     |       | 34,824 |   |
|                                                          |            |            |            |                            |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

| **53 Weeks Ended  January 31, 2005** | ** ** | ** ** | ** **                 | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------|----------------------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| ** **                                               | ** ** | ** ** | **(Dollars in Thousands)** | ** **           |
| Revenues                                                 |       |       | $                          | 32,282               |       |                   | $          | 4,290                |       | $                       | 10,785     |      |       | $         | 17,499     |   |   | $ | — |   | $ | 64,856 |   |
| Interest income                                          |       |       | —                     |                 |       | —                 |       | —               |       |                    | —     |      |       | 5         |       | 5 |   |
| Interest expense                                         |       |       | (192                       | )                    |       | —                 |       | —               |       |                    | —     |      |       | (448      | )          | (640 | ) |
| Depreciation & amortization                     |       |       | 1,084                      |                 |       | 210                    |       | 625                  |       |                    | 457        |      |       | 64        |       | 2,440 |   |
| Impairment of long-lived assets                          |       |       | 798                        |                 |       | 1,040                  |       | 754                  |       |                    | 246        |      |       | —    |       | 2,838 |   |
| Income (loss) before income taxes                        |       |       | 1,142                      |                 |       | (1,667                 | )          | (24                  | )          |                    | 2,411      |      |       | (2,202    | )          | (340 | ) |
| Total  assets                                            |       |       | 12,386                     |                 |       | 4,388                  |       | 9,314                |       |                    | 6,576      |      |       | 2,216     |       | 34,880 |   |
|                                                          |            |            |                            |                      |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

| **52 Weeks Ended  January 26, 2004** | ** ** | ** ** | ** **                 | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------|----------------------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| ** **                                               | ** ** | ** ** | **(Dollars in Thousands)** | ** **           |
| Revenues                                                 |       |       | $                          | 33,773               |       |                   | $          | 6,045                |       | $                       | 10,592     |      |       | $         | 17,680     |   |   | $ | — |   | $ | 68,090 |   |
| Interest income                                          |       |       | —                     |                 |       | —                 |       | —               |       |                    | —     |      |       | 107       |       | 107 |   |
| Interest expense                                         |       |       | (202                       | )                    |       | —                 |       | —               |       |                    | —     |      |       | (367      | )          | (569 | ) |
| Depreciation & amortization                     |       |       | 1,211                      |                 |       | 319                    |       | 507                  |       |                    | 497        |      |       | 136       |       | 2,670 |   |
| Impairment of long-lived assets                          |       |       | 114                        |                 |       | 490                    |       | 466                  |       |                    | 13         |      |       | —    |       | 1,083 |   |
| Income (loss) before income taxes                        |       |       | 1,987                      |                 |       | (1,129                 | )          | 71                   |       |                    | 2,286      |      |       | (1,493    | )          | 1,722 |   |
| Total  assets                                            |       |       | 12,271                     |                 |       | 5,686                  |       | 10,960               |       |                    | 6,225      |      |       | 812       |       | 35,954 |   |
|                                                          |            |            |                            |                      |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

F-23

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**NOTE 9—STOCKHOLDERS’ EQUITY**

**Common Stock**

Holdersof Common Stock are entitled to one vote per share on all matters to be votedupon by the stockholders and do not have cumulative voting rights. Subject topreferences that may be applicable to the holders of outstanding shares ofPreferred Stock, if any, at the time, holders of Common Stock are entitled toreceive ratably such dividends, if any, as may be declared from time to time bythe Board of Directors out of funds legally available therefor. In the event ofliquidation, dissolution or winding up of the Company, the holders of CommonStock shall be entitled to assets of the Company remaining after payment of theCompany’s liabilities and the liquidation preference, if any, of anyoutstanding Preferred Stock. All outstanding shares of Common Stock, are fullypaid and nonassessable. Holders of Common Stock have no preemptive,subscription, redemption or conversion rights. The rights, preferences andprivileges of holders of Common Stock are subject to, and may be adverselyaffected by, the rights of the holders of shares of any series of PreferredStock, which the Company may designate and issue in the future. The Companypaid an annual cash dividend of $0.50 and $0.25 for fiscal 2005 and fiscal2004, respectively. The Company also paid a special dividend of $0.25 in bothfiscal 2005 and 2004.

**Preferred Stock**

The Board of Directors hasthe authority, without further vote or action by the stockholders, to providefor the issuance of up to 1,500,000 shares of Preferred Stock from time to timein one or more series with such designations, rights, preferences andprivileges and limitations as the Board of Directors may determine, includingthe consideration received therefor. The Board of Directors also has authorityto 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 CommonStock. Although it is not possible to state the effect that any issuance ofPreferred Stock might have on the rights of holders of Common Stock, theissuance of Preferred Stock may have one or more of the following effects: (i) torestrict the payment of dividends on the Common Stock, (ii) to dilute thevoting power and equity interests of holders of Common Stock, (iii) toprevent holders of Common Stock from participating in any distribution of theCompany’s assets upon liquidation until any liquidation preferences granted toholders of Preferred Stock are satisfied, or (iv) to require approval bythe holders of Preferred Stock for certain matters such as amendments to theCompany’s Certificate of Incorporation or any reorganization, consolidation,merger or other similar transaction involving the Company. As a result, theissuance of Preferred Stock may, under certain circumstances, have the effectof delaying, discouraging or preventing bids for the Common Stock at a premiumover the market price thereof, or a change in control of the Company, and couldhave a material adverse effect on the market price for the Common Stock.

**Officer’s NotesReceivable**

In connection with theCompany’s employment contract with Mr. Robert E. Wheaton, the Company’sPresident and Chief Executive Officer, the Company agreed to provide Mr. Wheatonwith certain loans solely for the purchase of the Company’s common stock priorto the enactment of Sarbanes-Oxley Act of 2002. Mr. Wheaton ownsapproximately 49% of the Company’s outstanding common shares and may have theeffective power to elect members of the board of directors and to control thevote on substantially all other matters, without the approval of the otherstockholders. The loans were secured by the common stock and bore interest atthe prevailing rate set forth in the Company’s credit facility with M&IMarshall & Ilsley Bank. Repayment terms stipulate that the presidentwould repay principal and interest on or before the later of the fifthanniversary date of the initial advance under the loan agreement, the date hereceived a lump sum payment per a termination clause or six month’s after thetermination of his employment. Management has elected not to record anyinterest income on the loans until the interest income was paid. Mr. Wheatonpaid $698,000 in principal and $250,000 in interest in June 2005. There is

F-24

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noremaining principal balance due at January 30, 2006. Mr. Wheaton owesapproximately $44,000 in interest as of April 18, 2006.

**Common StockRepurchase**

On January 4, 2006,the Company announced that it had received necessary approval from its lenderto commence with a buyback program to purchase up to 250,000 common shares. StarBuffet’s Board of Directors originally authorized the repurchase of up to500,000 in 1999, but covenants in effect in the loan agreements restricted theCompany’s ability to implement the program. Under the current agreement withits lender, Star Buffet may purchase shares on the open market, or throughnegotiated transactions, from time-to-time through May 31, 2006, unlessotherwise extended. The timing and amount of shares purchased will be based onprevailing market conditions and other factors. As of April 18, 2006, theCompany had 3,104,175 common shares outstanding.

**NOTE 10—EMPLOYEEBENEFIT PLANS**

**401(k) Plan**

In May 1998,the Company established a 401(k) plan available to certain employees whohave attained age 21, work 30 hours or more per week, and have met certainminimum service requirements. The plan allows participants to allocate up to15% of their annual compensation before taxes for investment in severalinvestment alternatives. Employer contributions are at the discretion of theCompany. The Company’s contributions to the plan were approximately $15,000,$15,000, and $8,000, in administration costs for fiscal 2006, 2005 and 2004,respectively. The Board of Directors has authorized the termination of theCompany’s 401(k) plan. The plan has fewer than 50 participants as of April 15,2005. As of April 18, 2006, the plan had approximately 44 participants andshould be fully terminated before the year end.

**1997 Stock Incentive Plan**

In fiscal year 1998, the Companyadopted the 1997 Stock Incentive Plan (the “1997 Plan”), which authorizes thegrant of options to purchase up to 750,000 shares of Common Stock. The 1997 Planprovides for “incentive stock options,” within the meaning of section 422 ofthe Internal Revenue Code of 1986, as amended (the “Code”) and non-statutoryoptions to directors, officers, employees and consultants of the Company,except that incentive stock options may not be granted to non-employeedirectors or consultants. The 1997 Plan provides participants with incentiveswhich will encourage them to acquire a proprietary interest in, and continue toprovide services to, the Company. The Board of Directors has sole discretionand authority, consistent with the provisions of the 1997 Plan, to determinewhich eligible participants will receive options, time when options will begranted, terms of options granted and number of shares which will be subject tooptions granted under the 1997 Plan.

A summary of the status of the Company’s stock optionsis presented below (shares in thousands):

| ** **                       | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Three**                | ** ** | **Fifty-Two**                  | ** ** |
|----------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** |
| ** **                       | ** ** | **January 30, 2006** | ** ** | **January 31, 2005** | ** ** | **January 26, 2004** | ** ** |
| ** **                       | ** ** | ** **                     | ** ** | **Wgtd. Avg.**            | ** ** | ** **                     | ** ** | **Wgtd. Avg.** | ** ** | ** ** | ** ** | **Wgtd. Avg.** | ** ** |
| ** **                       | ** ** | **Shares**                     | ** ** | **Exer. Price**           | ** ** | **Shares**                     | ** ** | **Exer. Price** | ** ** | **Shares** | ** ** | **Exer. Price** | ** ** |
| Outstanding at beginning of year |       |                           | 701        |                           |       |                           | $          | 9.88 |   |   |   | 731 |   |   |   | $ | 9.75 |   |   |   | 733 |   |   |   | $ | 9.75 |   |   |
| Granted                          |       |                           | 49         |                           |       |                           | $          | 6.70 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Cancelled                        |       |                           | (1         | )                              |       |                           | $          | 7.06 |   |   |   | (30 | ) |   |   | $ | 6.73 |   |   |   | (2 | ) |   |   | $ | 6.00 |   |   |
| Exercised at end of year         |       |                           | (53        | )                              |       |                           | $          | 5.00 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Options exercisable at year end  |       |                           | 696        |                           |       |                           | $          | 10.04 |   |   |   | 701 |   |   |   | $ | 9.88 |   |   |   | 731 |   |   |   | $ | 9.75 |   |   |

 

F-25

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Theexercise price of the options granted and exercisable at January 31, 2005is $5.00 for 212,000 options and $12.00 for 489,000 options. On February 11,2005, the Company granted 49,000 options exercisable at $6.70.

**NOTE 11—SUPPLEMENTAL DISCLOSURE OF CASH FLOWINFORMATION**

| ** **                                                                       | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** | **Fifty-Two**              | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** |
| ** **                                                                       | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                                       | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** | **January 26,  2004** | ** ** |
| Cash paid for income taxes                                                       |       |                       | $          | 688,000                    |       |                       |       | $ | 554,000 |   |   |   | $ | 119,000 |   |   |
| Cash paid for interest                                                           |       |                       | 631,000    |                       |       |                       | 638,000    |   |   |   | 575,000 |   |   |
| Non-cash  investing and financing activities are as follows:                     |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Exchange of property rental  for repair services                                 |       |                       | $          | —                     |       |                       |       | $ | 2,000 |   |   |   | $ | — |   |   |
| Acquisition of property with  debt financing                                     |       |                       | 300,000    |                       |       |                       | 550,000    |   |   |   | 500,000 |   |   |
| Exchange of property,  buildings and equipment for notes receivable              |       |                       | —     |                       |       |                       | —     |   |   |   | 100,000 |   |   |
| Reclassification of property  held for sale to property, buildings and equipment |       |                       | —     |                       |       |                       | —     |   |   |   | 52,000 |   |   |
| Reclassification of property held for sale                                       |       |                       | —     |                       |       |                       | —     |   |   |   | 931,000 |   |   |

 

Duringthe forty weeks ended November 3, 2003, the Company reclassified netassets totaling $931,000 from property, buildings and equipment to net assetsheld for sale; these assets were classified as current prior to the thirdquarter of fiscal 2005. The amount reclassified included land of $567,000 andbuildings of $364,000.

**NOTE 12—RELATED PARTY TRANSACTIONS**

In connection with theCompany’s employment contract with Mr. Robert E. Wheaton, the Company’sPresident and Chief Executive Officer, the Company agreed to provide Mr. Wheatonwith certain loans solely for the purchase of the Company’s common stock priorto the enactment of Sarbanes-Oxley Act of 2002. Mr. Wheaton ownsapproximately 49% of the Company’s outstanding common shares and may have theeffective power to elect members of the board of directors and to control thevote on substantially all other matters, without the approval of the otherstockholders. The loans were secured by the common stock and bore interest atthe prevailing rate set forth in the Company’s credit facility with M&IMarshall & Ilsley Bank. Repayment terms stipulate that the presidentwould repay principal and interest on or before the later of the fifthanniversary date of the initial advance under the loan agreement, the date hereceived a lump sum payment per a termination clause or six month’s after thetermination of his employment. Management elected not to record any interestincome on the loans until the interest income was paid. Mr. Wheaton paid$698,000 in principal and $250,000 in interest in June 2005. There is noremaining principal balance due at January 30, 2006. Mr. Wheaton owesapproximately $44,000 in interest as of April 18, 2006.

**NOTE 13—COMMITMENTS AND CONTINGENCIES**

The Company is engaged in ordinary and routinelitigation incidental to its business. Management does not anticipate that anyresolution of any of these proceedings will require payments that will have amaterial effect on the Company’s consolidated statements of operations orfinancial position or liquidity.

HTB entered into a franchise agreement for eachlocation which requires among other items, the payment of a continuing royaltyfee paid to HomeTown Buffet, Inc. The royalty fee is based on 2% of theaggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each ofthe franchise 

F-26

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agreements has a 20-yearterm (with two five-year renewal options). HTB provides weekly sales reports tothe HomeTown franchisor as well as periodic and annual financial statements.HTB is obligated to operate its Hometown Buffet restaurants in compliance withthe franchisor’s requirements. The franchisor requires HTB to operate eachrestaurant in conformity with Franchise Operating Manuals, Recipe Manuals andMenus and HTB is to use it best effort to achieve the highest practicable levelof sales, promptly make royalty payments and restricts operating restaurantswithin a geographic radius of the franchisor’s restaurants. The HomeTownfranchisor may terminate a franchise agreement for a number of reasons,including HTB’s failure to pay royalty fees when due, failure to comply withapplicable laws or repeated failure to comply with one or more requirements ofthe franchise agreement. Many state franchise laws limit the ability of afranchisor to terminate or refuse to renew a franchise. Generally, a franchisormay terminate a franchise agreement only if the franchisee violates a materialand substantial provision of the agreement and fails to remedy the violationwithin a specified period.

On November 12, 1998, North’s Restaurants, Inc.(“North’s”) filed a Demand for Arbitration against the Company with theAmerican Arbitration Association, Irvine, California (District No. 949-251-9840),alleging breach of contract in connection with the Company’s failure to performunder a Business Services Agreement between North’s and the Company dated July 24,1997. On June 22, 1999, the parties agreed to dismiss the ArbitrationProceeding without prejudice since the issues related to the Business ServiceAgreement were being litigated in the Utah action described below.

On November 25, 1998, the Company filed an actionagainst North’s in the United States District Court, District of Utah, Case No. 2-98-CV-893,seeking damages for breach of a promissory note and an Amended and RestatedCredit Agreement (collectively, the “Credit Agreements”) in the amount of$3,570,935. On December 31, 1998, North’s filed an answer to the Company’sComplaint, denying generally the allegations, and filed counterclaims againstthe Company alleging (1) the Company fraudulently induced North’s to enterinto various agreements with the Company relating to the Company’s acquisitionof seven JJ North’s Grand Buffet Restaurants and an option to acquire nineadditional restaurants operated by North’s and (2) the Company hadbreached the Business Services Agreement. On January 26, 2001, the partiesentered into a Settlement Agreement (the “Settlement Agreement”). TheSettlement Agreement provides, among other things, that the Credit Agreementand Revolving Note terminate concurrently with the execution of the SettlementAgreement, that the Term Note be amended and restated, that the terms of theTerm Note have no further force or effect and that the security interesttransferred to the Company pursuant to the Assignment Agreement dated September 30,1997 between the Company and U.S. Bank National Association be amended andrestated pursuant to an Amended and Restated Star Buffet Security Agreement(the “Security Agreement”). The Company and North’s have agreed that the Star BuffetDebt be reduced to a total amount of $3,500,000 and that such reducedobligation be payable by North’s pursuant to the terms of the Amended andRestated Promissory Note (“Star Buffet Promissory Note”). The Company recordedno gain or loss on the settlement as the recorded balance of the note wasapproximately $3.5 million at the time of the settlement. The Company and North’shave agreed that the Company’s existing liens encumbering certain property ofNorth’s remain in place and continue to secure North’s obligations to theCompany, and the Company and North’s reserve all rights, claims and defenseswith respect to the extent and validity of such existing liens.

On March 2, 2004, the Company filed a secondaction against North’s in the United States District Court, District of Utah,Central Division, Case No. 2:04CV00211, demanding judgment against North’sfor failure to repay obligations under the Star Buffet Promissory Note in atotal amount not less than $2,934,453 plus interest at the default rate as setforth in the Star Buffet Promissory Note. In January 2005, the courtgranted the Company’s motion for summary judgment, ruling that North’s hadfailed to pay amounts owed to the Company. The Company obtained a judgmentagainst North’s in the amount of $3,059,905.78, plus $15,980.45 in attorney’sfees and costs.

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In a related proceeding, North’s other securedcreditor, Pacific Mezzanine, initiated litigation against North’s seeking amonetary 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 anorder appointing a receiver.

Since his appointment, the receiver has remitted onlyapproximately $56,000 in loan repayments and no payments have been made since Septemberof 2005. Additionally, the receiver has failed to complete a planned sale ofNorth’s restaurants and has presided over a significant deterioration in theoperating results of North’s restaurants. Payments of fees to the receiver wellexceeded amounts paid to the Company during this period.

As a result of the receiver’s failure to remit anymeaningful principal repayments, the Company has initiated certain legalactions designed to expedite the liquidation of North’s assets and repayamounts owed to Star Buffet. First, on October 3, 2005, the Companyobtained an Order in United States District Court for the District of UtahDirecting Entry of Final Judgment. Next, on April 14, 2006, the Companyobtained the Registration of Foreign Judgment for recognition and enforcementin the United States Court for both the District of Oregon and NorthernDistrict of California, jurisdictions where North’s operates its restaurants. Finally,on April 25, 2006, the Company noticed all relevant parties of its intentto foreclose. With these steps complete, the Company plans to promptly seek theliquidation of assets and repayment of amounts owed. The Company believes thatif it can act quickly asset sales and operating cashflows will be sufficient torepay both secured creditors.

On March 21, 2002, Alliant Foodservice, Inc.(“Alliant”) filed a breach of contract complaint against the Company in theSuperior Court for the State of Arizona in and for the County of Maricopa (No. CVZ002-005195),alleging breach of the Master Distribution Agreement (“MDA”) executed betweenthe Company and Alliant on or about December 1, 1999. Alliant sought$2,479,000 for alleged amounts owed by the Company plus attorneys’ fees andcosts. The Company included approximately $2,000,000 for this alleged amountowed in relation to this litigation in accounts payable-trade at January 27,2003 net of any amounts receivable from Alliant. The Company denied theallegations and vigorously defended the alleged breach of contract. On April 29,2002, the Company filed an answer and counterclaim in Superior Court for theState of Arizona in and for the County of Maricopa citing among other things,breach of the MDA. The Company sought over $7,250,000 in damages. On February 27,2003, the Company and Alliant entered into a Settlement Agreement thatdismissed charges against both parties and required the Company to pay Alliant$1,600,000 which resulted in a $400,000 reversal of a litigation accrual in thefirst quarter of fiscal 2004.

On February 1, 2005, theCompany announced in a press release that it had entered into a strategicalliance with K-BOB’S USA Inc. and related affiliates. In accordance with theterms of the strategic alliance, Star Buffet agreed to lend K-BOB’S up to $1.5million on a long-term basis. In exchange, K-BOB’S granted Star Buffet anoption to purchase as many as five corporate owned and operated K-BOB’Srestaurants located in New Mexico and Texas, as well as rights to develop K-BOB’Sin other areas in the United States. On January 31, 2005, the Companyexercised its option under the terms of the strategic alliance and purchasedthree K-BOB’S restaurants.

On February 24, 2006, theBoard of Directors approved the Company’s third annual dividend of $0.60 percommon share, a $0.10 increase from the prior year, and a special dividend of$0.25 per common share. Both are payable on June 7, 2006 to shareholdersof record on May 11, 2006.

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

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**NOTE 14—SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)**

Quarterly financial results for the 52 weeks ended January 30,2006 and the 53 weeks ended January 31, 2005 and the 52 weeks ended January 26,2004, are summarized below.

| ** **                        | ** ** | **For the 52 Weeks Ended January 30, 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| ** **                        | ** ** | **(In thousands except per share data)**                                       | ** ** |
| Revenues                          |       |                                                                           | $          | 18,869 |   |   |   | $ | 13,788 |   |   |   | $ | 11,493 |   |   |   | $ | 12,155 |   |   | $ | 56,305 |   |
| Income (loss) from operations     |       |                                                                           | 1,424      |   |   |   | 860 |   |   |   | (160 | ) |   |   | 61 |   |   | 2,185 |   |
| Income (loss) before income taxes |       |                                                                           | 1,338      |   |   |   | 1,050 |   |   |   | (156 | ) |   |   | (15 | ) |   | 2,217 |   |
| Income taxes (benefit)            |       |                                                                           | 462        |   |   |   | 342 |   |   |   | (54 | ) |   |   | (330 | ) |   | 420 |   |
| Net income (loss)                 |       |                                                                           | $          | 876 |   |   |   | $ | 708 |   |   |   | $ | (102 | ) |   |   | $ | 315 |   |   | $ | 1,797 |   |
| Earnings  (loss) per share:       |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                                                                           | $          | 0.30 |   |   |   | $ | 0.24 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.10 |   |   | $ | 0.60 |   |
| Diluted                           |       |                                                                           | $          | 0.27 |   |   |   | $ | 0.22 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.10 |   |   | $ | 0.56 |   |

 

| ** **                        | ** ** | **For the 53 Weeks Ended January 31, 2005** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| ** **                        | ** ** | **(In thousands except per share data)**                                       | ** ** |
| Revenues                          |       |                                                                           | $          | 21,551 |   |   |   | $ | 15,539 |   |   |   | $ | 13,269 |   |   |   | $ | 14,496 |   |   | $ | 64,856 |   |
| Income (loss) from operations     |       |                                                                           | 1,043      |   |   |   | 853 |   |   |   | (147 | ) |   |   | (1,876 | ) |   | (127 | ) |
| Income (loss) before income taxes |       |                                                                           | 940        |   |   |   | 780 |   |   |   | (247 | ) |   |   | (1,813 | ) |   | (340 | ) |
| Income taxes (benefit)            |       |                                                                           | 329        |   |   |   | 267 |   |   |   | (82 | ) |   |   | (682 | ) |   | (168 | ) |
| Net income (loss)                 |       |                                                                           | $          | 611 |   |   |   | $ | 513 |   |   |   | $ | (165 | ) |   |   | $ | (1,131 | ) |   | $ | (172 | ) |
| Earnings  (loss) per share:       |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                                                                           | $          | 0.21 |   |   |   | $ | 0.17 |   |   |   | $ | (0.06 | ) |   |   | $ | (0.38 | ) |   | $ | (0.06 | ) |
| Diluted                           |       |                                                                           | $          | 0.20 |   |   |   | $ | 0.16 |   |   |   | $ | (0.06 | ) |   |   | $ | (0.38 | ) |   | $ | (0.06 | ) |

 

| ** **                        | ** ** | **For the 52 Weeks Ended January 26, 2004** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| ** **                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **(As Restated)** | ** ** | **(As Restated)** | ** ** |
| ** **                        | ** ** | **(In thousands except per share data)**                                       | ** ** |
| Revenues                          |       |                                                                           | $          | 22,437 |   |   |   | $ | 16,259 |   |   |   | $ | 14,378 |   |   |   | $ | 15,016 |   |   |   | $ | 68,090 |   |   |
| Income (loss) from operations     |       |                                                                           | 972        |   |   |   | 772 |   |   |   | 132 |   |   |   | (305 | ) |   |   | 1,572 |   |   |
| Income (loss) before income taxes |       |                                                                           | 1,246      |   |   |   | 693 |   |   |   | 126 |   |   |   | (344 | ) |   |   | 1,722 |   |   |
| Income taxes (benefit)            |       |                                                                           | 433        |   |   |   | 237 |   |   |   | 43 |   |   |   | (104 | ) |   |   | 609 |   |   |
| Net income (loss)                 |       |                                                                           | $          | 813 |   |   |   | $ | 456 |   |   |   | $ | 83 |   |   |   | $ | (240 | ) |   |   | $ | 1,113 |   |   |
| Earnings  (loss) per share:       |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                                                                           | $          | 0.28 |   |   |   | $ | 0.15 |   |   |   | $ | 0.03 |   |   |   | $ | (0.08 | ) |   |   | $ | 0.38 |   |   |
| Diluted                           |       |                                                                           | $          | 0.28 |   |   |   | $ | 0.15 |   |   |   | $ | 0.03 |   |   |   | $ | (0.08 | ) |   |   | $ | 0.38 |   |   |

 

Amounts indicated may not footdue to quarterly rounding.

Thefiscal 2006 figures include approximately $369,000 for impairment expense. Thefiscal 2006 figures also included lower income tax provision due to largerincome tax credits. The fiscal 2005 figures include significant fourth quarteradjustments for impairment charges totaling $2,322,000, of which $592,000 isfor two store closures, $513,000 for asset impairment to leasehold improvementswhere projected undiscounted cash flow is less than the net book value of theassets and impairment expense of $32,000 for assets held for future use.Additionally, a goodwill impairment of $1,145,000 was made in four 

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stores and $40,000 impairment charge related to franchisefees. The fiscal 2004 figures include a significant fourth quarter adjustmentfor asset impairment charges of $342,000.

**NOTE 15—SUBSEQUENT EVENTS**

On April 21, 2006, the Company announced in apress release that it has entered into a Strategic Alliance with WesternSizzlin Corporation. In accordance with the terms of this agreement, Star Buffet, Inc.plans to convert certain of its existing restaurants to the Western Sizzlinbrand; test a newly developed Western Sizzlin buffet prototype; and seek toacquire selected Western Sizzlin franchised restaurants. Additionally, as animportant element of the Strategic Alliance, Star Buffet, Inc. and WesternSizzlin will explore a number of identified opportunities to reduce operatingand administrative expenses

On March 16, 2006, theCompany sold it’s JB’S restaurant property in Laramie, Wyoming For $780,000 andpaid off the real estate mortgage of approximately $622,000.

On February 28, 2006, theCompany announced in a press release that it has completed the acquisition ofK-BOB’S Steakhouse in Dumas, Texas. The Company purchased the equipment, thebuilding and the land for approximately $700,000.

On February 24, 2006, theBoard of Directors approved the Company’s third annual dividend of $0.60 percommon share, an increase of $0.10 per share from the prior year, and a specialdividend of $0.25 per common share. Both are payable on June 7, 2006 toshareholders of record on May 11, 2006.

On February 1, 2006, theCompany announced in a press release that it has completed the acquisition ofthree restaurants from K-BOB’S USA, Inc. The restaurants, located inTucumcari, New Mexico and Beeville and Lamesa, Texas, were acquired inaccordance with certain provisions of a strategic alliance entered into betweenthe Company and K-BOB’S on February 1, 2005. The Company purchased theequipment and leasehold improvements for approximately $1,285,500. The purchasereduced the Company’s K-BOB’S USA, Inc. note receivable to $214,500.

F-30

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**EXHIBITINDEX**

| Exhibit   No. | ** ** | ** **                                                                                                                                                                                                                                  | ** ** | **Description** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1           |       | Certificate  of Incorporation*                                                                                                                                                                                                              |
| 3.2           |       | Bylaws, as amended on September 22, 1997*                                                                                                                                                                                              |
| 4.1           |       | Form of Common Stock Certificate**                                                                                                                                                                                                     |
| 10.1          |       | Star Buffet, Inc. 1997 Stock Incentive Plan (the “1997 Plan”)**                                                                                                                                                              |
| 10.2          |       | Form of Stock Option Agreement for the 1997 Plan**                                                                                                                                                                                     |
| 10.3          |       | Form of Indemnification Agreement**                                                                                                                                                                                                    |
| 10.4          |       | Management Services Agreement with CKE Restaurants, Inc.**                                                                                                                                                                             |
| 10.5          |       | Form of Franchise Agreement with HomeTown Buffet, Inc.**                                                                                                                                                                          |
| 10.6          |       | Asset Purchase Agreement with North’s Restaurants, Inc. dated  July 24, 1997**                                                                                                                                               |
| 10.6.1        |       | Amendment No. 1 to Asset Purchase Agreement dated as of  September 30, 1997 (incorporated by reference to the Company’s filing on  Form 8-K on October 17, 1997)                                                   |
| 10.6.2        |       | Amended and Restated Credit Agreement dated as of September 30,  1997 between the Company and North’s Restaurants, Inc. (incorporated by  reference to the Company’s filing on Form 8-K on October 17,  1997) |
| 10.7          |       | Form of Contribution Agreement among CKE Restaurants, Inc.,  Summit Family Restaurants Inc. and the Company*                                                                                                                      |
| 10.8          |       | Form of Bill of Sale and Assumption Agreement between Summit  Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known  as Casa Bonita Incorporated)*                                                             |
| 10.9          |       | Form of Bill of Sale and Assumption Agreement between Summit  Family Restaurants Inc. and JB’s Restaurants, Inc.*                                                                                                            |
| 10.10         |       | License Agreement with CKE Restaurants, Inc. (incorporated by  reference to the Company’s filing on Form 10-K on April 24,  1998)                                                                                       |
| 10.11         |       | Settlement Agreement with HomeTown Buffet, Inc. (incorporated by  reference to the Company’s filing on Form  10-K on April 24, 1998)                                                                                    |
| 10.12         |       | Asset Purchase Agreement among Summit Family Restaurants Inc. and JB’s  Family Restaurants, Inc., dated February 10, 1998 (incorporated by  reference to the Company’s filing on Form 8-K on March 9,  1998)  |
| 10.13         |       | Stock Repurchase Agreement between Star Buffet, Inc. and CKE  Restaurants, Inc., dated September 10, 1998 (incorporated by  reference to the Company’s filing on Form 10-K on  September 28, 1998)            |
| 10.14         |       | Revolving Line of Credit with M&I Marshall & Ilsley Bank  dated October 28, 2003 (incorporated by reference to the Company’s  filing on Form 10-Q on December 15, 2003)                                    |
| 10.15         |       | Amendment to Revolving Line of Credit with M&I Marshall &  Ilsley Bank dated February 1, 2005 (incorporated by reference to the  Company’s filing on Form 10-K on January 31, 2005)                        |
| 14.1          |       | Code of Ethics (incorporated by reference to the Company’s filing on  Form 10-K on January 31, 2005)                                                                                                                         |
| 21.1          |       | List of Subsidiaries*                                                                                                                                                                                                                       |
| 23.1          |       | Consent  of Mayer Hoffman McCann P.C.                                                                                                                                                                                                       |

E-1

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| 31.1 |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of  2002      |
|------|--------|----------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Accounting Officer pursuant to  Section 302 of the Sarbanes-Oxley Act Of 2002  |
| 32.1 |   | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act Of 2002      |
| 32.2 |   | Certification of  Principal Accounting Officer pursuant to Section 906 of the  Sarbanes-Oxley Act Of 2002 |
| 99.1 |   | Press Release dated  April 28, 2006 reporting earnings for fiscal 2006                                    |

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*                    Previouslyfiled as an exhibit to the Registration Statement on Form S-1,Amendment No. 1 (Registration No. 333- 32249).

**             Previouslyfiled as an exhibit to the Registration Statement on Form S-1,Amendment No. 2 (Registration No. 333- 32249).

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