AMARILLO MESQUITE GRILL, INC.
TABLE OF CONTENTS
Page
Independent Auditors' Reports F-2
Financial Statements:
Balance Sheets F-4
Statements of Operations F-6
Statements of Stockholders' Equity (Deficit) F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Amarillo Mesquite Grill, Inc.
We have audited the accompanying balance sheet of Amarillo Mesquite Grill,
Inc. as of January 31, 1999 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the financial position of Amarillo Mesquite
Grill, Inc. as of January 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ALLEN, GIBBS & HOULIK, L.C.
March 19, 1999
Wichita, Kansas
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Amarillo Mesquite Grill, Inc.:
We have audited the accompanying consolidated balance sheet of Amarillo
Mesquite Grill, Inc. as of January 25, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended January 25, 1998 and January 26, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Amarillo Mesquite
Grill, Inc. as of January 25, 1998, and the results of their operations and
their cash flows for the years ended January 25, 1998 and January 26, 1997, in
conformity with generally accepted accounting principles.
KPMG LLP
Wichita, Kansas
March 20, 1998
F-3
AMARILLO MESQUITE GRILL, INC.
BALANCE SHEETS
January 31, 1999 and January 25, 1998
ASSETS
1999 1998
CURRENT ASSETS
Cash $ 214,513 $ 563,836
Accounts receivable 16,912 49,472
Inventories 140,414 167,848
Prepaid expenses and other current assets 144,950 184,179
Total current assets 516,789 965,335
PROPERTY AND EQUIPMENT
Buildings 1,107,429 1,105,229
Leasehold improvements 2,559,658 2,258,368
Equipment and fixtures 4,719,724 4,210,270
Transportation equipment 18,000 18,000
Property under capital leases 1,234,626 1,234,626
9,639,437 8,826,493
Less accumulated depreciation and amortization 2,172,730 1,383,895
Total property and equipment 7,466,707 7,442,598
OTHER ASSETS
Cost in excess of net tangible assets of
purchased businesses, net of accumulated
amortization of $188,184 and $115,337 758,827 831,674
License fees -- 7,867
Deposits and other 39,187 33,867
Total other assets 798,014 873,408
Total assets $ 8,781,510 $ 9,281,341
F-4
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
CURRENT LIABILITIES
Current notes payable $ 550,000 $ --
Current portion of long-term debt 1,020,795 871,936
Current portion of obligations under
capital leases 40,383 36,336
Accounts payable 921,831 985,093
Construction costs payable -- 552,944
Accrued payroll 140,551 197,053
Other accrued liabilities 782,746 555,598
Total current liabilities 3,456,306 3,198,960
Long-term debt, less current portion 5,164,077 5,618,279
Obligations under capital leases, less
current portion 1,006,142 1,046,525
Advances from affiliate 81,587 --
Total liabilities 9,708,112 9,863,764
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value,
authorized 10,000,000 shares, none issued -- --
Common stock, $.01 par value, authorized
20,000,000 shares, issued 7,705,895 shares
at January 31, 1999 and 7,183,895 shares
at January 25, 1998 77,059 71,839
Additional paid-in capital 6,807,214 6,666,574
Accumulated deficit (7,540,875) (7,050,836)
Treasury stock, 60,000 shares of common
stock, at cost (270,000) (270,000)
Total stockholders' equity (deficit) (926,602) (582,423)
Total liabilities and stockholders'
equity (deficit) $ 8,781,510 $ 9,281,341
[FN]
The accompanying notes are an integral
part of these financial statements.
F-5
AMARILLO MESQUITE GRILL, INC.
STATEMENTS OF OPERATIONS
Years Ended January 31, 1999, January 25, 1998 and January 26, 1997
1999 1998 1997
Net sales $20,509,882 $16,022,471 $14,185,898
Costs and expenses:
Cost of sales 7,637,278 6,041,032 4,719,511
Restaurant operating expenses 10,067,446 8,550,466 8,428,820
General and administrative 1,613,525 1,685,994 1,081,231
Depreciation and amortization 894,297 655,437 604,788
Provision for restaurant
closings, dispositions
and conversions -- -- 518,321
Total costs and expenses 20,212,546 16,932,929 15,352,671
Operating income (loss) 297,336 (910,458) (1,166,773)
Other income (expense):
Interest expense (689,535) (511,531) (306,234)
Gain on sales of restaurants -- 249,536 --
Loss on sale of fixed assets -- -- (52,268)
Noncash expense from issuance
of stock options pursuant to
debt guarantees (97,840) (97,840) (61,000)
Total other expense (787,375) (359,835) (419,502)
Loss before income taxes (490,039) (1,270,293) (1,586,275)
Income taxes -- -- --
Net loss $ (490,039) $(1,270,293) $(1,586,275)
Net loss per common share -
basic and diluted $ (.06) $ (.18) $ (.24)
Average shares outstanding -
basic and diluted 7,545,395 7,103,919 6,701,458
[FN]
The accompanying notes are an integral
part of these financial statements.
F-6
AMARILLO MESQUITE GRILL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended January 31, 1999, January 25, 1998 and January 26, 1997
Additional
Common Paid-In Accumulated Treasury
Stock Capital Deficit Stock Total
Balance, January 28, 1996 $ 61,414 $6,131,984 $(4,194,268) $(270,000) $ 1,729,130
Issuance of 1,000,000 shares of
common stock in connection
with acquisition 10,000 290,000 -- -- 300,000
Contributed capital -- 9,000 -- -- 9,000
Noncash expense from issuance
of stock options pursuant to
debt guarantees -- 61,000 -- -- 61,000
Net loss -- -- (1,586,275) -- (1,586,275)
Balance, January 26, 1997 71,414 6,491,984 (5,780,543) (270,000) 512,855
Contributed capital -- 9,000 -- -- 9,000
Noncash expense from issuance
of stock options pursuant to
debt guarantees -- 97,840 -- -- 97,840
Issuance of 42,437 shares of
common stock pursuant to stock
option plans 425 67,750 -- -- 68,175
Net loss -- -- (1,270,293) -- (1,270,293)
Balance, January 25, 1998 71,839 6,666,574 (7,050,836) (270,000) (582,423)
Contributed capital -- 9,000 -- -- 9,000
Noncash expense from issuance
of stock options pursuant to
debt guarantees -- 97,840 -- -- 97,840
Issuance of 72,000 shares of
common stock pursuant to stock
option plans 720 38,300 -- -- 39,020
Acquisition of AMG, Inc. 4,500 (4,500) -- -- --
Net loss -- -- (490,039) -- (490,039)
Balance, January 31, 1999 $ 77,059 $6,807,214 $(7,540,875) $(270,000) $ (926,602)
[FN]
The accompanying notes are an integral
part of these financial statements.
F-7
AMARILLO MESQUITE GRILL, INC.
STATEMENTS OF CASH FLOWS
Years Ended January 31, 1999, January 25, 1998 and January 26, 1997
1999 1998 1997
Cash flows from operating activities:
Net loss $ (490,039) $(1,270,293) $(1,586,275)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 894,297 655,437 604,788
Loss on sale of equipment -- -- 52,268
Gain on sale of restaurants -- (249,536) --
Noncash provision for restaurant
closings, dispositions and
conversions -- -- 518,321
Noncash compensation expense 9,000 9,000 9,000
Noncash expense from issuance
of stockoptions pursuant to
debt guarantees 97,840 97,840 61,000
Increase (decrease) in cash,
net of effects of acquisitions
and dispositions:
Accounts receivable 32,560 (27,414) (9,052)
Inventories 27,434 (19,943) (26,727)
Prepaid expenses 39,229 (47,792) (27,655)
Accounts payable (63,262) 124,933 375,031
Accrued expenses 170,646 60,067 295,248
Other (5,320) 40,790 (71,950)
Net cash provided by
(used in) operating activities 712,385 (626,911) 193,997
Cash flows from investing activities:
Additions to property and equipment (1,390,636) (3,563,335) (696,168)
Business acquisition -- -- (1,500,000)
Proceeds from sale of property
and equipment -- -- 253,274
Proceeds from sale of restaurants -- 428,300 --
Additions to license fees -- -- (9,000)
Net cash used in investing
activities (1,390,636) (3,135,035) (1,951,894)
Cash flows from financing activities:
Issuance of common stock pursuant
to stock option plan 39,020 68,175 --
Proceeds from long-term debt 200,000 4,330,000 2,425,000
Proceeds from notes payable 550,000 -- --
Advances from affiliate 81,587 -- --
Repayment of long-term debt and
capital lease obligations (541,679) (400,678) (534,183)
Net cash provided by financing
activities 328,928 3,997,497 1,890,817
(Decrease) increase in cash (349,323) 235,551 132,920
Cash at beginning of year 563,836 328,285 195,365
Cash at end of year $ 214,513 $ 563,836 $ 328,285
Cash paid during the year for:
Interest $ 665,483 $ 515,527 $ 302,250
Income taxes -- -- --
[FN]
The accompanying notes are an integral
part of these financial statements.
F-8
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS
Amarillo Mesquite Grill, Inc. (the Company) owns and operates twelve
Amarillo Grill restaurants in Kansas, Oklahoma, Missouri and Arkansas
and one franchised Cotton Patch Cafe located in Oklahoma. Amarillo
Grill is a casual, full-service restaurant specializing in mesquite-
grilled steaks. Cotton Patch Cafe is a casual, full-service family-
style restaurant specializing in home-style cooking. The Cotton Patch
Cafe concept features a variety of full entree meals all prepared to
order.
During fiscal 1998, the Company changed the corporate name from
Maverick Restaurant Corporation to Amarillo Mesquite Grill, Inc.
Effective March 24, 1997, the Company sold to Red Apple Corporation all
of the assets of the eight Grandy's restaurants owned and operated by
the Company. Red Apple Corporation also assumed the obligations under
existing leases for each restaurant location. Red Apple Corporation is
owned by five individuals, three of which are officers and directors of
the Company and one of which is a significant stockholder of the
Company. The consideration received for these assets consisted of
$435,000 in cash. The Company recognized a gain of $249,536 on this
disposition in fiscal 1998.
On September 11, 1997, the Company and four of its stockholders formed
AMG, Inc., a Kansas corporation, to develop and own three Amarillo
Grill restaurants. AMG, Inc. was owned 48% by the Company and 52% by
the four stockholders as of January 25, 1998. The accounts and
operations of AMG, Inc. were consolidated with the Company as entities
under common control for the year ended January 25, 1998. The Company
included the amount of AMG, Inc.'s loss otherwise attributable to the
stockholders who own the 52% interest in AMG, Inc., of $166,652, in the
consolidated financial statements as of January 25, 1998 because such
loss exceeded the capital investment made by these stockholders and
they were under no obligation to provide additional capital to AMG, Inc.
Effective February 23, 1998, the Company purchased the remaining shares
of AMG, Inc. by issuing 450,000 shares of the Company's common stock in
a transaction accounted for as a purchase. The interest in AMG, Inc.
acquired by the Company had no book value after consideration of the
losses absorbed by the Company in fiscal 1998. Accordingly, this book
value purchase resulted in no additional assets or liabilities being
established, and stockholders' equity reflects the issuance of the
shares of common stock at par value, with an offsetting reduction to
additional paid-in capital. Effective September 21, 1998, AMG, Inc.
was merged into the Company and the separate existence of AMG, Inc.
ceased.
(Continued)
F-9
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - The Company's fiscal year is the fifty-two or fifty-three
week period ending on the last Sunday in January.
Cash - The Company maintains cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes they are
not exposed to any significant credit risk on cash and cash
equivalents.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment is recorded at cost.
Depreciation is computed by the straight-line method based on the
estimated useful life of the asset. Leasehold improvements are
amortized over the lesser of the useful life of the asset or the
remaining lease term. Maintenance and repairs are charged to expense
as incurred; renewals and betterments are capitalized. Estimated
useful lives are as follows:
Buildings 98 months - 20 years
Leasehold improvements 3 - 20 years
Equipment and fixtures 5 - 10 years
Autos 3 years
Property under capital leases 20 years
License Fees - A license fee for each franchised Grandy's or Cotton
Patch Cafe restaurant is payable on commencement of construction.
Amortization is provided, beginning when the restaurant is opened, on
the straight-line method over the initial term of the related
restaurant lease. In fiscal 1998, the Company reduced capitalized
license fees by $106,688 due to the sale of Grandy's restaurants (Note
1) and store closings. In fiscal 1997, the Company recorded a write-
down of $16,288 on license fees due to store closings (see Note 7).
(Continued)
F-10
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets - Cost in excess of net tangible assets of purchased
businesses is amortized on a straight-line basis over thirteen years
which approximates the remaining life of the building leases. The
Company periodically assesses the recoverability of intangible assets
by determining whether the amortization of the intangible asset balance
over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of
intangible assets will be impacted if estimated future operating cash
flows are not achieved. In fiscal 1997, the Company recorded a write-
down of $60,331 on intangible assets due to store closings (see
Note 7).
Pre-Opening Costs - Pre-opening costs are charged to operations as
incurred.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was $287,949, $366,097 and $509,583 during fiscal
years 1999, 1998 and 1997, respectively.
Income Taxes - Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards; and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax
laws and rates on the date of enactment.
Use of Estimates - The preparation of financial statements requires
management to make estimates and assumptions that affect: 1) the
reported amounts of assets and liabilities, 2) disclosures such as
contingencies, and 3) the reported amounts of revenues and expenses
included in such financial statements. Actual results could differ
from those estimates.
(Continued)
F-11
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Earnings Per Share - In 1997, the Financial Accounting Standards
Board issued SFAS No. 128, Earnings Per Share (Statement 128), which
replaces the prior accounting standard regarding computation and
presentation of earnings per share. Statement 128 requires a dual
presentation of basic earnings per share (based on the weighted average
number of common shares outstanding) and diluted earnings per share
which reflects the potential dilution that could occur if contracts to
issue securities (such as stock options) were exercised. The Company
adopted Statement 128 as of January 25, 1998 and, accordingly, earnings
per share data for all periods presented has been computed in
accordance with Statement 128. The adoption of Statement 128 had no
impact on the Company's previously reported loss per share data.
Options to purchase common stock were not included in the computation
of diluted earnings (loss) per common share because the Company had a
net loss available to common stockholders and the inclusion of such
options would be antidilutive. As of January 31, 1999, there are
1,289,453 options outstanding at a weighted average exercise price of
$2.48 which may become dilutive in the future. As of January 25, 1998,
there were 1,273,613 options outstanding at a weighted average exercise
price of $2.11. As of January 26, 1997, there were 1,305,805 options
outstanding at a weighted average price of $1.92.
Stock Awards - The Company accounts for its stock options in accordance
with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. As such, compensation
expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. In addition,
SFAS No. 123, Accounting for Stock-Based Compensation, requires that
pro forma net income and pro forma income per share disclosures for
employee stock option grants made in fiscal years that begin after
December 15, 1994 be provided as if the fair-value-based cost
measurement method defined in SFAS No. 123 had been applied.
The Company accounts for its stock options issued to persons other than
employees in accordance with the provisions of SFAS No. 123. As such,
expense is determined on the date of grant and is charged to operations
over the period the services are provided, based on the fair-value-
based cost measurement method defined in SFAS No. 123 (see Note 5).
(Continued)
F-12
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets - Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. See Note 7.
Reclassifications - Certain reclassifications have been made to the
1997 amounts to conform to the 1998 presentation, consisting primarily
of recruiting and training expenses of $110,000 for 1997, which have
been reclassified from restaurant operating expenses to general and
administrative expenses.
3. FINANCING ARRANGEMENTS
Advances from Affiliate - The Company has received an advance from Red
Apple Corporation which has a balance of $81,587 at January 31, 1999.
The note has an implied interest rate of 8% and is considered long-
term.
Current Notes Payable - As of January 31, 1999, current notes payable
consists of a 10% unsecured demand note in the amount of $250,000
payable to the President of the Company, which is due January 1, 2000,
and a 7.75% note payable to a bank in the amount of $300,000 which is
due June 18, 1999.
Long-Term Debt - As of January 31, 1999 and January 25, 1998, long-term
debt consisted of the following:
1999 1998
Note payable to bank, due in monthly
installments of $41,161, including interest,
at the Wall Street Journal prime rate (7.75%
at January 31, 1999) with final installments
due May 2003. $ 1,892,293 $ 2,000,000
Note payable to bank, due in monthly
installments of $30,871, including interest,
at the Wall Street Journal prime rate (7.75%
at January 31, 1999) with final installment
due May 2003. 1,421,730 1,500,000
(Continued)
F-13
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. FINANCING ARRANGEMENTS (CONTINUED)
1999 1998
Note payable to bank, due in monthly
installments of $32,929, including interest,
at the Wall Street Journal prime rate (7.75%
at January 31, 1999) with final installment
due May 2003. $ 1,513,834 $ 1,400,000
Note payable to bank, due in monthly
installments of $27,000, including interest,
at the Wall Street Journal prime rate (7.75%
at January 31, 1999) with final installment
due June 2003. 1,254,235 1,393,832
Note payable to bank, due in monthly
installments of $4,000, including interest,
at the Bank's prime rate plus 1% (9.5% at
January 31, 1999) with final installment due
November 2000. 78,263 116,068
Note payable to bank, due in monthly
installments of $5,043, including interest,
at the Wall Street Journal prime rate (7.75%
at January 31, 1999) with final installment
due June 1999. 24,517 80,315
6,184,872 6,490,215
Less current portion 1,020,795 871,936
Long-term debt, less current portion $ 5,164,077 $ 5,618,279
In October 1998, the Company negotiated with its bank to make interest-
only payments on the above notes through March 1999. Principal amounts
payable on the notes under these revised terms are as follows:
2000 $ 1,020,795
2001 1,265,370
2002 1,327,893
2003 1,434,538
2004 1,136,276
$ 6,184,872
The Company has entered into loan agreements with its bank which are
represented by individual promissory notes that provide specific terms.
Notes issued pursuant to these loan agreements are secured by
substantially all of the Company's assets. The loan agreements have
been personally guaranteed by certain stockholders, officers and
directors of the Company.
(Continued)
F-14
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. LEASE AGREEMENTS
The Company leases its restaurant facilities under agreements with
lease terms of 10 to 20 years generally with a provision for one or two
renewal options of five years each. These agreements provide for
minimum annual rentals and, in certain instances, contingent rentals
based on sales performance. The Company is obligated to pay real
estate taxes, insurance and maintenance.
The Company has also entered into a lease agreement for its Corporate
offices. The lease agreement has a term of five years with a provision
for two renewal options of three years each. The lease agreement
provides for minimum annual rentals and additional rentals based on
operating costs incurred by the lessor. The Company is obligated to
pay real estate taxes, insurance and maintenance.
Future minimum lease payments required for the years subsequent to
January 31, 1999, under operating leases are as follows:
2000 $ 932,148
2001 808,046
2002 760,395
2003 768,529
2004 724,519
Thereafter 3,907,881
$7,901,518
Minimum annual rentals under operating leases were $871,672, $688,784
and $928,051 for the fiscal years ended January 31, 1999, January 25,
1998, and January 26, 1997, respectively. In addition, the Company
made percentage rental payments in the amount of $46,769, $33,631 and
$28,748 for the fiscal years ended January 31, 1999, January 25, 1998,
and January 26, 1997, respectively.
(Continued)
F-15
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. LEASE AGREEMENTS (CONTINUED)
Property and accumulated depreciation accounts at January 31, 1999
include $1,234,626 and $380,824, respectively, for leases that have
been capitalized. Generally, the building portions of such leases are
capitalized whereas the land portion of such leases are considered
operating leases. The future minimum lease payment obligations under
capital leases for the years subsequent to January 31, 1999 are as
follows:
2000 $ 151,102
2001 151,102
2002 151,102
2003 151,102
2004 151,102
Thereafter 1,332,819
2,088,329
Less amount representing interest 1,041,804
Total obligations under
capital leases 1,046,525
Less current portion 40,383
Obligations under capital leases,
less current portion $1,006,142
The Company, as lessor, subleases two properties to outside third
parties. Property and accumulated depreciation accounts at January 31,
1999 include $210,308 and $66,648, respectively, related to these
properties.
Future minimum lease payments to be received subsequent to January 31,
1999 are as follows:
2000 $ 108,600
2001 113,600
2002 115,000
2003 116,000
2004 116,000
Thereafter 118,000
$ 687,200
(Continued)
F-16
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. STOCKHOLDERS' EQUITY
The Company's President worked on behalf of the Company during 1999,
1998 and 1997 without receiving compensation from the Company. The
Company determined that the President performed services valued at
$9,000 which was paid by a corporation owned by a major stockholder of
the Company. Accordingly, such amount has been recorded as
compensation expense with a corresponding credit to additional paid-in
capital in the accompanying consolidated financial statements.
On June 17, 1996, the Company entered into Stock Option Agreements with
a director of the Company and a principal stockholder of the Company,
whereby it agreed to grant stock options as consideration for the
guarantee of the note payable to bank of $1,589,296 at January 26, 1997
by such individuals for the benefit of the Company. These two
individuals were each granted options to purchase 250,000 shares of the
Company's common stock. The exercise price of the options granted
pursuant to this agreement is $2.19 per share, and all options granted
are exercisable immediately and expire seven years from the date of
grant. Total noncash debt guarantee expense aggregating $684,875 is
based on the fair value of the stock options granted pursuant to the
Stock Option Agreements which is being recognized as expense over the
period of time the related debt is outstanding. The amount of noncash
expense recorded during the years ended January 31, 1999, January 25,
1998 and January 26, 1997 was $97,840, $97,840 and $61,000,
respectively.
The per share weighted average fair value of stock options granted
under the Stock Option Agreements during fiscal 1997 was $1.37 on the
date of grant using the Black Scholes option-pricing model and the
following weighted average assumptions: expected dividend yield 0%,
expected volatility of 145.0%, risk-free interest rate of 6.72% and an
expected life of five years.
At January 31, 1999, the weighted average remaining contractual life of
the 500,000 outstanding options under the Stock Option Agreements was
4.38 years.
(Continued)
F-17
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In March 1984, the Company adopted an Employee Incentive Stock Option
Plan (the 1984 Plan) for a ten-year term to grant options for the
purchase of up to 475,000 shares of common stock. The 1984 Plan
provides that the Company may grant options to certain employees at the
fair market value of the stock at the grant date. One-half of the
option is exercisable six months after the grant date and one-half
eighteen months after the grant date. Following is a summary of the
activity in the 1984 Plan for the three years ended January 31, 1999:
Per Share
Number Exercise Price
of Weighted
Shares Range Average
Balance, January 28, 1996 186,000 $ .29 - 1.75 $ .63
Canceled (35,000) 1.75 1.75
Balance, January 26, 1997 151,000 .29 - .47 .37
Canceled (2,500) .29 - .47 .33
Exercised (2,500) .29 .29
Balance, January 25, 1998 146,000 .29 - .47 .38
Exercised (69,000) .47 .47
Balance, January 31, 1999 77,000 $ .29 $ .29
Exercisable at January 26, 1997 151,000 $ .29 - .47 $ .37
Exercisable at January 25, 1998 146,000 $ .29 - .47 $ .38
Exercisable at January 31, 1999 77,000 $ .29 $ .29
At January 31, 1999, there were no additional shares available for
grant under the 1984 plan and the weighted average remaining
contractual life of outstanding options was .08 years.
(Continued)
F-18
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
On July 25, 1994, the Company adopted an Employee Incentive Stock
Option Plan (the 1994 Plan) for a ten-year term to grant options for
the purchase of up to 600,000 shares of common stock. The 1994 Plan
provides that the Company may grant options to certain employees at the
fair market value at the grant date. The vesting period is at the sole
discretion of the Board of Directors. Generally, 10% of the option can
be exercised after one year, an additional 15% after the second year
and 25% in each of the next three years. Following is a summary of the
activity in the 1994 Plan for the three years ended January 31, 1999:
Per Share
Number Exercise Price
of Weighted
Shares Range Average
Balance, January 28, 1996 146,704 $ .84 - 2.88 $ 1.26
Granted 436,776 .50 - 2.19 1.90
Canceled (88,675) .84 - 1.81 1.13
Balance, January 26, 1997 494,805 .50 - 2.88 1.85
Canceled (135,505) .50 - 2.88 1.12
Exercised (39,937) .50 - 2.88 1.69
Balance, January 25, 1998 319,363 1.81 - 2.19 2.17
Granted 189,740 1.87 - 4.25 3.77
Canceled (25,900) 4.06 - 4.25 4.17
Exercised (2,500) 2.19 2.19
Balance, January 31, 1999 480,703 $ 1.81 - 4.25 $ 2.70
Exercisable at January 26, 1997 8,490 $ .84 - 2.88 $ 1.74
Exercisable at January 25, 1998 31,936 $ 1.81 - 2.19 $ 2.17
Exercisable at January 31, 1999 306,504 $ 1.81 - 2.19 $ 2.19
At January 31, 1999, there were 119,297 additional shares available for
grant under the 1994 Plan and the weighted average remaining
contractual life of outstanding options was 8.12 years.
(Continued)
F-19
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
On January 1,1997, the Company adopted an Employee Incentive Stock
Option Plan (the 1997 Plan) for a ten-year term to grant options for
the purchase of up to 700,000 shares of stock. The 1997 Plan provides
that the Company may grant options to certain employees at the fair
market value at the grant date. The vesting period is at the sole
discretion of the Board of Directors. Generally, 10% of the option can
be exercised after one year, an additional 15% after the second year
and 25% in each of the next three years. Following is a summary of the
activity in the 1997 Plan for the three years ended January 31, 1999:
Per Share
Number Exercise Price
of Weighted
Shares Range Average
Balance, January 28, 1996 -- $ -- $ --
Granted 160,000 2.75 2.75
Balance, January 26, 1997 160,000 2.75 2.75
Granted 253,250 2.75 - 4.13 3.70
Canceled (105,000) 2.75 - 4.13 3.00
Balance, January 25, 1998 308,250 2.75 - 4.13 3.44
Granted 50,000 2.63 - 3.94 3.30
Canceled (126,000) 2.75 - 4.13 3.41
Exercised (500) 2.75 2.75
Balance, January 31, 1999 231,750 $ 2.63 - 4.13 $ 3.43
Exercisable at January 26, 1997 -- $ -- $ --
Exercisable at January 25, 1998 8,500 $ 2.75 $ 2.75
Exercisable at January 31, 1999 41,625 $ 2.75 - 4.13 $ 3.48
At January 31, 1999, there were 468,250 additional shares available for
grant under the 1997 plan and the weighted average remaining
contractual life of outstanding options was 8.51 years.
(Continued)
F-20
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The per share weighted average fair value of stock options granted
under the 1994 and 1997 Plans during fiscal 1999, 1998 and 1997 was
$3.09, $3.29, and $1.94, respectively, on the date of grant using the
Black Scholes option-pricing model using the following weighted average
assumptions:
1999 1998 1997
Expected dividend yield 0% 0% 0%
Volatility factor 119.77% 136.0% 145.0%
Risk free interest rate 5.33% 6.15% 6.47%
Expected life 5 years 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its stock
options issued to employees and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements. Had
the Company determined compensation cost for the 1994 Plan and 1997
Plan based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's fiscal 1999, 1998 and 1997 pro forma
net loss and pro forma net loss per common share would have been
adjusted to the pro forma amounts indicated below.
1999 1998 1997
Net loss As reported $ (490,039) $(1,270,293) $(1,586,275)
Pro forma for SFAS No. 123 (917,769) (1,547,009) (1,681,310)
Loss per
share As reported $ (.06) $ (.18) $ (.24)
Pro forma for SFAS No. 123 (.12) (.22) (.25)
The above pro forma disclosure reflects only options granted during
fiscal years 1999, 1998 and 1997. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period of five
years and compensation cost for options granted prior to February 1,
1995 is not considered.
(Continued)
F-21
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES
As of January 31, 1999, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$7,171,000 which, if not used, will expire as follows:
Operating
Loss
Expires in fiscal year ending Carryforward
2001 $ 554,000
2002 984,000
2003 1,193,000
2004 434,000
2005 134,000
2006 6,000
2008 180,000
2009 45,000
2011 114,000
2012 1,524,000
2013 1,385,000
2014 618,000
Total $ 7,171,000
The Company also has approximately $81,000 of investment tax credit
carryforwards available and, if not used, $72,000 will expire in fiscal
2000 and $9,000 will expire in fiscal 2001.
The total provision for income taxes varied from the Federal statutory
rate for the following reasons:
1999 1998 1997
Computed "expected" tax benefit (34.0)% (34.0)% (34.0)%
Increase in income taxes resulting
from:
Losses producing no financial
statement tax benefit 34.0% 34.0% 34.0%
--% --% --%
(Continued)
F-22
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 31, 1999 and January 25, 1998 are presented below:
1999 1998
Deferred tax assets:
Net operating loss carryforwards $ 3,010,234 $ 2,460,880
Investment tax credits 81,700 108,000
Capital leases 73,235 62,825
Debt guarantee expense 97,538 37,179
Other 20,173 14,392
Total gross deferred tax assets 3,282,880 2,683,276
Less valuation allowance (3,021,540) (2,518,904)
Net deferred tax assets 261,340 164,372
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation (261,340) (164,372)
Net deferred tax assets (liabilities) $ -- $ --
7. PROVISION FOR RESTAURANT CLOSINGS, DISPOSITIONS AND CONVERSIONS
During fiscal 1999, the Company closed one and converted another
restaurant to an Amarillo Grill. There were no related conversion or
closure costs recorded for these restaurants. Subsequent to January 31,
1999, the Company closed its last Cotton Patch Cafe. No closure
costs were recorded as the facility will be converted or subleased.
During fiscal year 1998, the Company converted three restaurants to
Amarillo Grills. Conversion costs were provided for during fiscal year
1997 at the time decisions were made.
During fiscal year 1997, the Company sold, converted or planned the
closing of five restaurants. Provision for restaurant closings,
dispositions and conversions in the accompanying 1997 statement of
operations of $518,321 relates principally to the write-off of property
and equipment, license fees and intangible assets.
(Continued)
F-23
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined the fair value of its financial instruments
in accordance with Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The carrying
amounts of variable rate debt instruments approximate their fair value
because the interest rates on these instruments change with market
interest rates. For all other financial instruments including cash,
accounts receivable, accounts payable and other accrued liabilities,
the carrying amounts approximate fair value because of the short
maturity of these instruments.
9. STATEMENTS OF CASH FLOWS
Noncash investing and financing activities included in the following:
1999 1998 1997
Increase in construction costs payable $ -- $373,705 $ 90,539
Addition to capital leases -- -- 385,804
Issuance of common stock in
business acquisition -- -- 300,000
10. BUSINESS ACQUISITION
Effective June 17, 1996, the company purchased substantially all of the
operating assets and business operations of Homestead West, Inc. and
Amagril, Inc. for an initial cash payment of $1,500,000. In addition,
1,000,000 shares of the Company's $.01 par value common stock were
issued at an estimated fair value of $.30 per share. The acquisition
was accounted for by the purchase method of accounting and,
accordingly, the operations of Homestead West, Inc. and Amagril, Inc.
have been included in the accompanying statements of operations
subsequent to June 17, 1996. The initial purchase price was allocated
to the assets acquired based on their estimated fair values at the date
of acquisition. Cost in excess of fair value of net tangible assets of
purchased businesses arising from the acquisition amounted to $947,011.
(Continued)
F-24
AMARILLO MESQUITE GRILL, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. BUSINESS ACQUISITION (CONTINUED)
The following table summarizes the pro forma results of operations for
the fifty-two weeks ended January 26, 1997 as if the acquisition had
been consummated at the beginning of fiscal 1997. The pro forma
results do not necessarily reflect what would have occurred if the
acquisition had been made at the beginning of the respective periods or
the results that may occur in the future.
1997
Net sales $ 16,257,436
Net earnings (loss) ( 1,470,582)
Net earnings (loss) per common
share - basic and diluted (.21)
In connection with the acquisition, the Company entered into an Option
to Purchase Agreement with the seller which grants the seller the
option to purchase the assets acquired after four years from the date
of the acquisition. The option is exercisable for a 90-day period and
the purchase price will be equal to the price paid by the Company plus
all amounts expended by the Company for capital improvements on the
restaurants during the four-year period.
11. LIQUIDITY
At January 31, 1999, the Company had current liabilities in excess of
current assets of $2,939,517 and a stockholders' deficit of $926,602.
The Company reported a net loss of $490,039 and cash provided by
operating activities of $712,385 for fiscal 1999.
Management believes the Amarillo Grill Restaurants opened in fiscal
1998 and 1999 will generate sufficiently increased cash flow from
operations which will enable the Company to meet its financial
obligations in fiscal 2000 as they come due.
12. SALE OF GRANDY'S RESTAURANTS
As noted in Note 1, the Company sold all of the assets of the eight
Grandy's restaurants owned and operated by the Company.
The following presents the net sales and operating income, before
allocation of corporate overhead, of the above restaurants which are
included in the accompanying statements of operations for the fiscal
years ended January 25, 1998 and January 26, 1997.
1998 1997
Net sales $ 803,734 $ 5,102,205
Operating income 47,227 36,013
F-25