UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997 .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-27258
SAGEBRUSH, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1875714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3238 West Main Street, Claremont, N.C. 28610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 459-0821
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X , No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 5, 1997
Common Stock (no par value) 6,300,000
PAGE 1 of 11 PAGES
SAGEBRUSH, INC.
- TABLE OF CONTENTS -
PART I Financial Information: Page No.
Item 1: Financial Statements
Consolidated Balance Sheets as of March 28, 1997
and January 3, 1997. 3
Consolidated Statements of Current and Retained Earnings for
the twelve-weeks ended March 28, 1997 and March 22, 1996. 4
Consolidated Statements of Cash Flows for the twelve weeks
ended March 28, 1997 and March 22, 1996. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART IIOther Information
Item 6. Exhibits 10
Signatures 11
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, 1997 and January 3, 1997
March 28, January 3,
1997 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,894,147 $ 1,570,515
Related party receivables 32,156 24,175
Other receivables 197,046 250,761
Inventories 493,065 495,848
Pre-opening costs, net 581,805 509,210
Prepaid and other current assets 56,267 80,613
Total current assets 3,254,486 2,931,122
Property and equipment, net 15,447,262 14,262,732
Other assets 10,819 11,293
Total assets $ 18,712,567 $ 17,205,147
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 460,000 $ 460,000
Current portion of long-term debt 59,666 -
Accounts payable 1,555,376 1,688,867
Accrued salaries 569,191 283,467
Taxes other than income 323,609 313,010
Other accrued liabilities 383,118 462,807
Total current liabilities 3,350,960 3,208,151
Long-term debt 781,756 -
Deferred income taxes 220,971 208,471
Total liabilities 4,353,687 3,416,622
Shareholders' equity:
Common stock 6,300,000 6,300,000
Additional paid-in capital 7,369,068 7,369,068
Retained earnings 689,812 119,457
Total shareholders' equity 14,358,880 13,788,525
Total liabilities and shareholders' equity $ 18,712,567 $ 17,205,147
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CURRENT AND RETAINED EARNINGS
Twelve Weeks ended March 28, 1997 and March 22, 1996 (Unaudited)
Twelve Weeks Ended
March 28, 1997 March 22, 1996
REVENUES - restaurant sales $ 10,615,560 $ 7,832,430
OPERATING COSTS AND EXPENSES
Cost of restaurant sales 3,956,666 2,806,794
Labor costs 2,846,395 2,112,738
Other operating expenses 1,565,585 1,238,529
General and administrative expenses 827,562 665,808
Depreciation 300,325 198,129
Amortization (principally of pre-opening costs) 176,891 52,454
Total operating costs and expenses 9,673,424 7,074,452
OPERATING INCOME 942,136 757,978
OTHER INCOME 23,823 19,000
INTEREST INCOME 782 33,095
INTEREST EXPENSE (26,652) (36,765)
INCOME BEFORE INCOME TAXES 940,089 773,308
INCOME TAX PROVISION (369,734) (293,857)
NET INCOME $ 570,355 $ 479,451
NET INCOME PER SHARE $ 0.09 $ 0.08
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,300,000 6,251,190
RETAINED EARNINGS
Balance at beginning of period $ 119,457 $ (1,451,587)
Net income 570,355 479,451
S corporation distribution and dividends paid - (888,188)
Balance at the end of period $ 689,812 $ (1,860,324)
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Weeks ended March 28, 1997 and March 22, 1996 (Unaudited)
Twelve Weeks Ended
March 28, March 22,
1997 1996
Cash Flows from Operating Activities:
Net income $ 570,355 $ 479,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 300,325 198,129
Deferred tax 12,500 -
Amortization (principally of pre-opening costs) 176,891 52,454
Changes in operating assets and liabilities
providing (using) cash
Receivables 45,734 (31,677)
Inventories 2,783 (9,875)
Pre-opening costs (249,486) (95,605)
Prepaid and other assets 24,819 (57,596)
Trade accounts payable and other accrued liabilities 83,143 15,171
Total adjustments 396,709 71,001
Net cash provided by operating activities 967,064 550,452
Cash Flows from Investing Activities:
Capital expenditures (1,484,854) (879,533)
Short-term investments - (1,900,000)
Net cash used in investing activities (1,484,854) (2,779,533)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 850,000 -
Reduction of debt (8,578) (2,187,909)
Purchase of assets related to reorganization - (1,652,500)
Cash paid to shareholders related to reorganization - (3,500,000)
S Corporation distributions and dividends paid - (888,188)
Proceeds from issuance of common stock - 11,411,819
Net cash provided by financing activities 841,422 3,183,222
Net increase in cash and cash equivalents 323,632 954,141
Cash and cash equivalents at beginning of period 1,570,515 2,145,809
Cash and cash equivalents at end of period $ 1,894,147 $ 3,099,950
Supplemental disclosure of cash flow information:
Cash paid for interest $ 26,652 $ 36,765
Cash paid for income taxes $ 17,598 $ 2,418
See accompanying notes to consolidated financial statements.
Sagebrush, Inc. and Affiliated Companies
Notes to Consolidated Statements
Note 1: The consolidated financial statements as of January 3, 1997 and
March 28, 1997 and for the twelve-week periods ended March 28, 1997
and March 22, 1996 include the accounts of Sagebrush, Inc. and its
wholly-owned subsidiaries ("Sagebrush"). All intercompany accounts
and transactions have been eliminated in consolidation and combination.
Note 2: In the opinion of management, the accompanying financial statements
(unaudited) contain all adjustments necessary to present fairly the
financial position as of March 28, 1997, and the results of operations
and cash flows for the twelve-week periods ended March 28, 1997 and
March 22, 1996.
Note 3: The results of operations for the twelve-week periods ended
March 28, 1997 and March 22, 1996 are not necessarily indicative of
results to be expected for the full year. Quarterly results are
presented based on 12, 12, 12 and 16 or 17 week quarters.
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion and analysis should be read in conjunction with the
financial statements and the notes thereto included elsewhere in this Form
10-Q and the Company's Annual Report on Form 10-K for the year ended
January 3, 1997.
RESULTS OF OPERATIONS
Quarterly results are presented based on 12, 12, 12 and 16 or 17 week
quarters. The following table sets forth for the periods indicated the
percentages of revenues - restaurant sales represented by items in the
Company's consolidated statements of income.
Twelve Weeks Ended
March 28, March 22,
1997 1996
Revenues - restaurant sales 100.0% 100.0%
Operating costs and expenses:
Cost of restaurant sales 37.3 35.8
Labor costs 26.8 27.0
Other operating expenses 14.7 15.8
General and administrative expenses 7.8 8.5
Depreciation 2.8 2.5
Amortization (principally of pre-opening costs) 1.7 .7
Total operating costs and expenses 91.1 90.3
Operating income 8.9 9.7
Other income (received from related parties) .2 .3
Interest income .0 .4
Interest expense (.2) (.5)
Income before income taxes 8.9 9.9
Income tax provision (3.4) (3.8)
Net income 5.5% 6.1%
Twelve weeks ended March 28, 1997 compared to twelve weeks ended March 22, 1996
Revenues. Restaurant sales increased 35.5% to $10.6 million for the
first quarter of 1997 as compared to $7.8 million for the first quarter of
1996. The increase in sales was primarily the result of an increase in the
number of restaurants operated at the end of the first quarter from 23 to
28 and a 1.5% increase in same store sales (stores open greater than
eighteen months during the first quarter of fiscal 1997).
Cost of restaurant sales. Cost of restaurant sales increased $1,150,000,
or 41.0%, from $2.8 million to $4.0 million and as a percentage of revenues
increased slightly from 35.8% to 37.3%. This increase is due in part to
slightly higher meat and dairy prices and operational changes implemented
to give the Company's customers a higher quality product.
Labor costs. Labor costs increased $734,000, or 34.7%, from $2.1 million
to $2.8 million, principally due to the increase in the number of
restaurants. As a percentage of revenues, labor costs decreased from 27.0%
to 26.8%.
Other operating expenses. Other operating expenses increased $327,000,
or 26.4%, from $1.2 million to $1.6 million, and as a percentage of
revenues decreased from 15.8% to 14.7%.
General and administrative expenses. General and administrative expenses
increased $162,000, or 24.3%, from $666,000 to $828,000, and as a
percentage of revenues decreased from 8.5% to 7.8%.
Depreciation. Depreciation increased $102,000, or 51.6%, from $198,000
to $300,000, and as a percentage of revenues increased from 2.5% to 2.8%
primarily because of increased investment in property and equipment due to
the Company's opening of new restaurants.
Amortization. Amortization of pre-opening costs increased $124,000, or
237.2%, from $52,000 to $177,000, and as a percentage of revenues increased
from .7% to 1.7%. The increase is primarily due to the expansion program
begun after the initial public offering in January 1996.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, remained constant as
a percentage of restaurant sales.
Interest income. The Company had interest income during the first
quarter of 1996 as a result of temporary investment of a portion of the
proceeds from the Company's initial public offering which was completed in
January 1996.
Income tax provision. The Company's effective tax rate for the first
quarter of 1997 was 39.3%. Prior to January 1996, most of the corporations
comprising the Company were S corporations for federal and state income tax
purposes, with taxable income allocated to shareholders rather than taxed
at the corporate level. All applicable S Corporation elections were
terminated in January 1996 in connection with the reorganization effected
in connection with the Company's initial public offering.
Net income. Net income was $570,000 for the first quarter of 1997, an
increase of 19% over net income of $479,000 for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1997, the Company had approximately $1.9 million in cash and
short term investments, $841,000 in long-term debt and $14.4 million in
shareholders' equity. The Company's long-term debt consists of a secured
term loan with a commercial bank. This loan bears interest at the bank's
prime rate and matures February 2007. At March 28, 1997, the Company had a
revolving credit facility with a commercial bank that provided for
borrowings up to $3.0 million. This facility expires on January 31, 1998
and advances under the line of credit are unsecured, limited to short-term
working capital purposes and bear interest at the bank's prime rate. At
March 28, 1997, $460,000 was outstanding under the line, which was also the
maximum amount outstanding during the quarter.
The Company primarily requires capital for the development and opening of
new restaurants. Because most of the Company's restaurants have been
established by converting existing restaurant facilities to the Sagebrush
concept, the Company's capital expenditures principally have been for
leasehold improvements, machinery, equipment, furniture and fixtures. The
Company's substantial growth has not historically required significant
additional working capital. Sales are predominantly cash, and the business
does not require the maintenance of significant receivables or inventories.
In addition, it is common to receive trade credit on the purchase of food,
beverage and supplies, thereby reducing the need for incremental working
capital to support sales increases.
The Company has historically established most of its restaurants by
leasing and renovating existing facilities to the Sagebrush concept. The
Company anticipates, however, that a higher proportion of new restaurants
in the future will be acquired by purchasing land and building a new
restaurant due to the increased difficulty of finding suitable buildings in
desirable locations that can be leased and renovated. The Company's cost of
opening a restaurant when the Company leases and renovates an existing
building is approximately $500,000, including the costs of renovating the
facility, purchasing necessary equipment and training personnel. The
Company's cost of building a restaurant on land the Company purchases
ranges from $1.2 million to $1.6 million, with the largest variance related
to the cost of land. Assuming that the Company opens a total of 8
restaurants in 1997 (and that five or six of such restaurants involve
purchasing land and building a new facility and two or three are
established by leasing and renovating an existing facility), management
expects capital expenditures to range from $9.0 million to $11.0 million.
Management believes that available cash, cash generated by operations and
available borrowings under the Company's $3.0 million line of credit
together with the real estate secured borrowings described below and other
long-term indebtedness will be adequate to fund the Company's working
capital and capital expenditure requirements through the end of 1997.
Management expects to finance part of the cost of establishing new
restaurants opened on real property purchased by the Company by borrowings
from commercial banks secured by such real property. In the event the
Company's operating results fall short of its projections or the borrowings
described above are insufficient to fund its capital expenditure
requirements, the Company could be required to seek additional financing.
For any such additional financing, the Company will consider borrowings
from commercial lenders and other sources of debt financing as well as
equity financing. No assurance can be given, however, that the Company will
be able to obtain any such additional financing when needed upon terms
satisfactory to the Company.
The Company currently plans to open approximately eight restaurants in
1997. One of the eight restaurants was opened during the first quarter on
January 13, 1997 in Mount Airy, North Carolina. A second restaurant was
opened subsequent to the end of the quarter on April 22, 1997 in Salisbury,
North Carolina. The Company now operates 29 restaurants in North Carolina,
South Carolina, Tennessee and Virginia. Construction has started on
restaurants in Lenoir, North Carolina, and Roanoke, Virginia.
Inflation
The impact of inflation on food, labor, equipment, land and construction
costs could affect the Company's operations. A majority of the Company's
employees are paid hourly rates related to federal and state minimum wage
laws. In addition, most of the Company's leases require the Company to pay
taxes, insurance, maintenance, repairs and utility costs, and these costs
are subject to inflationary pressures. The Company may attempt to offset
the effect of inflation through periodic menu price increases, economies of
scale in purchasing and cost controls and efficiencies at existing
restaurants. Management believes that inflation has had no significant
impact on costs during the first quarter of 1997, primarily because the
largest single item of expense, food costs, has remained relatively stable
during this period. Additionally, the increase in the minimum wage has had
little effect since the rate paid to servers, the largest group of the
Company's employees subject to minimum wage, was unchanged.
Cautionary Statement as to Forward Looking Information
Statements contained in this report as to the Company's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts
and other projections of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for the
future operations are "forward looking" statements, and are being provided
in reliance upon the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Important factors that could cause actual
results or events to differ materially from those projected, estimated,
assumed or anticipated in any such forward looking statements include,
without limitation: the significant effect on the Company's results of
operations that one or several of its restaurants could have were it or
they to be unsuccessful; adverse changes in economic, weather or other
conditions in the relatively small geographic area in which the Company's
restaurants are located; risks associated with the Company's expansion
strategy, including those associated with locating appropriate restaurant
sites, establishing restaurants at those locations, hiring and training
sufficiently skilled management and other personnel, securing required
governmental approvals and permits, and obtaining adequate financing;
increased competition; adverse changes in consumer preferences for, or
adverse publicity associated with, beef; increased food costs; adverse
changes in the availability of supplies; adverse changes in governmental
regulation relating to the Company's business; the loss or suspension of
any of the Company's licenses or permits; the loss of the services of any
of the Company's key management or other personnel; and other factors that
generally effect the Company's operations and the restaurant industry in
general.
Part I - Item 3. Qualitative and Quantitative Disclosure About Market Risk
Not applicable.
Part II - Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10.8 Noted dated February 4, 1997 between Peoples Bank and
the Company.
Exhibit 27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SAGEBRUSH, INC.
May 9, 1997 \s\ Noland M. Mewborn
Date By: Noland M. Mewborn,
Vice President, Treasurer and CFO
(Principal Financial Officer)