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 June 20, 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 July 25, 1997
Common Stock (no par value) 5,975,000
PAGE 1 of 13 PAGES
SAGEBRUSH, INC.
- TABLE OF CONTENTS -
PART I Financial Information: Page No.
Item 1: Financial Statements
Consolidated Balance Sheets as of June 20, 1997
and January 3, 1997. 3
Consolidated Statements of Income for the twelve weeks and
twenty-four weeks ended June 20, 1997 and June 14, 1996. 4
Consolidated Statements of Cash Flows for the twenty-four weeks
ended June 20, 1997 and June 14, 1996. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 11
PART IIOther Information
Item 4. Submission of Matters to a Vote on Security Holders 12
Item 6. Exhibits 12
Signatures 13
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 20, 1997 and January 3, 1997
June 20, January 3,
1997 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,255,787 $ 1,570,515
Related party receivables 22,622 24,175
Other receivables 183,370 250,761
Inventories 583,564 495,848
Pre-opening costs, net 587,870 509,210
Prepaid and other current assets 74,070 80,613
Total current assets 2,707,284 2,931,122
Property and equipment, net 16,868,938 14,262,732
Other assets 10,510 11,293
Total assets $ 19,586,732 $ 17,205,147
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,593,750 $ 460,000
Current portion of long-term debt 118,328 -
Accounts payable 1,935,893 1,688,867
Accrued salaries 641,8670 283,467
Taxes other than income 381,180 313,010
Other accrued liabilities 56,723 462,807
Total current liabilities 4,609,414 3,208,151
Long-term debt 1,563,881 -
Deferred income taxes 233,471 208,471
Total liabilities 6,525,093 3,416,622
Shareholders' equity:
Common stock 5,925,000 6,300,000
Additional paid-in capital 5,760,318 7,369,068
Retained earnings 1,376,321 119,457
Total shareholders' equity 13,061,639 13,788,525
Total liabilities and shareholders' equity $ 19,586,732 $ 17,205,147
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CURRENT AND RETAINED EARNINGS
Twelve Weeks ended June 20, 1997 and June 14, 1996 (Unaudited)
12 Weeks Ended 24 Weeks Ended
June 20,1997 June 14,1996 June 20,1997 June 14,1996
REVENUES - restaurant sales $11,554,633 $ 8,931,698 $22,170,193 $16,764,127
OPERATING COSTS AND EXPENSES
Cost of restaurant sales 4,288,402 3,225,383 8,245,068 6,032,177
Labor costs 3,211,367 2,385,697 6,057,763 4,498,435
Other operating expenses 1,609,592 1,362,218 3,175,177 2,600,747
General and administrative expenses 817,865 752,510 1,645,426 1,418,317
Depreciation 300,876 210,049 601,201 408,178
Amortization (principally of pre-opening costs) 170,093 62,654 346,984 115,108
Total operating costs and expenses 10,395,195 7,998,511 20,071,619 15,072,962
OPERATING INCOME 1,156,438 933,187 2,098,574 1,691,165
OTHER INCOME 13,475 23,350 37,298 42,350
INTEREST INCOME 301 42,171 1,083 75,266
INTEREST EXPENSE (42,780) (384) (69,432) (37,149)
INCOME BEFORE INCOME TAXES 1,127,434 998,324 2,067,523 1,771,632
INCOME TAX PROVISION (440,925) (379,363) (810,659) (673,220)
NET INCOME $ 686,509 $ 618,961 $ 1,256,864 $ 1,098,412
NET INCOME PER SHARE $ 0.11 $ 0.10 $ 0.20 $ 0.18
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,134,821 6,300,000 6,217,411 6,275,594
RETAINED EARNINGS
Balance at beginning of period $ 689,812 $(1,860,324) 119,457 $(1,451,587)
Net income 686,509 618,961 1,256,864 1,098,412
S corporation distribution and
dividends paid - - - (888,188)
Balance at the end of period $ 1,376,321 $(1,241,363) $ 1,376,321 $(1,241,363)
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four Weeks ended June 20, 1997 and June 14, 1996 (Unaudited)
Twenty-four Weeks Ended
June 20, June 14,
1997 1996
Cash Flows from Operating Activities:
Net income $ 1,256,864 $ 1,098,412
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 601,201 408,178
Deferred tax 25,000 -
Amortization (principally of pre-opening costs) 346,984 115,109
Changes in operating assets and liabilities
providing (using) cash
Receivables 68,943 (53,032)
Inventories (87,716) (9,416)
Pre-opening costs (425,644) (190,750)
Prepaid and other assets 7,325 (74,141)
Trade accounts payable and other accrued liabilities 267,513 (176,531)
Total adjustments 803,606 19,417
Net cash provided by operating activities 2,060,470 1,117,829
Cash Flows from Investing Activities:
Capital expenditures (3,207,407) (2,232,481)
Short-term investments - (1,900,000)
Net cash used in investing activities (3,207,407) (2,779,533)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 1,700,000 -
Proceeds from bank debt 1,133,750 -
Reduction of debt (17,791) (2,187,909)
Repurchase of common stock (1,983,750) -
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 - 11,394,391
Net cash provided by financing activities 832,209 3,165,794
Net increase in cash and cash equivalents (314,728) 151,142
Cash and cash equivalents at beginning of period 1,570,515 2,145,809
Cash and cash equivalents at end of period $ 1,255,787 $ 2,296,951
Supplemental disclosure of cash flow information:
Cash paid for interest $ 69,432 $ 36,765
Cash paid for income taxes $ 733,431 $ 313,742
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
June 20, 1997 and for the twelve-week and twenty-four-week periods
ended June 20, 1997 and June 14, 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 June 20, 1997, and the results
of operations for the twelve-week and twenty-four-week periods ended
June 20, 1997 and June 14, 1996 and cash flows for the twenty-four-
week periods ended June 20, 1997 and June 14, 1996.
Note 3: The results of operations for the twelve-week and twenty-four-
week periods ended June 20, 1997 and June 14, 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.
Note 4: On May 12, 1997, the Company repurchased 375,000 shares of its
Common Stock in a negotiated block purchase from an institutional
investor at a price of $5.25 per share.
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 Twenty-four Weeks Ended
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
Revenues - restaurant sales 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of restaurant sales 37.1 36.1 37.2 36.0
Labor costs 27.8 26.7 27.3 26.8
Other operating expenses 13.9 15.3 14.3 15.5
General and administrative expenses 7.1 8.4 7.4 8.5
Depreciation 2.6 2.4 2.7 2.4
Amortization (principally of pre-opening costs) 1.5 .7 1.6 .7
Total operating costs and expenses 90.0 89.6 90.5 89.9
Operating income 10.0 10.4 9.5 10.1
Other income (received from related parties) .1 .3 .1 .3
Interest income .0 .5 .0 .4
Interest expense (.3) (.0) (.3) (.2)
Income before income taxes 9.8 11.2 9.3 10.6
Income tax provision (3.9) (4.3) (3.6) (4.0)
Net income 5.9% 6.9% 5.7% 6.6%
Twelve weeks ended June 20, 1997 compared to twelve weeks ended June 14, 1996
Revenues. Restaurant sales increased 29.4% to $11.6 million for the
second quarter of 1997 as compared to $8.9 million for the second 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 second quarter from 24
to 30 and a .14% increase in same store sales (stores open greater than
eighteen months during the second quarter of fiscal 1997).
Cost of restaurant sales. Cost of restaurant sales increased $1,063,000,
or 33.0%, from $3.2 million to $4.3 million and as a percentage of revenues
increased from 36.1% to 37.1%. This increase is due in part to higher meat
and dairy prices and operational changes implemented to give the Company's
customers a higher quality product.
Labor costs. Labor costs increased $826,000, or 34.6%, from $2.4 million
to $3.2 million and as a percentage of revenues, increased from 26.7% to
27.8%. The increase in dollars and percent of revenue is primarily due to
new restaurants, which have higher initial labor costs.
Other operating expenses. Other operating expenses increased $247,000,
or 18.2%, from $1.4 million to $1.6 million, and as a percentage of
revenues decreased from 15.3% to 13.9% due to leveraging of fixed costs.
General and administrative expenses. General and administrative expenses
increased $65,000, or 8.7%, from $753,000 to $818,000, and as a percentage
of revenues decreased from 8.4% to 7.1%.
Depreciation. Depreciation increased $91,000, or 43.2%, from $210,000 to
$301,000, and as a percentage of revenues increased from 2.4% to 2.6%
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 $177,000, or
171.5%, from $63,000 to $170,000, and as a percentage of revenues increased
from .7% to 1.5%. 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, decreased as a
percentage of restaurant sales. These fees will continue to decrease as a
percentage of sales as the Company continues to open new restaurants.
Interest income. The Company had interest income during the second
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.
Interest expense. The Company had interest expense during the second
quarter of 1997 as a result of borrowings to finance restaurant expansion.
(see Liquidity and Capital Resources below)
Income tax provision. The Company's effective tax rate for the second
quarter of 1997 was 39.1%. 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 $687,000 for the second quarter of 1997, an
increase of 11% over net income of $619,000 for the second quarter of 1996.
Twenty-four weeks ended June 20, 1997 compared to twenty-four weeks ended
June 14, 1996
Revenues. Restaurant sales increased 32.2% to $22.2 million for the
first two quarters of 1997 as compared to $16.8 million for the comparable
period of 1996. The increase in sales was primarily the result of an
increase in the number of restaurants operated and a .61% increase in same
store sales (stores open greater than eighteen months during the first two
quarters of fiscal 1997).
Cost of restaurant sales. Cost of restaurant sales increased $2,213,000,
or 36.7%, from $6.0 million to $8.2 million and as a percentage of revenues
increased from 36.0% to 37.2%. This increase is due in part to higher meat
and dairy prices and operational changes implemented to give the Company's
customers a higher quality product.
Labor costs. Labor costs increased $1,559,000, or 34.7%, from $4.5
million to $6.1 million and as a percentage of revenues, increased from
26.8% to 27.3%. The increase in dollars and percent of revenue is
primarily due to new restaurants, which have higher initial labor costs.
Other operating expenses. Other operating expenses increased $574,000,
or 22.1%, from $2.6 million to $3.2 million, and as a percentage of
revenues decreased from 15.5% to 14.3%.
General and administrative expenses. General and administrative expenses
increased $227,000, or 16.0%, from $1.4 million to $1.6 million, and as a
percentage of revenues decreased from 8.5% to 7.4%.
Depreciation. Depreciation increased $193,000, or 47.3%, from $408,000
to $601,000, and as a percentage of revenues increased from 2.4% to 2.7%
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 $232,000, or
201.4%, from $115,000 to $347,000, and as a percentage of revenues
increased from .7% to 1.6%. 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, decreased slightly as
a percentage of restaurant sales.
Interest income. The Company had interest income during the first two
quarters 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.
Interest expense. The Company had interest expense during the second
quarter of 1997 as a result of borrowings to finance restaurant expansion.
(see Liquidity and Capital Resources below)
Income tax provision. The Company's effective tax rate for the first two
quarters of 1997 was 39.2%. 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 $1,257,000 for the first two quarters of
1997, an increase of 14% over net income of $1,098,000 for the comparable
period of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 20, 1997, the Company had approximately $1.3 million in cash and
short term investments, $1.7 million in long-term debt and $13.1 million in
shareholders' equity. The Company's long-term debt consists of secured term
loans with a commercial bank. These loans bears interest at the bank's
prime rate and the latest maturity is February 2007. At June 20, 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 June 20, 1997, $1.6 million was outstanding under the
line. The maximum amount outstanding during the year was $2.4 million.
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. At June 20, 1997, the Company had opened three restaurants, located
in Mount Airy and Salisbury, North Carolina and Roanoke, Virginia. The
Company now operates 30 restaurants in North Carolina, South Carolina,
Tennessee and Virginia. A restaurant in Lenoir, North Carolina was
scheduled to open in the third quarter. Construction had started on a
restaurant in Denver, North Carolina.
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 material impact
on costs during the second quarter of 1997, primarily because prices for
the largest single item of expense, food costs, has risen less than 1%
during this period.
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 - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Registrant held on May 8,
1997, the shareholders approved (i) the election of Charles F. Connor, Jr.,
L. Dent Miller, Barry W. Whisnant, and C. Kenneth Wilcox as Directors and
(ii) the selection of Deloitte & Touche, LLP as independent public
accountants. The following table sets forth the votes on each matter:
Against/
For Withheld Abstain
Election of Directors
(by Nominee)
Charles F. Connor, Jr. 5,431,721 375
L. Dent Miller 5,431,721 375
Barry C. Whisnant 5,431,521 575
C. Kenneth Wilcox 5,431,521 575
Approval of Selection of
Deloitte & Touche, LLP as
Independent Public Accountants 5,429,371 2,200 525
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.9 Noted dated May 14, 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.
July 31, 1997 \s\ Noland M. Mewborn
Date By: Noland M. Mewborn,
Vice President, Treasurer and CFO
(Principal Financial Officer)