4
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 September 12, 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 October 10, 1997
Common Stock (no par value) 5,925,000
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 September 12, 1997
and January 3, 1997. 3
Consolidated Statements of Current and Retained Earnings
for the twelve weeks and thirty-six weeks ended
September 12, 1997 and September 6, 1996. 4
Consolidated Statements of Cash Flows for the thirty-six weeks
ended September 12, 1997 and September 6, 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 II Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 12, 1997 and January 3, 1997
September 12, January 3,
1997 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,718,301 $ 1,570,515
Related party receivables 21,845 24,175
Other receivables 149,797 250,761
Inventories 563,872 495,848
Pre-opening costs, net 537,988 509,210
Prepaid and other current assets 53,198 80,613
Total current assets 3,045,001 2,931,122
Property and equipment, net 18,650,315 14,262,732
Other assets 10,080 11,293
Total assets $ 21,705,396 $ 17,205,147
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,393,750 $ 460,000
Current portion of long-term debt 181,760 -
Accounts payable 2,187,073 1,688,867
Accrued salaries 575,260 283,467
Taxes other than income 431,820 313,010
Other accrued liabilities 622,967 462,807
Total current liabilities 5,392,630 3,208,151
Long-term debt 2,320,287 -
Deferred income taxes 245,971 208,471
Total liabilities 7,958,888 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 2,061,190 119,457
Total shareholders' equity 13,746,508 13,788,525
Total liabilities and shareholders' equity $ 21,705,396 $ 17,205,147
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CURRENT AND RETAINED EARNINGS
Twelve Weeks and Thirty-six Weeks ended September 12, 1997 and September 6, 1996
(unaudited)
<HEADING>
12 Weeks Ended 36 Weeks Ended
Sep 12, 1997 Sep 6, 1996 Sep 12, 1997 Sep 6, 1996
REVENUES - restaurant sales $12,288,463 $10,050,955 $34,458,657 $26,815,083
OPERATING COSTS AND EXPENSES
Cost of restaurant sales 4,533,691 3,746,412 12,778,759 9,778,589
Labor costs 3,476,290 2,721,340 9,534,052 7,219,775
Other operating expenses 1,742,120 1,463,750 4,917,297 4,064,498
General and administrative expenses 870,607 839,055 2,516,034 2,257,372
Depreciation 317,111 228,945 918,312 637,123
Amortization (principally of pre-opening costs) 173,893 81,051 520,878 196,159
Total operating costs and expenses 11,113,712 9,080,553 31,185,332 24,153,516
OPERATING INCOME 1,174,751 970,402 3,273,325 2,661,567
OTHER INCOME 10,200 18,050 47,498 60,400
INTEREST INCOME 205 29,626 1,288 104,892
INTEREST EXPENSE (60,367) (264) (129,799) (37,413)
INCOME BEFORE INCOME TAXES 1,124,789 1,017,814 3,192,312 2,789,446
INCOME TAX PROVISION (439,920) (386,769) (1,250,579) (1,059,989)
NET INCOME $ 684,869 $ 631,045 $ 1,941,733 $ 1,729,457
NET INCOME PER SHARE $ 0.12 $ 0.10 $ 0.32 $ 0.28
WEIGHTED AVERAGE SHARES
OUTSTANDING 5,925,000 6,300,000 6,143,865 6,283,730
RETAINED EARNINGS
Balance at beginning of period $ 1,376,321 $(1,241,363) $ 119,457 $(1,451,587)
Net income 684,869 631,045 1,941,733 1,729,457
S corporation distribution and
dividends paid - - - (888,188)
Balance at the end of period $ 2,061,190 $ (610,318) $ 2,060,190 $ (610,318)
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks ended September 12, 1997 and September 6, 1996 (Unaudited)
Thirty-six Weeks Ended
September 12, September 6,
1997 1996
Cash Flows from Operating Activities:
Net income $ 1,941,733 $ 1,729,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 918,312 637,123
Deferred tax 37,500 -
Amortization (principally of pre-opening costs) 520,877 196,159
Changes in operating assets and liabilities
providing (using) cash
Receivables 103,294 (105,565)
Inventories (68,024) (54,789)
Pre-opening costs (549,656) (487,216)
Prepaid and other assets 28,629 (54,252)
Trade accounts payable and
other accrued liabilities 1,068,969 647,878
Total adjustments 2,059,901 779,338
Net cash provided by operating activities 4,001,634 2,508,795
Cash Flows from Investing Activities:
Capital expenditures (5,305,895) (4,018,090)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 2,550,000 -
Proceeds from bank debt 933,750 -
Reduction of debt (47,953) (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 1,452,047 3,165,794
Net increase in cash and cash equivalents 147,786 1,656,499
Cash and cash equivalents at beginning of period 1,570,515 2,145,809
Cash and cash equivalents at end of period $ 1,718,301 $ 3,802,308
Supplemental disclosure of cash flow information:
Cash paid for interest $ 129,799 $ 37,149
Cash paid for income taxes $ 861,776 $ 655,442
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
September 12, 1997 and for the twelve-week and thirty-six-week
periods ended September 12, 1997 and September 6, 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 September 12, 1997, and the
results of operations for the twelve-week and thirty-six-week
periods ended September 12, 1997 and September 6, 1996 and cash
flows for the thirty-six-week periods ended September 12, 1997 and
September 6, 1996.
Note 3: The results of operations for the twelve-week and thirty-six-
week periods ended September 12, 1997 and September 6, 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.
Note 5: On September 25, 1997, Sagebrush, Inc. and WSMP, Inc. signed a
letter of intent to pursue WSMP's acquisition of Sagebrush in a
stock for stock merger of the two companies. The proposed
transaction is subject to various conditions, including the approval
of Sagebrush's directors and shareholders. The proposed exchange
rate is .3214 shares of WSMP common stock for each share of
Sagebrush common stock.
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 Thirty-six Weeks Ended
Sept 12, Sept 6, Sept 12, Sept 6,
1997 1996 1997 1996
Revenues - restaurant sales 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of restaurant sales 36.9 37.3 37.1 36.5
Labor costs 28.3 27.1 27.7 26.9
Other operating expenses 14.2 14.6 14.3 15.2
General and administrative expenses 7.1 8.3 7.3 8.4
Depreciation 2.6 2.3 2.7 2.4
Amortization (principally of pre-opening costs) 1.3 .8 1.4 .7
Total operating costs and expenses 90.4 90.3 90.5 90.1
Operating income 9.6 9.7 9.5 9.9
Other income (received from related parties) .1 .2 .1 .2
Interest income .0 .3 .0 .4
Interest expense (.5) (.0) (.4) (.1)
Income before income taxes 9.2 10.1 9.2 10.4
Income tax provision (3.6) (3.8) (3.6) (4.0)
Net income 5.6% 6.3% 5.6% 6.4%
Twelve weeks ended September 12, 1997 compared to twelve weeks ended
September 6, 1996
Revenues. Restaurant sales increased 22.3% to $12.3 million for the
third quarter of 1997 as compared to $10.1 million for the third quarter of
1996. The increase in sales was the result of an increase in the number of
restaurants operated at the end of the third quarter from 26 to 31, offset
by a 3.3% decrease in same store sales (stores open greater than eighteen
months during the third quarter of fiscal 1997). Much of the same store
sales decline can be traced to restaurants in the tourist areas of North
Carolina and Tennessee. These restaurants were disrupted by a rock slide
that closed Interstate 40 at the state line for 11 of the 12 weeks in the
quarter.
Cost of restaurant sales. Cost of restaurant sales increased $787,000,
or 21.0%, from $3.7 million to $4.5 million and as a percentage of revenues
decreased from 37.3% to 36.9%. This decrease is due in part to lower
produce prices and operational changes.
Labor costs. Labor costs increased $755,000, or 27.7%, from $2.7 million
to $3.5 million and as a percentage of revenues, increased from 27.1% to
28.3%. The increase in dollars and percent of revenue is primarily due to
new restaurants, which have higher initial labor costs, and changes in the
minimum wage over the past year.
Other operating expenses. Other operating expenses increased $278,000,
or 19.0%, from $1.5 million to $1.7 million, and as a percentage of
revenues decreased from 14.6% to 14.2% due to leveraging of fixed costs.
General and administrative expenses. General and administrative expenses
increased $32,000, or 3.8%, from $839,000 to $871,000, and as a percentage
of revenues decreased from 8.3% to 7.1%.
Depreciation. Depreciation increased $88,000, or 38.5%, from $229,000 to
$317,000, and as a percentage of revenues increased from 2.3% 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 $93,000, or
114.5%, from $81,000 to $174,000, and as a percentage of revenues increased
from .8% to 1.3%. 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 third
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 third
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 third
quarter of 1997 was 39.1%.
Net income. Net income was $685,000 for the third quarter of 1997, an
increase of 8.5% over net income of $631,000 for the third quarter of 1996.
Thirty-six weeks ended September 12, 1997 compared to thirty-six weeks
ended September 6, 1996
Revenues. Restaurant sales increased 28.5% to $34.5 million for the
first three quarters of 1997 as compared to $26.8 million for the
comparable period of 1996. The increase in sales was the result of an
increase in the number of restaurants operated offset by a .8% decrease in
same store sales.
Cost of restaurant sales. Cost of restaurant sales increased $3,000,000,
or 30.7%, from $9.8 million to $12.8 million and as a percentage of
revenues increased from 36.5% to 37.1%. This increase is due mostly to
higher meat prices offset somewhat by lower produce prices.
Labor costs. Labor costs increased $2,314,000, or 32.1%, from $7.2
million to $9.5 million and as a percentage of revenues, increased from
26.9% to 27.7%. The increase in dollars and percent of revenue is
primarily due to new restaurants, which have higher initial labor costs,
and changes in the minimum wage over the past year.
Other operating expenses. Other operating expenses increased $853,000,
or 21.0%, from $4.1 million to $4.9 million, and as a percentage of
revenues decreased from 15.2% to 14.3% due to the leveraging of fixed
costs.
General and administrative expenses. General and administrative expenses
increased $259,000, or 11.5%, from $2.3 million to $2.5 million, and as a
percentage of revenues decreased from 8.4% to 7.3%.
Depreciation. Depreciation increased $281,000, or 44.1%, from $637,000
to $918,000, 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. All restaurants opened during
1997 have been built on real property purchased by the Company rather than
leased.
Amortization. Amortization of pre-opening costs increased $325,000, or
165.5%, from $196,000 to $521,000, and as a percentage of revenues
increased from .7% to 1.4%. 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 three
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 first
three quarters 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
three 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 $1,942,000 for the first three quarters of
1997, an increase of 12.3% over net income of $1,729,000 for the comparable
period of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 12, 1997, the Company had approximately $1.7 million in cash
and short term investments, $2.5 million in long-term debt and $13.7
million in shareholders' equity. The Company's long-term debt consists of
term loans with a commercial bank that are secured by certain parcels of
real estate owned by the Company. These loans bears interest at the bank's
prime rate (8.5% at September 12, 1997) and mature at various times from
January 2007 to September 2007. At September 12, 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 (8.5%
at September 12, 1997). At September 12, 1997, $1.4 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. 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.
Prior to 1997, the Company established most of its restaurants by leasing
and renovating existing facilities to the Sagebrush concept. In 1997,
however, all restaurants opened to date have been established 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 anticipates this trend will continue in the future.
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 6 restaurants in 1997 (and that each restaurant involves
purchasing land and building a new facility), management expects capital
expenditures to range from $7.0 million to $10.0 million. Capital
expenditures through September 12, 1997 were $5.3 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 two additional restaurants in 1997,
one in Denver North Carolina and the other in Sanford, North Carolina. At
September 12, 1997, the Company had opened four restaurants this year,
located in Mount Airy, Salisbury and Lenoir, North Carolina and Roanoke,
Virginia. The Company now operates 31 restaurants in North Carolina, South
Carolina, Tennessee and Virginia. Construction had started on a restaurant
in Aiken, South 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. While the Company has seen price increases in certain
categories, management believes that inflation has had no material impact
on costs during the third quarter of 1997, primarily because prices for the
largest single item of expense, food costs, has risen less than 1% during
this period.
Subsequent Events
On September 25, 1997, Sagebrush, Inc. and WSMP, Inc. signed a letter of
intent to pursue WSMP's acquisition of Sagebrush in a stock for stock
merger of the two companies. The proposed transaction is subject to
various conditions, including the approval of Sagebrush's directors and
shareholders. The proposed exchange rate is .3214 shares of WSMP common
stock for each share of Sagebrush common stock. In the event the merger is
completed, the Company's future store expansion plans may be altered.
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.10 Note dated September 10, 1997 between Peoples Bank
and the Company.
Exhibit 27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the registrant on September 26,
1997, to report under Item 5, Other Information, that the
registrant had entered into a letter of intent to pursue a merger
with WSMP, Inc.
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.
Date October 23, 1997 By: \s\ Noland M. Mewborn
Noland M. Mewborn,
Vice President, Treasurer and CFO
(Principal Financial Officer)