FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12145
AMARILLO MESQUITE GRILL, INC.
Exact name of registrant as specified in its charter)
Kansas 48-0936946
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Suite 200
302 North Rock Road
Wichita, Kansas 67206
(Address of principal executive offices)
(Zip Code)
(316) 685-7286
(Registrant's telephone number, including area code)
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 .
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As of October 26, 1997, 7,113,345 shares of common stock $.01 par value
were outstanding.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS October 26 January 26
---------- ----------
1997 1997
---------- ----------
Current assets:
Cash and cash equivalents $ 479,493 $ 328,285
Accounts receivable - trade 36,927 22,058
Inventories 165,853 219,315
Prepaid expenses 192,742 130,902
---------- ----------
Total current assets 875,015 700,560
---------- ----------
Property and equipment:
Buildings 1,105,229 224,178
Leasehold improvements 1,565,382 1,433,338
Equipment and fixtures 3,689,477 3,901,586
Leased property under capital lease 1,234,626 1,903,191
---------- ----------
7,594,714 7,462,293
Less: accumulated depreciation and amortization 1,338,898 2,860,486
---------- ----------
6,255,816 4,601,807
---------- ----------
Minority Interest 12,373 -
---------- ----------
Other assets:
Cost in excess of net tangible assets of purchased
business, net of amortization of $97,100 and
$436,309 849,911 1,012,496
License fees, net of amortization of $2,784 and
$52,361 15,216 63,327
Deposits 82,424 79,504
---------- ----------
947,551 1,155,327
---------- ----------
$8,090,755 $6,457,694
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $4,180,872 $1,014,778
Current portion of obligation under capital lease 32,649 95,947
Accounts payable 1,000,120 1,039,399
Accrued payroll 154,988 205,373
Other accrued liabilities 495,430 575,514
---------- ----------
Total current liabilities 5,864,059 2,931,011
---------- ----------
Long-term debt, less current portion 1,361,307 1,506,421
Obligation under capital lease, less current portion 1,058,374 1,500,618
Deferred credits - 6,789
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000
shares, none issued - -
Common stock, $.01 par value, authorized 20,000,000
shares,issued 7,173,345, outstanding 7,112,155 71,733 71,414
Additional paid-in capital 6,610,115 6,491,984
Accumulated deficit (6,604,833) (5,780,543)
Treasury stock, 60,000 shares of common stock ( 270,000) ( 270,000)
---------- ----------
Total stockholders' equity ( 192,985) 512,855
---------- ----------
$8,090,755 $6,457,694
---------- ----------
---------- ----------
See notes to financial statements.
2
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 26 October 27 October 26 October 27
---------- ---------- ---------- ----------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales $3,953,526 $3,793,810 $11,405,950 $ 9,871,010
---------- ---------- ----------- -----------
Costs and expenses:
Cost of goods sold 1,493,842 1,294,704 4,241,173 3,267,891
Operating expenses (Note 2) 2,074,935 2,079,943 6,093,802 5,670,804
Depreciation and amortization 171,713 159,883 456,937 439,149
General and administrative (Note 2) 361,828 275,430 1,280,837 734,032
---------- ---------- ----------- -----------
4,102,318 3,909,960 12,072,749 10,111,876
---------- ---------- ----------- -----------
Operating income (loss) (148,792) (116,150) (666,799) (240,866)
---------- ---------- ----------- -----------
Other income (expense)
Interest expense (141,910) (86,549) (351,775) 216,554
Noncash expense from issuance
of stock options pursuant to
debt guarantees (24,460) - (48,920) -
Gain (loss) on sale of assets 443 - 254,771 (52,268)
Provision for restaurant closings
and dispositions - - - (598,598)
---------- ---------- ----------- -----------
(165,927) (86,549) (170,384) (864,420)
---------- ---------- ----------- -----------
Earnings (loss) before taxes and
minority interests (314,719) (202,699) (837,183) (1,105,286)
Provision for income taxes - - - -
Minority interest in loss 12,893 - 12,893 -
---------- ---------- ----------- -----------
Net earnings (loss) $ (301,826) $ (202,699)$ (824,290) $(1,105,286)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net earnings (loss) per common share $ (.04) $ (.03) $ (.12) $ (.17)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Average shares outstanding 7,113,345 7,081,458 7,113,345 6,524,758
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
See notes to financial statements.
3
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Thirty-Nine Weeks Ended
October 26 October 27
----------- -----------
1997 1996
----------- -----------
Operating Activities
Net loss $ (824,290) $(1,105,286)
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization 456,937 439,149
Changes in assets and liabilities
(Increase) decrease in accounts receivable (14,869) 1,139
(Increase) decrease in inventories (12,713) (47,382)
(Increase) decrease in prepaid expenses (56,355) (215,467)
Increase (decrease) in accounts payable (39,279) 308,240
Increase (decrease) in accrued expenses (94,174) 217,250
(Gain) loss on sale of assets (254,771) 52,268
Minority interest share of loss (12,373) -
Noncash expense from issuance of stock
options pursuant to debt guarantees 73,380 -
Provision for restaurant closings
and dispositions - 534,434
Other net ( 9,620) (17,600)
----------- -----------
Net cash provided (used) by operating activities (788,127) 166,745
----------- -----------
Investing activities
Purchase of property and equipment (2,530,183) (l,000,683)
Purchase of other assets - (624,811)
Proceeds from sale of assets 435,000 235,747
----------- -----------
Net cash provided (used) by investing activities (2,095,183) (1,389,747)
----------- -----------
Financing activities
Sale of common stock 45,070 -
Long-term borrowings 3,230,000 1,775,000
Repayment of long-term borrowings
and capital lease obligations (240,552) (457,705)
----------- -----------
Net cash provided (used) by financing activities 3,034,518 1,317,295
----------- -----------
Net increase (decrease) in cash and cash equivalents 151,208 94,293
Cash and cash equivalents at beginning of period 328,285 195,365
----------- -----------
Cash and cash equivalents at the end of period $ 479,493 $ 289,658
----------- -----------
----------- -----------
See notes to financial statements.
4
AMARILLO MESQUITE GRILL, INC.
Notes to Financial Statements
(Unaudited)
October 26, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended October 26, 1997 are
not necessarily indicative of the results that may be expected for the
year ended January 25, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's 10-K
and Annual Report to Stockholders as filed on April 24, 1997.
(2) RECLASSIFICATION
For the prior year perids ending October 27, 1996, training expenses and
area management expenses in the amount of $165,656 have been reclassified
from operating expense to general and administrative expense. All
training costs and area management costs for the current year are also
included with general and administrative expense.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
GENERAL
Over the past year the Company has taken major steps toward reorganizing
and changing the direction of the Company in terms of moving away from low
volume fast food restaurants and towards high volume full service
restaurants. Due to differences in volume and the nature of the business, the
operating results, expressed as percentage of sales, can be substantially
different for fast food as compared to a full service restaurant.
In addition, over the past eighteen months the number of restaurants
operated by the Company has changed substantially as follows:
Cotton Amarillo
Grandy's Patch Cafe Grill
-------- ---------- --------
January 28, 1996 8 7 -
Opened 1
Purchased 4
Converted (1) 1
Closed (2)
-------- ---------- --------
January 26, 1997 8 5 5
Opened 2
Converted (2) 2
Sold (8)
Closed (1)
-------- ---------- --------
October 26, 1997 - 2 9
-------- ---------- --------
-------- ---------- --------
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 26, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 27,
1996.
For the three months ended October 26, 1997, sales increased 4.2% to
$3,953,526 as compared to sales of $3,793,810 for the second quarter of the
prior year. As of October 26, 1997, the Company operated nine Amarillo
Mesquite Grills and two Cotton Patch Cafes as compared to eighteen restaurants
as of October 27, 1996.
Cost of sales, as a percentage of total sales, was 37.8% and 34.1% for the
1997 and 1996 periods respectively. The increase in cost of sales, as a
percentage of total sales, is the result of a change in direction by the
Company from fast food restaurants such as our Grandy's which historically have
had a 31.0% cost of sales to an upscale, full service restaurant concept,
Amarillo Mesquite Grill, which has a higher cost of sales.
Operating expenses, as a percentage of total sales, was 52.5% and 54.9%
for the 1997 and 1996 periods respectively. The decrease in operating expense,
as a percentage of total sales, is the result of operating more Amarillo
Mesquite Grills which have a higher sales volume and lower operating costs than
the Grandy's restaurants which were sold during the first quarter of the
current year.
General and administrative expenses, as a percentage of total sales, was
9.2% and 7.3% for the 1997 and 1996 periods respectively. The increase in
general and administrative expense, as a percentage of total sales, can be
attributed to recruiting and training expenses relating to expansion of the
Amarillo Mesquite Grill concept. During the quarter the Company incurred
approximately $107,890 in recruiting and training expenses relating to the
development of management personnel for future restaurants.
The increase in the dollar amount of interest expense from 1996 to 1997 is
the result of an increase in bank debt relating to new store development and
the acquisition of four Amarillo Grills.
The Company incurred noncash expenses of $24,460 in the third quarter
related to the issuance of stock options pursuant to debt guarantees.
6
NINE MONTHS ENDED OCTOBER 26, 1997 COMPARED TO NINE MONTHS OCTOBER 27, 1996.
For the nine months ended October 26, 1997, sales increased 22.6% to
$11,405,950 as compared to sales of $9,871,000 for the nine months ended
October 27, 1996. As of October 26, 1997, the Company operated nine Amarillo
Mesquite Grills and two Cotton Patch Cafes as compared to eighteen restaurants
as of October 27, 1996.
Cost of sales, as a percentage of total sales, was 37.2% and 33.1% for the
1997 and 1996 periods respectively. The higher cost of sales, as a percentage
of total sales, can be attributed to the Amarillo Mesquite Grill restaurants
which operate at a higher cost of sales percentage than do the Grandy's or
Cotton Patch Cafes.
Operating expenses, as a percentage of total sales was 53.4% and 57.5% for
the 1997 and 1996 periods respectively. The decrease in operating expense, as
percentage of total sales, was the result of operating more Amarillo Mesquite
Grills which have a higher sales volume and lower operating costs than the
Grandy's restaurants which were sold during the first quarter of the current
year.
General and administrative expenses, as a percentage of total sales, was
11.2% and 7.4% for the 1997 and 1996 periods respectively. The increase in
general and administrative expenses, as a percentage of total sales, can be
attributed to recruiting and training expenses relating to expansion of the
Amarillo Mesquite Grill concept. During the first nine months ending October
26, 1997, the Company incurred approximately $565,000 in recruiting and
training expense relating to the development of management personnel for future
restaurants.
The increase in the dollar amount of interest expense from 1996 to 1997 is
the result of an increase in bank debt relating to new store development and
the acquisition of four Amarillo Mesquite Grills.
The Company incurred noncash expenses of $73,380 in the nine months ended
October 26, 1997, related to the issuance of stock options pursuant to debt
guarantees.
The Company has determined that it is in its best interest to focus its
efforts and financial resources on the Amarillo Grill concept. Therefore,
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 is owned by five individuals, four of which are officers
and directors of the Company. The consideration received for these assets
consisted of $435,000 in cash. Red Apple Corporation also assumed the lease
obligations associated with these restaurants. The Company recognized a gain
of approximately $254,000 on this disposition. The sales price was computed as
three times last year's store level cash flow before overhead or administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to finance its business have been
its cash flow from operations, and proceeds from the sale of the Company's
common stock. At October 26, 1997, the Company had a working capital deficit
of $4,268,557 compared to working capital deficit of $2,230,451 as of January
26, 1997. The Company does have available $1,300,000 of unused funds from a
$5,100,000 bank line of credit. While the line of credit expires in June 1998,
management anticipates the loan agreement will be renewed at that time under
comparable terms.
Substantially, all of the Company's revenues are derived from cash sales. The
Company does not maintain significant receivables and inventories; therefore,
working capital requirements for continuing operations are not significant.
Additions to property and equipment represent the single largest use of
funds by the Company. The expenditures are primarily made for the purchase
and development of new restaurants. Capital expenditures were $2,530,183 for
nine months ended October 26, 1997, compared to $1,000,683 for the nine
months ended October 27, 1996. These capital expenditures have resulted in
an increase in property and equipment and a decrease in working capital.
7
The Company plans to continue expansion of the Amarillo Mesquite Grill
concept in fiscal 1998. The Company intends to lease existing restaurant
properties which are suitable for conversion to the Amarillo Mesquite Grill
concept. It is expected that each conversion will require approximately
$300,000 to $500,000 for equipment and remodel costs. A ground-up proto-type
restaurant will cost approximately $1.7 million for the land, building and
equipment. New restaurants will be financed with proceeds received as a result
of bank debt.
The Company does not expect to pay dividends in the foreseeable future, but
rather intends to retain all available funds for the development of the
business.
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable.
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
9
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.
AMARILLO MESQUITE GRILL INC.
(Registrant)
Date December 5, 1997 /s/LINN F. HOHL
--------------------------------
Linn F. Hohl - Vice President
of Finance,
Secretary and
Treasurer
10