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 July 26, 1998
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 0-12145
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 .
---- -----
As of July 26, 1998, 7,576,895 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 July 26 January 25
1998 1998
---------- ----------
Current assets:
Cash $ 573,347 $ 563,836
Accounts receivable 39,456 49,472
Inventories 153,686 167,848
Prepaid expenses and other current assets 309,074 184,179
---------- ----------
Total current assets 1,075,563 965,335
---------- ----------
Property and equipment:
Buildings 1,105,229 1,105,229
Leasehold improvements 2,316,428 2,258,368
Equipment and fixtures 4,610,718 4,228,270
Leased property under capital lease 1,234,626 1,234,626
---------- ----------
9,267,001 8,826,493
Less: accumulated depreciation and amortization 1,763,394 1,383,895
---------- ----------
7,503,607 7,442,598
---------- ----------
Other assets:
Cost in excess of net tangible assets of purchased
business, net of amortization of $151,747 and $115,337 795,264 831,674
License fees, net of amortization 7,567 7,867
Deposits and other 39,187 33,867
---------- ----------
842,018 873,408
---------- ----------
$9,421,188 $9,281,341
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes Payable $ 560,000 -
Current portion of long term debt 1,201,837 $ 871,936
Current portion of obligation under capital lease 38,240 36,336
Accounts payable 1,139,448 985,093
Construction costs payable 174,130 552,944
Accrued payroll 218,767 197,053
Other accrued liabilities 542,129 555,598
---------- ----------
Total current liabilities 3,874,551 3,198,960
---------- ----------
Long-term debt, less current portion 5,201,465 5,618,279
Obligation under capital lease, less current portion 1,026,363 1,046,525
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 7,636,895 shares at July 26, 1998 and
7,183,895 at January 25, 1998 76,369 71,839
Additional paid-in capital 6,717,554 6,666,574
Accumulated deficit (7,205,114) (7,050,836)
Treasury stock, 60,000 shares of common stock at cost ( 270,000) ( 270,000)
---------- ----------
Total stockholders' equity (deficit) ( 681,191) ( 582,423)
---------- ----------
$9,421,188 $9,281,341
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
2
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 26 July 27 July 26 July 27
1998 1997 1998 1997
---------- ---------- ----------- ----------
Net sales $5,080,117 $3,549,776 $10,511,158 $7,452,424
---------- ---------- ----------- ----------
Costs and expenses:
Cost of goods sold 1,988,353 1,321,827 4,049,032 2,747,331
Operating expenses 2,449,792 1,822,785 5,004,646 4,018,867
Depreciation and amortization 204,114 137,667 416,209 285,224
General and administrative 400,295 465,596 814,027 919,009
---------- ---------- ----------- ----------
5,042,554 3,747,875 10,283,914 7,970,431
---------- ---------- ----------- ----------
Operating income (loss) 37,563 (198,099) 227,244 (518,007)
---------- ---------- ----------- ----------
Other income (expense)
Interest expense (173,476) (115,507) (332,602) (209,865)
Noncash expense from issuance
of stock options pursuant to
debt guarantees ( 24,460) ( 24,460) ( 48,920) ( 48,920)
Gain on sale of assets - - - 254,328
---------- ---------- ----------- ----------
(197,936) (139,967) (381,522) ( 4,457)
---------- ---------- ----------- ----------
Loss before income taxes (160,373) (338,066) (154,278) (522,464)
Provision for income taxes - - - -
---------- ---------- ----------- ----------
Net Loss $ (160,373) $ (338,066) $ (154,278) $ (522,464)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net loss per common share-
Basic and diluted $ (.02) $ (.05) $ (.02) $ (.09)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Average shares outstanding-
Basic and diluted 7,576,895 7,112,155 7,507,203 7,112,155
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
See accompanying notes to consolidated financial statements.
3
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Six Weeks Ended
July 26 July 27
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $( 154,278) $( 522,464)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 416,209 285,224
Changes in assets and liabilities
(Increase) decrease in accounts receivable 10,016 ( 18,283)
(Increase) decrease in inventories 14,162 ( 12,460)
(Increase) decrease in prepaid expenses and
other current assets ( 124,895) ( 92,403)
Increase (decrease) in accounts payable 154,355 117,534
Increase (decrease) in accrued expenses 8,245 (104,471)
Gain on sale of assets - (254,328)
Noncash expense from issuance of stock
options pursuant to debt guarantees 48,920 48,920
Other net ( 5,320) ( 9,591)
---------- ----------
Cash provided by (used in) operating activities 367,414 (562,322)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ( 819,322) (1,975,860)
Proceeds from sale of assets - 435,000
---------- ----------
Cash used in investing activities ( 819,322) (1,540,860)
---------- ----------
Cash flows from financing activities:
Sale of common stock 6,590 44,071
Short-term borrowings 560,000 -
Long-term borrowings 200,000 2,350,000
Repayment of long-term borrowings
and capital lease obligations ( 305,171) (161,981)
---------- ----------
Cash provided by financing activities 461,419 2,232,090
---------- ----------
Increase in cash 9,511 128,908
Cash at beginning of period 563,836 328,285
---------- ----------
Cash at the end of period $ 573,347 $ 457,193
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 332,602 $ 209,865
Cash paid for income taxes $ - -
See accompanying notes to consolidated financial statements.
4
AMARILLO MESQUITE GRILL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
July 26, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated 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
July 26, 1998 are not necessarily indicative of the results that may
be expected for the year ended January 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's 10-K and Annual Report to
Stockholders as filed on April 23, 1998.
(2) 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 July 26, 1998, there are
1,379,853 options outstanding at a weighted average exercise price of
$2.41 which may become dilutive in the future.
(3) ACQUISITION OF INTEREST IN COMMON CONTROLLED SUBSIDIARY
Effective February 23, 1998, the Company purchased the remaining
shares of AMG, Inc., a common controlled subsidiary, by issuing
450,000 shares of the Company's common stock in a transaction
accounted for as a combination of entities under common control.
The interest in AMG, Inc. acquired by the Company had no book value.
Accordingly, the fair value of the Company's common stock of
$1,327,500 was recorded, and a corresponding deemed dividend was
recognized as a reduction to stockholders' equity (deficit). The pro
forma effects of such transaction was not significant.
(4) LIQUIDITY
At July 26, 1998, the Company had current liabilities in excess of current
assets of $2,798,988 and a stockholders' deficit of $681,191. The
Company reported a loss of $154,278 and cash flow from operations of
$367,414 for the six month period ended July 26, 1998.
5
(4) LIQUIDITY CONTINUED
Management believes the Amarillo Grill restaurants opened in fiscal 1998
and two additional Amarillo Grill restaurants opened in fiscal 1999
will generate sufficiently increased cash flow from operations which,
together with continuing trade payable financing at current levels,
will enable the company to meet its financial obligations in fiscal
1999 as they come due. The Company has no additional borrowing
capacity under its existing loan agreements. In the event operating
cash flow, including a continuation of the current level of trade
payable financing, is not sufficient to enable the Company to meet its
financial obligations in fiscal 1999, an individual who is a major
stockholder and director of the Company has committed to provide up to
$1,000,000 of additional capital or guarantees of additional
indebtedness on behalf of the Company.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
GENERAL
Over the past two years the Company has taken major steps toward
reorganizing and changing the direction of the Company in terms of moving away
from fast food restaurants and towards full service restaurants which generate
higher sales with a lower gross margin and operating expenses. 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
restaurants as compared to a full service restaurant.
During the quarter ended July 26, 1998, the Company closed one Amarillo
Mesquite Grill in Overland Park, Kansas and one Cotton Patch Cafe in
Bartlesville, Oklahoma. The Cotton Patch Cafe has been converted to an Amarillo
Mesquite Grill which opened on the first day of the third quarter. The Amarillo
Grill was an older restaurant with a short-term lease. Management did not feel
that the location was good enough to justify the expense of a major remodel.
The Company's loss for the quarter ended July 26, 1998, in the amount of
$160,373 can in part be attributed to the expensing of pre-opening costs in the
amount of $84,710 relating to the opening of our Bartlesville unit on the first
day of the third quarter. In addition, costs of sales increased 1.9% from 37.2%
for the quarter ended July 27, 1997 to 39.1% for the current year quarter. To
address the cost of sales increase the Company will implement a new menu in all
restaurants during the third quarter. The new menu consists of new products
with more favorable margins, price increases on selected menu items, a change in
portion sizing and the discontinuance of certain high cost menu items.
RESULTS OF OPERATIONS
Three Months Ended July 26, 1998 Compared to Three Months Ended July 27, 1997.
For the three months ended July 26, 1998, sales increased 43.1% to
$5,080,117 as compared to sales of $3,549,776 for the second quarter of the
prior year. As of July 26, 1998, the Company operated eleven Amarillo Mesquite
Grills and one Cotton Patch Cafe as compared to eight Amarillo Mesquite Grills
and three Cotton Patch Cafes as of July 27, 1997.
Cost of sales, as a percentage of total sales, was 39.1% and 37.2% for the
1998 and 1997 periods respectively. The increase in cost of sales, as a
percentage of total sales, is due in part to an increase in commodity prices and
in part due to a change of direction from fast food restaurants with a lower
costs of sales to a full service concept, Amarillo Mesquite Grill, which has a
higher cost of sales.
Operating expenses, as a percentage of total sales, were 48.2% and 51.4%
for the 1998 and 1997 periods respectively. The decrease in operating expense,
as a percentage of total sales, is the result of operating more Amarillo Grills
which have higher sales volume and lower operating costs than the other
restaurant concept operated by the Company which have been sold or converted.
General and administrative expenses, as a percentage of sales, was 7.9% for
the quarter ended July 26, 1998, as compared to 13.1% for the second quarter of
the prior year. The decrease in general and administrative, as a percentage of
total sales, is the result of substantially increasing sales while reducing the
dollar amount of general and administrative expenses.
7
Depreciation and amortization is directly related to the acquisition and
disposition of fixed assets. The increase in depreciation and amortization from
1997 to 1998 is the result of operating more restaurants with a greater
investment.
Interest expense was $173,476 for the quarter ended July 26, 1998 as
compared to $115,507 for the same period a year ago. The increase in the dollar
amount of interest expense from second quarter 1997 to second quarter 1998 is
the result of an increase in long-term debt relating to new store development.
The Company incurred noncash expenses of $24,460 for the 1998 and 1997
periods respectively, relating to the issuance of stock options pursuant to debt
guarantees.
Six Months Ended July 26, 1998 compared to Six Months Ended July 27, 1997.
For the six months ended July 26, 1998, sales increased 41.0% to
$10,511,158 as compared to sales of $7,452,424 for the six months ended July 27,
1997. As of July 26, 1998, the Company operated eleven Amarillo Mesquite Grills
and one Cotton Patch Cafe as compared to eight Amarillo Grills and three Cotton
Patch Cafes as of July 27, 1997.
Cost of sales, as a percentage of total sales, was 38.5% and 36.9% for the
1998 and 1997 periods respectively. The higher cost of sales, as a percentage
of total sales, is due in part to an increase in commodity prices and in part
due to a change of direction from fast food restaurants with a lower cost of
sales to a full service concept, Amarillo Mesquite Grill, which has a higher
cost of sales.
Operating expenses, as a percentage of total sales was 47.6% and 53.9% for
the 1998 and 1997 periods respectively. The decrease in operating expense, as a
percentage of total sales, is the result of operating more Amarillo Grills which
have higher sales volume and lower operating costs than the other restaurant
concept operated by the Company which have been sold or converted.
General and administrative expenses, as a percentage of total sales, was
7.7% and 12.3% for the 1998 and 1997 periods respectively.
Interest Expense was $332,602 for the six months ended July 26, 1998 as
compared to $209,865 for the same period a year ago. The increase in the dollar
amount from 1997 to 1998 is the result of an increase in the bank debt relating
to new store development.
The Company incurred noncash expenses of $48,920 for the 1998 and 1997
periods respectively 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.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funding to finance its business have been
its cash flow from operations, and proceeds principally from long term debt. On
July 26, 1998 and January 25, 1998, the Company had an excess of current
liabilities over current assets of $2,798,988 and $2,233,624, respectively.
Management anticipates being able to sustain the current level of trade payable
financing and higher cash flow from operations in fiscal 1999 and that such
higher operating cash flow will enable the Company to meet its financial
obligations in fiscal 1999 as they come due. The Company has no remaining
available borrowing capacity under its existing loan agreements. Cash flow from
operations was $367,414 in the first six months of fiscal 1999 compared to
cash used of $562,322 in the first six months of fiscal 1998. In the event
operating cash flow is not sufficient to enable the Company to meet its
financial obligations in fiscal 1999, an individual who is a major
stockholder and director of the Company has committed to provide up to
$1,000,000 of additional capital or guarantees of additional indebtedness on
behalf of the Company.
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 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. Cash expended for capital expenditures was
$819,322 for the six months ended July 26, 1998, compared to $1,975,860 for the
six months ended July 27, 1997. These expenditures were funded primarily with
cash flow from operations and proceeds from long-term debt.
The Company plans to continue expansion of the Amarillo Mesquite Grill
concept in fiscal 1999. 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 $600,000 for equipment and remodel costs. A ground-up proto-type
restaurant will cost approximately $1.5 million for the land, building and
equipment. The Company is holding discussions with an investment banking firm
regarding a private placement of convertible securities which would enable the
Company to open approximately eight to ten new Amarillo Grill restaurants. The
company has no commitments for financing at this time. In order for the Company
to meet its expansion goals for fiscal 1999, it will need to raise additional
funds through debt or equity instruments, the availability and terms of which
will depend upon market and other conditions. There can be no assurance that
such additional financing will be available on terms acceptable to the Company.
This report contains certain forward-looking statements, including those
relating to the opening of additional restaurants and planned capital
expenditures. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, actual results could
differ materially from such forward-looking statements. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company that objectives and plans of the Company will be
achieved.
YEAR 2000
The Company maintains an outsourcing agreement for its accounting software
and has been advised that its outsourcer is capable of processing in the year
2000. Three of the Company's restaurants operate on a different point of sale
system that has not been assessed, while the restaurants point of sale system
for all the remaining restaurants is believed to be year 2000 compliant. Other
various restaurant equipment has not been assessed to determine if it is date
sensitive and possibly out of compliance. Any computer system that is not year
2000 compliant could potentially be disruptive to the Company's operations, but
actual impact has not been determined.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 29, 1998, the Company held it's Annual Meeting of Stockholders.
The only matter voted upon at such meeting was the election of
directors. The following Directors were re-elected to serve on the
Board of Directors:
FOR WITHHELD
Chris F. Hotze 6,845,216 3,500
Linn F. Hohl 6,845,216 3,500
C. Howard Wilkins, Jr. 6,845,216 3,500
Alan Bundy 6,847,216 1,500
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Not Applicable
(b) Reports on Form 8-K.
The Company filed a Form 8-K/A-1 dated June 10, 1998 with respect to the
exchange of its restricted stock for all outstanding shares of AMG. Inc. The
Form 8-K/A-1 stated that pursuant to Regulation S-X, the Company was not
required to file financial statements relative to the acquisition of the AMG,
Inc. stock.
10
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 August 26, 1998 /s/ LINN F. HOHL
-------------------------------
Linn F. Hohl - Vice President
of Finance,
Secretary and
Treasurer
11