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 25, 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 October 25, 1998, 7,645,895 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)
October 25 January 25
ASSETS 1998 1998
----------- ---------
Current assets:
Cash $ 370,445 563,836
Accounts receivable 38,227 49,472
Inventories 168,734 167,848
Prepaid expenses and other current assets 234,661 184,179
----------- ---------
Total current assets 812,067 965,335
----------- ---------
Property and equipment:
Buildings 1,107,429 1,105,229
Leasehold improvements 2,531,768 2,258,368
Equipment and fixtures 4,698,832 4,228,270
Leased property under capital lease 1,234,626 1,234,626
----------- ---------
9,572,655 8,826,493
Less: accumulated depreciation and amortization 1,966,302 1,383,895
----------- ---------
7,606,353 7,442,598
----------- ---------
Other assets:
Cost in excess of net tangible assets of purchased
business, net of amortization of
$169,952 and $115,337 777,059 831,674
License fees, net of amortization 7,417 7,867
Deposits and other 39,187 33,867
----------- ---------
823,663 873,408
----------- ---------
$ 9,242,083 $ 9,281,341
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes Payable $ 628,048 --
Current portion of long term debt 732,804 $ 871,936
Current portion of obligation under capital lease 36,336 36,336
Accounts payable 1,128,974 985,093
Construction costs payable 257,148 552,944
Accrued payroll 186,787 197,053
Other accrued liabilities 544,342 555,598
----------- ---------
Total current liabilities 3,514,439 3,198,960
----------- ---------
Long-term debt, less current portion 5,476,444 5,618,279
Obligation under capital lease, less current portion 1,019,138 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 7,705,895 shares at October 25, 1998 and
7,183,895 at January 25, 1998 77,059 71,839
Additional paid-in capital 6,773,754 6,666,574
Accumulated deficit (7,348,751) (7,050,836)
Treasury stock, 60,000 shares of common stock at cost (270,000) ( 270,000)
----------- ---------
Total stockholders' equity (deficit) (767,938) (582,423)
----------- ---------
$ 9,242,083 $ 9,281,341
----------- ---------
----------- ---------
See accompanying notes to consolidated financial statements.
2
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 25 October 26 October 25 October 26
------------ ------------ ------------- ------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
Net sales $ 5,048,622 $ 3,953,526 $ 15,559,780 $ 11,405,950
------------ ------------ ------------- ------------
Costs and expenses:
Cost of goods sold 1,871,514 1,493,842 5,920,546 4,241,173
Operating expenses 2,524,031 2,074,935 7,528,677 6,093,802
Depreciation and amortization 221,263 171,713 637,472 456,937
General and administrative 379,089 361,828 1,193,116 1,280,837
------------ ------------ ------------- ------------
4,995,897 4,102,318 15,279,811 12,072,749
------------ ------------ ------------- ------------
Operating income (loss) 52,725 (148,792) 279,969 (666,799)
------------ ------------ ------------- ------------
Other income (expense)
Interest expense (171,902) (141,910) (504,504) (351,775)
Noncash expense from issuance
of stock options pursuant to
debt guarantees (24,460) (24,460) (73,380) (73,380)
Gain on sale of assets -- 443 -- 254,771
------------ ------------ ------------- ------------
(196,362) (165,927) (577,884) (170,384)
------------ ------------ ------------- ------------
Loss before income taxes (143,637) (314,719) (297,915) (837,183)
Provision for income tax -- -- -- --
------------ ------------ ------------- ------------
Net Loss $ (143,637) $ (314,719) $ (297,915) $ (837,183)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Net loss per common share-
Basic and diluted $ (.02) $ (.04) $ (.04) $ (.12)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Average shares outstanding-
Basic and diluted 7,682,728 7,113,345 7,613,571 7,113,345
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
See accompanying notes to consolidated financial statements.
3
AMARILLO MESQUITE GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks Ended
October 25 October 26
------------- ------------
1998 1997
------------- ------------
Cash flows from operating activities:
Net loss $ (297,915) $ (837,183)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 637,472 456,937
Changes in assets and liabilities
(Increase) decrease in accounts receivable 11,245 (14,869)
(Increase) decrease in inventories (886) (12,713)
(Increase) decrease in prepaid expenses and
other current assets (50,482) (56,355)
Increase (decrease) in accounts payable 143,881 (39,279)
Increase (decrease) in accrued expenses (21,522) (94,174)
Gain on sale of assets -- (254,771)
Noncash expense from issuance of stock
options pursuant to debt guarantees 73,380 73,380
Other net ( 5,320) ( 9,100)
------------- ------------
Cash provided by (used in) operating activities 489,853 (788,127)
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (1,041,958) (2,530,183)
Proceeds from sale of assets -- 435,000
------------- ------------
Cash used in investing activities (1,041,958) (2,095,183)
------------- ------------
Cash flows from financing activities:
Sale of common stock 39,020 45,070
Short-term borrowings 628,048 --
Long-term borrowings -- 3,230,000
Repayment of long-term borrowings
and capital lease obligations (308,354) (240,552)
------------- ------------
Cash provided by financing activities 358,714 3,034,518
------------- ------------
Increase (decrease) in cash (193,391) 151,208
Cash at beginning of period 563,836 328,285
------------- ------------
Cash at the end of period $ 370,445 $ 479,493
------------- ------------
------------- ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 504,504 $ 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)
October 25, 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 October 25, 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 October 25, 1998, there are 1,281,328
options outstanding at a weighted average exercise price of $2.51 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 October 25, 1998, the Company had current liabilities in excess of
current assets of $2,702,372 and a stockholders' deficit of $767,938.
The Company reported a loss of $297,915 and cash flow from operations of
$489,853 for the nine month period ended October 25, 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.
RESULTS OF OPERATIONS
Three Months Ended October 25, 1998 Compared to Three Months Ended October 26,
1997.
For the three months ended October 25, 1998, sales increased 27.7% to
$5,048,622 as compared to sales of $3,953,526 for the third quarter of the prior
year. As of October 25, 1998, the Company operated twelve Amarillo Mesquite
Grills and one Cotton Patch Cafe as compared to nine Amarillo Mesquite Grills
and two Cotton Patch Cafes as of October 26, 1997.
Cost of sales, as a percentage of total sales, was 37.1% and 37.8% for
the 1998 and 1997 periods respectively. The Company introduced a new menu in
all stores during the quarter. The menu was introduced in a couple of stores
at a time with the last three stores being completed the last week of the
quarter. With the new menu in effect for a full period the Company expects
cost of sales to be in the 34% to 36% range.
Operating expenses, as a percentage of total sales, were 50.0% and 52.5%
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 October 25, 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 without
substantially increasing the dollar amount of general and administrative
expenses.
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 $171,902 for the quarter ended October 25, 1998 as
compared to $141,910 for the same period a year ago. The increase in the dollar
amount of interest expense from third quarter 1997 to third quarter 1998 is the
result of an increase in long-term debt relating to new store development.
7
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.
NINE MONTHS ENDED OCTOBER 25, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 26,
1997.
For the nine months ended October 25, 1998, sales increased 36.4% to
$15,559,780 as compared to sales of $11,405,950 for the nine months ended
October 26, 1997. As of October 25, 1998, the Company operated twelve Amarillo
Mesquite Grills and one Cotton Patch Cafe as compared to nine Amarillo Grills
and two Cotton Patch Cafes as of October 26, 1997.
Cost of sales, as a percentage of total sales, was 38.1% and 37.2% for
the 1998 and 1997 periods respectively. The Company introduced a new menu in
all stores during the quarter. The menu was introduced in a couple of stores
at a time with the last three stores being completed the last week of the
quarter. With the new menu in effect for a full period the Company expects
cost of sales to be in the 34% to 36% range.
Operating expenses, as a percentage of total sales was 48.4% and 53.4% 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 total sales, was
7.7% and 11.2% for the 1998 and 1997 periods respectively. The decrease in
general and administrative, as a percentage of total sales, is the result of
substantially increasing sales without substantially increasing the dollar
amount of general and administrative expenses.
Interest Expense was $504,504 for the nine months ended October 25, 1998 as
compared to $351,775 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 $73,380 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
October 25, 1998 and January 25, 1998, the Company had an excess of current
liabilities over current assets of $2,702,372 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 $489,853 in the first nine months of fiscal 1999 compared to cash
used of $788,127 in the first nine 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
$1,041,958 for the nine months ended October 25, 1998, compared to $2,530,183
for the nine months ended October 26, 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.
Not applicable.
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.
Not Applicable.
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 December 8, 1998 /s/LINN F. HOHL
----------------------- -------------------------------
Linn F. Hohl - Vice President
of Finance,
Secretary and
Treasurer
11