Item 1 - Business.
General
Sagebrush, Inc. owns and operates 28 "Sagebrush Steakhouse & Saloon" restaurants in North Carolina, South Carolina, Tennessee, and Virginia at March 21, 1997. The Company opened the first Sagebrush restaurant in Hickory, North Carolina in October 1990. The Company's operations have expanded since then to include a total of 28 Sagebrush restaurants. The weighted average annualized sales per restaurant for the twelve months ended January 3, 1997 were approximately $1.7 million each. Sagebrush, Inc., which was incorporated in North Carolina in 1992 and had no operations prior to the Company's initial public offering in January 1996, reorganized and consolidated the operations of the 23 corporations (the "Related Corporations") which had conducted the Company's business prior to such initial public offering (such reorganization and consolidation is hereinafter referred to as the "Reorganization"). In September 1996, Sagebrush, Inc. streamlined and simplified its organizational structure by, among other things, consolidating certain of its operations in newly-formed entities in North Carolina, South Carolina and Tennessee. (see Note 1 to the Consolidated Financial Statements) All references herein to the "Company" include the business and operations of Sagebrush, Inc., its subsidiaries and such Related Corporations.
The Sagebrush Concept
The Sagebrush concept is to serve high-quality, moderately-priced meals in a casual, family-oriented atmosphere suggestive of a Texas roadhouse. The Company seeks to locate its restaurants in smaller cities and suburban areas where they fill a significant market niche. Sagebrush restaurants are distinguished from other family-oriented steakhouses in these smaller markets (many of which are cafeteria-style) by their full table service and attentive wait staff, full bar service, entertaining atmosphere, distinctive decor and consistently high- quality food. The Company distinguishes its restaurants from other full-service restaurants through their family orientation which is accomplished by offering lower priced food (such as hamburgers and sandwiches) at dinner, placing less emphasis on alcohol sales as compared to most competitors and offering features designed to appeal to children. The Company believes that the combination of these factors makes its concept attractive to a broad range of consumers in the markets it serves.
Sagebrush Menu
The Company's selective menu features high-quality aged steaks, prime rib, chops, ribs, chicken and fish along with hamburgers and chicken sandwiches. The Company's dinner menu includes nine steak entrees which are cut daily from specially-selected U.S.D.A. choice aged western beef and prepared using the Company's special seasoning. In addition to the regular menu items, each restaurant has a daily, specially-priced "Blue Plate Special" at lunch which is selected by its general manager and typically features fish, chicken or pork chops. Each restaurant also has a "Little Pistols" children's menu featuring hamburgers and sandwiches. All steaks come with a choice of Texas fries, baked potato or baked sweet potato, a fresh garden salad and Texas toast. The menu also includes specialty appetizers, desserts and full bar service where legally permitted. The Company periodically tests new menu items in an effort to update and adapt to changing customer preferences.
The Company's dinner entrees, which are also available at lunch, range in price from $7.95 to $18.95, lunch entrees range in price from $3.95 to $5.95, and appetizers are priced from $1.95 to $8.95. The average check per customer, including beverages, is approximately $12.75 for dinner and $6.85 for lunch. Menu prices are generally the same at each restaurant except for those located in resort areas where seasonal factors require slightly higher prices. Sales of alcoholic beverages, which are available in all but two of the Company's restaurants, account for approximately 9% of the Company's revenues. Each restaurant typically serves from 150-250 customers at lunch and from 250-300 customers at dinner during the week and from 100-300 customers at lunch and from 700-900 customers at dinner on weekends. The Company's restaurants do not serve breakfast.
Atmosphere and Decor
The Company's restaurants feature a casual, family-oriented atmosphere suggestive of a Texas roadhouse. The restaurants feature wood booths and walls, and a mix of western memorabilia and other collectibles, including license plates and signs from around the United States, photographs of sports figures and movie stars, and a replica of an antique jukebox featuring country music. In all areas of the restaurants, complimentary peanuts are offered and customers are encouraged to drop their shells on the floor. Special effort is made to make families with children feel welcome. A "Little Pistols" children's menu featuring hamburgers and sandwiches is available, birthdays are recognized in a special manner by the wait staff and servers offer balloons to children.
Site Selection
The Company considers the location of its restaurants to be important to its long-term success and devotes significant effort to the investigation and evaluation of potential sites. The Company's site selection process focuses on trade area demographics, population density and household income levels, and specific site characteristics such as visibility, accessibility, traffic volume and parking as well as proximity to shopping centers, hotels and motels, colleges and universities, large employers and tourist attractions. The Company also reviews potential competition and the profitability of restaurants operating in the area. Senior management inspects and approves each restaurant site.
All but one of the Company's restaurants are located in freestanding buildings that are generally located near interstate highways or other main thoroughfares. Prior to 1996, the Company leased all but one of its restaurant sites, and, with the exception of the Clemmons and Kernersville, North Carolina restaurants, had established all of its restaurants by converting existing buildings to the Sagebrush concept. The Company continued this method of expansion in the first part of 1996 as the first four restaurants opened in 1996 were conversions of existing buildings, one of which was purchased rather than leased.
The final two restaurants opened in 1996, Colonial Heights, Virginia and Greenwood, South Carolina, however, represent methods of expansion that may be relied upon by the Company more in the future. The Colonial Heights restaurant is the Company's first non-freestanding location. It is a leased facility located in an endcap of a high traffic, retail strip center. The location in Greenwood is a Company-owned property and was built using the Company's new prototype plan. While the Company will continue to attempt to locate facilities to lease or buy and convert, the Company expects a higher proportion of locations in the future will be established by purchasing land and building a restaurant. This is primarily due to the difficulty of finding suitable buildings in desirable locations that can be leased and renovated.
Because the Company has historically established its Sagebrush restaurants in existing buildings which it remodeled for the Sagebrush concept, restaurant sizes vary from approximately 4,500 to 8,500 square feet with the tables in the dining area seating from approximately 150 to 280 people. The bar area of a typical restaurant generally has seating capacity for approximately 20 people. Most of the Company's restaurants also have a private banquet room seating from 25 to 50 people. Although the banquet facilities are often used for private parties, they can also be used for general customer seating during peak dining hours. The Company's prototype facility is approximately 6,500 square feet and contains 208 dining seats and 37 seats in the bar area.
Converting Facilities to the Sagebrush Concept
The Company has been able to minimize start-up costs for its restaurants in the past by leasing or buying existing restaurant facilities or other buildings in the targeted areas of expansion, and converting them to the Sagebrush concept. The Company has established all but three of its existing restaurants in this manner. The Company engages an experienced contractor who is typically able to convert a facility into a Sagebrush restaurant in six to seven weeks. Restaurant furniture and equipment is generally purchased from a single supplier, although the Company believes that there are a number of other suppliers who could also furnish furniture and equipment at competitive prices. The Company's cost of opening a new restaurant when it leases and renovates an existing building is approximately $500,000, including the costs of renovating the facility, purchasing equipment (if necessary) and training personnel. Twenty-five of the Company's 28 existing restaurants have been conversions. The Company established its Clemmons, North Carolina restaurant by erecting a new building on leased property at a total cost of approximately $900,000, its Kernersville, North Carolina restaurant by erecting a new building on purchased property at a total cost of approximately $1.4 million and its Greenwood, South Carolina restaurant by erecting a new building on purchased property at a total cost of approximately $1.5 million. See "-Site Selection."
Restaurant Locations
The following table sets forth the location, opening date, seating capacity (excluding bar area and private rooms) and approximate square footage of each of the Company's 28 restaurants:
Seating Approximate Date Opened Capacity Sq. Footage North Carolina: Hickory October 1990 158 5,000 Statesville October 1991 256 6,500 Boone June 1992 270 8,500 Hickory (Viewmont) July 1992 280 7,000 Morganton March 1993 252 6,300 Winston-Salem September 1993 180 6,500 Clemmons December 1993 265 6,800 Waynesville January 1994 270 6,800 Brevard March 1994 196 6,000 Arden August 1994 256 6,300 Wilkesboro September 1994 221 6,300 Monroe December 1994 236 6,800 Kernersville June 1995 200 6,800 Mount Airy January 1997 208 6,500
South Carolina: Rock Hill December 1992 246 6,300 Gaffney December 1995 212 8,000 Greenwood November 1996 196 6,800
Tennessee: Pigeon Forge September 1991 172 4,500 Oak Ridge November 1991 204 8,000 Knoxville February 1992 202 7,500 Kingsport February 1993 144 6,000 Sevierville May 1994 173 4,500 Gatlinburg April 1995 168 6,800 Johnson City March 1996 226 9,000 Alcoa June 1996 204 7,500 Morristown September 1996 226 9,000
Virginia: Lynchburg July 1996 204 9,000 Colonial Heights October 1996 188 5,850
Restaurant Operations
Management and Employees. The management staff of a typical restaurant consists of a general manager, a manager, an assistant manager and a kitchen manager. Each restaurant also employs from 40 to 100 hourly employees, many of whom work part-time. The general manager of each restaurant has primary responsibility for the day-to-day operations of the restaurant and is responsible for maintaining Company-established operating procedures. Two of the managers are present at each restaurant from Monday through Thursday and three of the managers are present at each restaurant from Friday through Sunday of each week. General managers are required to supervise both the opening and closing of their restaurant several times per week. The Company currently has four area supervisors, each of whom currently oversees from six or seven restaurants, and one director of training, who oversees one existing store and all new stores from pre-opening through approximately twelve weeks of operations.
The Company seeks managers with substantial restaurant experience and requires all new managers, most of whom are college graduates, to complete a 28- day orientation and training program at its Rock Hill, South Carolina restaurant. The orientation and training program, which is conducted by the Company's director of training, is designed to educate new managers in all aspects of the Company's operations, including the Company's philosophy, management strategy, policies, procedures and operating standards. The Company's managers are required to know how to perform every job in a restaurant. The Company also has hired consultants to assist in its training of junior managers. After their initial training, managers attend monthly training sessions at the Company's headquarters. The Company's senior management meets bi-weekly with area supervisors to discuss restaurant operations. Senior management also receives daily and weekly reports prepared by general managers and staff accountants summarizing each restaurant's operations for the preceding week. Based upon these reports, senior management is able to closely monitor and supervise each restaurant's operations. Additionally, members of senior management regularly visit each restaurant to ensure that the Company's philosophy, strategy and standards of quality are being adhered to in all aspects of restaurant operations.
A restaurant's general manager usually does the hiring for his or her restaurant and is responsible for overseeing the training of new employees. The general managers delegate certain of their responsibilities to the manager, assistant manager and kitchen manager of the restaurant. The initial training period for new employees lasts one to two weeks and is characterized by on-the-job training by a certified unit trainer. All food servers are required to pass a written test examining their knowledge of the menu and operating procedures before they are allowed to serve customers. Ongoing training of employees is the responsibility of each restaurant's general manager.
Restaurant managers are compensated by means of a base salary and an incentive arrangement pursuant to which they receive additional compensation based on their restaurant's pre-tax earnings. The Company also sponsors contests for general managers based on the achievement of specified sales goals. The Company generally prefers to draw a restaurant's general manager from within the Company's organization. The Company's hourly employees are generally paid at rates ranging from the minimum wage ($2.13 per hour for wait staff) to $9.00 per hour.
Restaurant Reporting. Each restaurant's general manager is primarily responsible for providing financial and other reports to the Company's management. The general managers prepare weekly reports on daily sales, cash deposits, customer counts, purchases, inventory and labor costs which are reviewed by staff accountants. Monthly profit and loss statements are prepared for each restaurant and reviewed by management. Physical inventory of beef is taken on a daily basis and physical inventories of all other food, beverage and supply items are taken on a bi-weekly basis.
Quality Assurance. The Company has adopted a number of measures to ensure strict compliance with its operating standards and procedures. The Company's senior management monitors each restaurant by reviewing the weekly reports prepared by the Company's general managers and staff accountants, and by making regular visits to and inspections of each restaurant. In order to avoid employee theft, the Company has a strict policy that the back door of each of its restaurants must be locked and secured by an alarm at all times unless a manager is present at the door. The Company also engages an independent service to visit periodically each of the Company's restaurants on an anonymous basis and to submit reports to senior management focusing on factors such as food quality, wait service and cleanliness and to summarize the overall dining experience at each such restaurant.
Ingredients and Purchasing. As part of its commitment to using fresh, high quality ingredients, the Company purchases only U.S.D.A. choice aged western beef. Steaks are hand cut daily at each restaurant. In order to ensure the uniform quality and freshness of the food served in its restaurants, the Company establishes rigid specifications for all of its meat and produce. The Company monitors the prices and specifications of the products it purchases in order to ensure that it can consistently serve high quality food at competitive prices. The Company currently purchases most of its food products from one supplier, Biggers Brothers, Inc., from whom purchases during 1996 accounted for approximately 90% of the Company's total food and beverage costs and approximately 85% of its total cost of restaurant sales. The Company believes, however, that products of comparable quality are available, or upon short notice can be made available, from alternative suppliers. While food and supplies are shipped directly to the restaurants, invoices for purchases are sent by the supplier to the Company's headquarters in Claremont, North Carolina for payment.
Marketing and Advertising. The Company uses radio advertising in all markets. Most markets are clustered around media centers such as Charlotte, Asheville, and Winston-Salem, North Carolina, Knoxville and Johnson City, Tennessee and Roanoke, Virginia. The Company utilizes billboard advertising for restaurants located in close vicinity to interstate highways. The Company uses aggressive direct local marketing campaigns, including school programs, hotel marketing, charitable and community events. The Company does not advertise in newspapers or by distributing coupons.
Restaurant Industry and Competition
The restaurant industry generally, and the Company's business specifically, are intensely competitive with respect to concept, price, service, location and food quality and there are many well-established competitors, including a number of other steakhouse and family-oriented restaurants with concepts similar to the Company's, with substantially greater financial and other resources than the Company. Some of the Company's competitors have been in existence for a substantially longer period than the Company and may be better established in or decide to enter the markets where the Company's restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. The Company's revenues are derived primarily from the sale of beef and, therefore, a change in consumer preferences for, or adverse publicity associated with, beef could have an adverse effect on the Company's sales and profitability. In addition, factors such as inflation, increased cost of food, labor and benefits and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company's restaurants and its ability to expand in particular.
The Company endeavors to compete with other restaurants primarily on the basis of service, value, location and providing high quality meals in a casual, family-oriented atmosphere. While the Company believes that it competes for customers with a broad variety of other restaurants, there are several restaurant chains, including Rare Hospitality, Inc. and Lone Star Steakhouse & Saloon, Inc., which have restaurant concepts very similar to the Company's and which currently operate in, or may further expand into, the Company's geographic market areas and may be significant competitors.
Employees
As of January 3, 1997, the Company employed approximately 1,507 persons, of whom 19 were corporate personnel, 131 were restaurant managers or supervisors and approximately 1,357 were hourly employees. Of the 19 corporate employees, 6 were in management and 13 were in administrative positions. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.
Trademarks
The Company has registered the service mark SAGEBRUSH STEAKHOUSE & SALOON(r) with the United States Patent and Trademark Office. The Company regards its service mark as having significant value and as being an important factor in the marketing of its restaurants. While the Company is aware of names and marks similar to the service mark of the Company used by other persons in certain geographic areas, it does not believe that such uses will adversely affect the Company. It is the Company's policy to oppose vigorously any infringement of its marks in its marketing area.
Government Regulation and Potential Liabilities
The Company is subject to various federal, state and local laws affecting its business. Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of new restaurants in particular areas.
Approximately 9% of the Company's revenues are attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, to county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. The loss, lapse or suspension of a restaurant's food or liquor licenses could adversely affect the Company.
The Company may be subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance and has never been named as a defendant in a lawsuit involving such a dram-shop statute.
Although the Company has established and maintains high standards for ingredients and food preparation at its restaurants, the restaurant and food service industry generally is subject to potential liability for injuries to customers resulting from food poisoning or similar causes due to faulty ingredients or inadequate food preparation. Incidents of food poisoning at other restaurants or restaurant chains have adversely affected such restaurants' business and reputation.
The Company's restaurant operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of the Company's food service and preparation personnel are paid at hourly rates and increases in the federal minimum wage could increase the Company's labor costs.
The Company's development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental laws and regulations. Compliance with federal, state and local environmental laws has not historically had a significant impact on the Company's capital expenditures, earnings and competitive position.
Item 2
Item 2 - Properties.
The Company, which maintains its executive offices in Claremont, North Carolina, owns and operates 28 restaurants. The Company owns the property upon which its Alcoa, Greenwood, Kernersville, Knoxville and Mount Airy restaurants are located and leases its other restaurant sites. The Company's executive offices and 14 of its restaurants are located on properties owned directly or indirectly by certain shareholders of the Company and are leased to the Company. The Company's remaining 10 restaurants are located on properties owned by unaffiliated parties. The following table sets forth certain information relating to the leases entered into in connection with the Company's facilities:
_____________________ (1) Base rent for the leases generally does not include taxes, utilities or insurance, for which the Company is responsible. Additionally, most of the leases provide either for (a) periodic adjustments in the rent payable based on changes in the prime rate or (b) specified increased payments either during the renewal terms or at other specified times.
(2) Because many of the Company's restaurants are conversions of existing facilities of varying sizes, and because the additional rental payments are based on gross sales and are not necessarily related to restaurant sizes, comparisons of base rents per square foot among restaurants may not be meaningful.
(3) Certain of the leases provide for contingent rental payments based on a percentage of the applicable restaurant's gross sales. The additional rent payable under these leases is generally equal to the difference between the total base rent paid under the lease during the preceding year and the indicated percentage of such restaurant's gross sales for such year.
(4) This property is leased on a month to month basis.
(5) Under this lease, the Company is required to pay as contingent rent by October 5 of each year an amount equal to 5% of this restaurant's gross sales in excess of $1,440,000 for the twelve-month period ending on September 20 of such year.
(6) Under this lease, the Company is required to pay as contingent rent by August 31 of each year an amount equal to 5% of this restaurant's gross sales in excess of $1,248,000 for the twelve-month period ending on August 16 of such year.
(7) Under this lease, the Company is required to pay as contingent rent each year an amount equal to 3% of this restaurant's gross sales in excess of $2,000,000 for the prior calendar year.
(8) Under this lease, the Company is required to pay as contingent rent by March 1 of each year an amount equal to 5% of this restaurant's gross sales in excess of $1,200,000 for the prior calendar year.
(9) Lease of additional parking area. Under a purchase agreement, the Company is obligated to purchase this property for no greater than $144,000 no later than December 31, 1999.
(10) Restaurant operations closed at the close of business on January 3, 1997.
Item 3
Item 3 - Legal Proceedings.
Not applicable.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Part II
Item 5
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters.
Market Information
The common stock of Sagebrush, Inc. is traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol SAGE. Stock price quotations can be found in major daily newspapers and the Wall Street Journal. There was no market for the common stock of Sagebrush, Inc. prior to the Company's initial public offering. The stock began trading on January 11, 1996. At March 21, 1997, there were 72 shareholders of record of the Company's Common Stock. The following table shows, for the periods indicated, the high and low sales prices per share for the common stock as reported by Nasdaq.
1996 High Low First quarter 7 5/8 5 3/4 Second quarter 9 1/4 6 7/8 Third quarter 9 1/8 6 Fourth quarter 7 3/4 5 3/4
Dividends and Dividend Policy
Prior to its initial public offering, the Company's dividend policy was based primarily on considerations relating to the "S Corporation" status of most of the Related Corporations under Subchapter S of the Internal Revenue Code of 1986 and for state income tax purposes, and to the fact that most of the Related Corporations were capitalized through equity investments with any associated debt being incurred at the shareholder level. As a result of their S Corporation status, the net income of most of the Related Corporations was taxed directly to their shareholders rather than to the respective corporations. Because of these factors, each of the Related Corporations historically distributed all of its net income to its shareholders on a current basis. The Company (including all Related Corporations) paid total cash dividends of $888,000 in 1996 and $3,962,000 in 1995. The S Corporation elections of all applicable Related Corporations were terminated in connection with the Reorganization. Following the Reorganization and termination of such S Corporation elections, the Company has been subject to corporate income taxation as a C Corporation and has not paid dividends as a public company.
The Company anticipates that for the foreseeable future any earnings will be retained to support the operation and expansion of the Company's business and that it will not pay any cash dividends.
Recent Sales of Unregistered Securities
In connection with the Reorganization (which was consummated on January 17, 1996), the Company issued 4,500,000 shares of its Common Stock to shareholders of the Related Corporations as part of the consideration for their exchange of the capital stock of the Related Corporations. The 26 shareholders who received such Common Stock in the Reorganization were either directors, prospective directors, executive officers or management employees of the Company, members of their families, or other persons having relationships with the Company or its principals (including a public corporation engaged in the restaurant business and two of its subsidiaries) who were familiar with the business and affairs of the Company, were provided with substantially the same information as would have been provided in a registration statement for such transaction, and acquired such shares solely for investment. Although the Reorganization was contingent upon the closing of the Company's initial public offering, the terms of the Reorganization were agreed to by such shareholders prior to the filing of any registration statement in connection with the Company's initial public offering. Consequently, the Company believes that the issuance of its Common Stock to such shareholders in the Reorganization was exempt from registration under Section 4(2) of the Securities Act of 1933.
Item 6
Item 6 - Selected Financial Data.
The following selected consolidated and combined financial data as of the end of and for each of the fiscal years in the five-year period ended January 3, 1997 are derived from the audited combined financial statements of the Company. The combined selected financial data as of December 27, 1991 and for the year ended were derived from unaudited financial statements. In the opinion of management, such unaudited data reflect all adjustments necessary to reflect properly the financial position and results of operations for the periods presented. The selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein. See "Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters - Dividends and Dividend Policy" for information relating to the Company's declaration of dividends.
(Dollars in thousands except per share data)
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Since opening the first Sagebrush restaurant in Hickory, North Carolina in October 1990, the Company's operations have grown to include 28 restaurants in North Carolina, South Carolina, Tennessee and Virginia at January 3, 1997. From 1993 to 1996, the Company's revenues increased from approximately $19.3 million to $42.1 million. The rapid growth in the Company's revenues has resulted primarily from an increase in the number of the Company's restaurants. The Company opened three restaurants in 1991, five in 1992, four in 1993, six in 1994, three in 1995 and six in 1996. The Company's operating income has increased from $2.0 million in 1993 to $3.9 million in 1996. The Company believes that these favorable trends in both its revenues and operating income have been achieved as a result of its attracting and retaining experienced employees, implementing an effective management development program and adopting measures to ensure strict compliance with its operating standards and procedures.
Substantially all of the Company's revenues are derived from restaurant sales with approximately 9% of such revenues attributable to sales of alcoholic beverages.
Cost of restaurant sales consists of food, beverage and supply costs.
Labor costs include salaries, wages and benefits of all restaurant level employees.
Other operating expenses principally consist of restaurant occupancy costs such as rent, utilities, building maintenance, insurance and taxes, as well as equipment rentals and repairs, bank transaction charges and miscellaneous restaurant expenses.
General and administrative expenses consist of wages for management, supervisory and other corporate personnel, and other personnel costs, costs of advertising and promotions and other expenses.
Depreciation of property and equipment is provided primarily over the estimated useful lives of the respective assets on a straight-line basis.
Amortization expense principally includes pre-opening costs which consist of labor costs, costs of hiring and training personnel, and certain other costs relating to opening new restaurants. These costs are capitalized until the restaurant is opened and then amortized over a twelve-month period.
In connection with the reorganization effected immediately prior to the completion of the initial public offering of Common Stock of Sagebrush, Inc. in January 1996, the S Corporation elections of certain of the Related Corporations were terminated, and salaries payable to certain of the Company's principal executive officers were increased to more representative levels. If the increase in executive salaries had been in effect since the beginning of 1995, expenses would have increased by approximately $500,000 in 1995.
The following analysis of the financial condition and results of operations of the Company should be read in conjunction with its Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report. Fiscal 1996 and 1992 consisted of 53 weeks and all other fiscal years presented herein consisted of 52 weeks. The Company's fiscal quarters consist of accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively.
Results of Operations
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.
Fiscal Year 1991 1992 1993 1994 1995 1996 Revenues - restaurant sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Cost of restaurant sales 38.8 38.7 38.3 38.0 37.4 36.9 Labor costs 28.7 28.0 26.6 26.2 26.3 27.1 Other operating expenses 14.2 14.3 14.1 14.2 15.4 14.6 General and administrative expenses 14.7 7.4 7.0 7.0 7.0 8.5 Depreciation 3.9 2.0 1.8 1.8 2.2 2.3 Amortization (principally of pre-opening costs) 2.8 2.5 1.8 1.2 1.0 1.0 Store closing cost .4 Total operating costs and expenses 103.1 92.9 89.6 88.4 89.3 90.8 Operating income (loss) (3.1) 7.1 10.4 11.6 10.7 9.2 Other income, net 3.2 .9 .4 .3 .3 .2 Interest income .3 Interest expense (1.0) (.7) (.3) (.3) (.4) (.1) Income (loss) before income taxes (.9) 7.3 10.5 11.6 10.6 9.6 Income tax provision .7 .6 .2 3.7 Net income (loss) (.9)% 7.3% 9.8% 11.0% 10.4% 5.9% Pro forma net income (1) 5.6%
(1) Includes proforma effects of executive salaries ($500,000) and income taxes ($1.2 million).
The following table sets forth selected operating data for the periods indicated.
(Dollars in thousands) Fiscal Year 1991 1992 1993 1994 1995 1996 Restaurants open at the beginning of the year 1 4 9 13 19 22 Restaurants opened during the year 3 5 4 6 3 6 Restaurants open at the end of the year 4 9 13 19 22 28 Restaurant sales $1,955 $10,577 $19,272 $28,664 $34,020 $42,110 Weighted average sales per restaurant $1,240 $ 1,602 $ 1,746 $ 1,783 $ 1,677 $ 1,726 Weighted average weekly sales per restaurant $ 23.8 $ 30.2 $ 33.6 $ 34.3 $ 32.2 $ 32.6
The table below presents a progression of restaurant sales presented by the year in which the Company's restaurants began operations. Results for the first year of each restaurant's operations reflect its sales from the date of opening through fiscal year end.
Restaurant Openings (Dollars in thousands) Fiscal Year Year Number 1990 1991 1992 1993 1994 1995 1996 1990 1 $ 222 $ 1,225 $ 1,681 $ 1,873 $ 2,094 $ 2,110 $ 2,126 1991 3 730 4,343 4,886 5,100 5,168 5,200 1992 5 4,553 8,707 9,008 8,726 8,522 1993 4 3,806 6,675 6,410 6,452 1994 6 5,787 9,419 9,324 1995 3 2,187 4,892 1996 6 5,594 Total 28 $ 222 $ 1,955 $ 10,577 $ 19,272 $ 28,664 $ 34,020 $ 42,110
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues. Revenues increased $8.1 million, or 23.8%, from $34.0 million in 1995 to $42.1 million in 1996. This increase resulted from an increase in the number of restaurants operated by the Company from 22 to 28, as well as a slight increase in revenues of .6% for restaurants open over eighteen months.
Cost of restaurant sales. Cost of restaurant sales increased $2.8 million, or 22.1%, from $12.7 million to $15.5 million, and as a percentage of revenues decreased from 37.4% to 36.9%. This decrease as a percentage of revenues principally resulted from reduced food costs realized from lower market prices and improved purchasing practices.
Labor costs. Labor costs increased $2.5 million, or 27.6%, from $9.0 million to $11.4 million, principally due to the increase in the number of restaurants. As a percentage of revenues, labor costs increased from 26.3% to 27.1%. The increase is primarily the result of an increase in costs associated with the Company's management training program due to the increased number of restaurant openings in 1996.
Other operating expenses. Other operating expenses increased $900,000, or 17.2%, from $5.2 million to $6.1 million, and as a percentage of revenues decreased from 15.4% to 14.6%. The improvement as a percentage of sales was due to most operating expenses rising less than the percentage increase in sales and three restaurants being owned rather than leased.
General and administrative expenses. General and administrative expenses increased $1.2 million, or 50.0%, from $2.4 million to $3.6 million, and as a percentage of revenues increased from 7.0% to 8.5%. Adjusting 1995 general and administrative expenses for the approximately $500,000 increase in executive pay related to the reorganization discussed above, general and administrative expenses for 1995 as a percentage of revenue would have been 8.4%.
Depreciation. Depreciation increased $215,000, or 28.2%, from $761,000 to $976,000, and as a percentage of revenues increased from 2.2% to 2.3% primarily because of increased investment in property and equipment related to the new restaurants.
Amortization. Amortization of pre-opening costs increased $121,000, or 38.7%, from $314,000 to $435,000, and as a percentage of revenues remained constant. The increase was due to an increase in the number of restaurants opened in 1996 compared to 1995.
Store closing cost. During the fourth quarter of 1996, the Company recorded a pre-tax charge of $168,000 relating to the closing of its restaurant in Asheville, North Carolina at the close of business on January 3, 1997. The restaurant was unprofitable and did not meet company operating expectations. The declining sales at this restaurant were primarily attributable to a poor location. The charge includes the expenses of closing and writing down assets to estimated net realizable value.
Other income. Other income, which principally represents accounting fees charged to certain related non-Sagebrush restaurants, declined due to a decrease in the number of those restaurants.
Interest income. The Company had interest income during fiscal 1996 as a result of investments of the proceeds from the Company's initial public offering.
Interest expense. Interest expense decreased $105,000 from $151,000 to $46,000 primarily as a result of a decrease in the Company's borrowings in 1996.
Income tax provision. The Company's effective tax rate for fiscal 1996 was 39.0%. 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. (See Note 7 to the Consolidated Financial Statements)
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenues. Revenues increased $5.3 million, or 18.7%, from $28.7 million in 1994 to $34.0 million in 1995. This increase resulted from an increase in the number of restaurants operated by the Company from 19 to 22, and was offset slightly by a decrease in revenues of 1.9% in restaurants open for both years. Three of the restaurants experienced revenue decreases significantly greater than the average decrease in restaurants open for both periods. The remaining ten restaurants open for both periods had an average sales growth of .8%.
Cost of restaurant sales. Cost of restaurant sales increased $1.8 million, or 16.9%, from $10.9 million to $12.7 million, and as a percentage of revenues decreased from 38.0% to 37.4%. This decrease as a percentage of revenues principally resulted from reduced food costs (primarily beef and potatoes) realized from lower market prices and improved purchasing practices, as well as improved security and waste management.
Labor costs. Labor costs increased $1.4 million, or 19.1%, from $7.5 million to $9.0 million, principally due to the increase in the number of restaurants. As a percentage of revenues, labor costs increased slightly from 26.2% to 26.3%.
Other operating expenses. Other operating expenses increased $1.1 million, or 29.0%, from $4.1 million to $5.2 million, and as a percentage of revenues increased from 14.2% to 15.4%. This increase as a percentage of revenues principally resulted from certain of the Company's leases with affiliates being amended to conform the terms thereof to the terms of other leases with affiliates and certain third parties, which provide for contingent rental payments based on a percentage of the applicable restaurant's gross sales.
General and administrative expenses. General and administrative expenses increased $360,000, or 17.8%, from $2.0 million to $2.4 million, and as a percentage of revenues remained constant at 7.0%.
Depreciation. Depreciation increased $235,000, or 44.6%, from $526,000 to $761,000, and as a percentage of revenues increased from 1.8% to 2.2% primarily because of increased investment in property and equipment.
Amortization. Amortization of pre-opening costs decreased $38,000, or 10.9%, from $352,000 to $314,000, and as a percentage of revenues decreased from 1.2% to 1.0%.
Other income. Other income, which principally represents accounting fees charged to certain related non-Sagebrush restaurants, remained constant as a percentage of restaurant sales.
Interest expense. Interest expense increased $76,000 from $75,000 to $151,000 as a result of the Company's incurring additional indebtedness during late 1994 and early 1995 principally to fund new store openings.
Quarterly Results
The following table sets forth the Company's revenues, income before income taxes, income before income taxes as a percentage of revenues, and number of restaurants in operation at the end of the period for each quarter of 1995 and 1996. In the opinion of management, the unaudited financial statements from which these data have been derived include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The Company's fiscal quarters consist of 12, 12, 12 and 16 or 17 weeks, respectively (16 weeks in 1995 and 17 weeks in 1996).
Quarterly results have been, and in the future are likely to be, substantially affected by the timing of new restaurant openings. Management believes that there is a degree of seasonality in the Company's business with sales being lower in January and February of each year. The first quarter of 1996 was impacted by unusually severe weather in most of the area served by the Company.
Liquidity And Capital Resources
In January 1996, the Company completed its initial public offering and, after deducting the underwriting discount and expenses of the offering, received approximately $11.1 million in total proceeds (including proceeds received in February 1996 from the underwriter's exercise of its option to purchase additional shares to cover over- allotments). The Company used approximately $5.2 million of the proceeds to fund cash payments to or for the benefit of shareholders of the Related Corporations in connection with the reorganization effected immediately prior to the initial public offering, and approximately $2.2 million of the proceeds to repay indebtedness. The remaining $3.8 million of the proceeds, together with the cash flow from operations, was used to finance the development of additional restaurants and for general working capital purposes.
At January 3, 1997, the Company had approximately $1.6 million in cash and short term investments, $460,000 in short-term debt and $13.8 million in shareholders' equity. At January 3, 1997, the Company had a revolving credit facility with a commercial bank that provided for borrowings up to $6.0 million (with a participation by another bank for advances over $3.0 million). This facility expired on January 31, 1997 and was renewed through January 31, 1998 to provide for borrowings of up to $3.0 million (without any other bank participation). 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 January 3, 1997, $460,000 was outstanding under the line, which was also the maximum amount outstanding during fiscal 1996. (See Note 4 to the Consolidated Financial Statements)
The Company primarily requires capital for the development and opening of new restaurants. Prior to the Company's initial public offering, the Company financed most of its capital expenditures with cash provided by operating activities, proceeds from the issuance of common stock of the Related Corporations, and from other shareholder contributions.
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 currently plans to open approximately eight restaurants in 1997. The Company now operates 28 restaurants in North Carolina, South Carolina, Tennessee and Virginia. Fiscal 1996 fourth quarter restaurant openings were in Colonial Heights, Virginia and Greenwood, South Carolina. The Company opened a restaurant in Mount Airy, North Carolina on January 14, 1997, and construction has started on restaurants in Salisbury and Lenoir, North Carolina, and Roanoke, Virginia.
The Company has historically established most of its restaurants by leasing and renovating existing facilities to the Sagebrush concept. In 1996, the Company established two of its six new restaurants by purchasing land and building a new restaurant. The remaining four restaurants were established by renovating existing facilities, one of which was purchased and the remaining three leased. 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 1996 (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 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.
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 significant impact on costs during fiscal 1995 or 1996, primarily because the largest single item of expense, food costs, has remained relatively stable during this period. Additionally, the increase in the minimum wage has had little effect since the rate paid to servers, the largest group of the Company's employees subject to minimum wage, was unchanged.
Impact of Recently Issued Accounting Pronouncements
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of," during 1996. It requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Management has reviewed all long-lived assets as of January 3, 1997 and believes that the carrying amounts reported in the balance sheet represent the amounts expected to be recovered over the remaining useful lives of those assets.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This Statement is generally effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Management believes that the implementation of the Statement will not have any material impact on the Company's financial position or results of operations.
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. Item 8
Item 8 - Selected Quarterly Data. (Unaudited)
Fiscal 1996 Quarter ended March 22 June 14 September 6 January 3 Net sales $7,832 $8,932 $10,051 $15,295 Operating income 758 933 970 1,206 Net income 479 619 631 730 Net income per share $ .08 $ .10 $ .10 $ .12
Fiscal 1995 Quarter ended March 24 June 16 September 8 December 29 Net sales $7,224 $7,698 $8,460 $10,638 Operating income 761 724 939 1,227 Net income 721 702 907 1,194
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Part III
Item 10
Item 10 - Directors and Executive Officers of the Registrant.
Reference is made to "Election of Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" included in the definitive Proxy Statement which will be filed with the Commission no later than May 2,1997 and is hereby incorporated by reference.
Item 11
Item 11 - Executive Compensation.
Reference is made to "Executive Compensation", "Director Compensation", "Board of Directors Report on Executive Compensation", "Shareholder Return Performance Graph" and "Compensation Committee Interlocks and Insider Participation" included in the definitive Proxy Statement which will be filed with the Commission no later than May 2,1997 and is hereby incorporated by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management.
Reference is made to "Principal Shareholders and Holdings of Management" and "Election of Directors" included in the definitive Proxy Statement which will be filed with the Commission no later than May 2,1997 and is hereby incorporated by reference.
Item 13
Item 13 - Certain Relationships and Related Transactions.
Reference is made to "Compensation Committee Interlocks and Insider Participation" included in the definitive Proxy Statement which will be filed with the Commission no later than May 2,1997 and is hereby incorporated by reference.
Part IV
Item 14
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) 1. Financial Statements
The following financial statements of the Company are included at pages 22 to 35 hereof.
Independent Auditors' Report
Consolidated Balance Sheets as of January 3, 1997 and December 29, 1995
Consolidated Statements of Income for the Fiscal Years Ended January 3, 1997, December 31, 1995 and December 30, 1994
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended January 3, 1997, December 31, 1995 and December 30, 1994
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 1997, December 31, 1995 and December 30, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules are omitted because of the absence of conditions under which they are required or because information required is included in financial statements or the notes thereto.
3. Exhibits
(3.1) Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-98914) and incorporated by reference herein).
(3.2) Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(10.1) Agreement dated as of March 16, 1992 by and between the Company and Biggers Brothers, Inc. (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(10.2) 1995 Stock Option Plan (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).*
(10.3) Form of restaurant lease with related parties.
(10.6) Letter of Agreement dated January 28, 1997 between Peoples Bank and the Company.
(10.7) Note dated January 31, 1997 between Peoples Bank and the Company.
(21) Subsidiaries of the Company.
(27) Financial Data Schedule. (filed in electronic format only)
________________ * Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the registrant during the last quarter of the period covered by this report.
(c)Exhibits.
See Item 14(a)(3).
(d)Financial Statement Schedules.
Not applicable.
Part IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ L. Dent Miller Name: L. Dent Miller Title: President, Chief Executive Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Charles F. Connor, Jr. Director and April 1, 1997 Charles F. Connor, Jr. Chairman of the Board
/s/ L. Dent Miller Director and President April 1, 1997 L. Dent Miller and Chief Executive Officer (Principal Executive Officer)
/s/ Michael A. Shubert Director and Executive April 1, 1997 Michael A Shubert Vice President and Chief Operating Officer
/s/ Barry W. Whisnant Director April 1, 1997 Barry W. Whisnant
/s/ C. Kenneth Wilcox Director April 1, 1997 C. Kenneth Wilcox
/s/ Noland M. Mewborn Vice President, Treasurer and April 1, 1997 Noland M. Mewborn Chief Financial Officer (Principal Financial Officer)
/s/ Gary E. Abernethy Controller April 1, 1997 Gary E. Abernethy (Principal Accounting Officer)
SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
EXHIBITS Item 14(a)(3)
FORM 10-K ANNUAL REPORT
For the fiscal year ended Commission File Number January 3, 1997 0-27258
SAGEBRUSH, INC.
EXHIBIT INDEX
Exhibit Number Exhibit Description (3.1) Amended and Restated Articles of Incorporation (filed as exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(3.2) Bylaws of the Company (filed as exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(10.1) Agreement dated as of March 16, 1992 by and between the Company and Biggers Brothers, Inc. (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(10.2) 1995 Stock Option Plan (filed as exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 33-98914) and incorporated by reference herein).
(10.3) Form of restaurant lease with related parties.
(10.6) Letter of agreement dated January 28, 1997 between Peoples Bank and the Company.
(10.7) Note dated January 31, 1997 between Peoples Bank and the Company.
(21) Subsidiaries of the Company.
(27) Financial Data Schedule. (filed in electronic format only)