10-Q 1 q103rd01.txt 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 28, 2001 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 28, 2001, 8,241,137 shares of common stock $.01 par value were outstanding. PART 1 - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements AMARILLO MESQUITE GRILL, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)

See accompanying notes to consolidated financial statements. AMARILLO MESQUITE GRILL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to consolidated financial statements. AMARILLO MESQUITE GRILL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to consolidated financial statements. AMARILLO MESQUITE GRILL, INC. Notes to Consolidated Financial Statements (Unaudited) October 28, 2001 (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 thirty-nine week period ended October 28, 2001 are not necessarily indicative of the results that may be expected for the year ended January 27, 2002. 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 27, 2001. (2) Net Earnings Per Share The Company, as required under FASB Statement no. 128, Earnings Per Share, calculates and presents both a basic and diluted earnings per share in the financial statements. Earnings per common share is computed on the basis of the weighted-average number of common shares outstanding during each period presented. The Company has granted options to employees to purchase 1,346,725 shares of common stock at a weighted average exercise price of $1.86 per share. These options were not included in the computation of diluted earnings per share because the exercise price of those options exceeded the average market price of the common shares during the quarter. Also since the Company had a net loss available to common stockholders, inclusion of these options would be antidilutive to earnings per share. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Results of Operations Thirteen Weeks Ended October 28, 2001 Compared to Thirteen Weeks Ended October 29, 2000. For the thirteen weeks ended October 28, 2001, sales were $4,634,634 as compared to sales of $5,260,497 for the third quarter of the prior year. As of October 28, 2001, the Company operated thirteen Amarillo Mesquite Grills as compared to fifteen Amarillo Mesquite Grills as of October 29, 2000. Cost of sales, as a percentage of total sales, was 38.8% and 35.0% for the 2001 and 2000 periods respectively. The cost of sales as a percentage of sales were up due to the rise in the cost of beef. Operating expenses, as a percentage of total sales, were 55.2% and 52.5% for the 2001 and 2000 periods respectively. The increase in operating expense is a direct result to the decrease in sales for the quarter ended October 28, 2001 as compared to the same quarter ended October 29, 2001. The dollars spent were actually lower this quarter as compared to the same quarter of the last year. General and administrative expenses, as a percentage of sales, was 5.8% for the quarter ended October 28, 2001, as compared to 6.5% for the third quarter of the prior year. The decrease in general and administrative, as a percentage of sales is the result of management controlling the costs of recruiting and training new management staff by focusing on retaining current management personnel. Even though the Company has experienced a rise in real estate taxes, personal property taxes and insurance costs the management has succeeded in controlling other costs. Depreciation and amortization is directly related to the acquisition and disposition of fixed assets. Interest expense was $124,745 for the quarter ended October 28, 2001 as compared to $170,541 for the same period a year ago. Interest expense is a function of the interest rate and the amount of debt. The interest rate has decreased over the past few months resulting in a decrease in interest expense. The Company incurred noncash expenses of $24,460 for the 2001 and 2000 periods respectively, relating to the issuance of stock options pursuant to debt guarantees. During the quarter ended October 28, 2001, management decided to close the Wichita Falls unit. With respect to this closure, the Company has accrued $49,800 representing estimated future costs to be incurred prior to finding a sublessee for the facility. A non-cash write-off of $320,894 was recorded, representing the net book value of leasehold improvements and other equipment that management believes would have no fair value or use outside the restaurant. These costs have been recorded as "provision for restaurant closings" on the income statement. The Company incurred operating losses on this store of $48,800 in fiscal year 2002. The Company incurred $121,265 in losses on the sale of equipment for the quarter ended October 28, 2001. The equipment sold included items originally kept by the Company upon closure of the McAlester unit and items sold during the process of moving one unit into a new facility. Historically the third quarter of the year is the weakest of the year in terms of sales and earnings and this year was no exception. With the repercussions from events of September 11 along with the closing of the Wichita Falls unit, it has resulted in a loss of $865,685, or ten cents per common share, as compared to a loss of $114,431, or one cent per common share, for the third quarter of the prior year. Thirty-Nine Weeks Ended October 28, 2001 Compared to Thirty-Nine Weeks Ended October 29, 2000. For the thirty-nine weeks ended October 28, 2001, sales were $14,313,456 as compared to sales of $16,107,300 for the first thirty-nine weeks of the prior year. The Company operated thirteen Amarillo Mesquite Grills as of October 28, 2001, as compared to fifteen Amarillo Mesquite Grills as of October 29, 2000. Cost of sales, as a percentage of total sales, was 37.4% and 34.4% for the 2001 and 2000 periods respectively. The increase in the cost of sales is a direct result in the increase in the cost of beef over the past thirty-nine weeks ended October 28, 2001, as compared to the same thirty-nine weeks ended October 29, 2000. Operating expense, as a percentage of total sales, was 53.9% and 52.1% for the 2001 and 2000 periods respectively. The increase in operating expense is due to the decrease in sales resulting in higher labor and utility costs as a percentage of total sales. The dollars spent is lower this quarter as compared to the same quarter last year. General and administrative expense, as a percentage of total sales was 5.7% for the thirty-nine weeks ended October 28, 2001, as compared to 5.9% for the first thirty-nine weeks of the prior year. The decrease in general and administrative expense has resulted from the Company's focus on retaining management staff thereby reducing the costs of recruiting and training. The Company has experienced a rise in real estate taxes, personal property taxes and insurance costs but has been able to hold down the costs in general and administrative expenses the past thirty-nine weeks. Depreciation and amortization is directly related to the acquisition and disposition of fixed assets. Interest expense was $410,999 for the thirty-nine weeks ended October 28, 2001, as compared to $496,651 for the same period a year ago. Interest expense is a function of the interest rate and the amount of debt. Over the past few months, the interest rates have continually declined, therefore the interest expense has decreased. Liquidity and Capital Resources The Company's primary sources of funding to finance its business have been its cash flow from operations, and proceeds from bank debt. On October 28, 2001 and January 28, 2001, the Company had an excess of current liabilities over current assets of $7,874,183 and $1,675,794, respectively. However included as a current liability as of October 28, 2001 is a bank note payable in the amount $5,904,586 which is due April 15, 2002. Cash flow from operations was $172,994 and $749,370 for 2001 and 2000 respectively. Management anticipates cash flow from operations for the full fiscal year of 2002 will enable the Company to meet its financial obligations as they come due. However, there may be periods during the year when cash flow is insufficient and additional debt or equity investment may be necessary. During the quarter ended October 28, 2001, two stockholders invested $200,000 in the Company, which was recorded as Additional Paid-In Capital. Management evaluates store performance and cash flows weekly. On a long-term basis, if cash flows from operations are not sufficient to meet working capital needs, management will consider menu modifications and price adjustments to increase margins. Management will also take actions to reduce store-level operating costs where possible. Additionally, management would consider closing underperforming locations where it believes the long term prospect of obtaining positive cash flow would not be possible. 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. The Company may consider expansion of the Amarillo Mesquite Grill concept in fiscal 2002 by leasing existing restaurant properties which are suitable for conversion to the Amarillo Mesquite Grill concept. It is expected that each conversion will require approximately $300,000 to $500,000 for equipment and remodel costs. A ground-up proto-type restaurant will cost approximately $1.3 million for the land, building and equipment. The Company has no commitments for financing at this time. If the Company decides to expand in fiscal 2002, it may 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. The Company has restructured its long-term bank debt to provide for interest only payments through April 15, 2002. The purpose of the restructuring is to give management the option of investing cash flow back into our existing restaurants or adding new restaurants without increasing bank debt. Management anticipates refinancing this debt in April 2002 with its existing lender. However, the Company does not presently have a commitment from the lender, or other commitments for additional financing. If the Company's lender is not willing to refinance its debt when due, management will respond by restructuring its debt arrangements in a matter acceptable to the lender, by relocating this debt to an alternate lending source, or by securing new sources of debt or equity financing. 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. Pronouncements Issued Not Yet Adopted In July 2001, the Financial Accounting Standards Board issued Statement 142, Goodwill and Other Intangible Assets, which will potentially impact the Company's accounting for its reported goodwill and other intangible assets. Statement 142 a)eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life, and b)requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of this Statement, the Company will be required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. The Company has not yet completed its full assessment of the effects of these new pronouncements on its financial statements and so is uncertain as to the impact. The Company is required to implement this standard with its fiscal year beginning on January 28, 2002. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities. Not Applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K 10.1 Promissory Note with Intrust Bank dated April 15, 2001 No reports on Form 8-K were filed during the quarter ended October 28, 2001. 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, 2001 /s/CHRIS F. HOTZE Chris F. Hotze - President Exhibit 10.1 PROMISSORY NOTE Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $5,904,586.21 04-15-2001 04-15-2002 35418 04A0 27 R- 186943 GAJ23 Borrower: Lender: Amarillo Mesquite Grill, Inc. INTRUST Bank, N.A. P.O. Box One P 0 BOX 2817 105 N. Main Wichita, KS 67201 Wichita, KS 67201 Principal Amount: $5,904,586.21 Initial Rate: 7.500% Date of Note: April 15, 2001 PROMISE TO PAY. Amarillo Mesquite Grill, Inc. ("Borrower") promises to pay to INTRUST Bank, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Million Nine Hundred Four Thousand Five Hundred Eighty Six & 21/100 Dollars ($5,904,586.21), together with interest on the unpaid principal balance from April 15, 2001, until paid in full. PAYMENT. Borrower will pay this loan in one principal payment of $5,904,586.21 plus interest on April 15, 2002. This payment due April 15, 2002, will be for all principal and accrued interest not yet paid. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning May 15, 2001, with all subsequent interest payments to be due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Prime Rate as published in the Wall Street Journal (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each month on the first day of the month following the change of the index. The Index currently is 8.000% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 0.500 percentage points under the Index, resulting in an initial rate of 7.500% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $100.00, whichever is less. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws, (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security Interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (h) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note 2.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else who is not a salaried employee of Lender to help collect this Note if Borrower does not pay. Borrower will be liable for all reasonable costs incurred in the collection of this Note, including but not limited to, court costs, attorneys' fees, and collection agency fees, except that such costs of collection shall not include the recovery of both attorneys' fees and collection agency fees. This Note has been delivered to Lender and accepted by Lender in the State of Kansas. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Sedgwick County, the State of Kansas. This Note shall be governed by and construed in accordance with the laws of the State of Kansas. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $22.50 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. COLLATERAL. This Note is secured by Security Agreement dated 6/10/97 covering all tangible and intangibles property of Amarillo Mesquite Grill, Inc., all equipment, utensils, small wares, furniture, inventory, accounts, contract rights, general intangibles, fixtures, and machinery located at various locations listed on attached Exhibit "A". ADDITIONAL PROVISIONS: FINANCIAL STATEMENTS. Borrower covenants and agrees with Lender that Borrower will furnish to Lender, in a form satisfactory to Lender, such financial statements and other financial and business information as Lender may request from time to time including, without limitation, balance sheet and income statements on a periodic basis, tax returns, and listings of inventory, accounts or other assets. Borrower further covenants and agrees with Lender that all financial statements provided to Lender shall be prepared in accordance with generally accepted accounting principles, consistently applied, and shall be certified by Borrower as being true and correct. Borrower agrees to deliver financial statements and information requested by Lender no later than thirty (30) days after Lender's request for such information. "TERMS AND FEES IF RENEWED. Borrower acknowledges that Lender is under no obligation to renew this Note upon its maturity. Any renewal shall be at Lender's sole option and may include terms and conditions that differ materially from those contained in this Note. Upon renewal, Bank may impose such fees and charges as the Bank deems appropriate, including, without limitation, a renewal fee, and if this Note evidences a line of credit, an unused commitment fee.". PRIOR NOTE. Promissory Note #186943-35418 to renew. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. 04-15-2001 PROMISSORY NOTE Page 2 Loan No 35418 (Continued) PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: Amarillo Mesquite Grill, Inc By: s/s Chris F. Hotze By: s/s Alan Bundy Chris F. Hotze, President Alan Bundy, Vice President

AMARILLO MESQUITE GRILL INC 10-Q