Sagebrush Inc · 10-K · For 1/3/97

Filed On 4/2/97   ·   SEC File 0-27258   ·   Accession Number 1003110-97-1

Annual Report   ·   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         39±   193K 
 2: EX-10       Material Contract                                      7±    37K 
 3: EX-10       Material Contract                                      3±    14K 
 4: EX-10       Material Contract                                      2±    13K 
 5: EX-21       Subsidiaries of the Registrant                         1      5K 
 6: EX-27       Financial Data Schedule                                1      6K 

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SECURITIES AND EXCHANGE COMMISSION            
Washington, D.C. 20549            

FORM 10-K           

[X] ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE  
 ACT OF 1934 [FEE REQUIRED] for the fiscal year ended    January 3, 1997 .

OR            

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE  REQUIRED] for the transition period from      to      .

Commission file number  0-27258                                                 

     SAGEBRUSH, INC.
(Exact name of registrant as specified in its charter)            
NORTH CAROLINA                                        56-1875714        
(State or other jurisdiction of                        (I.R.S. Employer         
incorporation or organization)                       Identification No.)        

3238 West Main Street, Claremont, N.C.                      28610               
(Address of principal executive offices)                  (Zip Code)            

Registrant's telephone number, including area code:  (704) 459-0821             

Securities registered pursuant to Section 12(b) of the Act:           
None      

Securities registered pursuant to Section 12(g) of the Act:           
Common Stock (no par value)             
(Title of Class)            

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   .                              

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405  
of Regulation S-K is not contained herein, and will not  be contained, to the   
best of the registrant's knowledge, in  definitive proxy or information         
statements incorporated by reference in Part III of this Form 10-K or any       
amendment to this Form 10-K. [  ]                                               

The aggregate market value of shares of the Registrant's no par value Common    
Stock, its only class of voting stock, held by non-affiliates as of March 21,   
1997 was $17,911,363.                                                           

The number of shares outstanding of the Registrant's no par value Common Stock, 
its only outstanding class of common equity, as of March 21, 1997 was 6,300,000.

Documents Incorporated by Reference           
Incorporated Document     Parts into which Incorporated       
Proxy Statement for Annual Meeting of        Part III                         
Shareholders to be held May 8, 1997                                         

Part I                                                                          

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 -  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:

                                                        · Enlarge/Download Table

                                                                                    Approximate    
                                    Base Rent                       Approximate        Date of     
                                       Per          Basis for          Date of        Expiration   
                        Base Rent/  Sq. Foot/    Calculation of     Expiration of    Last Renewal  
Location                 Month (1)  Month (2)  Additional Rent (3)  Current Term        Option     
Leases with related parties:                                                                       
                                                                                                   
Claremont, N.C. (executive                                                                         
   offices)               $2,300     $0.23             --              (4)               --        
Arden, N.C.               $6,500     $1.03     5% of gross sales    May 2004         May 2019      
Asheville, N.C. (10)      $5,000     $0.79     5% of gross sales    April 1997       April 2007    
Boone, N.C.               $8,000     $0.94     5% of gross sales    May 1997         May 2012      
Brevard, N.C.             $4,000     $0.67     5% of gross sales    February 2004    February 2019 
Hickory, N.C.             $6,000     $1.20             --           September 2000   September 2005
Hickory, N.C. (Viewmont)  $6,000     $0.86     5% of gross sales    July 1997        July 2012     
Johnson City, Tenn.       $8,200     $0.91             --           January 1998     January 2008  
Kingsport, Tenn..         $6,000     $1.00     5% of gross sales    December 2003    December 2018 
Monroe, N.C.              $6,000     $0.88            (5)           September 2004   September 2019
Morganton, N.C.           $6,000     $0.95     5% of gross sales    February 1998    February 2013 
Morristown, Tenn.         $8,000     $0.89     6% of gross sales    November 1997    November 2007 
Sevierville, Tenn.        $6,500     $1.44     5% of gross sales    April 2004       April 2019    
Statesville, N.C.         $3,500     $0.54             --           October 1997     October 2012  
Waynesville, N.C.         $4,000     $0.59             --           December 2003    December 2018 
Wilkesboro, N.C.          $5,200     $0.83            (6)           August 2004      August 2019   

Leases with unrelated parties:                                                                     
Clemmons, N.C.            $5,700     $0.84     4% of gross sales    January 2009     January 2019  
Colonial Heights, Va.     $6,547     $1.12            (7)           September 2006   September 2016
Gaffney, S.C.             $5,000     $0.63             --           October 2005     October 2015  
Gatlinburg, Tenn.         $2,917     $0.43     5% of gross sales    December 1999    December 2009 
Lynchburg, Va.            $5,000     $0.56     5% of gross sales    September 2012   September 2012
Rock Hill, S.C.           $3,440     $0.55     5% of gross sales    October 1997     October 2012  
Winston-Salem, N.C.       $6,200     $0.95            (8)           August 2000      August 2005   

Ground leases with unrelated parties:                                                              
Knoxville, Tenn.          $   700     N/A             (9)           December 1999    December 1999 
Oak Ridge, Tenn.          $2,645     $0.33     2% of gross sales    February 2004    February 2014 
Pigeon Forge, Tenn.       $1,873     $0.42             --           June 1998        June 2008     

_____________________                                                           
(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 -  Legal Proceedings.                                                    

Not applicable.                                                       

Item 4 -  Submission of Matters to a Vote of Security Holders.                  

Not applicable.                                                 

Part II                                                                         

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 -  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)                                    

                                                        · Enlarge/Download Table

                          January 3,  December 29,  December 30,  December 31,  January 1,
Fiscal Year Ended            1997        1995          1994          1993          1993   
                                                                                          
Selected Income Statement Data:                                                           
  Net sales                $ 42,110    $ 34,020     $ 28,664      $ 19,272      $ 10,577  
  Net income               $  2,459    $  3,524     $  3,155      $  1,887      $    774  
  Net income per share     $    .39                                                       

Selected Balance Sheet Data:                                                              
  Total assets             $ 17,205    $ 10,820     $  8,736      $  5,577      $  3,574  
  Long-term debt, including                                                               
     current maturities          -     $  2,188     $  1,387      $  1,028      $    953  

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).    

                                                        · Enlarge/Download Table

                                       Fiscal 1995                 Fiscal 1996           
Quarter:                      First  Second  Third Fourth   First Second  Third   Fourth 
(Dollars in thousands)                                                                   
                                                                                         
Revenues - restaurant sales  $7,224 $7,698 $8,460 $10,638  $7,832 $8,932 $10,051 $15,295 
Income before income taxes   $  753 $  717 $  916 $ 1,215  $  773 $  998 $ 1,018 $ 1,245 
Income before income taxes                                                               
  as a percentage of revenues  10.4%   9.3%  10.8%   11.4%    9.9%  11.2%   10.1%    8.1%
Restaurants in operation at                                                              
  end of quarter                 19     20     21      22      23     23      26      28 

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 -  Financial Statements and Supplementary Data.     

Independent Auditors' Report                                                    

To the Board of Directors and Shareholders                                      
of Sagebrush, Inc.:                                                             

We have audited the accompanying consolidated balance sheets of                 
Sagebrush, Inc. and subsidiaries (the "Company") as of January 3,               
1997 and December 29, 1995, and the related consolidated statements             
of income, shareholders' equity, and cash flows for each of the three           
fiscal years in the period ended January 3, 1997. As discussed in               
Note 1, the financial statements as of December 29, 1995 and for each           
of the two fiscal years in the period then ended include the combined           
accounts of several commonly owned corporations which became wholly-            
owned subsidiaries of Sagebrush, Inc. in January, 1996. These                   
financial statements are the responsibility of the Company's                    
management. Our responsibility is to express an opinion on these                
financial statements based on our audits.                                       

We conducted our audits in accordance with generally accepted                   
auditing standards. Those standards require that we plan and perform            
the audit to obtain reasonable assurance about whether the financial            
statements are free of material misstatement. An audit includes                 
examining, on a test basis, evidence supporting the amounts and                 
disclosures in the financial statements. An audit also includes                 
assessing the accounting principles used and significant estimates              
made by management, as well as evaluating the overall financial                 
statement presentation. We believe that our audits provide a                    
reasonable basis for our opinion.                                               

In our opinion, such financial statements present fairly, in all                
material respects, the financial position of the Company at January             
3, 1997 and December 29, 1995, and the results of its operations and            
its cash flows for each of the three fiscal years in the period ended           
January 3, 1997 in conformity with generally accepted accounting                
principles.                                                                     

DELOITTE & TOUCHE LLP                                                           

Hickory, North Carolina                                                         
February 27, 1997                                                               

SAGEBRUSH, INC. AND SUBSIDIARIES                                                
CONSOLIDATED BALANCE SHEETS                                                     
January 3, 1997 and December 29, 1995                                           

                                                        January 3,  December 29,
                                                       1997         1995
ASSETS                                                                          
CURRENT ASSETS:                                                                 
 Cash and cash equivalents  (Note 2)                  $ 1,570,515  $ 2,145,809
 Related party receivables  (Note 6)                       24,175      127,423
 Other receivables                                        250,761       58,870
 Inventories  (Note 2)                                    495,848      411,675
 Pre-opening costs, net  (Note 2)                         509,210      131,434
 Prepaid and other current assets  (Note 1)                80,613      370,390
   Total current assets                                 2,931,122    3,245,601

PROPERTY AND EQUIPMENT, NET  (Notes 2 and 3)            14,262,732    7,562,432 
OTHER ASSETS                                                11,293       12,266 

TOTAL ASSETS                                           $17,205,147  $10,820,299 

LIABILITIES AND SHAREHOLDERS' EQUITY                                            
CURRENT LIABILITIES:                                                            
Note payable to bank  (Note 4)                        $  460,000  $      -  
Accounts payable(including $115,094 at January 3, 1997                      
   and $98,724 at December 29, 1995 to related parties) 1,688,867    1,220,206
 Accrued salaries                                         283,467      414,625
 Taxes other than income                                  313,010      188,338
 Other accrued liabilities                                462,807      463,893
Total current liabilities                                3,208,151    2,287,062 

LONG-TERM DEBT  (Notes 4 and 6) (including                                      
   $4,822 at December 29, 1995 to related parties)            -      2,187,909
DEFERRED INCOME TAXES  (Note 7)                            208,471          549 
 Total liabilities                                      3,146,622    4,475,520

SHAREHOLDERS' EQUITY (Note 1):                                                  
Common stock  ($1.00 par value; 50,000,000 shares                           
authorized; 6,300,000 shares issued and outstanding                     
 at January 31, 1997)                                 6,300,000          -
 Common stock of combined companies                           -        535,202
 Additional paid-in capital                             7,369,068    7,261,164
  Retained earnings (deficit)                              119,457   (1,451,587)
   Total shareholders' equity                          13,788,525    6,344,779

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             $17,205,147  $10,820,299 

See accompanying notes to consolidated financial statements.                    

SAGEBRUSH, INC. AND SUBSIDIARIES                                                
CONSOLIDATED STATEMENTS OF INCOME                                               
Fiscal Years Ended January 3, 1997, December 29, 1995 and December 30, 1994     

                                                        · Enlarge/Download Table

                                                                 Year Ended               
                                                   January 3,   December 29, December 30, 
                                                      1997         1995         1994      
                                                                                          
REVENUES - restaurant sales                      $ 42,110,051  $ 34,019,810  $ 28,664,211 

OPERATING COSTS AND EXPENSES  (Notes 5 and 6)                                             
  Cost of restaurant sales                         15,546,906    12,732,990    10,888,664 
  Labor costs                                      11,422,845     8,953,428     7,519,222 
  Other operating expenses (including $2,090,560,                                         
    $1,926,178 and $990,979 for fiscal years 1996,                                        
    1995 and 1994, respectively, paid to related    6,133,256     5,233,973     4,055,921 
  General and administrative expenses               3,560,928     2,373,978     2,014,452 
  Depreciation                                        975,827       760,881       526,328 
  Amortization (principally of pre-opening costs)     435,238       313,780       352,040 
  Store closing cost                                  167,890           -             -   

    Total operating costs and expenses             38,242,890    30,369,030    25,356,627 

OPERATING INCOME                                    3,867,161     3,650,780     3,307,584 

OTHER INCOME (received from related parties) (Note 6)  84,150       101,175        84,957 

INTEREST INCOME                                       128,826           -             -   

INTEREST EXPENSE                                      (45,609)     (150,980)      (74,915)

INCOME BEFORE INCOME TAXES (Note 7)                 4,034,528     3,600,975     3,317,626 

INCOME TAX PROVISION                               (1,575,296)      (76,915)     (163,052)

NET INCOME                                       $  2,456,232  $  3,524,060  $  3,154,574 

NET INCOME PER SHARE                             $       0.39                             

WEIGHTED AVERAGE SHARES OUTSTANDING                 6,288,949                             

PRO FORMA - UNAUDITED:  (Note 11)                                                         
  Historical income before income taxes                        $  3,600,975               
  Pro forma adjustment for compensation                            (500,000)              
  Pro forma income before income taxes                            3,100,975               
  Pro forma income taxes                                         (1,209,380)              
  Pro forma net income                                         $  1,891,595               
  Pro forma net income per share                               $       0.35               
  Pro forma weighted average shares outstanding                   5,462,748               

See accompanying notes to consolidated financial statements.                    

SAGEBRUSH, INC. AND SUBSIDIARIES                                                
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                                 
Fiscal Years Ended January 3, 1997, December 29, 1995 and December 30, 1994     

                                                        · Enlarge/Download Table

                          Additional                                                      
                            Common   Paid-in                                              
                            Stock    Capital   Deficit    Total                           
                                                                                          
BALANCE AT DECEMBER 31, 1993           $   210,200  $ 3,572,386  $ (604,168) $  3,178,418 

Issuance of common stock                   245,000    2,205,000                 2,450,000 
Capital contributions                                   294,468                   294,468 
Net income                                                        3,154,574     3,154,574 
S Corporation distributions and dividend                         (3,563,663)   (3,563,663)

BALANCE AT DECEMBER 30, 1994               455,200    6,071,854  (1,013,257)    5,513,797 

Issuance of common stock                    80,002      925,000                 1,005,002 
Capital contributions                                   264,310                   264,310 
Net income                                                        3,524,060     3,524,060 
S Corporation distributions and dividend                         (3,962,390)   (3,962,390)

BALANCE AT DECEMBER 29, 1995               535,202    7,261,164  (1,451,587)    6,344,779 

Payments to and exchanges with                                                            
 shareholders related to reorganization  3,964,798   (9,117,298)               (5,152,500)
Net proceeds of public offering          1,800,000    9,225,202                11,025,202 
Net income                                                        2,459,232     2,459,232 
S Corporation distributions and dividend                           (888,188)     (888,188)

BALANCE AT JANUARY 3, 1997             $ 6,300,000  $ 7,369,068  $  119,457  $ 13,788,525 

See accompanying notes to consolidated financial statements.                    

SAGEBRUSH, INC. AND SUBSIDIARIES                                                
CONSOLIDATED STATEMENTS OF CASH FLOW                                            
Fiscal Years Ended January 3, 1997 and December 29, 1996                        

                                                        · Enlarge/Download Table

                                                              Year Ended               
                                                January 3,   December 30,  December 29,
                                                   1997         1995          1994     
                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                  
Net income                                     $ 2,459,232   $ 3,524,060   $ 3,154,574 
Adjustments to reconcile net income to net                                             
 cash provided by operating activities:                                                
 Depreciation                                      975,827       760,881       526,328 
 Amortization (principally of pre-opening costs)   435,238       313,780       352,040 
 Changes in operating assets and liabilities                                           
   providing (using) cash:                                                             
   Receivables                                     (61,643)       52,925       (83,446)
   Inventories                                     (84,173)      (36,385)     (156,814)
   Pre-opening costs                              (813,014)     (225,845)     (442,562)
   Deferred income tax                             207,922       (21,961)        1,804 
   Trade accounts payable and                                                          
     other accrued liabilities                     461,809       474,946       462,563 
   Total adjustments                             1,015,807       946,277       712,786 
     Net cash provided by operating activities   3,475,039     4,470,337     3,867,360 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                  
 Capital expenditures (including $931,879,                                             
   $287,368 and $397,438 in fiscal years                                               
   1996, 1995 and 1994, respectively, paid                                             
   to related parties)                          (7,676,127)   (2,311,057)   (2,479,601)

CASH FLOWS FROM FINANCING ACTIVITIES:                                                  
 Proceeds from issuance of debt                    460,000     1,329,629       262,000 
 Repayment of debt                              (2,187,909)     (529,163)     (202,588)
 Purchase of assets related to reorganization   (1,652,500)          -             -   
 Cash paid to shareholders related to                                                  
   reorganization                               (3,500,000)          -             -   
 S Corporation distributions and dividends paid   (888,188)   (3,962,390)   (3,563,663)
 Proceeds of issuance of common stock           11,394,391           -             -   
 Capital contributions                                 -       1,506,312     2,725,468 
   Net cash provided by (used in)                                                      
     financing activities                        3,625,794    (1,655,612)     (778,783)

NET INCREASE (DECREASE) IN CASH                                                        
    AND CASH EQUIVALENTS                          (575,294)      503,668       608,976 
CASH AND CASH EQUIVALENTS                                                              
    AT BEGINNING OF YEAR                         2,145,809     1,642,141     1,033,165 
CASH AND CASH EQUIVALENTS                                                              
    AT END OF YEAR                             $ 1,570,515   $ 2,145,809   $ 1,642,141 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                      
Cash paid for interest                         $    45,609   $   147,810   $    74,915 
Cash paid for income taxes                     $ 1,496,642   $   132,088   $   176,489 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:            
Sagebrush issued common stock in exchange for notes receivable of $27,000 and   
$264,000 in fiscal 1995 and 1994, respectively.                       
Sagebrush acquired land in fiscal 1994 in exchange for cash of $85,000 and a    
note payable of $300,000.                                             

See accompanying notes to consolidated financial statements.                    

SAGEBRUSH, INC. AND SUBSIDIARY COMPANIES                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
Fiscal Years Ended January 3, 1997, December 29, 1995 and December              
30, 1994                                                                        

NOTE 1 - Basis of Presentation and Initial Public Offering of Common            
Stock                                                                           

The consolidated financial statements as of and for the year ended              
January 3, 1997 ("Fiscal 1996") include the accounts of Sagebrush,              
Inc. and its subsidiaries (the "Company"), all of which are wholly              
owned. The financial statements as of and for the years ended                   
December 29, 1995 ("Fiscal 1995") and December 30, 1994 ("Fiscal                
1994") represent combined financial statements of Sagebrush, Inc. and           
affiliated companies prior to the reorganization discussed below. All           
intercompany accounts and transactions have been eliminated in the              
consolidated/combined financial statements.                                     

The combined financial statements for Fiscal 1995 and 1994 include              
the accounts of Sagebrush, Inc., and 22 corporations operating                  
restaurants (the "Restaurant Corporations") under the name of                   
"Sagebrush Steakhouse and Saloon." In addition, to the extent                   
considered attributable to "Sagebrush Steakhouse and Saloon"                    
restaurants, the combined financial statements include the accounts             
of Connor Management, Inc. ("Connor Management"), which provided                
development, management and administrative services to the Restaurant           
Corporations and to certain other corporations operating other                  
restaurants. The Restaurant Corporations and Connor Management are              
collectively referred to as the "Related Corporations." In connection           
with Sagebrush's initial public offering in January 1996, a                     
reorganization was effected which resulted in the Related                       
Corporations becoming wholly-owned subsidiaries of, or transferring             
all of their assets to, Sagebrush, Inc., with shareholders of such              
corporations becoming shareholders of Sagebrush, Inc. The combination           
was accounted for at historical cost in a manner similar to a pooling-          
of-interests due to the entities being under common management and              
control and the absence of significant monetary consideration to the            
shareholders. The Restaurant Corporations and the applicable                    
operations and accounts of Connor Management, Inc., as well as                  
Sagebrush, Inc., are collectively referred to herein as the                     
"Company."                                                                      

This reorganization was effected immediately prior to the initial               
public offering of common stock of Sagebrush, Inc. in January 1996.             
In conjunction with the reorganization of the Related Corporations,             
Sagebrush completed the initial public offering of its Common Stock,            
selling 1,700,000 shares in January 1996 and 100,000 shares in                  
February 1996 upon the underwriter's exercise of its over-allotment             
option. Net proceeds from the offering were $11,025,000. A portion of           
the net proceeds were used to repay corporate indebtedness (see Note            
4) and to fund cash payments to or for the benefit of current                   
shareholders in connection with the reorganization. The remaining               
portion of the net proceeds has been used to finance the development            
of additional restaurants and for other general corporate purposes.             

In connection with the reorganization, the shareholders of the                  
Related Corporations (other than those formed to operate the                    
Gatlinburg, Kernersville and Gaffney restaurants) contributed their             
capital stock in these corporations to Sagebrush, Inc. for an                   
aggregate of 4,500,000 shares of Sagebrush, Inc. common stock and               
cash of $3.5 million. As a result of the reorganization, shareholders           
of these corporations became the shareholders of Sagebrush, Inc.,               
owning all 4,500,000 shares of its common stock outstanding                     
immediately prior to its initial public offering. Proceeds of the               
initial public offering were also used to purchase the assets of the            
Gatlinburg, Kernersville and Gaffney restaurants for a total                    
consideration of approximately $1.7 million, which represents the               
historical cost of such assets. The accounts of the Gatlinburg,                 
Kernersville and Gaffney restaurants, opened in April, June and                 
December of 1995, respectively, are included in the combined                    
financial statements as of and for the year ended December 29, 1995.            
In connection with the reorganization and the completion of the                 
public offering, the following structural and organizational changes            
were effected: (i) the Related Corporations formerly operating as S             
Corporations became subject to corporate income taxation as C                   
Corporations and (ii) salaries payable to certain executive officers            
were adjusted to more representative levels as a result of the                  
termination of the S Corporation elections and the elimination of the           
related distributions.                                                          

Costs associated with the public offering were offset against                   
proceeds from the sale of stock. Such costs incurred prior to                   
December 29, 1995 totaled $369,000 and have been included in prepaid            
and other current assets on the balance sheet as of that date.                  

In September 1996, in order to streamline the Company's operations              
and organizational structure, Sagebrush, Inc. caused, among other               
things, (a) the assets and liabilities of the North Carolina                    
Restaurant Corporations to be transferred in liquidation to a North             
Carolina limited liability company, (b) the assets and liabilities of           
the South Carolina Restaurant Corporations to be transferred in                 
liquidation to a South Carolina limited liability company, (a) the              
assets and liabilities of the Tennessee Restaurant Corporations to be           
transferred to a Delaware limited partnership, and (d) Sagebrush of             
Virginia, Inc. (which owned and operated all of the Company's                   
Virginia restaurants) and Connor management to be liquidated into               
Sagebrush, Inc.                                                                 

Certain information concerning the corporations included in the                 
combined financial statements follows:                                          

                      Common Stock of Combined Companies
                                           Shares issued as of
                       Commencement         December 29,
Entity                             of Operations             1995               
Sagebrush, Inc.                                                 2               
Connor Management, Inc.                                     1,000               
Tumbleweed, Inc.                     Oct 1990                 100               
Tumbleweed of Pigeon Forge, Inc.     Sep 1991              10,000               
Tumbleweed of Statesville, Inc.      Oct 1991                 100               
Oak Ridge Foods, Inc.                Nov 1991              10,000               
Knoxville Foods, Inc.                Feb 1992               1,000               
Sagebrush of Asheville, Inc.         Apr 1992               1,000               
Sagebrush of Boone, Inc.             Jun 1992               1,000               
Viewmont Foods, Inc.                 Jul 1992               1,000               
Sagebrush of Rock Hill, Inc.         Dec 1992              30,000               
Kingsport Foods, Inc.                Feb 1993              10,000               
Sagebrush of Morganton, Inc.         Mar 1993              35,000               
Sagebrush of Winston, Inc.           Sep 1993              35,000               
Sagebrush of Clemmons, Inc.          Dec 1993              40,000               
Sagebrush of Waynesville, Inc.       Jan 1994              35,000               
Sagebrush of Brevard, Inc.           Mar 1994              40,000               
Sagebrush of Sevierville, Inc.       May 1994              35,000               
Sagebrush of Arden, Inc.             Aug 1994              40,000               
Sagebrush of Wilkesboro, Inc.        Sep 1994              40,000               
Sagebrush of Monroe, Inc.            Dec 1994              40,000               
Gatlinburg Foods, Inc.               Apr 1995              40,000               
Forsyth Land Company                 Jun 1995              50,000               
Sagebrush of Gaffney, Inc.           Dec 1995              40,000               
Total                                               535,202         

All shares are recorded at a par or stated value of $1.                         

At December 29, 1995, the Related Corporations had varying                      
percentages of common ownership with five individuals and one                   
corporation (and its subsidiaries) having direct and indirect                   
ownership interest in all of the Related Corporations in amounts                
greater than 50%.                                                               

In November 1995, the Company amended and restated its articles of              
incorporation to authorize the issuance of up to 50,000,000 shares of           
common stock and 10,000,000 shares of preferred stock in one or more            
series, with such preferences, limitations and relative rights as               
will be determined by the Board of Directors at the time of issuance.           
No shares of preferred stock have been issued.                                  

NOTE 2 - Summary of Significant Accounting Policies                             

Fiscal Year - The Company's fiscal year ends on the Friday nearest              
December 31. Fiscal 1996 includes 53 weeks, Fiscal 1995 and Fiscal              
1994 include 52 weeks. Quarterly results are presented based on 12,             
12, 12 and 16 or 17 week quarters.                                              

Estimates - The preparation of financial statements in conformity               
with generally accepted accounting principles requires management to            
make estimates and assumptions that affect the reported amounts of              
assets and liabilities and disclosure of contingent assets and                  
liabilities at the date of the financial statements and the reported            
amounts of revenues and expenses during the reporting period. Actual            
results could differ from those estimates.                                      

Cash and Cash Equivalents - The Company considers all highly liquid             
investments purchased with an original maturity of three months or              
less to be cash equivalents.                                                    

Inventories - Inventories, representing food items and supplies, are            
stated at the lower of cost (first-in, first-out) or market.                    

Pre-opening Costs - Labor costs and costs of hiring and training                
personnel and certain other direct costs related to opening new                 
restaurants are capitalized until the restaurant is opened and then             
amortized over a twelve month period.                                           

Property and Equipment - Property and equipment are stated at cost.             
Expenditures for maintenance and repairs which do not significantly             
extend the useful lives of assets are charged to earnings; additions,           
betterments and interest costs incurred during construction are                 
capitalized. Gains and losses on dispositions are charged or credited           
to operations.                                                                  

Depreciation of property and equipment is provided primarily over the           
estimated useful lives of the respective assets on a straight-line              
basis. Generally, the depreciable lives are the shorter of 15 years             
or the term of  the related land leases for buildings, 15 years for             
land improvements, and five to seven years for furniture and                    
equipment. Leasehold improvements are amortized over the shorter of             
15 years or the maximum term of the related lease.                              

Effective January 1, 1996, the Company adopted Statement of Financial           
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the                  
Impairment of Long-Lived Assets and for Long-Lived Assets to be                 
Disposed Of'" which requires impairment losses to be recorded on long-          
lived assets used in operations when indicators of impairment are               
present and the undiscounted cash flows estimated to be generated by            
those assets are less than the assets' carrying amount. The Company             
has evaluated the carrying values of its long-lived assets in                   
operations based on the criteria set forth in this statement and has            
determined that no writedown for impairment is necessary as of                  
January 3, 1997.                                                                

Costs and Expenses - The principal costs and expenses of the                    
Company's operations include (i) cost of restaurant sales, which                
consists principally of food, beverage and supply costs, (ii) labor             
costs, which consist primarily of wages for wait staff and food                 
preparers, (iii) other operating expenses, which principally consist            
of 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, and (iv)             
general and administrative expenses, consisting of wages for                    
management, supervisory and other corporate personnel and other                 
personnel costs, costs of advertising and promotions and other                  
expenses.                                                                       

Advertising - The Company expenses the production cost of advertising           
as incurred. Advertising expense was $619,000  in fiscal 1996,                  
$515,000  in fiscal 1995 and $310,000 in fiscal 1994.                           

Income Taxes - Prior to Fiscal 1996, nineteen of the Restaurant                 
Corporations and Connor Management were S Corporations for purposes             
of the Internal Revenue Code. These S Corporations were exempt from             
Federal and state income taxes, and applicable taxable income or loss           
was allocated to the shareholders. The remaining three Restaurant               
Corporations, all of which began operations in 1992, were C                     
Corporations. For the C Corporations and Sagebrush, Inc., income                
taxes were provided for temporary differences between the tax and               
financial accounting bases of assets and liabilities using the asset            
and liability method. The tax effects of such differences are                   
reflected in the balance sheet using the enacted tax rates expected             
to apply in the period in which the differences reverse (See Note 7).           

Beginning in Fiscal 1996, all of the former S Corporations converted            
to C Corporations and income taxes are provided using the asset and             
liability method discussed above.                                               

Fair Value of Financial Instruments - The carrying amounts of the               
Company's financial instruments approximate their fair values due to            
short terms to maturity (including debt which was repaid in January             
1996 from the proceeds of the public offering).                                 

Earnings Per Share - Earnings per share are calculated on the                   
weighted average shares of common stock and dilutive common stock               
equivalents.                                                                    

NOTE 3 - Property and Equipment                                                 

The major components of property and equipment are as follows:                  

                    January 3,  December 29,
                   1997         1995

Land                             $   2,329,338   $   385,943                    
Land improvements                      402,050       210,137                    
Buildings                            3,392,287     1,746,681                    
Leasehold improvements               4,739,772     3,530,624                    
Machinery and equipment              3,706,605     2,593,290                    
Furniture and fixtures               1,785,906     1,136,240                    
Construction in progress               852,154           -                      

Total Cost                          17,208,112     9,602,915                    
Less accumulated depreciation        2,945,380     2,040,483                    
Property and equipment, net       $ 14,262,732   $ 7,562,432                    

NOTE 4 - Financing Arrangements                                                 

During Fiscal 1996, the Company had a commitment from a commercial              
bank for a revolving credit facility providing for borrowings of up             
to $6.0 million (with a participation by another bank for advances              
over $3.0 million). Advances under the line were unsecured and                  
limited to short-term working capital purposes. The facility expired            
on January 31, 1997.                                                            

Borrowings under this line of credit as of January 3, 1997 totaled              
$460,000, which was also the maximum amount outstanding during Fiscal           
1996. The average amount outstanding during Fiscal 1996 was $102,426.           
Both the interest rate at January 3, 1997 and the weighted average              
rate for Fiscal 1996 were 8.25%.                                                

In January 1997, the Company obtained a commitment from a commercial            
bank for a revolving credit facility providing for borrowings of up             
to $3.0 million. Advances under the line will be unsecured and                  
limited to short-term working capital purposes. The facility will               
expire on January 31, 1998 and the interest rate for borrowings will            
be the bank's prime rate.                                                       

All long-term debt existing at December 29, 1995, was paid off at               
face value subsequent to December 29, 1995 using proceeds from the              
public offering of common stock. Accordingly, at December 29, 1995,             
current maturities of long-term debt of $907,002 were classified as             
long-term debt due to the Company's intention and ability to                    
refinance such debt with equity securities.                                     

Debt with originally scheduled maturities as of December 29, 1995,              
was as follows:                                                                 

Installments              Final        December 29,     
Payee          Payable      Rate     Maturity         1995                      

Bank           Monthly   Prime + 1%    2004      $    381,468                   
Monthly   Prime - 1%    2006           273,309    
Monthly   Prime + 1%    1995            29,606    
Monthly   Prime + 1%    1997            30,522    
Monthly   Prime + .5%   1997           147,134    
Monthly   Prime + .5%   1996           643,314    
Monthly       9%        2000           389,646    
Related party  Monthly   Prime + 1%    1996             4,822                   
Other          Monthly       8%        1999           288,088                   
Total                                             $ 2,187,909                   

The applicable prime rate at December 29, 1995 was 8.5%.                        

NOTE 5 - Leased Properties                                                      

Certain premises occupied by the Company are under operating leases             
with terms expiring from 1997 through 2012. Two of the restaurants              
are in buildings owned by the Company and located on land that is               
leased; the Company owns both the building and land for four of the             
restaurants; the remaining restaurant buildings and land are leased.            
Most of the leases are with related parties (Note 6).                           

The leases have remaining renewal clauses, exercisable at the option            
of the lessee, of one to 15 years, some of which provide for                    
increased rents. Certain of the leases are for equipment as well as             
for premises. In addition, certain leases contain provisions                    
providing for contingent rentals based on a percentage of gross sales           
or for scheduled increases in base rents.                                       

Future minimum rental payments required under operating leases are              
summarized as follows:                                                          

Fiscal Year                                                                     
1997                         $ 1,396,191                                        
1998                             990,378                                        
1999                             968,603                                        
2000                             879,890                                        
2001                             776,290                                        
Thereafter                     3,264,883                                        
Total                       $ 8,276,235                                       

Rental expense charged to operations was $1,663,579, $1,434,154 and             
$1,085,628 (which includes contingent rentals of $197,760, $162,915             
and $59,034) in fiscal 1996, 1995 and 1994, respectively.                       

NOTE 6 - Transactions with Related Parties                                      

The Company has transactions, in the normal course of business, with            
certain related individuals and with certain corporations in which              
the Company's principal shareholders have a substantial direct or               
indirect ownership interest. These transactions are summarized below:           
                              January 3, December 29, December 30,
                            1997       1995         1994
During the Year                                                                 
Rents paid (Note 5)               $ 1,133,875  $ 1,002,283  $ 792,463           
Equipment and supply purchases      1,083,281      492,125    397,438           
Insurance expenses                    708,780      685,584    664,851           
Store decorating costs paid            96,503       37,399     55,294           
Fees received for accounting services                                           
provided to other restaurants     80,950       83,025     73,625      

End of Year                                                                     
Receivables from shareholders (all paid subsequently)                           
-                                      27,000                                   
Other related party receivables        24,175      100,423                      
Accounts payable                      115,094       98,724                      
Notes payable (Note 4)                                                          
-                                       4,822                                   

Other related party receivables primarily consist of receivables from           
other restaurants managed by Connor Management, Inc.                            

NOTE 7 - Income Taxes                                                           

Prior to Fiscal 1996, income taxes have been provided for the three C           
Corporations (see Note 2). Deferred income taxes for the three C                
Corporations, arising principally from loss carryforwards and the               
temporary differences in book and tax depreciation, were not material           
in any of the years presented prior to Fiscal 1996. See Note 10 for             
discussion of pro forma income taxes. The tables below present                  
information related to the income tax provision for Fiscal 1996.                

Fiscal 1996           
Amount          %           
Statutory rate reconciliation                                                   

Pre-tax earnings            $4,034,528 100.0%                                   
Federal income tax at                                                           
statutory rate             1,371,740  34.0                                  
State income taxes-net of                                                       
federal tax benefit          185,812   4.6                                  
Other                           17,744    .4                                    
Total income tax provision  $1,575,296  39.0%                                   

Components of income tax provision                                              
Current                                                                         
Federal                   $1,015,128  64.4%                                 
State                        209,931  13.4                                  
Total Current                1,225,059  77.8                                    
Deferred                                                                        
Federal                      294,296  18.7                                  
State                         55,941   3.5                                  
Total Deferred                 350,237  22.2                                    
Total Income Tax Provision  $1,575,296 100.0%                                   

The tax effect of cumulative temporary differences and carryforwards            
that gave rise to the deferred tax assets and liabilities at January            
3, 1997, are as follows:                                                        

                   January 3, 1997
                     Assets  Liabilities   Total
Excess Tax Over Book Depreciation       -     $(288,158)  $(288,158)            
Pre-opening costs                       -       (30,875)    (30,875)            
Basis write-up, reorganization      116,679         -       116,679             
Other, Net                              -        (6,117)     (6,117)            
Total                            $116,679   $(325,150)  $(208,471)          

Management has evaluated the realizability of the deferred tax asset            
and believes that no valuation allowance is necessary at January 3,             
1997                                                                            

NOTE 8 - Employee Stock Option Plan                                             

The Company adopted a stock option plan which became effective as of            
the closing date of the public offering. The plan allows for                    
incentive and non-qualified stock options and stock appreciation                
rights to be granted to those key employees that the Compensation               
Committee of the Board of Directors may select. A total of 600,000              
shares of common stock have been reserved for issuance upon exercise            
of the options to be granted. Options granted may have a maximum term           
of ten years and may be granted until November 1, 2005. At January 3,           
1997, there were 241,000 shares available for grant.  Option                    
information is summarized as follows:                                           

                                                  Option Price
                            Shares               per Share
Outstanding December 29, 1995              -                    -               
Granted in Fiscal 1996               387,500               $8.875           
Canceled or expired in Fiscal 1996   (28,500)              $8.875           
Outstanding January 3, 1997            359,000               $8.875             

All options granted are incentive stock options with the option price           
no less than the fair market value of the common stock on the date of           
grant. Options begin vesting two years after the grant date and are             
fully vested after five years. The outstanding stock options at                 
January 3, 1997 have a weighted average exercise price of $8.875 and            
a weighted average contractual life of 9 1/2 years.                             

The Company applies Accounting Principles Board Opinion No. 25 and              
related Interpretations in accounting for its stock option plan.                
Accordingly, no compensation cost has been recognized for its stock             
options granted. Had compensation cost for the Company's stock option           
plan been determined based on the fair value at the grant dates for             
the awards under those plans consistent with Statement of Financial             
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-               
Based Compensation," the Company's pro forma net income and net                 
income per share for the year ended January 3, 1997 would have been             
$2,356,000 and $.37, respectively.                                              

The fair value of options granted under the Company's stock option              
plan during Fiscal 1996 was estimated on the date of grant using the            
Black-Scholes option-pricing model with the following weighted-                 
average assumptions used: no dividend yield, expected volatility of             
25%, risk free interest rate of 6.5%, and expected lives of 4 1/2 years.        
The effects of applying SFAS 123 in this proforma disclosure are not            
indicative of future amounts.                                                   

NOTE 9 - Employee Health Insurance Benefits                                     

The Company  provides employee health insurance benefits under a                
419(e) trust arrangement. These benefits are partially funded by the            
Company. The Company has $25,000 per participant and $1,000,000                 
annual aggregate stop loss coverage on group medical claims with an             
insurance carrier. A third-party administrator handles all claims.              
The Company's contributions to this plan were approximately $121,000,           
$121,000 and $120,000 in fiscal 1996, 1995 and 1994, respectively.              

The Company provides no post-retirement or post-employment benefits.            

NOTE 10 - Commitments, Contingencies and Litigation                             

See Note 5 concerning commitments related to lease agreements.                  

The Company had a purchase commitment of approximately $400,000 as of           
January 3, 1997 for construction of a restaurant in Salisbury, NC.              

The Company knows of no material pending legal proceedings to which             
the Company or any of its subsidiaries or related companies is a                
party.                                                                          

NOTE 11 - Pro Forma Data (Unaudited)                                            

In connection with the reorganization described in Note 1, certain of           
the Restaurant Corporations and Connor Management became wholly-owned           
subsidiaries of Sagebrush, Inc. and terminated their elections to be            
treated as S Corporations. The Related Corporations distributed all S           
Corporation earnings through the date of such termination from                  
available cash and, as stated in Note 1, Sagebrush, Inc. paid                   
approximately $5.2 million of the proceeds from the offering to or              
for the benefit of its current shareholders as part of the                      
reorganization.                                                                 

Pro forma net income reflects an anticipated increase in compensation           
expense and the application of corporate income taxes to pro forma              
income before income taxes at an effective tax rate of 39% of                   
$500,000 and $1,200,000, respectively, which reflects the estimated             
combined federal and state income tax rate.                                     

Pro forma net income per share is calculated as if all shares of                
Sagebrush, Inc. common stock outstanding immediately prior to the               
offering (4,500,000) were outstanding since December 31, 1994 and               
include additional shares (962,748) issued at the offering price of             
$7.00 per share, reduced by offering expenses and underwriting                  
discounts of 11.1%, to fund the distribution of S Corporation                   
earnings undistributed at December 29, 1995 and the $5.2 million                
referred to above.                                                              

*****                                                                           
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 -  Changes in and Disagreements with Accountants on Accounting           
and Financial Disclosure.                                         

Not applicable.                                                   

Part III                                                                        

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 -  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 -  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 -  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  -  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)           

Dates Referenced Herein   and   Documents Incorporated By Reference

This 10-K Filing		Date		Other Filings
		3/16/92
		12/31/93
		12/30/94
		12/31/94
		12/29/95
		12/31/95
		1/1/96
		1/11/96
		1/17/96
		12/29/96
		12/31/96
For The Period Ended		1/3/97
		1/14/97
		1/28/97
		1/31/97
		2/27/97
		3/21/97
		4/1/97
Filed On / Filed As Of		4/2/97
		5/8/97		DEF 14A
		1/31/98
		12/31/99
		11/1/5
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