SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the transition period from to .
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Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 820-5559
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(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 past 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 5, 2004, 5,588,019 shares of Common Stock of the issuer were
outstanding.
GRILL CONCEPTS, INC.
--------------------
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - March 28, 2004
and December 28, 2003 (restated) . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations - For the three
months ended March 28, 2004 and March 30, 2003 (restated). . . . . 5
Consolidated Condensed Statements of Cash Flows - For the three
months ended March 28, 2004 and March 30, 2003 (restated). . . . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 23
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 28, December 28,
2004 2003
(unaudited) (restated)
------------ --------------
Current assets:
Cash and cash equivalents $ 1,405,000 $ 1,473,000
Inventories 569,000 570,000
Receivables, net of reserve ($13,000 in 2004 and 2003) 561,000 741,000
Prepaid expenses & other current assets 876,000 608,000
------------ --------------
Total current assets 3,411,000 3,392,000
Furniture, equipment and improvements, net 9,878,000 9,020,000
Goodwill, net 205,000 205,000
Liquor licenses 330,000 330,000
Restricted cash 72,000 72,000
Advance to managed outlets 302,000 331,000
Note receivable 112,000 111,000
Other assets 420,000 426,000
------------ --------------
Total assets $ 14,730,000 $ 13,887,000
============ ==============
The accompanying notes are an integral part of these consolidated condensed financial
statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
March 28, December 28,
2004 2003
(unaudited) (restated)
------------ --------------
Current liabilities:
Accounts payable $ 1,289,000 $ 998,000
Accrued expenses 2,239,000 2,315,000
Current portion of long term debt 326,000 254,000
Current portion notes payable - related parties 242,000 269,000
------------ --------------
Total current liabilities 4,096,000 3,836,000
Long-term debt 104,000 283,000
Notes payable - related parties 310,000 323,000
Other long-term liabilities 2,342,000 1,496,000
------------ --------------
Total liabilities 6,852,000 5,938,000
Minority interest 1,337,000 1,521,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2004 and 2003 - -
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, 500 shares issued
and outstanding in 2004 and 2003 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2004 and 2003, 5,588,019 issued and
outstanding in 2004 and 5,537,071 issued and - -
outstanding 2003
Additional paid-in capital 13,233,000 13,207,000
Accumulated deficit (6,692,000) (6,779,000)
------------ --------------
Total stockholders' equity 6,541,000 6,428,000
------------ --------------
Total liabilities, minority interest and stockholders' equity $14,730,000 $ 13,887,000
============ ==============
The accompanying notes are an integral part of these consolidated condensed financial
statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
--------------------------
March 28, March 30,
------------ ------------
2004 2003
------------ ------------
(restated)
Revenues:
Sales $12,958,000 $11,667,000
Management and license fees 296,000 255,000
------------ ------------
Total revenues 13,254,000 11,922,000
Cost of sales 3,630,000 3,174,000
------------ ------------
Gross profit 9,624,000 8,748,000
------------ ------------
Operating expenses:
Restaurant operating expenses 7,776,000 6,997,000
Gain on disposal of assets - (12,000)
General and administrative 1,227,000 910,000
Depreciation and amortization 386,000 432,000
Pre-opening costs 147,000 187,000
------------ ------------
Total operating expenses 9,536,000 8,514,000
------------ ------------
Income from operations 88,000 234,000
Interest expense, net (34,000) (48,000)
------------ ------------
Income before provision for income taxes, equity in
loss of joint venture and minority interest 54,000 186,000
Provision for income taxes (23,000) (55,000)
Minority interest in net loss of subsidiaries 60,000 216,000
Equity in loss of joint venture (4,000) (5,000)
------------ ------------
Net income 87,000 342,000
Preferred dividends accrued (13,000) (13,000)
------------ ------------
Net income applicable to common stock $ 74,000 $ 329,000
============ ============
Net income per share applicable to common stock:
Basic net income $ 0.01 $ 0.06
============ ============
Diluted net income $ 0.01 $ 0.06
============ ============
Weighted average share outstanding:
Basic 5,545,864 5,537,071
============ ============
Diluted 6,192,910 5,537,071
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
-------------------------
March 28, March 30,
2004 2003
------------ -----------
Cash flows from operating activities: (restated)
Net income $ 87,000 $ 342,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 386,000 432,000
Stock based compensation expense 187,000 5,000
Gain on sale of liquor license - (12,000)
Minority interest in loss of subsidiaries (60,000) (216,000)
Equity in loss of joint venture 4,000 5,000
Changes in operating assets and liabilities:
Inventories 1,000 (22,000)
Receivables 180,000 (285,000)
Prepaid expenses and other current assets (272,000) (269,000)
Other assets 22,000 (4,000)
Accounts payable 291,000 (9,000)
Accrued expenses (265,000) (316,000)
Other long-term liabilities (1,000) -
------------ -----------
Net cash provided by (used in) operating activities 560,000 (349,000)
------------ -----------
Cash flows from investing activities:
Purchase of furniture, equipment and improvements (1,240,000) (184,000)
Investment in non-consolidated entity (20,000) -
Restricted cash for Daily Grill at Continental Park, LLC - 466,000
Proceeds from disposal of assets - 26,000
Advance repaid by managed outlet 29,000 -
------------ -----------
Net cash provided by (used in) investing activities (1,231,000) 308,000
------------ -----------
Cash flows from financing activities:
Tenant improvement allowances 847,000 -
Proceeds from minority interest in LLC 15,000 -
Payments to related parties (40,000) (36,000)
Payments on long term debt (107,000) (98,000)
Return of capital and profits to minority shareholder (68,000) (72,000)
Preferred return to minority shareholder (44,000) (44,000)
------------ -----------
Net cash provided by (used in) financing activities 603,000 (250,000)
------------ -----------
Net decrease in cash and cash equivalents (68,000) (291,000)
Cash and cash equivalents, beginning of period 1,473,000 1,275,000
------------ -----------
Cash and cash equivalents, end of period $ 1,405,000 $ 984,000
============ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 33,000 $ 38,000
Income taxes $ 36,000 $ 16,000
The accompanying notes are an integral part of these consolidated condensed financial
statements.
6
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have
not been audited by independent auditors. The December 28, 2003 balance
sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should be
read in conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 28, 2003, as amended. In
the opinion of management, these interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of
the results for the interim periods presented. The current period results
of operations are not necessarily indicative of results, which ultimately
will be reported for the full year ending December 26, 2004.
RESTATEMENT
The accompanying consolidated financial statements as of December 28, 2003
and for the three months ended March 30, 2003 have been restated from those
originally issued by the Company to reflect the accounting for employee
stock options using variable accounting treatment and to make other
miscellaneous corrections.
In 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," this cashless exercise feature requires the
Company to account for its option plan using a variable accounting
treatment. Under variable accounting, compensation expense must be
remeasured each balance sheet date based on the difference between the
current market price of the Company's stock and the option's exercise
price. An accrual for compensation expense is determined based on the
proportionate vested amount of each option as prescribed by Financial
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans." Each period, adjustments to the
accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant.
In addition to this change, the Company also recorded additional general
and administrative expenses of $29,000 for the fourth quarter of fiscal
year 2003 to correctly state its liability for payroll and other costs.
Lastly, the Company increased additional paid-in capital and accumulated
deficit by $55,000 as of each fiscal yearend in the period from 1998
through 2003, to properly reflect the fair value of stock options issued in
connection with severance agreements arranged in fiscal year 1998.
The impact of this restatement, which has been reflected throughout the
consolidated financial statements and accompanying notes, is as follows:
7
Balance Sheet
-------------
December 28, December 28,
2003 2003
-------------- --------------
(As reported) (As restated)
Accrued expenses $ 2,118,000 $ 2,315,000
Total current liabilities 3,639,000 3,836,000
Total liabilities 5,741,000 5,938,000
Minority interest 1,522,000 1,521,000
Additional paid-in capital 13,152,000 13,207,000
Accumulated deficit (6,528,000) (6,779,000)
Total stockholders equity 6,624,000 6,428,000
Income Statement
----------------
March 30, March 30,
2003 2003
-------------- --------------
(As reported) (As restated)
Restaurant operating expenses 6,995,000 6,997,000
General and administrative 907,000 910,000
Total operating expenses 8,509,000 8,514,000
Income from operations 239,000 234,000
Income before provision
for income taxes, minority
interest, and equity in loss of
joint venture 191,000 186,000
Net income 347,000 342,000
Net income applicable to
common stock 334,000 329,000
Net income per share
applicable to common stock:
Basic net income 0.06 0.06
Diluted net income 0.06 0.06
Statement of Cash Flows
-----------------------
Net income 347,000 342,000
Stock based compensation - 5,000
In addition, certain prior year amounts have been reclassified to conform
to current year presentation.
2. RESTRICTED CASH
Restricted cash consists of amounts held in escrow for the Daily Grill at
Continental Park in El Segundo, California which was opened in January 2003
and all but $72,000 was released.
8
3. WORKER'S COMPENSATION LOSS RESERVE
The Company has obtained a large deductible worker's compensation policy
for 2004 that includes a deductible per occurrence of $250,000 subject to
an aggregate loss of $1.7 million. The Company has established a loss
reserve to cover the potential deductible amounts. The loss reserve is
determined by estimating the ultimate cost to the Company utilizing
information on current accidents, prior year experience and the carrier's
loss development and loss trend factors.
4. OTHER LONG-TERM LIABILITIES
Construction of the Bethesda Daily Grill was paid for through a $1.8
million tenant improvement allowance of which $885,000 was received during
the first quarter of 2004. This tenant incentive allowance has been
recorded in other long-term liabilities and is being amortized against rent
expense over the 15 year lease term.
5. OPERATING LEASES AND CONTRACTUAL OBLIGATIONS
During the quarter ended March 28, 2004, we entered into a lease relating
to a restaurant scheduled to open in the fourth quarter of 2004.
Accordingly, at March 28, 2004, we were obligated under seventeen leases
covering the premises in which our Daily Grill and Grill Restaurants are
located as well as leases on our executive offices. Such restaurant leases
and the executive office lease contain minimum rent provisions which
provide for the payment of minimum aggregate rental payments of
approximately $18.5 million over the life of those leases, with minimum
annual rental payments of $2.8 million in 2004, $4.8 million between 2005
and 2006, $3.9 million between 2007 and 2008, and $6.9 million thereafter.
With the exception of entering into the referenced lease, there were no
material changes in our obligations under operating leases or other
contracts during the quarter ended March 28, 2004 as compared to those
described in the Company's Form 10-K for the year ended December 28, 2003,
as amended.
6. RECENTLY ISSUSED ACCOUNTING REQUIREMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which addresses the consolidation of business
enterprises (variable interest entities) to which the usual condition
(ownership of a majority voting interest) of consolidation does not apply.
The interpretation focuses on financial interests that indicate control. It
concludes that in the absence of clear control through voting interests, a
company's exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are the
best evidence of control. Variable interests are rights and obligations
that convey economic gains or losses from changes in the values of the
variable interest entity's assets and liabilities. Variable interests may
arise from financial instruments, service contracts, nonvoting ownership
interests and other arrangements. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include the
assets, liabilities and the results of operations of the variable interest
entity in its financial statements. In December 2003, the FASB issued a
revision to FIN 46 to address certain implementation issues. The provisions
of this Interpretation were effective for the Company for the interim
period ending March 28, 2004. The Company has reviewed its various
agreements in order to determine if any variable interest entities exist
which would require consolidation. The Company does not believe that it
holds the majority of the variable interests of an entity whereby it would
be considered the primary beneficiary. Accordingly, the adoption of this
Interpretation has not had a significant impact on the Company's financial
results of operations and financial position.
9
7. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on
Hollywood and South Bay Daily Grill restaurants are each owned by limited
liability companies (the "LLCs") in which the Company serves as manager and
owns a controlling interest. Each of the LLCs has minority interest owners.
In connection with the financing of each of the LLCs, the minority members
may have certain rights to priority distributions of capital until they
have received a return of their initial investments ("Return of Member
Capital") as well as rights to receive defined preferred returns on their
invested capital ("Preferred Return").
The following tables set forth a summary for each of the LLCs of (1) the
distributions of capital to the Members and/or the Company during the
quarter ended March 28, 2004, (2) the unreturned balance of the capital
contributions of the Members and/or the Company at March 28, 2004, and (3)
the accrued but unpaid preferred returns due to the Members and/or the
Company at March 28, 2004:
SAN JOSE GRILL LLC
Distributions of capital, preferred return
and profit during the three months
ended March 28, 2004: Members $68,000
=======
Company $68,000
=======
Unreturned Initial Capital Contributions
at March 28, 2004: Members $ 0
=======
Company $ 0
=======
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
=======
Company $ 0
=======
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 28, 2004: Members (a) $ 56,000
========
Company $ 0
========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $888,000
========
Company $ 0
========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
========
Company $ 0
========
10
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $1,200,000
==========
Company $ 250,000
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
==========
Company $ 73,000
==========
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $1,000,000
==========
Company $ 350,000
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 128,000
==========
Company $ 45,000
==========
(a) Distribution of capital as of March 28, 2004 includes $44,000 of
capital and preferred return and $12,000 of payment on the loan.
8. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," which amends SFAS No. 123. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results of operations. As the Company has
not elected to change to the fair value based method of accounting for
stock based employee compensation, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial position or results of
operations. All disclosure requirements of SFAS No. 148 have been adopted
and are reflected in these financial statements.
11
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay
to acquire the stock. Because grants under the plan require variable
accounting treatment, compensation expense is remeasured at each balance
sheet date based on the difference between the current market price of the
Company's stock and the option exercise price. An accrual for compensation
expense is determined based on the proportionate vested amount of each
option as prescribed by Financial Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Each period, adjustments to the accrual are recognized in the income
statement. The Company accounts for stock and options to non-employees at
fair value in accordance with the provisions of SFAS No. 123 and the
Emerging Issues Task Force Consensus on Issue No. 96-18.
On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12,
1998 the 1998 Stock Option Plan (the "1998 Plan") was adopted. These Plans
provide for options to be issued to the Company's employees and others. The
exercise price of the shares under option shall be equal to or exceed 100%
of the fair market value of the shares at the date of grant. The options
generally vest over a five-year period. The terms of the option grants
allow the employee to exercise the option by surrendering a portion of the
vested shares in lieu of paying cash, subject to the terms of the plan
including the rights of the Compensation Committee to amend grants in any
manner that the committee in its sole discretion deems to not adversely
impact the option holders.
The Company has adopted the disclosure-only provisions of SFAS No. 148 and
SFAS No. 123, and will continue to use the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." Pro forma compensation expense for the Company's stock
option plans determined based on the fair value at the grant date for
awards is as follows:
2004 2003
--------- ----------
(Restated)
Net income, as reported $ 87,000 $ 342,000
Add: stock compensation expense
recorded 187,000 5,000
Deduct: stock compensation expense
under fair value method (30,000) (38,000)
Net income, pro forma $244,000 $ 309,000
Net income per share, as reported:
Basic $ 0.01 $ 0.06
Diluted $ 0.01 $ 0.06
Net income per share, pro forma:
Basic $ 0.04 $ 0.06
Diluted $ 0.04 $ 0.06
12
9. PER SHARE DATA
Pursuant to SFAS No. 128, "Earnings Per Share," basic net income per share
is computed by dividing the net income attributable to common shareholders
by the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income
attributable to common shareholders by the weighted-average number of
common and common equivalent shares outstanding during the period. Common
share equivalents included in the diluted computation represent shares
issuable upon assumed exercise of stock options, warrants and convertible
preferred stocks using the treasury stock method.
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the quarters ended March 28, 2004 and March 30, 2003 follow:
2004 2003
--------------------- ---------------------
Earnings Shares Earnings Shares
--------------------------------------------
Restated
Net income $ 87,000 $ 342,000
Less: preferred stock dividend (13,000) (13,000)
---------- ----------
Earnings available for common
stockholders 74,000 5,545,864 329,000 5,537,071
Dilutive securities:
Stock options - 142,215 - -
Warrants - 504,831 - -
---------- --------- ---------- ---------
Dilutive earnings available to
common stockholders $ 74,000 6,192,910 $ 329,000 5,537,071
============================================
Stock options for 230,750 and 664,525 shares for 2004 and 2003,
respectively, were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. Warrants for 203,645 and 1,922,786
shares for 2004 and 2003, respectively, were excluded from the calculation
of diluted earnings per share because they were anti-dilutive. 500 shares
of preferred stock were excluded from the calculation of diluted earnings
per share because they were anti-dilutive for both 2004 and 2003.
10. ADVANCE TO MANAGED OUTLETS
On February 25, 2002 the Company began management of the San Francisco
Daily Grill in the Handlery Hotel near Union Square in San Francisco,
California. The Company advanced approximately $331,000 to the restaurant
during 2002 that will be reimbursed through future operations. Repayments
of $29,000 were made during the first three months of 2004.
In July 2002 the Company began management of a Daily Grill restaurant in
the Westin Galleria in Houston, Texas. The Company advanced approximately
$64,000 to the restaurant for initial working capital during 2002 that was
repaid in May 2003.
11. ADDITIONAL INVESTMENT IN NON-CONSOLIDATED ENTITY
In February 2004 the Company contributed an additional $20,000 to the
Universal CityWalk joint venture. Although the management agreement for
Universal Grill Joint Venture requires the Company and the other member to
make an interest free loan to the joint venture of fifty percent of
anticipated negative cash flows, both members agreed to make this payment a
capital contribution. A similar contribution totaling $30,000 was made in
April 2003.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this Form
10-Q. Except for the historical information contained herein, the discussion in
this Form 10-Q contains certain forward looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward looking statements
wherever they appear in this Form 10-Q. The Company's actual results could
differ materially from those discussed here. For a discussion of certain factors
that could cause actual results to be materially different, refer to the
Company's Annual Report on Form 10-K for the year ended December 28, 2003, as
amended.
RESTATEMENT
The accompanying consolidated financial statements as of December 28, 2003 and
for the three months ended March 30, 2003 have been restated from those
originally issued by the Company to reflect the accounting for employee stock
options using variable accounting treatment and to make other miscellaneous
corrections.
In 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," this cashless exercise feature requires the Company to
account for its option plan using a variable accounting treatment. Under
variable accounting, compensation expense must be remeasured each balance sheet
date based on the difference between the current market price of the Company's
stock and the option's exercise price. An accrual for compensation expense is
determined based on the proportionate vested amount of each option as prescribed
by Financial Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans." Each period, adjustments to
the accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant.
In addition to this change, the Company also recorded additional general and
administrative expenses of $29,000 for the fourth quarter of fiscal year 2003 to
correctly state its liability for payroll and other costs. Lastly, the Company
increased additional paid-in capital and accumulated deficit by $55,000 as of
each fiscal yearend in the period from 1998 through 2003, to properly reflect
the fair value of stock options issued in connection with severance agreements
arranged in fiscal year 1998.
The impact of this restatement, which has been reflected throughout the
consolidated financial statements and accompanying notes, is as follows:
14
Balance Sheet
-------------
December 28, December 28,
2003 2003
-------------- --------------
(As reported) (As restated)
Accrued expenses $ 2,118,000 $ 2,315,000
Total current liabilities 3,639,000 3,836,000
Total liabilities 5,741,000 5,938,000
Minority interest 1,522,000 1,521,000
Additional paid-in capital 13,152,000 13,207,000
Accumulated deficit (6,528,000) (6,779,000)
Total stockholders equity 6,624,000 6,428,000
Income Statement
----------------
March 30, March 30,
2003 2003
-------------- --------------
(As reported) (As restated)
Restaurant operating expenses 6,995,000 6,997,000
General and administrative 907,000 910,000
Total operating expenses 8,509,000 8,514,000
Income from operations 239,000 234,000
Income before provision
for income taxes, minority
interest, and equity in loss of
joint venture 191,000 186,000
Net income 347,000 342,000
Net income applicable to
common stock 334,000 329,000
Net income per share
applicable to common stock:
Basic net income 0.06 0.06
Diluted net income 0.06 0.06
Statement of Cash Flows
-----------------------
Net income 347,000 342,000
Stock based compensation - 5,000
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total operating revenues, except where otherwise noted.
Three Months Ended
----------------------
March 28, March 30,
2004 2003
---------- ----------
(restated)
% %
Revenues:
Company restaurant sales 97.8 97.9
Management and license fees 2.2 2.1
---------- ----------
Total revenues 100.0 100.0
Cost of sales 27.4 26.6
---------- ----------
Gross profit 72.6 73.4
---------- ----------
Restaurant operating expenses 58.6 58.7
Gain on sale of liquor license - (0.1)
General and administrative 9.3 7.6
Depreciation and amortization 2.9 3.6
Pre-opening costs 1.1 1.6
---------- ----------
Total operating expenses 71.9 71.4
---------- ----------
Operating income 0.7 2.0
Interest expense, net (0.3) (0.4)
---------- ----------
Income before taxes, equity in loss of joint
Venture and minority interest 0.4 1.6
Provision for income taxes (0.2) (0.5)
Minority interest 0.5 1.8
Equity in loss of joint venture 0.0 0.0
---------- ----------
Net income 0.7 2.9
========== ==========
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
First Quarter Total open at
Openings End of Quarter
--------------- ------------------
FY 2004 FY 2003 FY 2004 FY 2003
Daily Grill Restaurants:
Company owned 1 1 11 10
Managed and/or licensed - - 7 6
Grill on the Alley restaurants:
Company owned - - 4 4
Other restaurants
Managed and/or licensed - - 1 1
------- ------- -------- -------
Total 1 1 23 21
======= ======= ======== =======
16
Three Months Ended
--------------------------
March 28, March 30,
2004 2003
------------ ------------
Weighted average weekly sales per company
owned restaurant:
Daily Grill $ 69,700 $ 67,800
Grill on the Alley 80,115 75,500
Change in comparable restaurants (1)
Daily Grill 8.7% 3.4%
Grill on the Alley 6.1% (1.3)%
Total Company revenues:
Daily Grill $ 8,792,000 $ 7,739,000
Grill on the Alley 4,166,000 3,928,000
Management and license fees 296,000 255,000
------------ ------------
Total consolidated revenues 13,254,000 11,922,000
------------ ------------
Managed restaurants sales 4,572,000 3,302,000
Licensed restaurants sales 2,142,000 2,295,000
Less management and license fees (296,000) (255,000)
------------ ------------
Total system sales $19,672,000 $17,264,000
============ ============
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28,
2004 AS COMPARED TO THE THREE MONTHS ENDED MARCH 30, 2003
Revenues. Revenues for the 2004 quarter increased 11.1% to $13.3 million from
$11.9 million in the 2003 period. Sales revenues increased 11.1% to $13.0
million in 2004 from $11.7 million in 2003. Management and license fee revenues
increased to $296,000 in 2004 from $255,000 in 2003. System-wide sales,
including sales of non-consolidated restaurants operated under license,
management or partnership agreements, totaled $19.7 million in 2004, an increase
of 13.9% from $17.3 million in 2003. System-wide sales, computed by adding to
total revenues the revenues of unconsolidated restaurants and subtracting
license and management fees reported from those restaurants, is considered by
management to be a key indicator of brand strength. See reconciliation of
system-wide sales to revenues above.
Sales for Daily Grill restaurants increased by 13.6% from $7.7 million in the
2003 quarter to $8.8 million in the 2004 period. The increase in sales revenues
for the Daily Grill restaurants from 2003 to 2004 was primarily attributable to
an increase in same store sales of 8.7% ($0.6 million) for restaurants open for
12 months in both 2003 and 2004 and opening of the Bethesda Daily Grill ($0.6
million). Management considers performance of same store or comparable store
sales to be an important measure of growth when evaluating performance. Weighted
average weekly sales at the Daily Grill restaurants increased 9.2% from $67,800
in 2003 to $69,700 in 2004. Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 2004 reflected both increased
guest counts and improved average checks during the period.
17
Sales for Grill restaurants increased by 6.1% from $3.9 million in the 2003
quarter to $4.2 million in 2004. The increase in sales revenues for the Grill
restaurants from 2003 to 2004 was attributable to the improved check averages
and increased guest counts. Weighted average weekly sales at the Grill
restaurants increased 6.1% from $75,500 in 2003 to $80,115 in 2004.
Management and license fee revenues during the 2004 quarter were attributable to
(1) hotel restaurant management services which accounted for $209,000 of
management fees, (2) licensing fees from the LAX Daily Grill, Skokie, Illinois
Daily Grill and the San Jose City Bar and Grill which totaled $58,000 and (3)
$29,000 in management fees from Universal CityWalk. The increase in management
fees during 2004 was attributable to management of the Portland Daily Grill
beginning in September 2003 and improved sales at other managed locations.
We account for our 50% interest in the Universal CityWalk Daily Grill using the
equity method. As a result, our sales do not include sales from Universal
CityWalk. Total revenues for the Universal CityWalk Daily Grill were $552,000
during the 2004 quarter as compared to $466,000 during 2003.
Cost of Sales and Gross Profit. While sales revenues increased by 11.1% ($1.3
million) in the 2004 quarter as compared to 2003, cost of sales increased by
14.4% ($456,000) and increased as a percentage of sales from 26.6% in 2003 to
27.4% in 2004. The increase in cost of sales as a percentage of sales revenues
was attributable to higher costs for a variety of food and grocery products,
including dairy, poultry and seafood during the current period. The dollar
increase in cost of sales reflects the opening of the Bethesda Daily Grill,
increased same store sales and the increase in various food grocery prices.
Gross profit increased 10.0% from $8.7 million (73.4% of revenues) in 2003 to
$9.6 million (72.6% of revenues) in 2004.
Operating Expenses and Operating Results. Total operating expenses, including
restaurant operating expenses, general and administrative expense, depreciation
and amortization, and pre-opening costs, increased 12.0% to $9.5 million in the
2004 quarter (representing 71.9% of revenues) from $8.5 million in 2003
(representing 71.4% of revenues).
Restaurant operating expenses increased 11.1% to $7.8 million in the 2004
quarter from $7.0 million in 2003. As a percentage of revenues, restaurant
operating expenses represented 58.6% in 2004 compared to 58.7% in 2003. The
dollar increase in restaurant operating expenses was primarily attributable to
the sales increase, including the opening of the Bethesda Daily Grill
($458,000), and increases in various restaurant costs, including wages and
related costs ($107,000), promotion and advertising ($106,000), occupancy costs
($96,000), and compensation expense for stock options ($43,000) among others.
The decrease in operating expenses as a percentage of revenues resulted from
improved operating efficiencies partially offset by compensation expense for
stock options attributable to an increase in the Company's stock price during
the quarter.
General and administrative expenses rose 34.8% to $1.2 million in the 2004
quarter compared to $0.9 million in 2003. General and administrative expenses
represented 9.3% of revenues in 2004 as compared to 7.6% of revenues in 2003.
The increase in general and administrative expense was attributable to increases
in a broad number of categories, including compensation expense for stock
options ($139,000), wages and related costs ($82,000), travel expenses
($20,000), telephone ($13,000), taxes and license expenses ($10,000) and
professional services ($56,000), including costs associated with implementing
various systems and procedures mandated by the Sarbanes-Oxley Act.
Depreciation and amortization expense decreased 10.6% for the 2004 quarter
representing 2.9% of revenues in 2004 and 3.6% of revenues in 2003 primarily due
to higher revenues with relatively fixed depreciation amounts and the completion
of amortization of a non-compete agreement in 2003.
18
Pre-opening costs totaled $147,000 in the 2004 period as compared with $187,000
in 2003. These pre-opening costs were attributable to the opening in January
2003 of the South Bay Daily Grill and the opening of the Bethesda Daily Grill in
January 2004.
Interest Expense. Interest expense, net, totaled $34,000 during the 2004
quarter as compared to $48,000 in 2003. The decrease in interest expense was
primarily attributable to the reduction in long-term debt.
Minority Interest and Equity in Loss of Joint Venture. We reported a minority
interest in the loss of our majority owned subsidiaries of $60,000 during the
2004 quarter as compared to $216,000 during the 2003 quarter. The decrease in
minority interest in loss was primarily attributable to improved operating
results from the South Bay Daily Grill which reflected pre-opening costs for the
2003 quarter.
We recorded equity in loss of joint venture of $4,000 in the 2004 quarter and
$5,000 in 2003 relating to the Company's 50% interest in the Universal CityWalk
Daily Grill.
We reported net income of $87,000 in the 2004 quarter as compared to a net
income of $342,000 for 2003.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At March 28, 2004 the Company had negative working capital of $0.7 million and a
cash balance of $1.4 million compared to negative working capital of $0.4
million and a cash balance of $1.5 million at December 28, 2003.
Net cash provided by operations during the quarter ended March 28, 2004 totaled
$560,000 compared to $349,000 used in operations during the quarter ended March
30, 2003. The positive change in working capital resulted from a reduction in
receivables and an increase in payables, offset by a reduction in depreciation
and amortization and lower net income.
Net cash used in investing activities during the quarter ended March 28, 2004
totaled $1,231,000 as compared to $308,000 provided by operations during the
quarter ended March 30, 2003. Cash used in investing activities, during the
current period, related primary to purchases of property, plant and equipment
for the Bethesda Daily Grill ($1,155,000).
Net cash provided by financing activities during the quarter ended March 28,
2004 totaled $603,000 as compared to $250,000 used in operations during the
quarter ended March 30, 2003. Cash provided by financing activities during the
current period related to tenant improvement allowances ($847,000), and an
investment by a minority member in a LLC ($15,000), partially off-set by
reductions in debt ($147,000), payment of preferred returns to minority
investors in Chicago - the Grill on the Alley, LLC ($44,000) and distribution of
profits to the minority member of San Jose Grill, LLC ($68,000).
Financing Facilities. At March 28, 2004, the Company had a bank credit facility
with nothing owing, a loan from a member of Chicago - The Grill on the Alley,
LLC of $0.4 million, equipment loans of $0.3 million, loans from
stockholders/officers of $0.2 million, and loans/advances from a landlord, the
SBA and others of $0.1 million. Construction of the Bethesda Daily Grill was
paid for through a $1.8 million tenant improvement allowance of which $885,000
was received during the first quarter of 2004. This tenant incentive allowance
has been recorded in other long-term liabilities and is being amortized against
rent expense over the 15 year lease term.
19
In March 2004, we entered into a preliminary agreement with respect to the
establishment of a new bank credit facility to replace our facility that expires
in October 2004. Under the terms of the new bank credit facility, we will be
provided with financing in the form of a revolving line of credit in the amount
of $500,000, an irrevocable standby letter of credit in the amount of $700,000
and equipment financing in the amount of $500,000. The facility will have a
one-year term, be secured by assets and is subject to certain standard borrowing
covenants. The definitive loan documents for the equipment lease and revolving
line of credit have been drafted but are not yet signed. All documents related
to the letter of credit have been signed.
Operating Leases and Contractual Obligations. During the quarter ended March
28, 2004, we entered into a lease relating to a restaurant scheduled to open in
the fourth quarter of 2004. Accordingly, at March 28, 2004, we were obligated
under seventeen leases covering the premises in which our Daily Grill and Grill
Restaurants are located as well as leases on our executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provide for the payment of minimum aggregate rental payments of
approximately $18.5 million over the life of those leases, with minimum annual
rental payments of $2.8 million in 2004, $4.8 million between 2005 and 2006,
$3.9 million between 2007 and 2008, and $6.9 million thereafter. With the
exception of entering into the referenced lease, there were no material changes
in our obligations under operating leases or other contracts during the quarter
ended March 28, 2004 as compared to those described in the Company's Form 10-K
for the year ended December 28, 2003, as amended.
Commitments Relating to Managed Restuarants and LLCs. Under certain of our
operating and management agreements we have an obligation to potentially make
additional cash advances and/or contributions and may not realize any
substantial returns for some time. The agreements and arrangements under which
we may be required to make cash advances or contributions, guarantee obligations
or defer receipt of cash are described in the Company's Form 10-K for the year
ended December 28, 2003, as amended. Developments with respect to those
agreements and arrangements during the quarter ended March 28, 2004 include:
Pursuant to the obligation of the Owner of the Portland Daily Grill to provide
working capital advances of not less than $50,000 and not more than $150,000,
after which the Company is required to make working capital advances, the Owner
had advanced $100,000 as of March 28, 2004.
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners. In
connection with the financing of each of the LLCs, the minority members may have
certain rights to priority distributions of capital until they have received a
return of their initial investments ("Return of Member Capital") as well as
rights to receive defined preferred returns on their invested capital
("Preferred Return").
Detailed information regarding the initial capital contributions to the LLCs,
Preferred Returns for each LLC, management fees payable to the Company and
principal distribution provisions are included in the Company's Form 10-K for
the year ended December 28, 2003, as amended. The following tables set forth a
summary for each of the LLCs of (1) the distributions of capital to the Members
and/or the Company during the quarter ended March 28, 2004, (2) the unreturned
balance of the capital contributions of the Members and/or the Company at March
28, 2004, and the accrued but unpaid preferred returns due to the Members and/or
the Company at March 28, 2004:
20
SAN JOSE GRILL LLC
Distributions of capital, preferred return
and profit during the three months
ended March 28, 2004: Members $ 68,000
==========
Company $ 68,000
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $ 0
==========
Company $ 0
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
==========
Company $ 0
==========
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 28, 2004: Members (a) $ 56,000
==========
Company $ 0
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $ 888,000
==========
Company $ 0
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
==========
Company $ 0
==========
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $1,200,000
==========
Company $ 250,000
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 0
==========
Company $ 73,000
==========
21
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital Contributions
at March 28, 2004: Members $1,000,000
==========
Company $ 350,000
==========
Accrued but unpaid Preferred Returns
at March 28, 2004: Members $ 128,000
==========
Company $ 45,000
==========
(b) Distribution of capital as of March 28, 2004 includes $44,000 of
capital and preferred return and $12,000 of payment on the loan.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company's
critical accounting policies is set forth in the Company's Form 10-K for the
year ended December 28, 2003, as amended. As of, and for the quarter ended,
March 28, 2004, there have been no material changes or updates to the Company's
critical accounting policies other than the establishment of a workers
compensation loss reserve.
Worker's Compensation Loss Reserves
-----------------------------------
The Company has obtained a large deductible worker's compensation policy for
2004. The Company has established a loss reserve to cover the potential
deductible amounts. The loss reserve is determined by estimating the ultimate
cost to the Company utilizing information on current accidents, prior year
experience and the carrier's loss development and loss trend factors. The
Company has reduced costs during the first quarter by $27,000 resulting from
savings of $64,000 due to lower premium costs net of the establishment of a loss
reserve of $37,000.
Based on the Company's review at March 28, 2004, the current loss reserve is
adequate.
22
RECENTLY ADOPTED ACCOUNTING REQUIREMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which addresses the consolidation of business enterprises (variable
interest entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The interpretation focuses on
financial interests that indicate control. It concludes that in the absence of
clear control through voting interests, a company's exposure (variable interest)
to the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interest may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority
of the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include the assets,
liabilities and the results of operations of the variable interest entity in its
financial statements. In December 2003, the FASB issued a revision to FIN 46 to
address certain implementation issues. The provisions of this Interpretation
were effective for the Company for the interim period ending March 28, 2004.
The Company has reviewed its various agreements in order to determine if any
variable interest entities exist which would require consolidation. The Company
does not believe that it holds the majority of the variable interests of an
entity whereby it would be considered the primary beneficiary. Accordingly, the
adoption of this Interpretation has not had a significant impact on the
Company's financial results of operations and financial position.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of new restaurants during 2004 and the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 28, 2003, the following developments may impact future operating
results and financial condition.
In March 2004, the Company signed a lease to open an owned Daily Grill in an
office park in Santa Monica, California. The landlord will provide a turn-key
location built to our specifications. The restaurant is scheduled to open in
the fourth quarter of 2004.
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; or that additional hotels will elect to
retain the Company's hotel restaurant management services
Variable accounting, as required, for employee stock options may result in
substantial fluctuations in the Company's compensation expense and accrued
compensation based on movements in stock price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its non-revolving credit facility (the "Credit
Facility"). There were no borrowings outstanding under the Credit Facility at
March 28, 2004. Borrowings under the Credit Facility bear interest at the
lender's reference rate plus 0.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
23
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on their
evaluation, subject to the discussion below and elsewhere in this Form 10-Q
concerning the restatement of our financial statements, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are effective to ensure that we record, process, summarize, and
report information required to be disclosed by us in our reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.
In connection with the review of our financial statements for the first quarter
of 2004, our independent accountants, PricewaterhouseCoopers LLP, reported to
management and the Audit Committee that our stock options plans which had been
accounted for using fixed accounting should have been accounted for using
variable accounting. Pricewaterhouse Coopers LLP also advised management and
the Audit Committee that it considered this situation to be a material weakness.
In response to the report of our independent accountants, and after
re-evaluation of our stock option accounting practices, our management
determined to restate our consolidated financial statements for the fiscal year
ended December 28, 2003, and for the first three quarters of fiscal 2003, to
recognize compensation expense arising from the application of variable
accounting to our existing stock option plans. During the restatement process,
we also elected to make other miscellaneous corrections which were previously
identified but passed upon due to their immaterial impact on our consolidated
financial statements.
In conjunction with the decision to restate our financial statements, management
re-evaluated our disclosure controls and procedures over the selection and
application of accounting principles, in particular stock option accounting
under APB 25 and SFAS 123. During the second quarter of 2004, we took steps to
identify, rectify and prevent the recurrence of the circumstances that resulted
in our determination to restate prior period financial statements, including
reviewing the terms of our grant agreements in relation to the option plan
agreement, consulting with our independent accountants, increasing emphasis on
continuing education for our accounting personnel and increasing emphasis on
reviewing applicable accounting literature, all relating to the selection and
application of accounting principles pertaining to stock options. We believe
these enhancements to our system of internal control and our disclosure controls
and procedures will be adequate to provide reasonable assurance that the control
objectives will be met.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 2004, the Company issued 43,290 shares of common stock to Michael
Weinstock, the Company's Chairman and Executive Vice President, pursuant to the
exercise of 75,000 warrants held by Mr. Weinstock. The exercise price of the
warrant, $1.4062 per share, was paid by means of a cashless exercise. The
warrants were originally issued to Mr. Weinstock pursuant to an agreement by Mr.
Weinstock to guarantee certain bank indebtedness of the Company.
The issuance of the shares of our common stock described above was pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended and related state private offering exemptions. The purchaser
was an Accredited Investors as defined in the Securities Act who took the shares
for investment purposes without a view to distribution and had access to
information concerning the Company and its business prospects, as required by
the Securities Act.
In addition, there was no general solicitation or advertising in connection with
the issuance of the shares. All certificates for our shares contain a
restrictive legend. Finally, our stock transfer agent has been instructed not to
transfer any of such shares, unless such shares are registered for resale or
there is an exemption with respect to their transfer.
No commissions were paid in connection with the issuance described above.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement, effective January 1, 2004, with Robert
Spivak
10.2 Consulting Agreement with Robert Spivak
31.1 Section 302 Certification of CEO
31.2 Section 302 Certification of CFO
32.1 Certification of CEO Pursuant to 18.U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of CFO Pursuant to 18.U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
None
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: May 24, 2004
By: /s/ Robert Spivak
-------------------------------------
Robert Spivak
President and Chief Executive Officer
By: /s/ Daryl Ansel
-------------------------------------
Daryl Ansel
Principal Accounting Officer
26