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 July 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
---------------------------------- -----------------------------
(State or other jurisdiction (IRS Employer
of 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
------------------------------------------------------------------
(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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of August 10, 2001, 5,537,071 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 -
July 1, 2001 and December 31, 2000..................................... 1
Consolidated Condensed Statements of Operations -
For the three months and six months ended July
1, 2001 and June 25, 2000.............................................. 2
Consolidated Condensed Statements of Cash Flows - For the six months
ended July 1, 2001 and
June 25, 2000.......................................................... 4
Notes to Consolidated Condensed Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............... 14
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES................................................................. 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
July 1, December 31,
2001 2000
---------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 148,431 $ 623,097
Inventories 604,270 541,579
Receivables 497,842 654,594
Prepaid expenses 327,017 270,672
---------- -----------
Total current assets 1,577,560 2,089,942
Furniture, equipment, & improvements, net 8,729,794 9,300,548
Goodwill, net 208,943 213,053
Liquor licenses 587,494 587,614
Other assets 479,571 342,921
------------ -------------
Total assets $11,583,362 $ 12,534,078
============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
1
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
July 1, December 31,
2001 2000
------------ ------------
(unaudited)
Current liabilities:
Bank line of credit $ 100,000 $ 100,000
Accounts payable 1,036,935 1,420,591
Accrued expenses 2,276,426 2,358,699
Current portion of long term debt 726,321 737,881
Note payable - related party 193,168 191,716
------------ ------------
Total current liabilities 4,332,850 4,808,887
Long-term debt 1,993,726 2,408,151
Notes payable - related parties 435,332 458,132
------------ ------------
Total liabilities 6,761,908 7,675,170
Minority interest 1,070,916 1,363,494
Stockholders' equity:
Series A, 10% Convertible Preferred Stock, $.001
par value; 1,000,000 shares authorized,
none issued - -
and outstanding in 2001 and 2000
Series B, 8% Convertible Preferred Stock,
$.001 par value; 1,000,000
shares authorized, none issued
and outstanding in 2001 and 2000 - -
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2001 and 2000 - -
Series II, 10% Convertible Preferred Stock,
$.001 par value; 1,000,000
shares, authorized, 500 shares
issued and outstanding in 2001 and 2000 1 1
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2001 and 7,500,000 shares authorized
in 2000, 4,203,738 shares issued and outstanding
in 2001 and 2000 168 168
Additional paid-in capital 11,071,055 11,071,055
Accumulated deficit (7,320,686) (7,575,810)
------------ -----------
Total stockholders' equity 3,750,538 3,495,414
------------ -----------
Total liabilities, minority interest and
stockholders' equity $11,583,362 $12,534,078
============ ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- --------------------------------
July 1, 2001 June 25, 2000 July 1, 2001 June 25, 2000
------------- ------------- ------------- --------------
Revenues:Sales $ 11,042,489 $10,195,015 $23,321,350 $ 20,871,005
Management and license fees 257,092 146,350 413,599 296,090
------------- ------------- ------------ -------------
Total revenues 11,299,581 10,341,365 23,734,949 21,167,095
Cost of sales 3,136,961 2,938,597 6,509,228 5,948,282
------------- ------------- ------------ -------------
Gross profit 8,162,620 7,402,768 17,225,721 15,218,813
Costs and expenses:Restaurant operating
expenses 6,959,748 6,017,244 14,286,652 12,321,357
General and administrative 873,705 874,668 1,897,214 1,675,963
Depreciation and amortization 346,732 296,684 656,286 583,368
Preopening costs 437,419 457,928
------------- ------------- ------------ -------------
Total operating expenses 8,180,185 7,626,015 16,840,152 15,038,616
Income (loss) from operations (17,565) (223,247) 385,569 180,197
Interest expense, net (103,083) (96,750) (193,335) (180,657)
(Loss) income before provision for
income taxes, equity in loss of joint
venture and minority interest (120,648) (319,997) 192,234 (460)
Provision for income taxes (1,771) (1,600) (1,870) (5,600)
Equity in loss of joint venture (4,390) - (4,390) (9,469)
Minority interest 53,146 201,002 69,150 168,366
------------- ------------- ------------ -------------
Net (loss) income (73,663) (120,595) 255,124 152,837
Preferred dividends accrued or paid (12,500) (12,500) (25,000) (25,000)
------------- ------------- ------------ -------------
Net (loss) income available to
common stockholders $(86,163) $ (133,095) $230,124 $ 127,837
========== =========== ============ =============
Basic net (loss) income share $ (0.02) $ (0.03) $ 0.05 $ 0.03
========== =========== ============ =============
Diluted (loss) income per share $ (0.02) $ (0.03) $ 0.05 $ 0.03
========== =========== ============ =============
Weighted average shares outstanding
Basic 4,203,738 4,003,738 4,203,738 4,003,738
=========== =========== ============ =============
Diluted 4,203,738 4,003,738 4,575,601 4,537,071
=========== =========== ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
------------------------
July 1, June 25,
2001 2000
--------- --------
Cash flows from operating activities:
Net income $255,124 $ 152,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 656,286 583,368
Minority interest in net loss of subsidiaries (69,150) (168,366)
Equity in loss of joint venture 4,390 9,469
Changes in operating assets and liabilities
Inventories (62,691) (113,892)
Receivables 156,752 243,515
Prepaid expenses (257,031) 71,930
Other assets (167,051) (69,944)
Accounts payable (383,656) (139,723)
Accrued liabilities 118,413 346,616
---------- ----------
Net cash provided by operating activities 251,386 915,810
---------- ----------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (55,412) (2,013,501)
Liquor Licenses 120 -
---------- ----------
Net cash used in investing activities (55,292) (2,013,501)
---------- ----------
Cash flows from financing activities:Proceeds from
equipment financing - 995,096
Proceeds from investment in Chicago Grill - 1,196,945
Payments on line of credit - (435,000)
Preferred return to minority stockholders (133,518) -
Return of capital to minority stockholders (89,910) -
Payments to related parties (21,348) -
Payments on long-term debt (425,984) (458,272)
---------- ----------
Net cash (used in) provided by financing activities (670,760) 1,298,769
---------- ----------
Net (decrease) increase in cash and cash equivalents (474,666) 201,078
Cash and cash equivalents, beginning of period 623,097 352,453
---------- ----------
Cash and cash equivalents, end of period $148,431 $ 553,531
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 160,121 $ 215,608
Income taxes 13,468 -
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
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 accountants. The December 31, 2000 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 dated
December 31, 2000. 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 30, 2001.
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules were effective the first quarter of 2001. The new standard did not
have a material impact on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations."
SFAS141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method will be prohibited. The Company does not believe that the adoption of
SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB also issued Statement of Financial Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 which changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach, will be effective for fiscal
years beginning after December 15, 2001. The company has not determined the
impact that adoption of this Standard will have on its financial statements.
5
3. PER SHARE DATA
Basic earnings per share data is based upon the weighted average number of
common shares outstanding. Diluted earnings per share data is based upon the
weighted average number of common shares outstanding plus the number of common
shares potentially issuable for dilutive securities such as stock options and
warrants.
4. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Operating Agreement for San Jose Grill LLC, stipulates that distributions of
distributable cash shall be made first, 10% to the Manager and 90% to the
Members in the ratio of their percentage interests until the Members have
received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the Member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the Members in the ratio of
their percentage interests until the additional capital contributions have be
repaid. Thereafter, to the Manager and Members in the ratio of their percentage
interests.
The Operating Agreement and the Senior Promissory Note for Chicago - The Grill
on the Alley, LLC stipulates that the non-manager member of Chicago - The Grill
on the Alley, LLC is entitled to cumulative preferred return of eight percent
annually of their converted capital contribution.
5. CAPITALIZED TRANSACTION COSTS
Transaction costs associated with the proposed issuance of common stock to
Starwood Hotels and Resorts Worldwide, Inc. and other strategic investors, in
the amount of $120,000, have been deferred and included in Other Assets on the
balance sheet. These costs will be netted against the proceeds received for the
stock and recorded as a reduction to Additional Paid in Capital on closing of
the transaction.
6. SUBSEQUENT EVENTS
On July 17, 2001 the Company finalized the sale of its franchised Pizzeria Uno
restaurant in South Plainfield, New Jersey. The sales price of the assets was
$700,000 with an estimated gain on the sale of approximately $225,000.
On July 18, 2001 the Company signed an agreement forming The Grill on Hollywood,
LLC with TrizecHahn Development Corporation to operate a Grill restaurant in the
Academy of Motion Pictures building in Hollywood, California. The Company will
manage the restaurant for the LLC.
On July 27, 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which (1) the Company and Starwood entered
into a Development Agreement under which the Company and Starwood agreed to
jointly develop the Company's restaurant properties in Starwood hotels; and (2)
the Company sold 666,666 shares of restricted common stock and 666,666 stock
purchase warrants at $2.00 to Starwood for $1,000,000. Concurrently, the Company
sold an additional 666,666 shares of restricted common stock and 666,666 stock
purchase warrants at $2.25 to other strategic investors for $1,000,000.
6
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 31, 2000.
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.
Percentages may not add due to rounding.
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2001 2000 2001 2000
-------- --------- ---------- ----------
Revenues:
Company restaurant sales 97.7 % 98.6 % 98.3 % 98.6 %
Management and license fees 2.3 1.4 1.7 1.4
--------- -------- --------- ---------
Total operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 27.8 28.4 27.4 28.1
--------- -------- --------- ---------
Gross profit 72.2 71.6 72.6 71.9
--------- -------- --------- ---------
Restaurant operating expense 61.6 58.2 60.2 58.2
General and administrative expense 7.7 8.5 8.0 7.9
Depreciation and amortization 3.1 2.9 2.8 2.8
Pre-opening costs - 4.2 0 2.2
--------- -------- --------- ---------
Total operating expenses 72.4 73.7 71.0 71.0
--------- -------- --------- ---------
Operating (loss) income (0.2) (2.2) 1.6 0.9
Interest expense, net (0.9) (0.9) (0.8) (0.9)
--------- -------- --------- ---------
(Loss) income before provision for income taxes,
minority interest and equity in loss of joint
venture (1.1) (3.1) 0.8 0.0
Provision for income taxes 0.0 0.0 0.0 0.0
Minority interest 0.5 1.9 0.3 0.8
Equity in loss of joint venture (0.1) 0 0.0 0.0
-------- ------- --------- ---------
Net (loss) income (0.7)% (1.2)% 1.1% 0.7%
======== ======= ========= =========
7
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.
Second Quarter Year-to-date Total open at
Openings Openings End of Quarter
----------------- --------------- -----------------
FY 2001 FY 2000 FY 2001 FY 2000 FY 2001 FY 2000
------- ------- ------- ------- ------- -------
Daily Grill restaurants:
Company owned - - - - 10 10
Managed and/or licensed - - - - 4 3
Grill on the Alley restaurants:
Company owned - 1 - 1 3 3
Pizza restaurants - - - - 2 3
Other restaurants
Managed and/or licensed - - - - 1 1
----- ----- ----- ---- ---- ----
Total - 1 - 1 20 20
===== ===== ===== ==== ==== ===
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2001 2000 2001 2000
---------- ---------- -------- ----------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 59,833 $ 57,965 $ 63,441 $ 59,925
Grill on the Alley 81,165 74,863 85,542 79,401
Pizza restaurants 33,715 31,216 34,688 31,671
Change in comparable restaurant (1):
Daily Grill 2.9% 5.3% 5.9% 5.0%
Grill on the Alley 0.4% 11.9% 2.9% 11.7%
Pizza restaurants (6.0)% (4.4)% (3.3)% (3.9)%
Total revenues:
Daily Grill $ 7,000,466 $ 6,781,888 $14,845,299 $14,022,510
Grill on the Alley 3,165,425 2,195,714 6,672,288 4,378,119
Pizza restaurants 876,598 1,217,413 1,803,763 2,470,376
Management and license fees 257,092 146,350 413,599 296,090
------------- ------------ ----------- -----------
Total consolidated revenues $ 11,299,581 $10,341,365 $23,734,949 $21,167,095
============== ============ ============ ===========
Managed restaurants 2,694,250 2,816,703 5,527,879 5,586,624
Licensed restaurants 2,136,314 1,390,756 4,079,725 2,638,126
Less: management and license fees (257,092) (146,350) (413,599) (296,090)
-------------- ------------ ------------ -----------
Total system sales $15,873,063 $14,402,474 $32,928,954 $29,095,755
============== ============ ============ ===========
When computing comparable restaurant sales, restaurants open for at least 12
months are compared from period to period.
8
Material Changes in Results of Operations for the Three and Six Months Ended
July 1, 2001 as compared to the Three and Six Months Ended June 25, 2000
The Company's revenues for the second quarter of fiscal 2001 increased to $ 11.3
million, 9.3% over the $ 10.3 million generated for the same quarter of fiscal
2000. Total revenues included $ 11.0 million of sales revenues and $ 257,000 of
management and licensing fees for the 2001 quarter compared to $ 10.2 million of
sales revenues and $ 146,000 of management and licensing fees for the 2000
quarter. This $ 0.8 million, or 8.3%, increase in sales revenues for the quarter
was primarily attributable to an increase in same store sales ($153,000) and a
full 13 weeks of sales for Chicago - The Grill on the Alley compared to only two
weeks in 2000 ($961,000), partially offset by the closure of Pizzeria Uno in
Media ($285,000).
Revenues for the six months ended July 1, 2001 rose 12.1% to $ 23.7 million from
the $ 21.2 million generated for the same period of fiscal 2000. Total revenues
included $ 23.3 million of sales revenues and $ 414,000 of management and
licensing fees for the first six months of 2001, compared to $ 20.9 million of
sales revenues and $ 296,000 of management and licensing fees for the first six
months of 2000. The increase in sales revenues for the six months ($ 2.5
million, or 11.7%) was primarily attributable to an increase in same store sales
($879,000), plus a full 26 weeks of sales at the Chicago - The Grill on the
Alley compared to only two weeks in 2000 ($2,176,000), which was partially
offset by the closure of the Pizzeria Uno restaurant in Media ($604,000).
Same store sales (for restaurants open at least 12 months) increased 2.9 % for
the quarter and 5.9 % for the six months. For the quarter, this increase was due
to average check price increases at the Daily Grill restaurants ($73,000), and
at the Grill on the Alley restaurants ($98,000), and an increase in the number
of guests at the Daily Grill restaurants ($128,000), which was partially offset
by a decrease in the number of guests at the Grill on the Alley restaurants
($90,000). For the six months the increase was due to average check price
increases at the Daily Grill restaurants ($1,016,000) and the Grill on the Alley
restaurants ($287,000) which was partially offset by a decrease in the number of
guests at both the Daily Grill and Grill on the Alley restaurants ($358,000).
The increase in management and licensing fees for both the quarter ($ 111,000 or
75.7 %) and the six months ($ 118,000 or 39.7%) was primarily attributable to
increased sales at the Daily Gill restaurants at Georgetown Inn and Los Angeles
International Airport and the opening of the Daily Grill in the Skokie
DoubleTree in September 2000.
In addition to the restaurants owned by the Company, which sales are
consolidated and included in the results of operations for the Company, the
Company also manages and licenses six other restaurants. Total revenues for all
20 restaurants owned, managed and licensed by the Company were $15,873,000 and
$14,402,000 for the quarters and $32,929,000 and $29,096,000 for the six months
ended July 2001 and 2000, respectively. This represents an increase of
$1,471,000, or 10.2%, for the quarter and $3,833,000, or 13.2%, for the six
months.
Cost of sales increased by $198,000, or 6.8%, for the quarter and $561,000, or
9.4%, for the six months ended July 1, 2001 as compared to the same periods in
2000 primarily due to the opening of Chicago - The Grill on the Alley which
increased $323,000 and $707,000 for the quarter and six months, respectively.
Cost of sales decreased as a percentage of sales revenues, cost of sales was
27.8% for the quarter and 27.4 % for the six months as compared to 28.4 % for
the second quarter of 2000 and 28.1% for the year-to-date period in 2000. The
decrease in cost of sales as a percentage of sales during the 2001 six months
was primarily the result of menu refinements and related sales mix as well as
cost reductions resulting from improved purchasing.
9
Restaurant operating expenses increased by $943,000, or 15.7%, for the quarter
and $1,965,000, or 16.0%, for the six months as compared to the same periods in
2000 primarily due to the opening of Chicago - The Grill on the Alley which had
increased operating expenses of $816,000 and $1,378,000 for the quarter and six
months, respectively. Restaurant operating expenses, as a percentage of
revenues, increased in the second quarter from 58.2 % in 2000 to 61.6 % in 2001.
For the six months, the percentages were 58.2 % in 2000 and 60.2% in 2001. The
increase in restaurant operating expenses as a percentage of total revenues was
primarily attributable to payroll and related expenses which were up $527,000,
or 14.7%, for the quarter and $1,381,000, or 19.8%, for the six months and
variable costs which were up $380,000, or 37.0%, for the three months and
$522,000, or 23.3%, for the six months. Payroll and related benefits for Chicago
- The Grill on the Alley are up $351,000 for the quarter and $874,000 for the
six months. Variable expenses for Chicago - The Grill on the Alley are up
$159,000 for the quarter and $276,000 for the six months. The increase in
expenses at Chicago - The Grill on the Alley are due to the restaurant's having
13 and 26 weeks of operations in the quarter and six months of 2001 compared to
only 2 weeks for both the quarter and six months of 2000.
General and administrative expense decreased 0.1 % for the quarter and increased
13.2 % for the six months as compared to the same periods in 2000. As a
percentage of total revenues, general and administrative expense totaled 7.7 %
for the quarter and 8.0% for the six months as compared to 8.5% for the quarter
and 7.9 % for the six months in 2000. General and administrative expenses were
flat for the second quarter compared to prior year. The increase in total
general and administrative expense of $221,000, or 13.2%, for the six months
during 2001was primarily attributable to increased headcount at the corporate
office and related benefits.
Depreciation and amortization expense increased by 16.9 % for the quarter and
12.5 % for the six months compared to 2000, representing 2.8% of sales for the
six months of 2001 and 2000. The increase in depreciation and amortization
expense for both the quarter and the six months was primarily due to the Chicago
- The Grill on the Alley assets being in service for 13 and 26 weeks during the
quarter and six months of 2001, respectively.
All pre-opening costs incurred during the 2000 quarter and six months relate to
the opening of Chicago-The Grill on the Alley and were fully funded through
landlord contributions, partnerships or a combination thereof and were expensed
as incurred.
10
Interest expense, net, increased by $6,000, or 6.5%, during the quarter and
$13,000, or 7.0%, during the six months compared to the same periods in 2000.
The increase in interest expense related to preferred returns payable to Chicago
- The Grill on the Alley and San Jose Grill investors, which increased by
$69,000 for the 2001 year-to-date period, which was partially offset by a
$56,000 decrease in bank interest due to a reduction in bank debt. Interest
expense was flat as a percentage of sales for both the quarter and six months
compared to prior year.
The Company recorded only minimal income taxes for the six months due to the
available federal and state net operating loss carryforwards that can be
utilized to offset federal and state taxable earnings.
Results for the quarter and six months reflect minority interest in the net
losses of subsidiaries of $53,000 and $69,000 respectively, compared with
$201,000 and $168,000 in the same periods in 2000. This decrease in the amount
of net losses allocated to minority interests resulted primarily from expensing
$468,000 of pre-opening costs during the 2000 quarter attributable to Chicago -
The Grill on the Alley.
The company incurred a charge of $5,000 for its equity in loss of joint venture
during the six months of 2001 compared to $9,000 in 2000, which reflects the
Company's 50% interest in the Daily Grill Short Order at Universal Studios City
Walk.
The Company reported dividends on preferred stock of $12,500 in each of the
quarters and $25,000 in each of the six months ended July 1, 2001 and June 25,
2000.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At July 1, 2001 the Company had negative working capital of $ 2.8 million and a
cash balance of $0.1 million compared to negative working capital of $2.7
million and a cash balance of $0.6 million at December 31, 2000. The change in
working capital was primarily attributable to a $0.4 million reduction of
accounts payable and $0.1million of capitalized expenses related to the
subsequent issuance of equity to Starwood Hotels and other strategic investors.
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, loans and tenant allowances
from certain of its landlords and, beginning in 1998, through joint venture
arrangements. At July 1, 2001, the Company had existing bank borrowing of $1.0
million, an SBA loan of $ 0.1 million, loans from stockholders/officers of $ 0.6
million, equipment loans of $ 1.3 million and loans/advances from a landlord and
others of $ 0.4 million.
11
As of August 10, 2001 the Company had opened no new restaurants in 2001. The
Company is scheduled to open a Grill restaurant in the new Academy of Motion
Pictures building in Hollywood in November 2001. The Company will be responsible
for approximately $250,000 of pre-opening costs in Hollywood. The Company is
scheduled to begin management of a San Francisco hotel-based Daily Grill
restaurant in the first quarter of 2002. The Company will be responsible for
approximately $250,000 of pre-opening costs in San Francisco. Management
anticipates that new non-hotel based restaurants will cost between $1 million
and $2 million per restaurant to build and open depending upon the location and
available tenant allowances. Hotel based restaurants may involve remodeling
existing facilities. Substantial capital contributions from the hotel operators
and other factors will cause the cost to the Company of opening such restaurants
to be substantially less than the Company's cost to build and open non-hotel
based restaurants.
Management believes that the Company has adequate resources on hand and
operating cash flow to sustain operations for at least the following 12 months.
In order to fund the opening of additional restaurants, on July 27, 2001 the
Company raised $2.0 million of additional capital through the issuance of equity
securities to Starwood Hotels and Resorts Worldwide, Inc. and other strategic
investors. In conjunction with the Company's transaction with Starwood, in July
2001, the Company entered into a development arrangement with Starwood Hotels
and Resorts Worldwide, Inc. to develop the Company's restaurants in Sheraton and
Westin hotel properties.
In July 2000, the Company sold the assets of its South Plainfield, New Jersey
franchised pizza restaurant for $700,000.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board ("FASB') issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives will be
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The new rules were effective the
first quarter of 2001. The new standard did not have a material impact on the
Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standard No. 141
("SFAS 141"), "Business Combinations." SFAS141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interest method will be prohibited. The Company does
not believe that the adoption of SFAS 141 will have a significant impact on its
financial statements.
In July 2001, the FASB also issued Statement of Financial Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142, which changes
the accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach, will be effective for fiscal
years beginning after December 15, 2001. The company has not determined the
impact that adoption of this Standard will have on its financial statements.
12
Certain Factors Affecting Future Operating Results
In addition to the planned opening of the new restaurants during 2001, as
described above, and the various factors described in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, the following
developments may impact future operating results.
On July 17, 2001 the Company finalized the sale of assets of its franchised
South Plainfield, New Jersey Pizza Restaurant which had been entered into in
October 2000 for $700,000. The proceeds from the sale will be used for future
capital projects.
The Company is actively looking for a buyer for the remaining franchised
Pizzeria Uno restaurant in Cherry Hill, New Jersey.
Opening of the Grill on Hollywood is expected to have a negative short-term
impact on cash flow due to the required expenditures for pre-opening costs. The
San Francisco restaurant is expected to open in the first quarter of 2002. The
Company will incur approximately $250,000 of pre-opening costs during the second
half of 2001 and the first quarter of 2002. Management fees from the San
Francisco restaurant will begin following opening of the restaurant which is
scheduled for the first quarter of 2002. Discussions are ongoing with Starwood
Hotels and Resorts regarding any development locations.
The current economic downturn has had a negative impact, and may continue to
have a negative impact, on the Company's revenues. Increases in energy prices
and potential shortages of electricity and natural gas might have a significant
impact on the business.
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; that additional hotels will elect to retain
the Company's hotel restaurant management services; that the remaining Pizza
Restaurant can be sold on terms satisfactory to the Company; or that proceeds,
if any, from the sale of the Pizza Restaurants can be deployed in a manner so as
to replace the cash flows from the Pizza Restaurants.
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 and term loan facility
(the "Credit Facility"). Borrowings outstanding under the Credit Facility
totaled $ 1,025,000 at July 1, 2001. 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.
13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At an annual meeting of shareholders of Grill Concepts, Inc. held on
June 25, 2001, the stockholders voted on five proposals: the election of
directors; amendment of the Company's 1998 Comprehensive Stock Option and Award
Plan to increase the number of shares reserved for issuance under the plan and
to modify the terms of option grants to non-employee directors; authorization of
the issuance of shares and warrants pursuant to, and approval of the terms of, a
Subscription Agreement with Starwood Hotels and Resorts Worldwide, Inc.;
amendment of the Company's Certificate of Incorporation to increase the number
of authorized shares of Common Stock from 7,500,000 to 12,000,000; and,
ratification of the appointment of PricewaterhouseCoopers LLP as the Company's
independent certifying accountants.
The first matter voted on was a proposal to elect Robert Spivak,
Michael Weinstock, Charles Frank, Glenn Golenberg, Lewis Wolff, Stephen Ross and
Norman MacLeod, as directors of the Company. All director nominees were elected.
The following table sets forth the votes in such election:
Votes For Votes Against
Robert Spivak 2,807,767 15,001
Michael Weinstock 2,808,771 14,997
Charles Frank 2,808,767 15,001
Glenn Golenberg 2,808,767 15,001
Lewis Wolff 2,808,739 15,029
Stephen Ross 2,808,739 15,029
Norman MacLeod 2,808,739 15,029
In addition to the election of directors as noted above, the following
matters were voted upon at such meeting:
14
Proposal 2, to amend the Company's 1998 Comprehensive Stock Option and
Award Plan to increase the number of shares reserved for issuance under the plan
and to modify the terms of option grants to non-employee directors was approved
with 1,479,922 votes cast for, 48,964 votes cast against, 33,024 votes abstained
and 1,672,514 broker non-votes.
Proposal 3, to authorize the issuance of shares and warrants pursuant
to, and approval of the terms of, a Subscription Agreement with Starwood Hotels
and Resorts Worldwide, Inc. was approved with 2,774,318 votes cast for, 23,411
votes cast against, 26,672 votes abstained and 410,023 broker non-votes.
Proposal 4, to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 7,500,000 to
12,000,000 was approved with 2,757,462 votes cast for, 34,525 votes cast
against, 32,414 votes abstained and 410,023 broker non-votes.
Proposal 5, to ratify the appointment of PricewaterhouseCoopers LLP as
the Company's independent certifying accountants was approved with 2,780,828
votes cast for, 23,869 votes cast against, 19,704 votes abstained and 410,023
broker non-votes.
Item 5. Other Information
On July 27, 2001, the Company completed a transaction with Starwood Hotels
and Resorts Worldwide, Inc. pursuant to which (1) the Company and Starwood
entered into a Development Agreement under which the Company and Starwood agreed
to jointly develop the Company's restaurant properties in Starwood hotels; and
(2) the Company sold 666,666 shares of restricted common stock and 666,666 stock
purchase warrants at $2.00 to Starwood for $1,000,000. Concurrently, the Company
sold an additional 666,666 shares of restricted common stock and 666,666 stock
purchase warrants at $2.25 to other strategic investors for $1,000,000.
In conjunction with the Starwood transaction, on July 17, 2001, the
Company sold the assets of its franchised Pizzeria Uno restaurant located in
South Plainfield, New Jersey for $700,000.
15
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Description
----------- --------------
3.1 Certificate of Amendment of Restated Certificate of Incorporation
10.1 Amendment to Hotel Restaurant Properties, Inc. Agreement, dated July
27, 2001
b. Reports on Form 8-K
Form 8-K dated May 16, 2001 reporting on Item 5 the execution of a
Subscription Agreement with Starwood Hotels and Resorts Worldwide, Inc.
16
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: August 13, 2001 By: /s/ Robert Spivak
--------------------------------------
Robert Spivak, President and C.E.O
Dated: August 13, 2001 By: /s/ Daryl Ansel
--------------------------------------
Daryl Ansel, Chief Financial Officer
17