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 September 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3319172
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of principal executive offices)(Zip code)
(310) 820-5559
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(Registrant's telephone number, including area code)
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(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 November 8, 2001, 5,537,071 shares of Common Stock of the issuer
were outstanding.
GRILL CONCEPTS, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 2001 and December 31, 2000.................... 3
Consolidated Condensed Statements of Operations - For the
three months and nine months ended September 30, 2001 and
September 24, 2000............................................. 5
Consolidated Condensed Statements of Cash Flows - For the
nine months ended September 30, 2001 and September 24, 2000.... 6
Notes to Consolidated Condensed Financial Statements........... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
SIGNATURES.............................................................. 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2000
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,221,833 $ 623,097
Inventories 575,107 541,579
Receivables 459,998 654,594
Prepaid expenses 626,985 270,672
---------- -----------
Total current assets 3,883,923 2,089,942
Furniture, equipment, & improvements, net 9,193,278 9,300,548
Goodwill, net 206,928 213,053
Liquor licenses 423,049 587,614
Other assets 365,017 342,921
------------ -------------
Total assets $ 14,072,195 $ 12,534,078
============ =============
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
September 30, December 31,
2001 2000
(unaudited)
Current liabilities:
Bank line of credit $ - $ 100,000
Accounts payable 1,353,302 1,420,591
Accrued expenses 1,897,946 2,358,699
Current portion of long term debt 640,525 737,881
Note payable - related party 289,735 191,716
---------- ------------
Total current liabilities 4,181,508 4,808,887
Long-term debt 1,594,245 2,408,151
Notes payable - related parties 627,060 458,132
---------- ------------
Total liabilities 6,402,813 7,675,170
Minority interest 2,002,258 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, 5,537,071 shares issued and outstanding in 2001
4,203,738 shares issued and outstanding in 2000 221 168
Additional paid-in capital 12,933,405 11,071,055
Accumulated deficit (7,266,503) (7,575,810)
----------- -----------
Total stockholders' equity 5,667,124 3,495,414
----------- -----------
Total liabilities, minority interest and
stockholders' equity $14,072,195 $12,534,078
=========== ===========
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 Nine Months Ended
------------------------------- ----------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
Revenues:
Sales $ 9,954,799 $10,761,965 $33,276,149 $31,632,970
Management and license fees 185,482 170,754 599,081 466,844
----------- ------------- ------------ -----------
Total revenues 10,140,281 10,932,719 33,875,230 32,099,814
Cost of sales 2,826,505 3,261,674 9,335,733 9,209,959
----------- ------------- ------------ -----------
Gross profit 7,313,776 7,671,045 24,539,497 22,889,858
Costs and expenses:
Restaurant operating expenses 6,202,824 6,456,468 20,489,476 18,777,825
General and administrative 845,729 912,490 2,742,943 2,588,453
Depreciation and amortization 319,009 344,606 975,295 927,974
Preopening costs - - - 457,928
----------- ------------ ------------ -----------
Total operating expenses 7,367,562 7,713,564 24,207,714 22,752,180
Income (loss) from operations (53,786) (42,519) 331,783 137,678
Interest expense, net (164,668) (152,638) (358,003) (333,295)
Gain on disposal of assets 225,042 - 225,042 -
----------- ------------- ------------- -----------
Income (loss) before provision for
income taxes, equity in loss of joint
venture and minority interest 6,588 (195,157) 198,822 (195,617)
Provision for income taxes (2,502) (7,500) (4,372) (13,100)
Equity in income (loss) of joint venture 357 - (4,033) (9,469)
Minority interest 49,740 82,472 118,890 250,838
----------- -------------- ------------- -----------
Net (loss) income 54,183 (120,185) 309,307 32,652
Preferred dividends accrued or paid (12,500) (12,500) (37,500) (37,500)
----------- -------------- ------------- -----------
Net (loss) income available to
common stockholders $41,683 $ (132,685) $271,807 $ (4,848)
=========== ============== ============= ===========
Basic net (loss) income share $ 0.01 $ (0.03) $ 0.06 $ 0.00
=========== ============== ============= ===========
Diluted (loss) income per share $ 0.01 $ (0.03) $ 0.05 $ 0.00
=========== ============== ============= ===========
Weighted average shares outstanding
Basic 5,170,771 4,171,823 4,526,082 4,061,402
=========== ============== ============= ===========
Diluted 5,751,160 4,705,156 5,130,310 4,594,735
=========== ============== ============= ===========
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)
Nine Months Ended
--------------------------
September 30, September 24,
2001 2000
-------- ---------
Cash flows from operating activities:
Net income $309,307 $ 32,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 975,295 927,974
Minority interest in net loss of subsidiaries (118,890) (250,838)
Equity in loss of joint venture 4,033 9,469
Gain on sale of assets (225,042) -
Changes in operating assets and liabilities
Inventories (33,528) (106,498)
Receivables 194,596 276,252
Prepaid expenses (364,026) 117,109
Other assets (103,390) (76,529)
Accounts payable (67,289) (238,605)
Accrued liabilities (460,753) 134,860
---------- ---------
Net cash provided by operating activities 110,313 825,846
---------- ---------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (1,088,488) (2,196,076)
Net proceeds from sale of assets 655,035 -
---------- ----------
Net cash used in investing activities (433,453) (2,196,076)
---------- ----------
Cash flows from financing activities:
Proceeds from equipment financing - 1,003,535
Proceeds from minority members' investment in LLCs 1,040,500 1,173,941
Proceeds from issuance of note payable - 400,000
(Payments)/proceeds under line of credit (100,000) 100,000
Proceeds from bank term loan - 1,200,000
Net proceeds from issuance of common stock 1,862,403 -
Preferred return to minority stockholders (74,924) -
Return of capital to minority stockholders (161,789) -
Payments on related party debt (104,922) (387,910)
Payments on long-term debt (539,392) (2,259,482)
----------- ----------
Net cash provided by financing activities 1,921,876 1,230,084
----------- ----------
Net (decrease) increase in cash and cash equivalents 1,598,736 (140,146)
Cash and cash equivalents, beginning of period 623,097 352,453
----------- ----------
Cash and cash equivalents, end of period $2,221,833 $ 212,307
=========== ==========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 317,123 $ 370,231
Income taxes 16,569 -
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 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. MINORITY INTEREST - THE GRILL ON HOLLYWOOD
In connection with the building of a new restaurant, in July 2001, a
limited liability company was formed for the operation of the "The Grill on
Hollywood" restaurant in Hollywood, California, of which the Company owns
51%. Construction of the restaurant has been funded primarily by a capital
contribution of $1,200,000 from the minority interest member of the limited
liability company of which $1,040,500 had been contributed as of September
30, 2001. The Company is responsible for approximately $250,000 of costs
that will be incurred during the fourth quarter. The consolidated financial
statements include the accounts of the limited liability company with
minority interest reflected.
3. 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.
7
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.
4. 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.
5. 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 been repaid. Thereafter, to the Manager and
Members in the ratio of their percentage interests. In January 2001 a
distribution of distributable cash in the amount of $89,910 was made to the
minority member that reduced the member's interest.
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 a cumulative preferred return of
eight percent annually of their converted capital contribution. Preferred
return payments of $22,976 and $74,924, for the three and nine months,
respectively were paid to the non-manager member. These payments are
treated as a reduction of equity. Return of capital payments were also made
to the non-manager member of $21,065 and $71,879, for the three and nine
months, respectively.
6. RELATED PARTIES
A note holder of the Company was elected to the Board of Directors at the
Company's annual meeting and became an investor of the Company at the same
time. The note payable was reclassified from Long Term Debt to Notes
Payable - related parties. The reclassification moved $95,850 from Current
portion of long term debt to current Notes payable - related parties and
$201,903 from Long term debt to non-current Notes payable - related
parties.
8
7. STOCKHOLDER'S EQUITY
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 666,667 shares of restricted common stock
and 666,667 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. Proceeds reflected in the financial
statements are net of transaction costs.
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 less legal and other sale related costs
of $44,965.
8. INCOME TAXES
The provisions for income taxes are minimal because the Company has
available federal and state operating loss carryforwards that may be
utilized to offset federal and state taxable earnings.
9
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 Nine Months Ended
September September September September
30, 2001 24, 2000 30, 2001 24, 2000
---------- ----------- ---------- ----------
Revenues:
Company restaurant sales 98.2 % 98.4 % 98.2 % 98.5%
Management and license fees 1.8 1.6 1.8 1.5
------ ------- -------- -------
Total operating revenues 100.0 % 100.0 % 100.0 % 100.0%
Cost of sales 27.9 29.8 27.6 28.7
------ ------- ------- -------
Gross profit 72.1 70.2 72.4 71.3
------ ------- ------- -------
Restaurant operating expense 61.2 59.1 60.5 58.5
General and administrative expense 8.3 8.3 8.1 8.1
Depreciation and amortization 3.1 3.2 2.9 2.9
Pre-opening costs - - - 1.4
------ ------- ------- -------
Total operating expenses 72.6 70.6 71.5 70.9
------ ------- ------- -------
Operating (loss) income (0.5) (0.4) 1.0 0.4
Interest expense, net (1.6) (1.4) (1.1) (1.0)
Gain on disposal of assets 2.2 0.0 0.7 0.0
------ ------- ------- -------
(Loss) income before provision for income
taxes, minority interest and equity in loss
of joint venture 0.1 (1.8) 0.6 (0.6)
Provision for income taxes 0.0 0.0 0.0 0.0
Minority interest 0.5 0.8 0.3 0.7
Equity in loss of joint venture 0.0 0.0 0.0 0.0
------ ------ ------- -------
Net (loss) income 0.6% (1.0)% 0.9% 0.1%
====== ====== ======= =======
10
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.
Third 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 - 1 - 1 4 4
Grill on the Alley restaurants:
Company owned - - - 1 3 3
Pizza restaurants (1) (1) (1) (1) 1 2
Other restaurants
Managed and/or licensed - - - - 1 1
------ ----- ------ ------ ------ -----
Total (1) - (1) 1 19 20
====== ===== ====== ====== ====== =====
Three Months Ended Nine Months Ended
------------------------- --------------------------
September September September September
30, 2001 24, 2000 30, 2001 24, 2000
----------- ----------- ----------- -------------
Weighted average weekly sales per company owned
restaurant:
Daily Grill $ 55,821 $ 54,765 $ 60,901 $ 58,205
Grill on the Alley 74,956 86,860 82,013 89,704
Pizza restaurants 33,323 29,892 34,560 31,631
Change in comparable restaurant sales (1):
Daily Grill 1.9 % 5.9 % 4.6 % 5.3 %
Grill on the Alley (4.7)% 17.0 % 0.5 % 13.3 %
Pizza restaurants (6.6)% (4.5)% (5.5)% (4.2)%
Total revenues:
Daily Grill $ 6,531,017 $ 6,407,463 $21,376,316 $20,429,973
Grill on the Alley 2,923,292 3,387,527 9,595,578 7,765,646
Pizza restaurants 500,490 966,975 2,304,255 3,437,351
Management and license fees 185,482 170,754 599,081 466,844
------------ ----------- ---------- -----------
Total consolidated revenues 10,140,281 10,932,719 33,875,230 32,099,814
=========== ========== =========== ===========
Managed restaurants 2,615,142 2,791,440 8,143,021 8,378,065
Licensed restaurants 1,920,866 1,509,039 6,000,591 4,147,165
Less: management and license fees (185,482) (170,754) (599,081) ( 466,844)
----------- ----------- ----------- ------------
Total system sales $14,490,807 $ 15,062,444 $47,419,761 $ 44,158,200
=========== ========== =========== ============
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
11
Material Changes in Results of Operations for the Three and Nine Months Ended
September 30, 2001 as compared to the Three and Nine Months Ended September 24,
2000
The Company's revenues for the third quarter of fiscal 2001 decreased to $10.1
million, 7.2% under the $10.9 million generated for the same quarter of fiscal
2000. Total revenues included $10.0 million of sales revenues and $185,000 of
management and licensing fees for the 2001 quarter compared to $10.8 million of
sales revenues and $171,000 of management and licensing fees for the 2000
quarter. This $0.8 million, or 7.5%, decrease in sales revenues for the quarter
was primarily attributable to a decrease in sales for Chicago - The Grill on the
Alley compared to the same period in fiscal 2000 ($373,000) and the closure of
Pizzeria Uno in South Plainfield, New Jersey ($410,000). Chicago has been
experiencing weakened sales which where exaggerated by the drop in tourism and
conventions resulting from the tragedy of September 11th. Last year's sales were
strong after the June opening, which generated significant amounts of publicity.
Revenues for the nine months ended September 30, 2001 rose 5.5% to $33.9 million
from the $32.1 million generated for the same period of fiscal 2000. Total
revenues included $ 33.3 million of sales revenues and $599,000 of management
and licensing fees for the first nine months of 2001, compared to $31.6 million
of sales revenues and $467,000 of management and licensing fees for the first
nine months of 2000. The increase in sales revenues for the nine months ($1.6
million, or 5.2%) was primarily attributable to an increase in same store sales
($954,000), plus a full 39 weeks of sales at the Chicago - The Grill on the
Alley compared to only 15 weeks in 2000 ($1,802,000), which was partially offset
by the closure of the Pizzeria Uno restaurants in Media ($630,000) and South
Plainfield ($428,000).
Same store sales (for restaurants open at least 12 months) were flat for the
quarter and increased 3.2% for the nine months. For the quarter, increases in
average check price were offset by a decrease in the number of guests. For the
nine months, the increase was due to average check price increases at the Daily
Grill restaurants ($1,085,000) and the Grill on the Alley restaurants
($477,000). This increase was partially offset by a decrease in the number of
guests at both the Daily Grill and Grill on the Alley restaurants ($590,000).
Slightly more than half of the increase in average check price was attributable
to menu price increases implemented in the fourth quarter of 2000. The increase
in management and licensing fees for both the quarter ($15,000 or 8.6 %) and the
nine months ($132,000 or 28.3%) was primarily attributable to increased sales at
the Daily Gill restaurant at Georgetown Inn and the opening of the Daily Grill
in the Skokie DoubleTree in September 2000.
In addition to the restaurants owned by the Company, of 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
restaurants owned, managed and licensed by the Company were $14.5 million and
$15.1 million for the quarters, and $47.4 million and $44.2 million for the nine
months ended September 2001 and 2000, respectively. This represents a decrease
of $572,000, or 3.8 %, for the quarter and an increase of $3.3 million, or 7.4
%, for the nine months.
12
Cost of sales decreased by $435,000, or 13.3%, for the quarter and increased by
$126,000, or 1.4%, for the nine months ended September 30, 2001 as compared to
the same periods in 2000. The quarter decrease was primarily due to a decrease
at Chicago - The Grill on the Alley ($205,000) and the closure of Pizzeria Uno
($127,000). The increase for the nine month period is primarily due to Chicago -
The Grill on the Alley ($502,000) offset by closure of Pizzeria Uno ($315,000).
Cost of sales decreased as a percentage of revenues. Cost of sales was 27.9% for
the quarter and 27.6 % for the nine months as compared to 29.8 % for the third
quarter of 2000 and 28.7% for the year-to-date period in 2000. The decrease in
cost of sales as a percentage of revenues during the 2001 nine months was
primarily the result of menu refinements and related sales mix as well as cost
reductions resulting from improved purchasing.
Restaurant operating expenses decreased by $254,000, or 3.9%, for the quarter
and increased as a percentage of revenues from 59.1% in 2000 to 61.2% in 2001.
Restaurant operating expenses increased by $1,712,000, or 9.1%, for the nine
months as compared to the same periods in 2000 and increased as a percentage of
revenues from 58.5% in 2000 to 60.5% in 2001. The changes were primarily due to
Chicago - The Grill on the Alley that had decreased operating expenses of
$259,000 for the quarter and increased operating expenses of $1,119,000 for the
nine months. The change in restaurant operating expenses as a percentage of
total revenues was primarily attributable to payroll and related expenses which
were down $60,000, or 1.7%, for the quarter and up $1,318,000, or 12.4%, for the
nine months and variable costs which were down $57,000, or 4.7%, for the three
months and up $221,000, or 5.9%, for the nine months. Payroll and related
benefits decreased for the quarter at the Pizzeria Uno restaurants ($310,000)
and were partially offset by an increase at the Daily Grill restaurants
($247,000). For the nine months payroll and related benefits increased at the
Daily Grill restaurants ($730,000) and Chicago - The Grill on the Alley
($733,000). Variable expenses for Chicago - The Grill on the Alley were down
$80,000 for the quarter and up $197,000 for the nine months. The increase in
expenses at Chicago - The Grill on the Alley are due to the restaurant's having
13 and 39 weeks of operations in the quarter and nine months of 2001 compared to
13 and 15 weeks for the quarter and nine months of 2000.
General and administrative expense decreased 7.4 % for the quarter and increased
6.0 % for the nine months as compared to the same periods in 2000. As a
percentage of total revenues, general and administrative expense totaled 8.3 %
for the quarters and 8.1% for the nine months in 2001 and 2000. The increase in
total general and administrative expense of $154,000, or 6.0%, for the nine
months during 2001 was primarily attributable to increased headcount at the
corporate office and related benefits.
Depreciation and amortization expense decreased by 7.4 % for the quarter and
increased by 5.1 % for the nine months compared to 2000, however, as a
percentage of revenues, it remained flat as it was offset by the increase in
revenues. The decrease in depreciation and amortization expense for the quarter
was primarily due to the closure of Pizzeria Unos while the increase for the
nine months was primarily due to the Chicago - The Grill on the Alley assets
being in service 39 weeks compared to 15 weeks in 2000.
All pre-opening costs incurred during the 2000 quarter and nine 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.
13
Interest expense, net, increased by $12,000, or 7.9%, during the quarter and
$25,000, or 7.4%, during the nine months compared to the same periods in 2000.
The increase in interest expense related to preferred returns payable to San
Jose Grill investors, which increased by $23,000 for the 2001 year-to-date
period. Interest expense remained relatively flat as a percentage of revenues
for both the quarter and nine months compared to prior year.
The Company recorded only minimal income taxes for the nine months due to the
available federal and state net operating loss carryforwards that can be
utilized to offset federal and state taxable earnings.
The Company reported a gain on disposal of assets in the amount of $225,042,
arising from the sale of the assets of the Pizzeria Uno in South Plainfield, New
Jersey. The Company sold the assets for $700,000 in July 2001 less legal and
other sale related costs of $44,965.
Results for the quarter and nine months reflect minority interest in the net
losses of subsidiaries of $50,000 and $119,000 respectively, compared with
$82,000 and $251,000 in the same periods in 2000. This decrease in the amount of
net losses allocated to minority interests resulted primarily from expensing
$458,000 of pre-opening costs, attributable to Chicago - The Grill on the Alley
during the second quarter of 2000.
The Company incurred a charge of $4,000 for its equity in loss of joint venture
during the nine 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 $37,500 in each of the nine months ended September 30, 2001 and
September 24, 2000.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At September 30, 2001 the Company had negative working capital of $0.3 million
and a cash balance of $2.2 million compared to negative working capital of $2.7
million and a cash balance of $0.6 million at December 31, 2000. The improvement
in working capital was primarily attributable to the receipt of $1.9 million
from the issuance of stock and $0.7 million from the sale of Uno South
Plainfield less legal and other sale related expenses of $44,965.
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 September 30 2001, the Company had existing bank borrowing of
$0.9 million, an SBA loan of $ 0.1 million, loans from stockholders/officers of
$ 0.9 million, equipment loans of $ 1.2 million and loans/advances from a
landlord and others of $ 0.1 million.
14
On November 9, 2001 the Company opened The Grill on Hollywood restaurant in the
new Hollywood and Highland upscale entertainment and shopping complex. The
Company is responsible for approximately $250,000 of costs at Hollywood to be
incurred in the fourth quarter of 2001. 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 2001, the Company sold the assets of its South Plainfield, New Jersey
franchised pizza restaurant for $700,000 less legal and other sale related fees
of $44,965.
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.
15
Certain Factors Affecting Future Operating Results
In addition to the opening of the new restaurant 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.
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, in November 2001, 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 first quarter of 2002. Management fees from the San Francisco
restaurant will begin following the opening of the restaurant. 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. . 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 $850,000 at September 30, 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.
16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On July 27, 2001, the Company sold (1) 666,667 shares of common stock
and 666,667 five year common stock purchase warrants exercisable at $2.00 per
share to Starwood Hotels and Resorts Worldwide, Inc. for $1,000,000 and (2)
666,666 shares of common stock and 666,666 five year common stock purchase
warrants exercisable at $2.25 per share to 16 investors for $1,000,000. The
securities were issued, without the use of an underwriter or placement agent and
without the payment of commissions, pursuant to the exemption set forth in Rule
506 of the Securities Act of 1933. The securities were offered and sold to a
limited number of purchasers, all of whom are accredited investors, in a
privately negotiated transaction without general solicitation or general
advertising. All of the certificates evidencing the securities sold are marked
with a legend indicating that the shares are "restricted stock" which may not be
resold except pursuant to an effective registration statement or an exemption
from registration.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
None
(b) Reports on Form 8-K
None
17
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: November 13, 2001 By:/s/ Robert Spivak
----------------------------------
Robert Spivak, President
and C.E.O
Dated: November 13, 2001 By:/s/ Daryl Ansel
----------------------------------
Daryl Ansel, Chief Financial Officer