SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 30, 2001
[ ] 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 of (I.R.S. Employer Identification
incorporation or organization) Number)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (310) 820-5559
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.00004 par value
-------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
5,537,071 shares of common stock of the Registrant were outstanding as
of March 20, 2002. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the closing price on
the NASDAQ Small-Cap Market, was approximately $4,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be
filed within 120 days of the Registrant's fiscal year ended December 30, 2001
are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS............................................... 1
ITEM 2. PROPERTIES............................................. 15
ITEM 3. LEGAL PROCEEDINGS...................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................ 16
ITEM 6. SELECTED FINANCIAL DATA................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK...................................... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 29
ITEM 11. EXECUTIVE COMPENSATION................................. 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................ 30
PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 28 of this Form 10-K.
ITEM 1. BUSINESS
General
Grill Concepts, Inc. and its subsidiaries (the "Company") develop and
operate casual dining restaurants under the name "Daily Grill" and fine dining
restaurants under the name "The Grill on the Alley." In addition, the Company
owns and operates, or has management or licensing agreements with respect to,
other restaurant properties.
The Company was incorporated under the laws of the State of Delaware in
November of 1985 to acquire and operate franchised Pizzeria Uno restaurants.
Since its acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, the Company has focused principally on the expansion of the
"Daily Grill" and "The Grill on the Alley" restaurant formats of GCI.
At December 30, 2001, the Company owned and operated 15 restaurants and
managed or licensed 5 additional restaurants, consisting of 10 Daily Grill
restaurants, 4 The Grill on the Alley restaurants and 1 Pizzeria Uno restaurant
which are owned and operated by the Company, 2 Daily Grill restaurants and a
City Bar & Grill restaurant which are managed by the Company and 2 Daily Grill
restaurants which are licensed by the Company. With the exception of three The
Grill on the Alley restaurants and one Daily Grill restaurant, which restaurants
are operated by partnerships, all of the Daily Grill and The Grill on the Alley
restaurants which were owned and operated at December 30, 2001 were solely owned
and operated on a non-franchise basis by the Company. The Pizzeria Uno
Restaurant was operated pursuant to franchise agreement.
During 2001, the Company (1) sold its Pizzeria Uno franchise in South
Plainfield, New Jersey and (2) opened The Grill on Hollywood in Hollywood,
California.
During 2001, the Company continued to pursue a strategic growth plan
whereby the Company plans to open, and/or convert, and operate, and/or manage,
Daily Grill and The Grill on the Alley restaurants in hotel properties in
strategic markets throughout the United States. The Company entered into a
strategic alliance with Starwood Hotels and Resorts Worldwide, Inc. to jointly
develop the Company's restaurant properties in Starwood hotels. Management
believes that the opening of restaurants in hotel properties in strategic
markets will help further establish brand name recognition for the opening of
free standing restaurants in those markets.
The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 2001 and 2000 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):
1
2000 2001
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year.................. 10 10
Restaurant openings................ - -
---- ----
End of year........................ 10 10
Managed Restaurants:
Beginning of year.................. 3 4
Restaurant openings................ 1 -
Restaurants closed or sold......... - -
----- ---
End of year........................ 4 4
Total Daily Grill restaurants:
Beginning of year.................. 13 14
Restaurant openings................ 1 -
Restaurants closed or sold......... - -
----- ----
End of year........................ 14 14
=== ===
Grill restaurants:
Company Restaurants:
Beginning of year.................. 2 3
Restaurant openings................ 1 1
--- ---
End of year........................ 3 4
Total Grill restaurants:
Beginning of year.................. 2 3
Restaurant openings................ 1 1
--- ---
End of year........................ 3 4
=== ===
Other restaurants1:
Company Restaurants:
Beginning of year.................. 3 2
Restaurants closed or sold......... (1) (1)
----- ---
End of year........................ 2 1
Managed or Licensed Restaurants:
Beginning of year.................. 1 1
Restaurants closed or sold......... - -
------ ----
End of year........................ 1 1
Total Other restaurants:
Beginning of year.................. 4 3
Restaurants closed or sold......... (1) (1)
---- ----
End of year........................ 3 2
==== ===
Total restaurants:
Beginning of year.................. 19 20
Restaurant openings................ 2 1
Restaurants closed or sold......... (1) (1)
---- ----
End of year........................ 20 20
==== ===
1 Includes two Pizzeria Uno Restaurants in 2000, and one Pizzeria Uno
Restaurant in 2001, operated by the Company pursuant to franchise
agreements.
2
2000 2001
---- ----
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants.................... $ 58,920 $ 60,041
Managed Restaurants.................... n.a. n.a.
Grill restaurants:
Company Restaurants.................... $ 89,476 $ 88,965
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... $ 32,029 $ 34,340
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants.................... 8.1% -%
Managed Restaurants.................... n.a. n.a.
Grill restaurants
Company Restaurants.................... 25.2% (4.6)%
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... (0.2)% (4.6%)
Total system sales:
Daily Grill.............................. $ 28,104,683 $ 28,099,091
Grill.................................... 12,168,746 13,713,816
Pizza Restaurants........................ 4,323,920 2,715,691
Management and license fees.............. 1,078,272 872,562
------------ ------------
Total consolidated revenues.............. $ 45,675,621 $ 45,401,160
============ ============
Managed restaurants ................... 11,150,362 10,488,301
Licensed restaurants................... 6,575,461 7,392,052
Less: management and license fees...... (1,078,272) (872,562)
------------ ------------
Total system sales....................... $ 62,323,172 $ 62,408,951
============ ============
Restaurant Concepts
- Daily Grill Restaurants
Background. At December 30, 2001, the Company, through its subsidiary, GCI,
owned and operated, managed or licensed ten Daily Grill restaurants in Southern
California, three Daily Grill restaurants in the Washington, D.C./Virginia
market and one Daily Grill restaurant in Skokie, Illinois. Daily Grill
restaurants are patterned after "The Grill on the Alley" in Beverly Hills, a
fine dining American-style grill restaurant which was acquired by the Company
during 1996. See "-- The Grill on the Alley." The Grill on the Alley was founded
by Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for a
number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants.
Restaurant Sites. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, managed or licensed and as
either hotel based or based in shopping malls and other commercial properties.
At December 30, 2001, fourteen Daily Grill restaurants were in operation, nine
of which were 100% owned by the Company and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, two of which were managed by the Company and located in
hotels and two of which were licensed restaurants.
3
Daily Grill locations opened, or are scheduled to open, in the following
months and years, are owned, managed or licensed as indicated and, where
indicated, are located in the referenced hotels:
Ownership
Interest,
Licensed or
Location Opened Managed
--------- -------- --------------
Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Encino, California April 1992 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Los Angeles International Airport January 1997 Licensed
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California (Hilton Hotel) January 1999 Managed
Washington, D.C. (Georgetown Inn) April 1999 Managed
Universal CityWalk, California May 1999 50%
Skokie, Illinois (DoubleTree Hotel) September 2000 Licensed
San Francisco, California (Handlery Union Square Hotel) February 2002 Managed
Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of the Company and,
accordingly, significant effort is exerted to assure that each site selected is
appropriate. For non-hotel based restaurants, the site selection process focuses
on local demographics and household income levels, as well as specific site
characteristics such as visibility, accessibility, parking availability and
traffic volume. Each site must have sufficient traffic such that management
believes the site can support at least twelve strong meal periods a week (i.e.,
five lunches and seven dinners). Preferred Daily Grill sites, which characterize
the existing 100% owned restaurants, are high-end, mid-size retail shopping
malls in large residential areas with significant daytime office populations and
some entertainment facilities. Historically, Daily Grill restaurants have been
anchor tenants at high profile malls and, therefore, have received significant
tenant improvement allowances.
Hotel based Daily Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership,
joint venture or license arrangement or operated pursuant to a management
agreement. As with non-hotel based restaurants, site selection is viewed as
critical and, accordingly, significant effort is exerted to assure that each
site selected is appropriate. The site selection process is the responsibility
of HRP which identifies suitable locations and negotiates leases, licenses or
management agreements for those properties. See "-- Hotel Property Agreement."
Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 100 and 250 persons. Our costs of existing
non-hotel based restaurants, including leasehold improvements, furniture,
fixtures and equipment and pre-opening expenses, have averaged $325 per foot per
restaurant, less tenant improvement allowances.
Existing hotel based Daily Grill restaurants range in size from 5,000 to
8,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 140 and 250 persons. Management anticipates
that additional hotel based Daily Grill restaurants will require minimal capital
investment on the Company's part. However, each hotel restaurant arrangement
will be negotiated separately and the capital investment by the Company may vary
widely. Opening costs, for the Company, of existing hotel restaurants, including
leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $150,000 to $600,000 per restaurant.
4
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be reminiscent
of the selection available at American-style grill restaurants of the 1930's and
1940's, in contrast to the "nouvelle cuisine" and diet meal fads of the 1980's.
Daily Grill offers such "signature" items as Cobb salad, Caesar salad, meatloaf
with mashed potatoes, chicken pot pie, chicken burgers, hamburgers, rice pudding
and fresh fruit cobbler. The emphasis at the Daily Grill is on freshly prepared
American food served in generous portions.
Entrees range in price, subject to regional differences in menu pricing,
from $9.50 for an "original" beef dip sandwich to $21.95 for a char-broiled 16
oz. T-bone steak with all the trimmings. The average lunch check is $16.00 per
person and the average dinner check is $24.00 per person, including beverage.
Daily Grill restaurants also offer a children's menu with reduced portions of
selected items at reduced prices. All of the existing Daily Grill restaurants
offer a full range of beverages, including beer, wine and full bar service.
During the year ended December 30, 2001, food and non-alcoholic beverage sales
constituted approximately 86% of the total restaurant revenues for the Daily
Grill restaurants, with alcoholic beverages accounting for the remaining 14%.
Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the Daily
Grill are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.
Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week. Each Daily Grill location is designed to
provide the sense and feel of comfort. In the tradition of an old-time
American-style grill, the setting is very open with a mix of booths and tables.
Several of the restaurants have counters for singles to feel comfortable. The
restaurant emphasizes the quality and freshness of Daily Grill food dishes in
addition to the cleanliness of operations. The dining area is well-lit and is
characterized by a "high energy level".
Reservations are accepted but not required.
The attention to detail and quality of the decor is carried through to the
professional service. All Daily Grill employees are trained to treat each person
who visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with the
traditions of the past, each Daily Grill employee is taught that at the Daily
Grill "the guest is always right." The Daily Grill's policy is to accommodate
all guest requests, ranging from substitutions of menu items to take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that at the Daily Grills which have been open for over a
year repeat business is significantly greater than the industry average, with
many guests becoming "regulars" in the tradition of the neighborhood restaurant.
5
The Grill on the Alley
Background. At December 30, 2001, the Company, through its subsidiary, GCI,
owned and operated four The Grill on the Alley restaurants ("Grill"), one in
Beverly Hills, California, one in San Jose, California, one in Chicago, Illinois
and the newest in Hollywood, California, named The Grill on Hollywood.
The original Grill is a fine dining Beverly Hills restaurant which opened
in 1984 and served as the model for the Daily Grill restaurants. The Grill is
set in the traditional style of the old-time grills of New York and San
Francisco, with black-and-white marbled floors, polished wooden booths and deep
green upholstery. In 1995, the Grill was inducted into Nation's Restaurant News'
Fine Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere.
In April of 1996, the Company acquired the original Grill from a
partnership, the managing partner of which was controlled by the Company's
principal shareholders and directors.
Restaurant Sites. At December 30, 2001, the Company operated four Grill
restaurants, two of which are non-hotel based facilities and two of which are
hotel-based facilities.
Grill locations opened, or are scheduled to open, in the following months
and years, are owned or managed as indicated and, where indicated, in the
referenced hotels:
Ownership
Interest or
Location Opened Managed
---------- --------- -------------
Beverly Hills, California January 1984 100.00%
San Jose, California (Fairmont Hotel) May 1998 50.05%
Chicago, Illinois (Westin Hotel) June 2000 60.00%
Hollywood, California November 2001 51.00%
The Company's Grill restaurants are located in leased facilities. As with
the Company's Daily Grill restaurants, site selection is viewed as critical to
the success of the Company and, accordingly, significant effort is exerted to
assure that each site selected is appropriate. For non-hotel based Grill
restaurants, the site selection process focuses on local demographics and
household income levels, as well as specific site characteristics such as
visibility, accessibility, parking availability and traffic volume. Because of
the upscale nature of Grill restaurants, convenience for business patrons is
considered a key site selection criteria.
Hotel based Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership or
joint venture arrangement or operated pursuant to a management agreement. As
with free standing restaurants, site selection is viewed as critical to the
success of the Company and, accordingly, significant effort is exerted to assure
that each site selected is appropriate.
The Beverly Hills based Grill restaurant is approximately 4,300 square feet
-- of which approximately 1,500 square feet is devoted to kitchen and service
areas -- and seats 120 persons. The Hollywood based Grill restaurant is
approximately 5,600 square feet - of which approximately 2,000 square feet is
devoted to kitchen and service areas - and seats 200 persons.
The San Jose based Grill restaurant is approximately 8,000 square feet --
of which approximately 38% is devoted to kitchen and service areas -- and seats
280 persons. The Chicago based Grill restaurant is approximately 8,500 square
feet, of which approximately 35% is devoted to kitchen and service areas, and
seats more than 300 guests.
Because of the unique nature of Grill restaurants, the size, seating
capacity and opening costs of future sites cannot be reasonably estimated.
Management anticipates that additional hotel based Grill restaurants will
require minimal capital investment on the Company's part. However, each hotel
restaurant arrangement will be negotiated separately and the capital investment
by the Company may vary widely. Opening costs of the existing hotel based
restaurants, including leasehold improvements, furniture, fixtures and equipment
and pre-opening expenses, have ranged from $2.1 million to $3.4 million.
6
Menu and Food Preparation. Each Grill restaurant offers a similar extensive
menu featuring over 100 items. The menu was designed to be reminiscent of the
selection available at fine American-style grill restaurants of the 1930's and
1940's, featuring steaks and seafood and freshly prepared salads and vegetables
served in generous portions.
Entrees range in price from $11.95 for a hamburger to $34.50 for a Prime
Porterhouse Steak. The average lunch check is $26.00 per person and the average
dinner check is $60.00 per person, including beverage. All of the existing Grill
restaurants offer a full range of beverages, including beer, wine and full bar
service. During the year ended December 30, 2001, food and non-alcoholic
beverage sales constituted approximately 72% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
28%.
Proprietary recipes have been developed for substantially all of the items
offered on the Grill menu. The same recipes are used at each location and all
chefs undergo extensive training in order to assure consistency and quality in
the preparation of food. Virtually all of the menu items offered at the Grill
are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
Each Grill has up to 8 cooks on duty during regular lunch and dinner hours
to provide prompt, specialized service. Restaurant staff members utilize a
"point-of-sale" computer system to monitor the movement of food items to assure
prompt and proper service of guests and for fiscal control purposes.
Atmosphere and Service. Each Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed to
provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level".
Reservations are accepted but are not required.
The attention to detail and quality of the decor is carried through to the
professional service. All Grill employees are trained to treat each person who
visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with the
traditions of the past, each Grill employee is taught that "the guest is always
right." The Grill's policy is to accommodate all guest requests, ranging from
substitutions of menu items to take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Grill employees from the kitchen staff to the serving staff
undergo extensive training making each employee knowledgeable not only in the
Company's procedures and policies but in every aspect of Grill operations. The
Company's policy of promoting from within and providing access to senior
management for all employees has produced a work force which works in a
cooperative team approach.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that at the original Grill repeat business is significantly
greater than the industry average, with many guests becoming "regulars" in the
tradition of the neighborhood restaurant.
- Pizzeria Uno Restaurant
Restaurant Site. At December 30, 2001, the Company, through its
wholly-owned subsidiary, operated a "Pizzeria Uno Restaurant & Bar" location in
Cherry Hill, New Jersey (the "Pizza Restaurant"). The Pizza Restaurant is
operated in accordance with certain guidelines established by, and with
managerial assistance from and training provided by, the Franchisor. See "-- The
Franchise Agreements" below.
7
The Pizza Restaurant is located in a suburban area in leased premises. The
Pizza Restaurant is approximately 7,900 square feet, including a bar and lounge
area, and has a seating capacity of 200 customers.
Menu and Food Preparation. The Pizza Restaurant offers a diverse menu in
accordance with guidelines established by the Franchisor, featuring gourmet,
Chicago-style deep-dish pizzas, filled with ingredients such as fresh meats,
spices, vegetables and cheese and baked to order based on proprietary recipes of
the Franchisor. The Pizza Restaurant also offers a variety of sandwiches,
hamburgers, appetizers, salads, desserts and beverages, including a full liquor
selection. All of the menu items offered by the Pizza Restaurant are also
available for delivery or carry-out. Delivery service is provided by third
parties pursuant to contractual arrangements. Entree selections currently range
in price from approximately $4.95 to $8.95, with an average cost per person per
meal, including beverage, of approximately $6.25 for lunch and $9.25 for dinner.
Atmosphere and Service. The Pizza Restaurant is characterized by a casual,
friendly and entertaining atmosphere, full and efficient service, and
high-quality menu items at moderate prices. The Pizza Restaurant employs four
full time managers and assistant managers and approximately 50 part-time and
full-time employees. The Pizza Restaurant is open from 11:00 a.m. to midnight,
seven days per week, except on Friday and Saturday when the Pizza Restaurant
remains open until 1:00 a.m.
The Franchise Agreement. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to a franchise agreement (the "Franchise Agreement") between the
Company or its subsidiary and the Uno Restaurant Group, a national operator and
franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreement, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurant's location.
The Franchise Agreement has a term of 20 years with three successive ten-year
renewal periods at the option of the Company, provided that the agreement has
not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreement entitles the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreement and the Manual are minimum insurance requirements,
non-competition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchise. Such ongoing fees consist of a continuing
license fee (5% of gross revenues), subject to certain prescribed periodic
minimum amounts and advertising fee (approximately 1% of gross revenues).
Sale and Potential Sale of Pizza Restaurant. During 1998, the Company
determined that the continued ownership and operation of the Pizza Restaurants
did not fit with the Company's strategic growth plan. In July, 2000, the Company
closed its Pizzeria Uno restaurant in Media, Pennsylvania due to declining
operations. In July 2001, the Company sold its Pizzeria Uno restaurant in South
Plainfield, New Jersey for $700,000. The Company is also seeking a suitable
buyer for its Pizzeria Uno restaurant located in Cherry Hill, New Jersey.
Other Restaurant Activities
In addition to owning and operating Daily Grill, The Grill and the Pizza
Restaurant, the Company, at December 30, 2001, also provided management services
for Daily Grill restaurants at the Burbank Hilton and the Georgetown Inn and for
the City Bar & Grill in the San Jose Hilton and had granted licenses to operate
a Daily Grill at LAX and a Daily Grill at the DoubleTree Hotel in Skokie,
Illinois.
8
- Restaurant Management Services
In conjunction with the Company's entry into the hotel restaurant market,
in May 1998, the Company began providing management services at the City Bar &
Grill at the San Jose Hilton. The Company is entitled to a management fee equal
to 4% of the gross receipts of the City Bar & Grill. Additionally, the Company
is entitled to a percentage of the annual profits of the City Bar & Grill in
excess of certain historical profits. The Agreement was amended in November 2001
to defer one-half of the management fee for six months at which time repayment
would begin.
In May 1998, the Company, pursuant to its agreement with Hotel Restaurant
Properties, Inc., began providing management services for a restaurant in the
Burbank Hilton Hotel. The restaurant was converted from its former format to a
Daily Grill in January 1999. Pursuant to its management agreement with the
hotel, the Company invested $500,000 for conversion of the restaurant to a Daily
Grill and is responsible for management and supervision of the restaurant. The
Company is entitled to a management fee equal to 8.5% of the gross receipts of
the restaurant. Additionally, the Company is entitled to 30% percent of the
annual profits of the restaurant in excess of a base amount.
In March 1999, the Company, pursuant to the Hotel Property Agreement (see
below), began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to its management agreement with the hotel, the Company
was not required to invest in the restaurant but is responsible for management
and supervision of the restaurant. The Company is entitled to a management fee
equal to 8% of the gross receipts of the restaurant. Additionally, the Company
is entitled to a percentage of the annual profits of the restaurant in excess of
a base amount.
- Restaurant Licensing
LAX Daily Grill. Since January 1997, CA One Services has operated a Daily
Grill restaurant (the "LAX Daily Grill") in the International Terminal of the
Los Angeles International Airport. The LAX Daily Grill was originally operated
as a joint venture between the Company and CA One Services, and since April 1998
has been operated by CA One Services under a license agreement.
Pursuant to the terms of the License Agreement, the Company is entitled to
receive royalties in an amount equal to 2.5% of the first $5 million of annual
revenues from the restaurant and 4% of annual revenues in excess of $5 million.
Following the events of September 11, 2001, service at the LAX Daily Grill has
been scaled back.
Skokie Daily Grill. In September 2000, pursuant to the Hotel Property
Agreement (see below), a licensed Daily Grill restaurant was opened in the
DoubleTree Hotel in Skokie, Illinois. Under the terms of the license, the hotel
operator paid all costs to build and open the restaurant and the Company is
entitled to a license fee equal to the greater of $65,000 or 2% of sales per
year.
Hotel Property Agreement
In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. HRP is responsible for identifying suitable hotel locations in
which a Grill or Daily Grill can be operated ("Managed Outlets") and negotiating
and entering into leases or management agreements for those properties. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company will advance certain pre-opening costs and
certain required advances ("Manager Loans") and will manage and supervise the
day to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $1,667 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company and 25% to HRP.
In July 2001, in conjunction with an investment in the Company by Starwood
Hotels, the Hotel Property Agreement was amended to limit, for so long as the
Company is subject to the exclusivity provisions of a Property Development
Agreement with Starwood, the amounts payable to HRP to $400,000 annually plus
12.5% of the amounts otherwise payable to HRP with respect to the Burbank,
Georgetown and San Jose Hilton restaurants.
9
The Agreement with HRP also provides that, beginning in May 2004, the
Company shall have the right to acquire HRP and HRP shall have the right to
cause the Company to acquire HRP. The purchase price of HRP shall be computed by
(1) multiplying the operating income of HRP over the preceding twelve months,
excluding operating income attributable to certain defined restaurants, by ten,
(2) subtracting from the product the principal balance of loans made in
connection with the development of restaurants pursuant to the HRP Agreement,
and (3) multiplying that amount by 25%. The purchase price shall be payable in
common stock of the Company based on the average closing price of the common
stock over the ten trading days immediately preceding closing.
Pursuant to the July 2001 amendment to the Hotel Property Agreement, the
maximum purchase price of HRP will not exceed $4,500,000.
Business Expansion
The Company's expansion plans focus on the addition of Daily Grill
restaurants with selected expansion of the Grill restaurant concept also
planned.
Management continually reviews possible expansion into new markets and
within existing markets. Such review will entail careful analysis of potential
locations to assure that the demographic make-up and general setting of new
restaurants is consistent with the patterns which have proven successful at the
existing Daily Grills and Grills. While the general appearance and operations of
future Daily Grills and Grill restaurants are expected to conform generally to
those of existing facilities, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.
The Company's future expansion efforts are expected to concentrate on (1)
expansion into new markets through the establishment of hotel based restaurants
pursuant to the Hotel Property Agreement, and (2) expansion within existing
markets through the opening of non-hotel based restaurants. With the assistance
of HRP, the Company expects to establish name recognition and market presence
through the opening of Daily Grill and Grill restaurants in fine hotel
properties in strategic markets throughout the United States. Upon establishing
name recognition and a market presence in a market, the Company intends to
construct and operate clusters of free standing restaurants within those
markets. Management intends to limit the construction and operation of Grill
restaurants to one restaurant per market while constructing multiple Daily Grill
restaurants within each market. The exact number of Daily Grill restaurants to
be constructed within any market will vary depending upon population,
demographics and other factors.
At December 30, 2001, the Company operated non-hotel based Daily Grill and
Grill restaurants in Southern California, principally the greater-Los Angeles
market, and metropolitan Washington, D.C. Management is presently evaluating the
opening of additional non-hotel based Daily Grill and Grill restaurants in
existing markets and in other major metropolitan areas. Existing markets will be
evaluated for expansion in order to establish market presence and economies of
scale. As of March, 2002, no definitive sites had been identified for future
construction of free standing restaurants. Management anticipates that the cost
to open additional free standing Daily Grill and Grill restaurants will average
$325 per square foot per restaurant, less tenant improvement allowances, with
each restaurant expected to be approximately 6,000 to 7,000 square feet in size.
Actual costs may vary significantly depending upon the tenant improvements,
market conditions, rental rates, labor costs and other economic factors
prevailing in each market in which the Company pursues expansion.
At December 30, 2001, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., and Skokie, Illinois, and hotel based Grill restaurants were operated in
San Jose, California and Chicago, Illinois. In February 2001, the Company
entered into a management agreement with Handlery Hotel, Inc. pursuant to which
the Company has agreed to manage a Daily Grill to be located adjacent to the
Handlery Union Square Hotel in San Francisco. The restaurant opened in February
of 2002. The Company and HRP are presently evaluating the opening of additional
hotel based Daily Grill restaurants in existing markets and in other major
metropolitan areas. Each hotel restaurant arrangement will be negotiated
separately and the size of the restaurants, ownership and operating arrangements
and capital investment by the Company may vary widely.
10
Starwood Development Agreement
On July 27, 2001, in conjunction with the purchase by Starwood Hotels
and Resorts of 666,667 shares of the Company's common stock and 666,667 $2.00
warrants for $1,000,000, 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.
Under the Starwood Development Agreement, either the Company or
Starwood may propose to develop a Daily Grill, Grill or City Bar and Grill
restaurant in a Starwood hotel property. If the parties agree in principal to
the development of a restaurant, the parties will attempt to negotiate either a
management agreement or a license agreement with respect to the operation of the
restaurant.
So long as Starwood continues to meet certain development thresholds
set forth in the Development Agreement, the Company is prohibited from
developing, managing, operating or licensing the Company's restaurants in any
hotel owned, managed or franchised by a person or entity, other than Starwood,
with more than 50 locations operated under a single brand. Existing hotel based
restaurants are excluded from the exclusive right of Starwood. The development
thresholds required to be satisfied to maintain Starwood's exclusive development
rights require, generally, (1) the signing of an average of one management
agreement or license agreement with respect to Daily Grill restaurants annually
over the life of the Development Agreement, (2) the signing of one management
agreement or license agreement in any two year period with respect to Grill
restaurants, and (3) the signing of an aggregate average of three management
agreements or license agreements with respect to all of the Company's
restaurants annually over the life of the Development Agreement. Satisfaction of
the thresholds set forth in the Development Agreement are determined on each
anniversary of the Development Agreement. With respect to satisfaction of the
specific thresholds applying to Daily Grill restaurants and Grill restaurants,
the failure to satisfy the development thresholds with respect to those
individual brands will terminate the exclusivity provisions relative to such
brand but will not effect the exclusivity rights as to the other brand or in
general.
Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common stock
equal to four percent of the outstanding shares upon the attainment of certain
development milestones. Such warrants are issuable upon execution of management
agreements and/or license agreements relating to the development and operation,
and the commencement of operation, of an aggregate of five, ten, fifteen and
twenty of the Company's branded restaurants. If the market price of the
Company's common stock on the date the warrants are to be issued is greater than
the market price on the date of the Development Agreement, the warrants will be
exercisable at a price equal to the greater of (1) 75% of the market price as of
the date such warrant becomes issuable, or (2) the market price on the date of
the Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price equal
to the market price as of the date such warrants become issuable. The warrants
will be exercisable for a period of five years.
In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement exceeds
35% of the total Daily Grill, Grill and City Grill-branded restaurants, the
Company will be obligated to issue to Starwood a warrant to purchase a number of
shares of the Company's common stock equal to 0.75% of the outstanding shares on
that date exercisable for a period of five years at a price equal to the market
price at that date. On each anniversary of that date at which the restaurants
operated under the Development Agreement continues to exceed the 35% threshold,
for so long as the Development Agreement remains effective, the Company shall
issue to Starwood additional warrants to purchase 0.75% of the outstanding
shares on that date at an exercise price equal to the market price on that date.
Following the events of September 11, 2001, Starwood has substantially
curtailed new development activities and no management agreements or license
agreements have, as yet, been entered into under the Development Agreement.
11
Restaurant Management
The Company strives to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
adherence to standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has experienced a relatively low
turnover at every level at its Daily Grill and Grill restaurants. See "-- Daily
Grill Restaurants" above.
Daily Grill and Grill. Each Daily Grill and Grill restaurant, including
both free standing and hotel based restaurants, is managed by one general
manager and up to four managers or assistant managers. Each restaurant also has
one head chef and one or two sous chefs, depending on volume. On average,
general managers have approximately seven years experience in the restaurant
industry and three years with the Company. The general manager has primary
responsibility for the operation of the restaurant and reports directly to an
Area Director who in turn reports to the Company's Director of Operations. In
addition to ensuring that food is prepared properly, the head chef is
responsible for product quality, food costs and kitchen labor costs. Each
restaurant has approximately 85 employees. Restaurant operations are
standardized, and a comprehensive management manual exists to ensure operational
quality and consistency.
The Company maintains financial and accounting controls for each Daily
Grill and Grill restaurant through the use of a "point-of-sale" computer system
integrated with centralized accounting and management information systems. In
the year 2000, the point of sale systems in the original six Daily Grills were
updated to new systems similar to those in newer restaurants. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue and
cash control. Financial management and accounting policies and procedures are
developed and maintained by the Company's Corporate Controller, Director of
Information Systems, and Chief Financial Officer.
All managers participate in a comprehensive six week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports, guest
comment cards and third party quality control reviews.
Servers at each restaurant participate in approximately ten days of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.
Pizza Restaurant. The staff of the Company's Pizza Restaurant consists of
four managers and 48 hourly employees, most of whom are part-time employees.
All managers of the Pizza Restaurant participate in an onsite training
program and are provided with the Franchisor's Operating Manual. Additionally,
selected management personnel participate in periodic meetings conducted by the
Franchisor focusing on marketing, new products and other aspects of business
management.
The Company has an Area Director who oversees and supervises the operation
of the Company's Pizza Restaurant, providing ongoing guidance and assistance to
managers as necessary. Additionally, field-service supervisors of the Franchisor
periodically visit and inspect the operations of the Pizza Restaurant to assure
compliance with the quality, service and other standards imposed by the
Franchisor.
12
Purchasing
Daily Grill and Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill and Grill restaurants. In
order to assure quality and consistency at each of the Daily Grill and Grill
restaurants, ingredients approved for the recipes are ordered on a unit basis by
each restaurant's head chef from a supplier designated by the Company's Vice
President-Operations and Development. Because of the emphasis on cooking from
scratch, virtually all food items are purchased "fresh" rather than frozen or
pre-cooked, with the exception being bread, which is ordered from a central
supplier which prepares the bread according to a proprietary recipe and delivers
daily to assure freshness. In order to reduce food preparation time and labor
costs while maintaining consistency, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings, soups and seasoning combinations.
The Company utilizes its point-of-sale computer system to monitor inventory
levels and sales, then orders food ingredients daily based on such levels. The
Company employs contract purchasing in order to lock in food prices and reduce
short term exposure to price increases. The Company's Director of Purchasing
establishes general purchasing policies and is responsible for controlling the
price and quality of all ingredients. The Vice President - Operations and
Development in conjunction with the Company's team of chefs, constantly monitors
the quality, freshness and cost of all food ingredients. All essential food and
beverage products are available, or upon short notice can be made available,
from alternative qualified suppliers.
Advertising and Marketing
Daily Grill and Grill. The Company has historically relied primarily on
reputation, local reviews and word of mouth to promote its Daily Grill and Grill
restaurants. Daily Grill and Grill restaurants have been featured in articles
and reviews in numerous local as well as national publications. The Company
supplements its reputation with a program of marketing and public relations
activities designed to keep the Daily Grill and Grill name before the public.
Such activities include media advertising, participating in local charity events
and providing a location and refreshments for meetings of charity organizations.
During 2001, expenditures for advertising and promotion were approximately 1.1%
of gross revenues.
Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."
The Company budgets an average of 3% of Pizza Restaurant sales annually for
advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers.
Competition
The Daily Grill restaurants compete within the mid-price, full-service
casual dining segment. Daily Grill competitors include national and regional
chains, such as Cheesecake Factory and Houston's, as well as local
owner-operated restaurants. Grill restaurants compete within the fine dining
segment. Grill competitors include a limited number of national fine dining
chains as well as selected local owner-operated fine dining establishments. The
primary competitors to the Company's Pizza Restaurants are casual theme
restaurant chains including Friday's and the Olive Garden. Competition for the
Company's hotel based restaurants is primarily limited to restaurants within the
immediate proximity of the hotel.
The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. The
Company believes that its ability to compete effectively will continue to depend
in large measure on its ability to offer a diverse selection of high quality,
fresh food products with an attractive price/value relationship served in a
friendly atmosphere.
13
Management believes that its affiliation with, and operation under the name
of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enable the Company to compete effectively with other local and national-chain
restaurants.
Employees
The Company and its subsidiaries employ approximately 1,328 people, 42 of
whom are corporate personnel and 102 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 40% are full-time employees, with the
remainder being part-time employees.
With the exception of the Chicago Grill on The Alley, none of the Company's
employees are represented by labor unions or are subject to collective
bargaining or other similar agreements. Management believes that its employee
relations are good at the present time.
Trademarks and Service Marks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "Satisfaction Served Daily,"
"Think Daily," "Daily Grind" and other marks with the United States Patent and
Trademark Office as service marks for restaurant service, and has secured
California state registration of such marks. The Company's policy is to pursue
registration of its marks and to oppose strenuously any infringement.
Pursuant to the Franchise Agreements, the Company's Pizza Restaurant
operates under the "Pizzeria Uno" trademark and service marks. The Franchisor
has undertaken to keep in place and renew, as necessary, its trademark
registrations and to vigorously oppose any infringements of its marks.
Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurants are located. Difficulties or failures in
obtaining or renewing the required licenses or approvals could result in
temporary or permanent closure of the Company's restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leaves of absence and mandated health benefits, or increased
tax reporting requirements for employees who receive gratuities, could be
detrimental to the economic viability of the Company's restaurants. Management
is not aware of any environmental regulations that have had a material effect on
the Company to date.
14
ITEM 2. PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant and
certain properties which may be operated pursuant to management arrangements or
partnership or joint venture arrangements, all of the Company's restaurants are
located in space leased from parties unaffiliated with the Company. The leases
have initial terms ranging from 10 to 25 years, with varying renewal options on
all but one of such leases. Each of the leases provides for a base rent plus
payment of real estate taxes, insurance and other expenses, plus additional
percentage rents based on revenues of the restaurant. See "Description of
Business."
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by a former director of the
Company, Robert L. Wechsler. The Grill restaurant in San Jose is located in
space leased from a hotel management company which may be deemed to be
controlled by a director of the Company, Lew Wolff who may also be deemed to be
an affiliate of the Company as a result of his holdings of common stock and
securities convertible into or exercisable to acquire common stock of the
Company.
The Company's executive offices are located in 3,300 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party pursuant to a lease expiring in January 2002.
Management believes that the Company's existing restaurant and executive
office space is adequate to support current operations. The Company intends to
lease, from time to time, such additional office space and restaurant sites as
management deems necessary to support its future growth plans.
ITEM 3. LEGAL PROCEEDINGS
Restaurants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of which the Company expects to be
covered by its general liability insurance. However, punitive damages awards are
not covered by general liability insurance. Punitive damages are routinely
claimed in litigation actions against the Company. No material causes of action
are presently pending against the Company. However, there can be no assurance
that punitive damages will not be given with respect to any actions which may
arise in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 30, 2001.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The following table sets forth the high and low bid price per share for
the Company's common stock for each quarterly period during the last two fiscal
years, adjusted to reflect a 1-for-4 reverse stock split effective August 9,
1999:
High Low
------ ------
2000 - First Quarter 1.812 1.281
Second Quarter 1.968 1.000
Third Quarter 2.125 1.234
Fourth Quarter 3.750 1.375
2001 - First Quarter 3.344 1.938
Second Quarter 3.500 1.940
Third Quarter 2.900 1.500
Fourth Quarter 1.900 1.100
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 20, 2002, the closing bid price of the Common Stock was $1.32.
As of March 20, 2002, there were approximately 419 holders of record of the
Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
16
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein.
Fiscal Year Ended December
----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands except per share data)
Statement of Operations Data:
Sales................................ $ 28,901 $ 34,464 $ 38,432 $ 44,598 $ 44,529
Management and license fees.......... - 444 544 1,078 872
------------- ----------- --------- ---------- ----------
Total revenues....................... 28,901 34,908 38,976 45,676 45,401
------------- ----------- --------- ---------- ----------
Gross profit......................... 20,981 25,234 28,090 32,674 32,985
Operating expenses:
Restaurant operating expenses...... 17,446 21,321 23,426 27,201 27,063
General and administration......... 2,648 2,755 3,296 3,303 3,540
Depreciation and amortization...... 949 1,137 1,196 1,334 1,457
Amortization of preopening costs... 337 175 54 330 199
Unusual charges.................... - 964 - 73 -
------------- ------------ -------- ---------- ----------
Total................................. 21,380 26,352 27,972 32,241 32,259
------------- ------------ -------- ---------- ----------
Income (loss) from operations......... (399) (1,118) 118 433 726
Interest expense, net................. (166) (231) (376) (478) (394)
Nonrecurring costs.................... 93 - - - -
------------- ------------ -------- ---------- ----------
Income (loss) before taxes,
minority interest, equity in loss
of joint venture and cumulative
effective of change in accounting
principle............................. (472) (1,349) (258) (45) 332
Provision for income taxes........... (5) (10) (6) (14) (65)
Equity in loss of joint venture...... - - (74) (9) (9)
Minority interests................... - 122 (68) 102 211
Cumulative effect of change in
accounting principle............... - (70) - - -
------------ ------------ -------- ---------- ----------
Net income (loss)................. (477) (1,307) (406) 34 469
------------ ------------ -------- ---------- ----------
Preferred dividends accrued or paid.. (69) (85) (50) (50) (50)
Accounting deemed dividends........... (211) (83) - - -
------------ ------------- -------- ---------- ----------
Net income (loss) applicable to
common stock........................ $ (757) $ (1,475) $ (456) $ (16) $ 419
============ ============= ======== ========== ==========
Net income (loss) per share applicable
to common stock (1):
Basic............................. $ (0.20) $ (0.37) $ (0.11) $ 0.00 $ 0.09
============ ============= ======== ========== ==========
Diluted........................... $ (0.20) $ (0.37) $ (0.11) $ 0.00 $ 0.09
============ ============= ======== ========== ==========
Weighted average shares outstanding
Basic.......................... 3,773,560 3,972,256 4,003,738 4,104,360 4,776,741
============ ============= ========== ========= =========
Diluted........................ 3,773,560 3,972,256 4,003,738 4,104,360 4,866,449
============ ============= ========== ========= =========
17
Balance Sheet Data:
Working deficit...................... $ (1,223) $ (2,300) $ (3,685) $ (2,719) $ (693)
Total assets......................... 9,011 11,387 11,288 12,534 14,344
Long-term debt, less
current portion.................... 699 2,928 2,033 2,866 1,534
Stockholders' equity.............. 5,183 3,867 3,461 3,495 6,045
(1) All per share amounts and weighted average shares outstanding have been
adjusted to reflect a 1-for-4 reverse stock split effective August 9, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 28 of this Form 10-K.
General
During the fiscal year ended December 30, 2001, the Company owned and
operated 16 restaurants and managed or licensed 5 additional restaurants,
consisting of 10 Daily Grill restaurants, 2 Pizzeria Uno restaurants (one was
sold in July 2001), 3 The Grill on the Alley restaurants and 1 The Grill on
Hollywood (opened in November 2001) which are owned and operated by the Company,
2 Daily Grill restaurants and a City Bar and Grill restaurant which are managed
by the Company and 2 Daily Grill restaurants which are licensed by the Company.
During the fiscal year ended December 31, 2000, the Company owned and operated a
total of 16 restaurants and managed or licensed 5 additional restaurants,
consisting of 10 Daily Grill restaurants, 3 Pizzeria Uno restaurants (one was
closed in July 2000) and 3 The Grill on the Alley restaurants which are owned
and operated by the Company, 2 Daily Grill restaurants and a City Bar & Grill
restaurant which are managed by the Company and 2 Daily Grill restaurants which
are licensed by the Company. During the fiscal year ended December 26, 1999, the
Company owned and operated a total of 15 restaurants and managed or licensed 4
additional restaurants, consisting of 10 Daily Grill restaurants, 3 Pizzeria Uno
restaurants and 2 The Grill on the Alley restaurants which are owned and
operated by the Company, 2 Daily Grill restaurants and a City Bar & Grill
restaurant which are managed by the Company and one Daily Grill restaurant which
was licensed by the Company. See "Description of Business."
Fiscal 2001 operating results include a full year of operations from the
Chicago Grill restaurant (compared to 29 weeks in 2000), 7 weeks of operations
of The Grill on Hollywood and a full year of operations for the Skokie
restaurant (compared to 12 weeks in 2000). The Pizzeria Uno restaurant in South
Plainfield, New Jersey was sold in July 2001 and revenues from that restaurant
terminated at that date.
Fiscal 2000 operating results include a full year of operations and
management fees from the Georgetown Inn Daily Grill restaurant (compared to 39
weeks of operations in 1999) and the Universal CityWalk Daily Grill (compared to
25 weeks of operations in 1999), 29 weeks of operations of the Chicago Grill
restaurant, and 12 weeks of operations at the Daily Grill in Skokie, Illinois.
The Pizzeria Uno restaurant in Media, Pennsylvania was closed in July 2000 and
revenues from that restaurant terminated at that date.
Fiscal 1999 operating results include a full year of operations from the
Tyson's Corner Daily Grill and the San Jose Fairmont Grill and a full year of
management fees from the Burbank Hilton Daily Grill, each of which opened in
1998, 39 weeks of management fees from the Georgetown Inn Daily Grill, 25 weeks
of management fees from the Universal CityWalk Daily Grill and no management
fees from the Salt Lake City Hilton Daily Grill. The Salt Lake City Daily Grill
was closed in November 1999 and management fees on that restaurant terminated at
that date.
The Company accounts for its interest in the Universal CityWalk Daily Grill
using the equity method. All other owned restaurants are consolidated with
minority interest being reflected in the San Jose Fairmont Grill, The Chicago
Grill on the Alley and The Grill on Hollywood.
18
Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 81% of combined 2001 sales
were food and 19% were beverage. Sales revenues from restaurant operations are
primarily influenced by the number of restaurants in operation at any time, the
timing of the opening of such restaurants and the sales volumes of each
restaurant.
The Company's expenses are comprised primarily of cost of food and
beverages and restaurant operating expenses, including payroll, rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. Restaurant operating expenses consist primarily of wages
paid to part-time and full-time employees, rent, utilities, insurance and taxes.
In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreement, the Company pays a continuing license fee
with respect to its Pizza Restaurant, an advertising fee and is required to
expend certain minimum amounts on local advertising and promotion. See
"Description of Business - The Pizza Restaurant -- The Franchise Agreement."
In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers and clerical personnel, rent,
legal and accounting costs, travel, insurance and various office expenses.
Results of Operations
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1999, 2000 and 2001:
Fiscal Year Ended December
--------------------------
1999 2000 2001
---- ---- ----
Sales revenues 98.6% 97.6% 98.1%
Management and licensing fees 1.4 2.4 1.9
------- -------- -------
Total revenues 100.0 100.0 100.0
Cost of sales 27.9 28.5 27.3
------- -------- -------
Gross profit 72.1 71.5 72.7
------- -------- -------
Restaurant operating expense 60.1 59.6 59.6
General and administrative expense 8.5 7.2 7.8
Depreciation and amortization 3.1 2.9 3.2
Preopening costs 0.1 0.7 0.5
Unusual charges 0.0 0.2 0.0
------- -------- -------
Total operating expenses 71.8 70.6 71.1
------- -------- -------
Operating income 0.3 0.9 1.6
Interest expense, net (1.0) (1.0) (0.9)
------- -------- -------
Income (loss) before income tax (0.7) (0.1) 0.7
Provision for taxes 0.0 0.0 (0.2)
Minority interest (0.1) 0.2 0.5
Equity in loss of joint venture (0.2) 0.0 0.0
------- -------- -------
Net income (loss) (1.0)% 0.1% 1.0%
======= ======== =======
19
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues. The Company's revenues for 2001 decreased 0.6% to $45.4 million
from $45.7 million in 2000. Sales revenues decreased 0.2% to $44.5 million in
2001 from $44.6 million in 2000. Management and license fee revenues decreased
to $872,000 in 2001 from $1,078,000 in 2000. System-wide sales, including sales
of non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.4 million in 2001 compared to $62.3 million in 2000.
The decline in consolidated revenues for the year is partially due to one
less week of sales in 2001 compared to 2000. Additionally it is believed to be
attributable to specific factors which may have effected individual restaurants,
to unfavorable economic and operating conditions which prevailed during the
fourth quarter of 2001, including weak economic conditions, the impact of the
September 11 terrorist attacks, corporate spending cutbacks and reduced business
travel. These factors contributed to a decline in consolidated revenues during
the fourth quarter of 15.1%, from $13.6 million in 2000 to $11.5 million in
2001. The adverse operating conditions which prevailed during the fourth quarter
of 2001 are continuing into the first quarter of 2002.
Sales for Daily Grill restaurants were flat at $28.1 million in 2000 and
2001. Although weighted average weekly sales at the Daily Grill restaurants
increased 1.9% from $58,920 in 2000 to $60,041 in 2001, the additional week in
2000 contributed, on average, $530,000, or 2% of sales. An increase in the
average ticket of almost $2.00 was offset by a 0.9% decrease in the number of
guests.
Sales for Grill restaurants increased by 12.7% from $12.2 million in 2000
to $13.7 million in 2001. The increase in sales revenues for the Grill
restaurants from 2000 to 2001 was primarily attributable to (1) the opening of
the Grill on Hollywood in November 2001 which contributed $0.7 million and (2)
having the full year of Chicago compared to only 29 weeks in 2000 which
contributed $1.2 million. Weighted average weekly sales at the Grill restaurants
decreased 0.6% from $89,476 in 2000 to $88,965 in 2001. An increase in the
average ticket of $7.73, primarily attributable to San Jose Grill, combined with
the addition of Hollywood offset the decrease in guests at both San Jose and
Beverly Hills.
Sales for the Pizza Restaurants decreased by 37.2% from $4.3 million in
2000 to $2.7 million in 2001. The decrease in sales revenues for the Pizza
Restaurants from 2000 to 2001 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, PA ($0.6 million), (2) the sale of
the Pizzeria Uno in South Plainfield, NJ ($0.9 million) and (3) a 4.6% decline
in same store sales at the remaining location. Weighted average weekly sales at
the Pizza Restaurants increased 7.2% from $32,000 in 2000 to $34,300 in 2001.
Management has determined that continued ownership and operation of the Pizza
Restaurants does not fit with the Company's strategic growth plans. In July
2001, the Company finalized the sale of its Pizza Restaurant in South
Plainfield, New Jersey for $700,000. The Company is also seeking a suitable
buyer for its Pizza Restaurant in Cherry Hill, New Jersey.
Price increases were last implemented during the fourth quarter of 2000 for
certain menu items with minor increases as a result of menu engineering in the
second quarter of 2001. While selected price increases may be implemented from
time to time in the future, the Company does not plan to implement additional
price increases in the foreseeable future. Future revenue growth is expected to
be driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
Management and license fee revenues were attributable to (1) hotel
restaurant management services which accounted for management fees of $577,000
in 2001 and $750,000 in 2000, (2) licensing fees from the LAX Daily Grill and
Skokie, Illinois Daily Grill which totaled $194,000 in 2001 and $148,000 in
2000, and (3) fees from Universal CityWalk which totaled $101,000 in 2001 and
$122,000 in 2000. The decrease in management fees during 2001 was attributable
to decreased sales at the Burbank Hilton and San Jose City Bar & Grill offset by
increases at the Georgetown Inn.
20
The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.0 million during 2001 as compared to $2.2 million during 2000.
Cost of Sales and Gross Profit. While sales revenues decreased by 0.2 % in
2001 as compared to 2000, cost of sales decreased by 4.5% ($0.6 million) and
decreased as a percentage of sales from 28.5% in 2000 to 27.3% in 2001. The
decrease in cost of sales as a percentage of sales revenues was primarily
attributable to menu refinements and related sales mix as well as cost
reductions resulting from improved purchasing.
Gross profit increased 1.0% from $32.7 million (71.5% of sales) in 2000 to
$33.0 million (72.7% of sales) in 2001.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, preopening costs, and unusual charges, rose 0.1%
to $32.3 million in 2001 (representing 71.1% of revenues) from $32.2 million in
2000 (representing 70.6% of sales).
Restaurant operating expenses decreased 0.5% to $27.1 million in 2001 from
$27.2 million in 2000. As a percentage of sales, restaurant operating expenses
represented 59.6 % in both 2001 and 2000. The decrease in restaurant operating
expenses resulted primarily from the sale of the Pizzeria Uno restaurant in
South Plainfield, New Jersey for net proceeds of $225,000 which were credited
against restaurant operating expenses.
General and administrative expenses increased 7.2% to $3.5 million in 2001
from $3.3 million in 2000. General and administrative expenses represented 7.8%
of sales in 2001 as compared to 7.2% of sales in 2000. The increase in total
general and administrative was primarily the result of increased headcount at
the corporate office and related benefits ($0.3 million).
Depreciation and amortization expense was $1.5 million during 2001 as
compared to $1.3 million during 2000. The increase in depreciation and
amortization expense reflects the opening of the Hollywood Grill in November
2001 ($0.1 million) and a full year of expense for the Chicago Grill ($0.1
million).
Preopening costs totaled $199,000 in 2001 as compared with $330,000 in
2000. These pre-opening costs were attributable to the opening in 2001 of The
Grill on Hollywood and in 2000 of the Chicago Grill.
Unusual charges totaling $73,000 in 2000 related to the costs of closing
the Media Pizza Restaurant. The Company reported no unusual charges in 2001.
Interest Expense. Interest expense, net, totaled $394,000 during 2001 as
compared to $478,000 in 2000. The decrease in interest expense was primarily
attributable to the reduction in total debt and decrease in interest rates on
bank debt.
Minority Interest and Equity in Loss of Joint Venture. The Company reported
a minority interest in the loss of its majority owned subsidiaries of $211,000
during 2001, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $77,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $144,000 and a minority interest in the loss of The
Grill on Hollywood, LLC of $144,000. For the year ending December 31, 2000 the
Company recorded a minority interest in the earnings of San Jose Grill on the
Alley, LLC of $115,000 and a minority interest in the loss of Chicago - The
Grill on the Alley, LLC of $217,000.
The Company recorded equity in loss of joint venture of $9,000 in 2001 and
2000 relating to the Company's 50% interest in Universal CityWalk Daily Grill.
The Company reported net income of $469,000 in 2001 as compared to $34,000
for 2000.
21
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues. The Company's revenues for 2000 increased 17.2% to $45.7 million
from $39 million in 1999. Sales revenues increased 16% to $44.6 million in 2000
from $38.4 million in 1999. Management and license fee revenues increased to
$1,078,000 in 2000 from $544,000 in 1999. System-wide sales, including sales of
non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.3 million in 2000, an increase of 22.6% from $50.8
million in 1999.
Sales for Daily Grill restaurants increased by 8.1% from $26 million in
1999 to $28.1 million in 2000. The increase in sales revenues for the Daily
Grill restaurants from 1999 to 2000 was primarily attributable to an increase in
same store sales of 8.1% for restaurants open for 12 months in both 1999 and
2000. Weighted average weekly sales at the Daily Grill restaurants increased
6.1% from $55,545 in 1999 to $58,920 in 2000 and the additional week in 2000
contributed, on average, $530,000, or 2% of sales. Comparable restaurant sales
and weighted average weekly sales at the Daily Grill restaurants in 2000 were
positively affected by increased customer counts in all restaurants and a price
increase in October 2000.
Sales for Grill restaurants increased by 63.8% from $7.4 million in 1999 to
$12.2 million in 2000. The increase in sales revenues for the Grill restaurants
from 1999 to 2000 was primarily attributable to (1) the opening of the Chicago
Grill in June 2000, and (2) an increase in same store sales of 16.1% at the
Grill restaurants which were open for 12 months in both 1999 and 2000. Weighted
average weekly sales at the Grill restaurants increased 25.2% from $71,450 in
1999 to $89,476 in 2000. Comparable restaurant sales and weighted average weekly
sales at the Grill restaurants in 2000 were positively affected by the maturing
of the San Jose Grill, now in its third year of operation, and increased
customer counts at The Grill in Beverly Hills.
Sales for the Pizza Restaurants decreased by 13.6% from $5.0 million in
1999 to $4.3 million in 2000. The decrease in sales revenues for the Pizza
Restaurants from 1999 to 2000 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, Pennsylvania and (2) a 0.2% decline
in same store sales. Weighted average weekly sales at the Pizza Restaurants
decreased 0.2% from $32,100 in 1999 to $32,000 in 2000. Management has
determined that continued ownership and operation of the Pizza Restaurants does
not fit with the Company's strategic growth plans. In October 2000, the Company
entered into an agreement to sell its Pizza Restaurant in South Plainfield, New
Jersey for $700,000. The Company is also seeking a suitable buyer for its Pizza
Restaurant in Cherry Hill, New Jersey.
Price increases were last implemented during the fourth quarter of 2000 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
Management and license fee revenues during 2000 were attributable to (1)
hotel restaurant management services which accounted for $750,000 of management
fees, and (2) licensing fees from the LAX Daily Grill and Skokie, Illinois Daily
Grill which totaled $148,000 and (3) $122,000 in fees from Universal CityWalk.
The increase in management fees during 2000 was attributable to (1) management
of the Georgetown Inn Daily Grill for all of 2000 as compared to 39 weeks during
1999, and (2) management of the Universal CityWalk Daily Grill for all of 2000
as compared to 25 weeks in 1999.
The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.2 million during 2000 as compared to $1.1 million during 1999.
22
Cost of Sales and Gross Profit. While sales revenues increased by 16.0 %
($6.2 million) in 2000 as compared to 1999, cost of sales increased by 19.4%
($2.1 million) and increased as a percentage of sales from 27.9% in 1999 to
28.5% in 2000. The increase in cost of sales as a percentage of sales revenues
was attributable to the additional Grill restaurant and the 16.1% same store
increase for the Grills, which typically have a higher cost of sales than Daily
Grills.
Gross profit increased 16.3% from $28.1 million (72.1% of sales) in 1999 to
$32.7 million (71.5% of sales) in 2000.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, preopening costs, and unusual charges, rose 15.3%
to $32.2 million in 2000 (representing 70.6% of revenues) from $28.0 million in
1999 (representing 71.8% of sales).
Restaurant operating expenses increased 16.1% to $27.2 million in 2000 from
$23.4 million in 1999. As a percentage of sales, restaurant operating expenses
represented 59.6% in 2000 as compared to 60.1% in 1999. The increase in
restaurant operating expenses followed the 16% sales increase for the Company
and resulted from the additional costs of opening the Chicago Grill, offset by
the spreading of fixed costs over the significant same store sales increases
experienced in the Daily Grills and the Grill restaurant same stores.
General and administrative expenses were flat at $3.3 million in 2000 and
1999. General and administrative expenses represented 7.2% of sales in 2000 as
compared to 8.5% of sales in 1999. While these expenses in total were nearly
equal, there were increases of approximately $120,000 in legal expense relating
to establishment of new credit facilities, efforts to sell the Pizza restaurants
and certain litigation, offset by decreases in other expenses such as,
restaurant management hiring and training.
Depreciation and amortization expense was $1.3 million during 2000 as
compared to $1.2 million during 1999. The increase in depreciation and
amortization expense reflects the opening of the Chicago Grill in June 2000
offset by a reduction in this expense in the older Daily Grill restaurants.
Preopening costs totaled $330,000 in 2000 as compared with $54,000 in 1999.
These pre-opening costs were attributable to the opening in 2000 of the Chicago
Grill.
Unusual charges totaling $73,000 in 2000 related to the costs of closing
the Media Pizza Restaurant. The Company reported no unusual charges in 1999.
Interest Expense. Interest expense, net, totaled $478,000 during 2000 as
compared to $376,000 in 1999. The increase in interest expense was primarily
attributable to the added debt for the Chicago Grill plus a slight increase in
interest rates on bank debt.
Minority Interest and Equity in Loss of Joint Venture. The Company reported
a minority interest in the loss of its majority owned subsidiaries of $102,000
during 2000, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $115,000 and a minority interest in the loss of Chicago -
The Grill on the Alley LLC of $217,000. For the year ending December 26, 1999
the Company recorded a minority interest in the earnings of San Jose Grill on
the Alley, LLC of $68,000.
The Company recorded equity in loss of joint venture of $9,000 in 2000 and
$74,000 in 1999 which is primarily attributable to the preopening costs incurred
in 1999 related to the Universal CityWalk Daily Grill.
The Company reported net income of $34,000 in 2000 as compared to a net
loss of $406,000 for 1999.
Liquidity and Capital Resources
At December 30, 2001, the Company had a working capital deficit of $0.7
million and a cash balance of $2.3 million as compared to a working capital
deficit of $2.7 million and a cash balance of $0.6 million at December 31, 2000.
The variance in the Company's working capital and cash was primarily
attributable to the issuance of new equity in 2001, proceeds from the sale of
the Pizzeria Uno in South Plainfield, New Jersey and cash flow from operations
that were used to pay off the Company's bank borrowing of $1.2 million and other
debt of $0.5 million.
23
The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new 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 and stock, loans and tenant
allowances from certain of its landlords, and, beginning in 1999, through joint
venture arrangements. At December 30, 2001, the Company had a bank credit
facility with nothing owing, a loan from a member of Chicago - The Grill on the
Alley, LLC of $0.5 million, an SBA loan of $0.1 million, loans from
stockholders/officers/directors of $0.5 million, equipment loans of $1.1
million, and loans/advances from a landlord of $0.1 million.
On August 1, 2000, the Company received a $400,000 loan from private
individuals. The loan bears interest at 9% and is payable in monthly
installments over four years. In connection with the loan, the Company issued
40,000 warrants. In June 2001 the lender became a member of the Company's Board
of Directors and the loan was reclassified as related party debt. The balance
owed on the loan at December 30, 2001 was $274,000.
On December 13, 2001 the Company amended its bank credit facility
converting the term loan to a $0.8 million reducing line of credit and extending
the existing $0.3 million line of credit for another year. At December 30, 2001
there were no borrowings against either line of credit. At December 31, 2000,
the Company had a bank credit facility of $1.5 million consisting of a $0.3
million revolving line of credit and a $1.2 million term loan payable. Interest
is payable at the bank's prime rate. In connection with the Credit Facility the
Company is required to comply with certain debt service coverage and liquidity
requirements. Two of the Company's principal stockholders have guaranteed the
Credit Facility. In exchange for the guarantee, the Company issued warrants to
purchase 150,000 shares at an exercise price of $1.406 per share exercisable for
a period of four years and agreed to pay each of the stockholders interest of 2%
per annum on the average annual balance on the note payable to the bank for
guaranteeing the note. The extended line of credit matures in August 2004 and
the reducing line of credit matures in October 2004.
During 2001, the Company and its subsidiaries were obligated under 16
leases covering the premises in which the Company's Daily Grill, Grill and Pizza
Restaurants are located as well as leases on its executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $2.9 million in 2001, with varying escalation and percentage rent
clauses in each of the restaurant leases. Minimum rental payments during 2001 on
existing leases as of December 30, 2001, total $2.6 million.
The Company opened one restaurant in February 2002, in San Francisco, and
is currently negotiating for two additional locations, which would open in 2002.
Cost of opening the Handlery Hotel Daily Grill in San Francisco is estimated at
$2.8 million, of which the Company expects to pay approximately $250,000, with
the balance being paid by the hotel. 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 which will
cause the cost to the Company of opening such restaurants to be less than the
Company's cost to build and open non-hotel based restaurants.
Capital expenditures were $1.1 million in 1999, $2.4 million in 2000 and
$1.4 million in 2001. Capital expenditures in fiscal 2002 are expected to be
between $1.0 million and $1.8 million, primarily for the development of new
restaurants, capital replacements and refurbishing for existing restaurants. The
amount of actual capital expenditures will be dependent upon, among other
things, the proportion of free standing versus hotel based properties as hotel
based restaurants are expected to generally require lower capital investment on
the Company's part. In addition, if the Company opens more, or less, restaurants
than it currently anticipates, its capital requirements will increase, or
decrease, accordingly.
In order to finance restaurant openings during 1997 and 1998, the Company
conducted an offering of common stock, convertible preferred stock and warrants
during 1997 and entered into a joint operating arrangement and loan in 1998.
The 1997 offering provided net proceeds to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred Stock,
500 shares of Series II 10% Convertible Preferred Stock, 187,500 five year $8.00
Warrants and 187,500 five year $12.00 Warrants. The aggregate sales price of
those securities was $1,500,000.
24
The Series I Convertible Preferred Stock was converted into 200,000 shares
of common stock in July 2000.
The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $4.00
per share, or (ii) 75% of the average closing price of the Company's common
stock for the five trading days immediately prior to the date of conversion;
provided, however, that the conversion price shall in no event exceed $10.00 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or redemption in
cash or, at the Company's option, in common stock at the then applicable
conversion price. The Series II Convertible Preferred Stock is subject to
redemption, in whole or in part, at the option of the Company on or after the
second anniversary of issuance at $1,000 per share. Accrued dividends in arrears
total $226,000 at December 30, 2001 and $176,000 at December 31, 2000.
The $8.00 Warrants are exercisable to purchase common stock at a price of
$8.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance.
The $12.00 Warrants are exercisable to purchase common stock at a price of
$12.00 per share commencing three years from the date of issuance and ending
five years from the date of issuance.
In February of 1999, the Company entered into a limited liability
company/member loan arrangement to provide financing for the planned opening of
a Grill restaurant at the Chicago Westin Hotel which opened June of 2000.
Pursuant to the financing arrangement for the Chicago Westin Hotel Grill,
investor members of the limited liability company (the "Chicago LLC") invested
$1,000 in the Chicago LLC and loaned an additional $1.699 million to the Chicago
LLC. $1,190,000 of the loan was converted to equity. The Company manages the
Chicago LLC for which it receives a management fee of 5% of sales and owns a 60%
interest in the Chicago LLC. The Company guaranteed repayment of the loan to the
Chicago LLC and issued warrants to acquire 203,645 shares of common stock at
$7.00 per share. The total cost to construct the Chicago Grill was $2.5 million.
The Chicago Grill opened in June 2000. At December 30, 2001, the balance of the
loan to Chicago LLC guaranteed by the Company was $455,000.
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, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and the balance to the members in the ratio
of their percentage interests. In January 2001 a distribution of distributable
cash in the amount of $90,000 was made to the minority member that reduced the
member's interest. The minority member's unrecovered capital contribution at
December 30, 2001 was $260,000.
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 $97,000 were paid to the non-manager member during 2001. These
payments are treated as a reduction of equity. Payments returning $94,000 of
converted capital contribution were made in 2001.
The Company may enter into investment/loan arrangements in the future on
terms similar to the Chicago Westin Grill arrangements to provide for the
funding of selected restaurants.
In September 2000, the Company opened a hotel-based licensed Daily Grill
restaurant at the Double Tree in Skokie, Illinois. All costs to build and open
the restaurant were paid by the hotel operator.
In July 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which the Company sold 666,667 shares of
restricted common stock and 666,6667 stock 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 for $2.25 to other
strategic investors for $1,000,000. Proceeds reflected in the financial
statements are net of transaction costs.
25
In conjunction with the investment by Starwood, 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.
Under the Starwood Development Agreement, either the Company or
Starwood may propose to develop a Daily Grill, Grill or City Bar and Grill
restaurant in a Starwood hotel property. If the parties agree in principal to
the development of a restaurant, the parties will attempt to negotiate either a
management agreement or a license agreement with respect to the operation of the
restaurant.
So long as Starwood continues to meet certain development thresholds
set forth in the Development Agreement, the Company is prohibited from
developing, managing, operating or licensing the Company's restaurants in any
hotel owned, managed or franchised by a person or entity, other than Starwood,
with more than 50 locations operated under a single brand. Existing hotel based
restaurants are excluded from the exclusive right of Starwood. The development
thresholds required to be satisfied to maintain Starwood's exclusive development
rights require, generally, (1) the signing of an average of one management
agreement or license agreement with respect to Daily Grill restaurants annually
over the life of the Development Agreement, (2) the signing of one management
agreement or license agreement in any two year period with respect to Grill
restaurants, and (3) the signing of an aggregate average of three management
agreements or license agreements with respect to all of the Company's
restaurants annually over the life of the Development Agreement. Satisfaction of
the thresholds set forth in the Development Agreement are determined on each
anniversary of the Development Agreement. With respect to satisfaction of the
specific thresholds applying to Daily Grill restaurants and Grill restaurants,
the failure to satisfy the development thresholds with respect to those
individual brands will terminate the exclusivity provisions relative to such
brand but will not effect the exclusivity rights as to the other brand or in
general.
Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common stock
equal to four percent of the outstanding shares upon the attainment of certain
development milestones. Such warrants are issuable upon execution of management
agreements and/or license agreements relating to the development and operation,
and the commencement of operation, of an aggregate of five, ten, fifteen and
twenty of the Company's branded restaurants. If the market price of the
Company's common stock on the date the warrants are to be issued is greater than
the market price on the date of the Development Agreement, the warrants will be
exercisable at a price equal to the greater of (1) 75% of the market price as of
the date such warrant becomes issuable, or (2) the market price on the date of
the Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price equal
to the market price as of the date such warrants become issuable. The warrants
will be exercisable for a period of five years.
In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement exceeds
35% of the total Daily Grill, Grill and City Grill-branded restaurants, the
Company will be obligated to issue to Starwood a warrant to purchase a number of
shares of the Company's common stock equal to 0.75% of the outstanding shares on
that date exercisable for a period of five years at a price equal to the market
price at that date. On each anniversary of that date at which the restaurants
operated under the Development Agreement continues to exceed the 35% threshold,
for so long as the Development Agreement remains effective, the Company shall
issue to Starwood additional warrants to purchase 0.75% of the outstanding
shares on that date at an exercise price equal to the market price on that date.
Following the events of September 11, 2001, Starwood has substantially
curtailed new development activities and no management agreements or license
agreements have, as yet, been entered into under the Development Agreement.
In July 2001, the Company sold its South Plainfield, New Jersey Pizza
Restaurant for net proceeds of $225,000.
In July 2001, the Company entered into a limited liability company for the
opening of The Grill on Hollywood. The investor member of the limited liability
company invested $1.2 million . The Company invested $250,000 and owns a 51%
interest in The Grill on Hollywood, LLC. The Company manages The Grill for which
it receives a management fee of 5% of sales. In November 2001, the Company
opened a free-standing Grill restaurant in Hollywood, California.
26
Management believes that the Company has adequate resources on hand and
operating cash flow to sustain operations for at least the following 12 months
and to open at least one restaurant. In order to fund the opening of additional
restaurants, the Company might require additional capital which might be raised
through the issuance of debt or equity securities, or the formation of
additional investment/loan arrangements, or a combination thereof. The Company
presently has no commitments in that regard. See "Description of Business --
Business Expansion" and "Management's Discussion and Analysis -- Certain Factors
Affecting Future Operating Results."
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 the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its financial statements. Principals of Consolidation and
Minority Interests
The Company's restaurant operations are conducted through multiple
wholly-owned subsidiaries as well as through three majority-owned limited
liability companies and through a 50% owned joint venture. The Company's
consolidated financial statements include balance sheet and income statement
items, after eliminating intercompany accounts and transactions, of each
wholly-owned and majority-owned subsidiary. The proportionate interest of the
earnings or loss of majority-owned subsidiaries attributable to the minority
owners of those subsidiaries is reflected in a single statement of operations
entry, with minority interests in earnings being a reduction in net income and
minority interests in losses being an increase in net income. The proportionate
interest in the equity of majority-owned subsidiaries attributable to the
minority owners of those subsidiaries is reflected as a single balance sheet
entry between liabilities and stockholders' equity.
The Company's interest in the 50% owned joint venture which operates the
Universal CityWalk Daily Grill is accounted for under the equity method of
accounting. Under the equity method, the balance sheet and statement of
operations items of that joint venture are not included on the Company's
financial statements. Instead, the Company reports on its statement of
operations a single line entry reflecting its proportionate interest in the
earnings or loss of the joint venture, provided that the aggregate net losses
from the joint venture do not exceed the Company's equity in the venture. The
Company equity in the joint venture is reflected as an investment on the balance
sheet which is adjusted, but not below zero, to reflect the Company's aggregate
share of net income and losses of the venture.
Impairment of Long-Lived Assets
The Company reviews all long-lived assets on a regular basis to determine
if there has been an impairment in the value of those assets. If, upon review,
it is determined that the carrying value of those assets may not be recoverable,
the Company will record a charge to earnings and reduce the value of the asset
on the balance sheet to the amount determined to be recoverable.
For purposes of evaluating recoverability of long-lived assets, the
recoverability test is performed using undiscounted cash flows of the individual
restaurants and consolidated undiscounted net cash flows for long-lived assets
not identifiable to individual restaurants compared to the related carrying
value. If the undiscounted operating income is less than the carrying value, the
amount of the impairment, if any, will be determined by comparing the carrying
value of each asset with its fair value. Fair value is generally based on a
discounted cash flow analysis.
Utilizing the above method, the Company, in prior years, has written down
the assets of its Pizza Restaurant to zero. Based on the Company's review of its
presently operating restaurants and other long-lived assets, during the fiscal
year ended December 30, 2001, the Company recorded no impairments of its
goodwill, intangibles or other long-lived assets.
27
Certain Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: adverse weather conditions and
other conditions affecting agricultural output which may cause shortages of key
food ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at the Company's
restaurants; the dependence on key personnel and ability to attract and retain
qualified management and restaurant personnel to support existing operations and
future growth; regulatory developments, particularly relating to labor matters
(i.e., minimum wage, health insurance and other benefit requirements), health
and safety conditions, service of alcoholic beverages and taxation, which could
increase the cost of restaurant operations; establishment of market position and
consumer acceptance in new markets in light of intense competition in the
restaurant industry and the geographic separation of senior management from such
markets; potential delays in securing sites for new restaurants and delays in
opening restaurants which may entail additional costs and lower revenues than
would otherwise exist in the absence of such delays; and the availability of
capital to fund future restaurant openings; rising energy costs and the
occurrence of rolling blackouts in California which may result in higher
occupancy costs and periodic restaurant closures which could adversely impact
revenues and earnings; and potential increases in meat prices, and corresponding
decreases in operating margins. In addition to the foregoing, the following
specific factors may affect the Company's future operating results.
The anticipated opening of additional Daily Grill and Grill locations is
expected to result in the incurrence of various pre-opening expenses and high
initial operating costs which may adversely impact earnings during the first
year of operations of such restaurants. However, management anticipates that
each of such operations can be operated profitably within the first year of
operations and that the opening of each of the restaurants presently
contemplated will improve revenues and profitability.
The Company closed its Media, Pennsylvania Pizza Restaurant in 2000 and, in
July 2001, finalized the sale of its South Plainfield, New Jersey Pizza
Restaurant for $700,000. The Company is actively looking for a buyer for its
remaining franchised Pizzeria Uno restaurant in Cherry Hill, New Jersey.
Future Accounting Requirements
In July 2001, the FASB issued Statement of Financial Accounting Standard
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 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 No. 141 will have a
significant impact on its financial statements.
In July 2001, the FASB also issued Statement of Financial Standard 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 the
Company for fiscal year 2002. Adoption of No. 142 will reduce amortization
expense in future periods. If the non-amortization provisions of SFAS No. 142
had been in effect as of the beginning of 2001, goodwill amortization of $8,000
for the year ended December 30, 2001 would have been eliminated. The Company has
until June 2002 to complete our transitional impairment of goodwill associated
with adopting SFAS No. 142. The amount of impairment losses recognizable upon
adoption, if any, is not known at this time.
In August 2001, the FASB also issued Statement of Financial Standards No.
144, ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which replaces SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived to be Disposed Of'" and also replaces and broadens the
provisions of Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 establishes one accounting model, based on framework established in SFAS
No. 121, for recognition, measurement and reporting of impairment of long-lived
assets to be held and used and measurement of long-lived assets to be disposed
of by sale. Adoption of SFAS No. 144 is required for our fiscal year beginning
December 31, 2001 although early adoption is permitted. We are currently
evaluating the impact this new standard will have on our business, consolidated
financial position, results of operations and cash flows.
28
Impact of Inflation
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past two years.
A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws and various laws that allow for credits to
that wage. The Company's cost of operations have been affected by several
increases in the Federal and State minimum wage in recent years, including a
state minimum wage increase in California in January 2002. In addition, further
increases in the minimum wage are also being discussed by the federal and
various state governments. Although the Company has been able to and will
continue to attempt to pass along increases in costs through food and beverage
price increases, there can be no assurance that all such increases can be
reflected in its prices or that increased prices will be absorbed by customers
without diminishing, to some degree, customer spending at its restaurants.
ITEM 7A. 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 $1.1 million revolving credit line and
reducing credit line facility. At December 30, 2001 there are no borrowings
under either credit line. Borrowings under the credit facility bear interest at
the lender's prime rate. A hypothetical 1% interest rate change would not have a
material impact on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent accountants report thereon of PricewaterhouseCoopers, LLP, appears
herein. See Index to Financial Statements on F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial Statements on
page F-1 of this report for financial statements and supplementary data filed as
part of this report.
(2) Financial Statement Schedules
None
(3) Exhibits
Exhibit
Number Description of Exhibit
--------- -------------------------
3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc.
(7)
3.2 Certificate of Amendment to Restated Certificate of Incorporation
of Grill Concepts, Inc. (8)
3.3 Certificate of Amendment to Restated Certificate of Incorporation
of Grill Concepts, Inc. dated August 1999 (13)
3.4 Certificate of Amendment of Restated Certificate of Incorporation
of Grill Concepts, Inc., dated July 3, 2001 (20)
3.5 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.6 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated
December 31, 1994 (2)
4.1 Certificate of Designation fixing terms of Series II Preferred
Stock (8)
4.2 Specimen Common Stock Certificate (1)
4.3 Form of Offshore Warrant (3)
4.4 Form of $8.00 Warrant (8)
4.5 Form of $12.00 Warrant (8)
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and
Denbob Corp. dated June 29, 1989 for premises in Cherry Hill, New
Jersey (1)
+10.3 Grill Concepts, Inc. 1995 Stock Option Plan (6)
+10.4 Employment Agreement, dated January 1, 2001, with Robert Spivak
(18)
10.5 Operating Agreement for San Jose Grill LLC, dated June 1997 (9)
10.6 Amendment, dated December 1997, to Operating Agreement for San
Jose Grill LLC (9)
10.7 Subordinate Note, dated December 1997, relating to San Jose Grill
LLC (9)
10.8 Management Agreement re: San Jose City Bar & Grill (10)
10.9 Blanket Conveyance, Bill of Sale and Assignment between Grill
Concepts, Inc. and Air Terminal Services, Inc. (11)
10.10 License Agreement between Grill Concepts, Inc. and Airport
Grill, L.L.C. (11)
10.11 Agreement, dated August 27, 1998, between Grill Concepts, Inc.
and Hotel Restaurant Properties, Inc. (11)
10.12 Restaurant Management Agreement between Grill Concepts, Inc.,
Hotel Restaurant Properties, Inc. and CapStar Georgetown Company,
L.L.C. for the Georgetown Inn (11)
10.13 Loan Agreement between Grill Concepts, Inc. and The Wolff
Revocable Trust of 1993 (12)
10.14 Addendum to Management Agreement re: San Jose City Bar & Grill
(12)
+10.15 Grill Concepts, Inc. 1998 Comprehensive Stock Option and Award
Plan, as amended February 27, 2001 (14)
30
10.16 Bank of America Business Loan Agreement (15)
10.17 Peter Roussak Warrant dated November 1999 (15)
10.18 Chicago - Grill on the Alley Warrant (15)
10.19 Chicago - Grill on the Alley First Extension Warrant (15)
10.20 Chicago - Grill on the Alley Second Extension Warrant (15)
10.21 Guaranty - Michigan Avenue Group Note (15)
10.22 Operating Agreement for Chicago -The Grill on the Alley LLC (15)
10.23 Letter Agreement dated July 19, 2000 with Wells Fargo Bank (16)
10.24 Indemnification Agreement between Grill Concepts, Inc., Lewis N.
Wolff and the Lewis N. Wolff Revocable Trust of 1993 and Michael
S. Weinstock and Michael S. Weinstock Trustee of the Michael S.
Weinstock Living Trust (16)
10.25 Form of Letter Agreement regarding Loan Facility (16)
10.26 Form of four year 9% Promissory Note (16)
10.27 Form of Warrant issued in connection with Promissory Notes (16)
10.28 Guarantee Agreement dated July 11, 2000 with Michael Weinstock
and Lewis Wolff (16)
10.29 Form of Warrant issued in connection with Loan Guaranty (16)
10.30 Michael Grayson Warrant (17)
10.31 Daily Grill Restaurant Management Agreement, dated February 5,
2001, between Grill Concepts Management, Inc., Hotel Restaurant
Properties II Management, Inc., and Handlery Hotel, Inc. (17)
10.32 Asset Purchase Agreement, dated October 18, 2000 re: South
Plainfield Pizzeria Uno (17)
10.33 Subscription Agreement, dated May 16, 2001, by and between Grill
Concepts, Inc. and Starwood Hotels & Resorts Worldwide, Inc. (19)
10.34 Development Agreement by and between Grill Concepts, Inc. and
Starwood Hotels & Resorts Worldwide, Inc. (19)
10.35 Investor Rights Agreement by and between Grill Concepts, Inc.
and Starwood Hotels & Resorts Worldwide, Inc. (19)
10.36 Stockholders' Agreement by and between Grill Concepts, Inc.,
Starwood Hotels & Resorts Worldwide, Inc., Robert Spivak, Michael
Weinstock, Lewis Wolff, Keith Wolff and Wolff Revocable Trust of
1993. (18)
10.37 Form of $2.00 Warrant. (19)
10.38 Amendment to Hotel Restaurant Properties, Inc. Agreement, dated
July 27, 2001 (20)
10.39*Amendment to San Jose City Bar and Grill Agreement
21.1* Subsidiaries of Registrant
23.1* Consent of PricewaterhouseCoopers LLP
+ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993.
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No. 33-
85730) declared effective by the Securities and Exchange Commission on
February 3, 1995.
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996.
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated December 13, 1996.
(5) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December 25,
1994.
(6) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the exhibits filed with the Registrant's Current Report
on Form 8-K dated March 3, 1995.
(8) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended June 29, 1997.
31
(9) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 28,
1997.
(10) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended March 29, 1998.
(11) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended September 27, 1998.
(12) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 27,
1998.
(13) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended June 27, 1999.
(14) Incorporated by reference to the Company's Definitive Proxy Statement filed
May 29, 2001.
(15) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-K for the year ended December 26, 1999.
(16) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended September 24, 2000.
(17) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
(18) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended April 1, 2001.
(19) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 8-K dated May 16, 2001.
(20) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended July 1, 2001.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 30, 2001.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak
--------------------------
Robert Spivak
President
Dated: March 29, 2002
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
----------- ------- ------
/s/ Robert Spivak President, Chief Executive Officer March 29, 2002
-----------------------
Robert Spivak and Director (Principal Executive
Officer)
/s/ Michael Weinstock Chairman of the Board of Directors March 29, 2002
-----------------------
Michael Weinstock and Executive Vice President
/s/ Charles Frank Director March 29, 2002
-----------------------
Charles Frank
/s/ Glenn Golenberg Director March 29, 2002
-----------------------
Glenn Golenberg
Director March __, 2002
-----------------------
Norman MacLeod
/s/ Stephen Ross Director March 29, 2002
-----------------------
Stephen Ross
Director March __, 2002
-----------------------
Lewis Wolff
/s/ Daryl Ansel Chief Financial Officer March 29, 2002
-----------------------
Daryl Ansel (Principal Accounting Officer and
Principal Financial Officer)
33
Grill Concepts, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets
As of December 30, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations
For the Years Ended December 30, 2001, December 31, 2000 F-4
and December 26, 1999
Consolidated Statements of Stockholders' Equity
For the Years Ended December 30, 2001, December 31, 2000 F-5
and December 26, 1999
Consolidated Statements of Cash Flows
For the Years Ended December 30, 2001, December 31, 2000 F-6
and December 26, 1999
Notes To Consolidated Financial Statements F-7
Report of Independent Accountants
To the Board of Directors and Stockholders of
Grill Concepts, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Grill Concepts, Inc. and its
subsidiaries at December 30, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of the Company's majority-owned subsidiaries, The
San Jose Grill, LLC (a California Limited Liability Company) and Chicago-The
Grill on The Alley, LLC (an Illinois Limited Liability Company) as of December
31, 2000 and for the year then ended, which combined statements reflect total
assets and total revenues of $4,430,000 and $8,063,000, respectively. In
addition, we did not audit the financial statements of The San Jose Grill, LLC
for the year ended December 26, 1999, which statements reflect total revenues of
$3,783,000. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for the aforementioned majority-owned
subsidiaries, is based solely on the reports of the other auditors. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
March 4, 2002
F-2
Consolidated Balance Sheets
Grill Concepts, Inc. and Subsidiaries
December 30, December 31,
2001 2000
----- -----
Assets
Current assets:
Cash and cash equivalents $ 2,300,000 $ 623,000
Inventories 590,000 541,000
Receivables 602,000 655,000
Prepaid expenses and other current assets 575,000 271,000
----------- -----------
Total current assets 4,067,000 2,090,000
Furniture, equipment and improvements, net 9,066,000 9,301,000
Goodwill, net 205,000 213,000
Liquor licenses 454,000 587,000
Other assets 552,000 343,000
----------- -----------
Total assets $14,344,000 $12,534,000
=========== ==========
Liabilities, Minority Interest and Stockholders' Equity
Current liabilities:
Bank line of credit $ - 100,000
Accounts payable 1,179,000 1,420,000
Accrued expenses 2,919,000 2,359,000
Current portion of long-term debts 369,000 738,000
Notes payable - related parties 293,000 192,000
----------- ------------
Total current liabilities 4,760,000 4,809,000
Long-term debts 943,000 2,408,000
Notes payable - related parties 591,000 458,000
----------- ------------
Total liabilities 6,294,000 7,675,000
----------- ------------
Minority interest 2,005,000 1,364,000
Commitments and contingencies (Note 10)
Stockholders' equity:
Series I, Convertible Preferred Stock,
$0.01 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, - -
liquidation preference of $226,000 and $176,000 in 2001 and 2000,
respectively
Common Stock, $.00004 par value; 12,000,000 shares authorized in 2001
and 7,500,000 shares authorized in 2000, 5,537,071 issued and outstanding - -
in 2001 and 4,203,738 issued and outstanding in 2000
Additional paid-in capital 13,152,000 11,071,000
Accumulated deficit (7,107,000) (7,576,000)
------------- ------------
Total stockholders' equity 6,045,000 3,495,000
------------- ------------
Total liabilities, minority interest and stockholders' equity $ 14,344,000 $12,534,000
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Grill Concepts, Inc. and Subsidiaries
Consolidated Statements of Operations
December 30, December 31, December 26,
2001 2000 1999
------------- ------------- ---------------
Revenues:
Sales $ 44,529,000 $ 44,598,000 $38,432,000
Management and license fees 872,000 1,078,000 544,000
------------- ------------- ---------------
Total revenues 45,401,000 45,676,000 38,976,000
Cost of sales 12,416,000 13,002,000 10,886,000
------------- ------------- --------------
Gross profit 32,985,000 32,674,000 28,090,000
------------- ------------- --------------
Operating expenses:
Restaurant operating expenses 27,063,000 27,201,000 23,426,000
General and administrative 3,540,000 3,303,000 3,296,000
Depreciation and amortization 1,457,000 1,334,000 1,196,000
Preopening costs 199,000 330,000 54,000
Unusual charges - 73,000 -
-------------- ------------- --------------
Total operating expenses 32,259,000 32,241,000 27,972,000
-------------- ------------- --------------
Income from operations 726,000 433,000 118,000
Interest expense, net (182,000) (398,000) (180,000)
Interest expense - related parties (212,000) (80,000) (196,000)
-------------- ------------- --------------
Income (loss) before provision for income taxes,
minority interest, and equity in loss of joint 332,000 (45,000) (258,000)
venture
Provision for income taxes (65,000) (14,000) (6,000)
-------------- -------------- --------------
Income (loss) before minority interest and
equity in loss of joint venture 267,000 (59,000) (264,000)
Minority interest in loss (earnings) of subsidiaries 211,000 102,000 (68,000)
Equity in loss of joint venture (9,000) (9,000) (74,000)
-------------- -------------- --------------
Net income (loss) 469,000 34,000 (406,000)
-------------- -------------- --------------
Preferred dividends accrued or paid (50,000) (50,000) (50,000)
-------------- -------------- --------------
Net income (loss) applicable to common stock $ 419,000 $ (16,000) $ (456,000)
============== =============== ==============
Net income (loss) per share applicable to common stock:
Basic net income (loss) $ 0.09 $ 0.00 $ (0.11)
============== =============== ==============
Diluted net income (loss) $ 0.09 $ 0.00 $ (0.11)
============== =============== ==============
Average-weighted shares outstanding:
Basic 4,776,741 4,104,360 4,003,738
============== =============== ==============
Diluted 4,866,449 4,104,360 4,003,738
============== =============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
Grill Concepts, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
eries I Preferred Stock Series II Preferred Stock Common Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ -------- ------ -------- ------- -------- ----------- ----------- --------
Balance, December
27, 1998 1,000 $ - 500 $ - 4,003,738 $ - $11,071,000 $ (7,204,000) $3,867,000
Net loss - - - - - - - (406,000) (406,000)
-------- -------- -------- -------- ---------- ------- ----------- ------------ ----------
Balance, December 26,
1999 1,000 - 500 - 4,003,738 - 11,071,000 (7,610,000) 3,461,000
Conversion of
Series I, Convertible
Preferred Stock,
to common stock (1,000) - 200,000 - - - - - -
Net income - - - - - - - 34,000 34,000
-------- -------- --------- ---------- ----------- ---------- ------------ ------------ ---------
Balance, December 31,
2000 - 500 - 4,203,738 - 11,071,000 (7,576,000) 3,495,000
Issuance of
common stock
and warrants 1,333,333 - 2,081,000 2,081,000
Net income - - - - - - - 469,000 469,000
-------- -------- --------- ----------- ----------- ---------- ------------ ----------- ----------
Balance, December 30,
2001 $ - - 500 $ - 5,537,071 $ - $ 13,152,000 $(7,107,000)$6,045,000
======== ======== ========= =========== =========== ========== ============ =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements
F-5
Grill Concepts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
December 30 December 31, December 26,
2001 2000 1999
----------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 469,000 $ 34,000 $ (406,000)
Adjustments to reconcile net income (loss) to net provided
by operating activities:
Depreciation and amortization 1,457,000 1,334,000 1,196,000
Unusual charges - write-off of assets - 73,000 -
Gain on sale of assets (225,000) - -
Minority interest in net (loss) earnings of
subsidiaries (211,000) (102,000) 68,000
Equity in loss of joint venture 9,000 9,000 74,000
Changes in operating assets and liabilities:
Inventories (49,000) (115,000) (42,000)
Receivables (1,000) 84,000 (382,000)
Prepaid expenses and other current assets (303,000) 24,000 169,000
Liquor licenses and other assets (56,000) 51,000 (29,000)
Accounts payable (241,000) (461,000) 462,000
Accrued expenses 547,000 695,000 618,000
-------------- ---------------- --------------
Net cash provided by operating activities 1,396,000 1,626,000 1,728,000
-------------- ---------------- --------------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (1,423,000) (2,382,000) (1,118,000)
Proceeds from sale of fixed assets 655,000 - -
Purchase of liquor license (31,000) - -
Investment in joint venture - - (83,000)
-------------- ---------------- --------------
Net cash used in investing activities (799,000) (2,382,000) (1,201,000)
-------------- ---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 400,000 -
Net increase in bank line of credit - 100,000 345,000
Proceeds from term debt - 1,200,000 624,000
Return of capital to minority member on San Jose Grill LLC (90,000) - -
Proceeds from investment in Chicago Grill LLC - 1,190,000 -
Proceeds from investment in Grill on Hollywood, LLC 1,200,000 - -
Preferred return to minority member on Chicago - The (191,000) (73,000) -
Grill on the Alley, LLC
Proceeds from equipment financing - 1,007,000 -
Payments on long term debt and bank loans (1,562,000) 2,398,000) (455,000)
Payments on related party debt (138,000) (399,000) (1,127,000)
Proceeds from issuance of common stock 1,861,000 - -
-------------- ---------------- --------------
Net cash provided by (used in) financing activities 1,080,000 1,027,000 (613,000)
-------------- ---------------- --------------
Net increase (decrease) in cash and 1,677,000 271,000 (86,000)
cash equivalents
Cash and cash equivalents, beginning of year 623,000 352,000 438,000
-------------- ---------------- --------------
Cash and cash equivalents, end of year $ 2,300,000 $ 623,000 $ 352,000
============== =============== ==============
Supplemental cash flows information:
Cash paid during the year for:
Interest $ 391,000 $ 544,000 $ 379,000
Income taxes $ 28,000 $ 12,000 $ 6,000
The accompanying notes are an integral part of these consolidated
financial statements
F-6
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation
General
Grill Concepts, Inc. (the "Company") is incorporated under the laws of
the State of Delaware. The Company operates exclusively in the
restaurant industry in the United States. At December 30, 2001, the
Company owned and operated fifteen restaurants, consisting of eight
Daily Grill restaurants in California; The Grill on the Alley ("The
Grill"); The Grill in San Jose ("The San Jose Grill LLC"); The Grill in
Chicago ("Chicago - The Grill on the Alley LLC"); The Grill on
Hollywood (The Grill on Hollywood, LLC): one Daily Grill in Washington,
D.C.; one Daily Grill in Virginia; and one Pizzeria Uno Restaurant
located in New Jersey. With the exception of the Pizzeria Uno
Restaurant which is operated pursuant to a franchise agreement, each of
the Company's restaurants is owned and operated on a nonfranchise basis
by the Company. The Company manages two Daily Grill restaurants and a
City Bar and Grill and licenses two additional Daily Grill restaurants.
Liquidity
At December 30, 2001, the Company had a working capital deficit of $0.7
million and a cash balance of $2.3 million as compared to a working
capital deficit of $2.7 million and a cash balance of $0.6 million at
December 31, 2000. The variance in the Company's working capital and
cash was primarily attributable to the issuance of new equity in 2001,
proceeds from the sale of the Pizzeria Uno in South Plainfield, New
Jersey and cash flow from operations that were used to pay off the
Company's bank borrowing of $1.2 million and other debt of $0.5
million.
The Company's need for capital resources historically has resulted
from, and for the foreseeable future is expected to relate primarily
to, the construction and opening of new 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 and preferred
stock, loans and tenant allowances from certain of its landlords, and,
beginning in 1999, through joint venture arrangements. At December 30,
2001, the Company had a bank credit facility with nothing owing, a loan
from a member of Chicago - The Grill on the Alley, LLC of $0.5 million,
an SBA loan of $0.1 million, loans from stockholders/officers/directors
of $0.5 million, equipment loans of $1.1 million, and loans/advances
from a landlord of $0.1 million.
Management believes that the Company has adequate resources on hand and
operating cash flows to sustain operations for at least the following
12 months. In order to fund the opening of additional restaurants, the
Company will require, and intends to raise, additional capital, the
issuance of debt or equity securities, or the formation of additional
investment/loan arrangements, or a combination thereof. The Company
presently has no commitments in that regard.
F-7
2. Summary of Significant Accounting Policies
Principles of Consolidation and Minority Interest
The consolidated financial statements at December 30, 2001 include the
accounts of Grill Concepts, Inc. and its wholly-owned subsidiaries,
which include the one Pizzeria Uno Restaurant, The Grill on the Alley,
Universal Grill Concepts, Inc. and three majority-owned subsidiaries:
The San Jose Grill LLC (a California Limited Liability Company),
Chicago - The Grill on the Alley, LLC and The Grill on Hollywood, LLC.
All significant intercompany accounts and transactions for the periods
presented have been eliminated in consolidation. The equity method of
accounting is used by Universal Grill Concepts, Inc. to account for the
investment in the joint venture in Universal CityWalk.
In connection with the building of a new restaurant, in July 2001, a
limited liability company was formed for the operation of "The Grill on
Hollywood" restaurant in Hollywood, California, of which the Company
owns 51%. Construction of the restaurant was funded by a capital
contribution of $1,200,000 from the minority interest member and a
tenant improvement allowance of up to $1,015,000. The Company
contributed $250,000 to the limited liability company. The consolidated
financial statements include the accounts of the limited liability
company with minority interest reflected.
In connection with the building of a new restaurant, in February 1999,
a limited liability company was formed for the operation of "The Grill
on the Alley" restaurant in Chicago, Illinois, of which the Company
owns 60.0%. Construction of the restaurant was funded primarily by a
capital contribution of $1,190,000 and a loan of $510,000 from the
minority interest member of the limited liability company and $750,000
of equipment financing. The consolidated financial statements include
the accounts of the limited liability company with minority interest
reflected.
In connection with the building of a new restaurant, in January 1998, a
limited liability company was formed for the operation of "The Grill"
restaurant in San Jose, California, of which the Company owns 50.05%.
Construction of the restaurant was funded primarily by a capital
contribution from the Company of $350,350 and by a capital contribution
of $349,650 and a $800,000 loan from the minority interest member of
the limited liability company. The consolidated financial statements
include the accounts of the limited liability company with minority
interest reflected.
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending the Sunday
closest to December 31. The fiscal year 2001 consisted of 52 weeks
ended December 30, 2001. The fiscal year 2000 consisted of 53 weeks
ended December 31, 2000. The fiscal year 1999 consisted of 52 weeks
ended December 26, 1999.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage
products are sold. Management and license fees are recognized on an
accrual basis when earned.
F-8
2. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The Company
currently maintains substantially all of its day-to-day operating cash
balances with major financial institutions. At times, cash balances may
be in excess of Federal Depository Insurance Corporation ("FDIC")
insurance limits.
Inventories
Inventories consist of food, wine and liquor and are stated at the
lower of cost or market, cost generally being determined on a first-in,
first-out basis.
Furniture, Equipment and Improvements
Furniture, equipment and improvements are stated at cost.
Depreciation of furniture and equipment is computed by use of the
straight-line method based on the estimated useful lives of 3 to 10
years of the respective assets. Leasehold improvements are amortized
using the straight-line method over the life of the improvement or the
remaining life of the lease, whichever is shorter. Interest costs
incurred during construction were capitalized and are being amortized
over the related assets' estimated useful lives. When properties are
retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and the resulting gain or
loss is credited or charged to current-year operations. The policy of
the Company is to charge amounts expended for maintenance and repairs
to current-year expense and to capitalize expenditures for major
replacements and betterments.
Goodwill
Goodwill relates to the excess of cost over the fair value of the net
assets of The Grill acquired in April 1996. Goodwill is being amortized
on a straight-line basis over 30 years. Accumulated amortization at
December 30, 2001 was $41,000.
Expendables
Initial amounts spent for china, glassware and flatware in connection
with the opening of a new restaurant are capitalized. Subsequent
purchases are expensed as incurred.
F-9
2. Summary of Significant Accounting Policies (Continued)
Liquor Licenses
The cost of acquiring liquor licenses is capitalized at cost and is
stated at the lower of cost or market.
Pre-opening Costs
Pre-opening costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which prescribes an asset and liability approach. Under the
asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted
statutory rates applicable to future years to the difference between
the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date. The Company establishes a valuation allowance to reduce net
deferred tax assets to the amount expected to be realized.
Advertising and Promotion Costs
All costs associated with advertising and promoting products are
expensed in the year incurred. Advertising and promotion expense for
the years ended December 30, 2001, December 31, 2000 and December 26,
1999 was $580,000, $ 844,000, and $804,000, respectively.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Long-Lived Assets
In accordance with SFAS No. 121, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of
long-lived assets, the recoverability test is performed using
undiscounted net cash flows of the individual restaurants and
consolidated undiscounted net cash flows for long-lived assets not
identifiable to individual restaurants compared to the related carrying
value. If the undiscounted operating income is less than the carrying
value, the amount of the impairment, if any, is determined by comparing
the carrying value of each asset with its fair value. Fair value is
generally based on a discounted cash flow analysis. Based on its
review, the Company does not believe that any impairment of its
goodwill, intangibles or other long-lived assets has occurred.
F-10
2. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
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. 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.
Net Income Per Share
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.
On August 9, 1999, the Company effected a 1-for-4 reverse stock split
of the Company's common stock. All shares and per share data have been
restated to reflect the reverse stock split.
A reconciliation of earnings available to common stockholders and
diluted earnings available to common stockholders and the related
weighted average shares for the years ended December 30, 2001, December
31, 2000 and December 26, 1999 follow:
------------------------------ ------------------------ -------------------------- -------------------------
2001 2000 1999
------------------------------ ------------------------ -------------------------- -------------------------
Earnings Shares Earnings Shares Earnings Shares
Net income (loss) $ 469,000 $ 34,000 $(406,000)
Less: preferred stock dividend (50,000) (50,000) (50,000)
----------- --------- -----------
Earnings available to common
stockholders 419,000 4,776,741 (16,000) 4,104,360 (456,000) 4,003,738
Dilutive securities:
Dilutive stock options 20,450 - -
Warrants - 69,258 - - - -
------------ ---------- ---------- ---------- ----------- -----------
Diluted earnings available
to common stockholders $ 419,000 4,866,449 $(16,000) 4,104,360 $ (456,000) 4,003,738
=========== ========== ========== ========== =========== ===========
F-11
2. Summary of Significant Accounting Policies (Continued)
Stock options for 460,813, 381,488 and 362,812 shares for 2001, 2000
and 1999, respectively, were excluded from the calculation of diluted
earnings per share because they were anti-dilutive. Warrants for
1,437,370, 844,895 and 641,145 shares, respectively, were excluded from
the calculation of diluted earnings per share because they were
anti-dilutive.
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, distributions of distributable cash will be
made first, 16 2/3% as an incentive to the manager and the balance to
the members in the ratio of their percentage interests. In January 2001
a distribution of distributable cash in the amount of $90,000 was made
to the minority member that reduced the member's interest. The minority
member's unrecovered capital contribution at December 30, 2001 was
$260,000.
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 $97,000 were paid to the
non-manager member during 2001. These payments are treated as a
reduction of equity. Payments returning $94,000 of converted capital
contribution were made in 2001.
The Operating Agreement for The Grill on Hollywood, LLC stipulates that
distributions of distributable cash shall be made first, 90% to the
non-manager member and 10% to the manager member until non-manger
member's preferred return, unrecovered contribution account and
additional contribution account are reduced to zero. Second, 90% to the
manager member and 10% to the non-manager member until the manager
member's preferred return and unrecovered contribution account have
been reduced to zero. Thereafter, distributions of distributable cash
shall be made to the members in proportion to their respective
percentage interests.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions for the reporting period and as of the
financial statement date. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent liabilities, and the reported amounts of revenue and
expenses. Actual results could differ from those estimates.
F-12
2. Summary of Significant Accounting Polices (continued)
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to
estimate. SFAS No. 107 excludes certain financial instruments, such as
certain insurance contracts, and all nonfinancial instruments from its
disclosure requirements. A financial instrument is defined as a
contractual obligation that ultimately ends with the delivery of cash
or an ownership interest in an entity. Disclosures regarding the fair
value of financial instruments have been derived using external market
sources, estimates using present value or other valuation techniques.
Cash, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity
of these instruments. The fair value of long-term debt closely
approximates its carrying value.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 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 the Company for fiscal year 2002.
Adoption of SFAS No. 142 will reduce amortization expense in future
periods. If the non-amortization provisions of SFAS No. 142 had been in
effect as of the beginning of 2001, goodwill amortization of $8,000 for
the year ended December 30, 2001 would have been eliminated. The
Company has until June 2002 to complete our transitional impairment of
goodwill associated with adopting SFAS No. 142. The amount of
impairment losses recognizable upon adoption, if any, is not known at
this time.
In August 2001, the FASB also issued Statement of Financial Standards
No. 144, ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which replaces SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived to be Disposed Of'"
and also replaces and broadens the provisions of Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No.
144 establishes one accounting model, based on framework established in
SFAS No. 121, for recognition, measurement and reporting of impairment
of long-lived assets to be held and used and measurement of long-lived
assets to be disposed of by sale. Adoption of SFAS No. 144 is required
for our fiscal year beginning December 31, 2001 although early adoption
is permitted. We are currently evaluating the impact this new standard
will have on our business, consolidated financial position, results of
operations and cash flows.
F-13
3. Furniture, Equipment and Improvements, Net
Furniture, equipment and improvements at December 30, 2001 and December 31,
2000 consisted of:
2001 2000
---- ----
Furniture, fixtures and equipment $ 7,514,000 $7,034,000
Leasehold improvements 9,148,000 8,764,000
Motor vehicle 23,000 23,000
Expendables 335,000 335,000
----------- ----------
Furniture, equipment and improvements 17,020,000 16,156,000
Less, Accumulated depreciation (7,954,000) (6,855,000)
------------ ----------
Furniture, equipment and improvements, net $ 9,066,000 $9,301,000
============ ==========
4. Accrued Expenses
Accrued Expenses at December 30, 2001 and December 30, 2000 consist of
the following:
2001 2000
--------- --------
Accrued payroll $ 636,000 $ 587,000
Accrued sales tax 484,000 283,000
Accrued vacation 377,000 190,000
Accrued interest 138,000 111,000
Deferred rent 331,000 292,000
Other 953,000 896,000
--------- ---------
Total $ 2,919,000 $ 2,359,000
========= =========
5. Debts
On December 13, 2001, the bank credit facility was amended converting
the term loan to a $800,000 reducing line of credit under which the
amount available to draw is reduced each month by $25,000 so that it
mimics the previous term loan as to the maximum outstanding balance.
The reducing line of credit expires in October 2004. The $300,000 line
of credit was extended until August 2002. Both lines bear interest at
the bank prime rate. At December 30, 2001 there is no outstanding
balance under the credit facility. All other terms and conditions
remain the same.
At December 31, 2000, the bank credit facility consisted of a
$1,200,000 term loan expiring August 1, 2004, payable in forty-eight
equal monthly installments starting September 1, 2000, plus interest
and a $300,000 line of credit expiring August 1, 2001. Interest was
payable monthly at the Bank's Reference Rate. The note is
collateralized by an interest in the assets of the Company. In
addition, two of the Company's principal stockholders have guaranteed
the credit facility. In connection with this facility, the Company is
required to comply with a number of restrictive covenants, including
meeting
F-14
5. Debts (continued)
certain debt service coverage and liquidity requirements. The credit
agreement also contains a subjective acceleration clause and a
cross-default provision.
Debts at December 30, 2001 and December 31, 2000 are summarized as follows:
2001 2000
---- ----
Bank credit facility described above $ - $ 1,200,000
Note payable to Small Business Administration collateralized by
property, payable monthly, $1,648, including interest at 4.0%, due
September 23, 2006. 84,000 101,000
Note payable to lessor, uncollateralized, payable monthly, $1,435,
including interest at 10.0%, due April 30, 2013. 123,000 128,000
Note payable for equipment, payable monthly, $2,039, due April 8,
2002. 5,000 22,000
Note payable for equipment, payable monthly, $14,597, including
interest at 9.25%, due April 30, 2004. 356,000 490,000
Note payable for equipment, payable monthly, $6,382, including
interest at 10.8%, due May 1, 2004. 159,000 220,000
Note payable to two non-related parties, payable monthly, $9,954,
including interest at 9.0%, due August 1, 2004 converted to related - 372,000
party in 2001.
Note payable for equipment, payable monthly, $15,396, including
interest at 10.8%, due December 1, 2005. 583,000 709,000
Note payable for equipment, payable monthly, $136, including
interest at 11.8%, due July 1, 2003. 2,000 4,000
---------- -----------
1,312,000 3,246,000
Less, Current portion of long-term debts 369,000 738,000
Less, Bank line of credit - 100,000
---------- -----------
Long-term portion $ 943,000 $2,408,000
========== ===========
F-15
5. Debts (continued)
Principal maturities of long-term debt are as follows:
Year Ending
December
2002 $ 369,000
2003 401,000
2004 256,000
2005 174,000
2006 20,000
Thereafter 92,000
-----------
Total $ 1,312,000
===========
6. Related Parties
Debts with related parties at December 30, 2001 and December 31, 2000
consisted of:
2001 2000
---- ----
Uncollateralized note payable to shareholder, with interest payable
at a rate of 10% per annum. The note payable and interest is due on
June 30, 2002. $ 70,000 $ 70,000
Uncollateralized subordinated note payable to shareholders, with
interest payable at a rate of 7.0% per annum. The note payable and
interest is due on June 30, 2002. 85,000 85,000
Note payable to a member of the Board of Directors, payable monthly,
$9,954, including interest at 9.0%, due August 1, 2004, converted 274,000 -
from non-related in 2001
Collateralized subordinated note payable to a member of Chicago - The
Grill on the Alley LLC. Conversion of the note is at the option of the
member. The original principle amount of the note was $1,699,000.
However, in February 1999, the member converted $1,190,000 of the note
to equity. The note bears monthly payments of $6,292, including
interest at 8% per annum. The note will mature on October 1, 2009. The
Company guaranteed repayment of the loan to Chicago - The Grill on the
Alley, LLC and issued 203,645 warrants to acquire common stock at $7.00
per share.
455,000 495,000
--------- ----------
884,000 650,000
Less, Current portion of notes payable - related parties 293,000 192,000
--------- ----------
Long-term portion $591,000 $ 458,000
========= ==========
F-16
6. Related Parties (continued)
Principal maturities of debts with related parties are as follows:
Year Ending December 30,
2002 $ 293,000
2003 151,000
2004 117,000
2005 51,000
2006 55,000
Thereafter 217,000
-----------
Total $ 884,000
===========
The Company agreed to pay to each of two stockholders interest at a
rate of 2% per annum of the average annual balance of the bank credit
facility for guaranteeing the note with their personal assets. Interest
expense totaled $59,000, $44,000 and $79,000 for fiscal years 2001,
2000 and 1999, respectively.
A stockholder of the Company is the lessor for property leased by one
of the Pizzeria Uno Restaurants. Rent expense related to this operating
lease was $252,000, $248,000 and $244,000 for each of the fiscal years
2001, 2000 and 1999, respectively.
The holder of all of the Company's preferred stock is a part owner of
the San Jose Fairmont Hotel, the site of The San Jose Grill LLC. He is
also a part owner of the San Jose Hilton Hotel, the site of The City
Bar & Grill, which is one of the restaurants managed by the Company
through management agreements entered into during 1998. Revenue related
to this management agreement was $65,000 and $92,000 for the fiscal
years 2001 and 2000, respectively.
In August 1998, the Company entered into an agreement (the "Agreement")
with Hotel Restaurant Properties, Inc. ("HRP") in which HRP will assist
the Company in locating hotel locations for the opening of Company
restaurants. One of the two owners of HRP is a family member of the
above-referenced preferred stockholder of the Company. HRP collects the
management fees earned under agreements entered into with the
assistance of HRP and forwards the Company its portion. There were
$143,000 and $188,000 of management fees paid to HRP on this Agreement
for fiscal year 2001 and 2000, respectively. The Agreement also
provides that HRP will repay to the Company amounts advanced to managed
units on behalf of HRP. As of December 30, 2001 $133,000 was receivable
from HRP and at December 31, 2000, $29,000 was payable to HRP.
Additionally, the Agreement provides that in certain cases both HRP and
the Company will have certain rights to cause the Company to acquire
HRP.
7. Stockholders' Equity
In June 1997, the Company completed a private placement of 50,000
shares of common stock, 1,000 shares of Series I Convertible Preferred
Stock, 500 shares of Series II, 10% Convertible Preferred Stock,
187,500 five-year $8.00 warrants and 187,500 five-year $12.00 warrants.
The aggregate sales price of those securities was $1,500,000.
F-17
7. Stockholders Equity (continued)
The Series I Convertible Preferred Stock is convertible into common
stock at $5.00 per share. In July 2000, the holder of the Series I
convertible preferred stock converted all 1,000 shares of preferred
stock into 200,000 shares of common stock.
The Series II 10% Convertible Preferred Stock is convertible into
common stock commencing one year from the date of issuance at the
greater of (i) $4.00 per share, or (ii) 75% of the average closing
price of the Company's common stock for the five trading days
immediately prior to the date of conversion; provided, however, that
the conversion price shall in no event exceed $10.00 per share. The
Series II, 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or
redemption in cash or, at the Company's option, in common stock at the
then-applicable conversion price. The Series II, 10% Convertible
Preferred Stock is subject to redemption, in whole or in part, at the
option of the Company on or after the second anniversary of issuance at
$4,000 per share. There were no conversions as of December 30, 2001.
Accumulated dividends in arrears totaled $226,000 and $176,000 as of
December 30, 2001 and December 30, 2000, respectively.
In July 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; (2) the Company sold 666,667 shares of
restricted common stock and 666,667 $2.00 stock purchase warrants 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.
Warrants
At December 31, 1995, the Company had outstanding 47,698 warrants
previously issued by Magellan and exercisable at a price of $8.00 per
share. These warrants expired in 2000. Additionally, in connection with
the merger and a private placement during 1995, the Company issued an
additional 25,000 warrants, which were exercisable at $12.00 per share.
These warrants expired in 2000.
In connection with the offshore placement of the Series A, 10%
Convertible Preferred Stock in June 1996, the Company issued warrants
to acquire an aggregate of 62,500 shares of the Company's common stock
at a price of $12.00 per share which expired June 17, 2001.
In June 1997, 187,500 warrants exercisable at $8.00 per share and
187,500 warrants exercisable at $12.00 per share were issued in
connection with the offering of the Series I Convertible Preferred
Stock which are scheduled to expire June 26, 2002.
F-18
7. Stockholders' Equity (Continued)
In February 1999, 17,708 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC. The exercisability of these
warrants is contingent on the accepting of renewal options with regard
to the restaurant lease for the Chicago - The Grill on the Alley, LLC.
These warrants expire June 2010.
In February 1999, 8,854 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC. The exercisability of these
warrants is contingent on the accepting of renewal options with regard
to the restaurant lease for the Chicago - The Grill on the Alley, LLC.
These warrants expire June 2015.
In February 1999, 177,083 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC. These warrants expire April 1,
2005.
In November 1999, 3,750 warrants exercisable at $2.00 were issued and
are scheduled to expire November 2004.
In connection with a $400,000 loan to the Company, the Company issued
40,000 warrants to two accredited investors in July 2000. The warrants
are exercisable for a period of four years at a price of $1.406 per
share. The warrants were issued pursuant to a privately negotiated
lending arrangement with two accredited investors pursuant to the
exemption from registration in Section 4(2) of the Securities Act of
1933, as amended. In July 2001 an additional 32,058 warrants
exercisable for a period of four years were issued in connection with
this loan at a price of $2.77 per share.
In connection with a guarantee of the Company's bank lending facility,
the Company issued 150,000 warrants in July 2000 to two principle
shareholders of the Company. The warrants are exercisable for a period
of four years at a price of $1.406 per share. The warrants were issued
pursuant to a privately negotiated guarantee of the Company's loan
facility by two directors of the Company pursuant to the exemption from
registration in Section 4(2) of the Securities Act of 1933, as amended.
In August 2001, an additional 150,000 warrants exercisable for a period
of four years were issued in connection with the guaranty at a price of
$2.12 per share.
In July 2001, in conjunction with the sale of restricted common stock
to Starwood Hotels and Resorts Worldwide, Inc. and other strategic
investors, the company issued 666,667 $2.00 stock purchase warrants and
666,666 $2.25 stock purchase warrants. The warrants expire in July
2006.
F-19
7. Stockholders' Equity (Continued)
Options
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.
A total of 1,072,500 common shares are reserved for issuance pursuant
to these plans. During the year, upon recommendation of the
Compensation Committee, 279,500 options were granted at $2.19 to $3.30.
The Plans were approved at the 1996 and 1998 annual stockholders'
meetings. The number of shares reserved under the Plans was increased
by 500,000 shares at the annual stockholders' meeting in 2001.
Transactions during the fiscal years 2001, 2000 and 1999 under the
Plans were as follows:
2001 2000 1999
------------------ --------------------- ----------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
Of Shares Option of Shares Option of Shares Option
--------- Exercise --------- Exercise --------- Exercise
Price Price Price
--------- ---------- ----------
Options outstanding at
beginning of year 381,488 $ 4.22 362,812 $ 5.05 320,275 $ 5.24
Options granted - price less
than fair value - - - - - -
Options granted -
price 179,500 2.54 92,300 1.55 121,625 4.20
equals fair value
Options granted - price greater
than fair value 100,000 3.16 - - - -
Options exercised - - - - - -
Options cancelled (117,875) 5.27 (73,624) 4.96 (79,088) 4.62
---------- ---------- --------- --------- --------- --------
Options outstanding at end of
Year 543,113 $ 3.24 381,488 $ 4.22 362,812 $ 5.05
======= ======== ========= ========= ========= ========
Options exercisable at end of
Year 188,210 234,863 227,175
Options available for grant at
end of year 529,387 191,012 209,688
F-20
7. Stockholders' Equity (Continued)
The following table summarizes information about stock options
outstanding at December 30, 2001 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Number Weighted- Number
Outstanding at Average Weighted- Outstanding at Weighted-
Range of December 30, Remaining Average December 30, Average
Exercise Price Contractual Life Exercise Price Exercise Price
-------------- -------------- ---------------- -------------- -------------- --------------
2001 2001
----- -----
$1.55 82,300 8.7 $ 1.55 16,460 $ 1.55
$2.19 to $3.30 279,500 8.8 $ 2.76 30,750 $ 3.30
$4.00 to $4.68 109,938 4.4 $ 4.26 73,675 $ 4.31
$5.36 to $6.12 71,375 3.9 $ 5.49 67,325 $ 5.50
-------- --------
543,113 188,210
======= ========
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and will continue to use the
intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized for the stock option plans.
Compensation expense for the Company's stock option plans determined
based on the fair value at the grant date for awards in fiscal year
2001, 2000 and 1999 would have decreased net income (loss) by $170,000,
$115,000 and $129,000, respectively on a pro forma basis.
2001 2000 1999
---- ---- ----
Net income (loss), as reported $ 469,000 $ 34,000 $ (406,000)
Net income (loss), pro forma $ 299,000 $ (81,000) $ (535,000)
Net income (loss) per share, as
reported:
Basic $ 0.09 $ 0.00 $ (0.11)
Diluted $ 0.09 $ 0.00 $ (0.11)
Net income (loss) per share, pro forma:
Basic $ 0.05 $ (0.03) $ (0.15)
Diluted $ 0.05 $ (0.03) $ (0.15)
The fair value of each option grant issued in fiscal year 2001, 2000
and 1999 is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
(a) no dividend yield on the Company's stock, (b) expected volatility
ranging from 63.60% to 71.25%, (c) risk-free interest rates ranging
from 4.43% to 6.00%, and (d) expected option lives of five years.
The weighted average fair value of options granted at market price
during 2001, 2000 and 1999 was $1.56, $0.98 and $0.57, respectively.
F-21
8. Unusual Charges
In 2000 the Company recorded a charge to earnings of $73,000 for the
costs related to the closure of the Pizzeria Uno restaurant in Media,
PA.
9. Pension Plan
Effective January 1, 1996, the Company established the Grill Concepts,
Inc. 401(k) Plan (the "Plan"), a defined contribution savings plan,
which is open to all employees of the Company who have completed one
year (1,000 hours in that year) of service and have attained the age of
21. The Plan allows employees to contribute up to the lesser of the
Internal Revenue Code-prescribed maximum amount or 20% of their income
on a pre-tax basis, through contribution to the Plan. The Company's
contributions are discretionary. For the years 2001, 2000 and 1999, the
Company made no contributions to the Plan.
10. Commitments and Contingencies
The Company leases most of its restaurant facilities and corporate
offices under noncancellable operating leases. The restaurant leases
generally include land and building, require various expenses
incidental to the use of the property, and certain leases require
contingent rent above the minimum lease payments based on a percentage
of sales. Certain leases also contain renewal options and escalation
clauses.
The aggregate minimum lease payments under noncancellable operating
leases are as follows:
Fiscal Year Ending
2002 $ 2,205,000
2003 2,147,000
2004 2,104,000
2005 1,976,000
2006 1,429,000
Thereafter 5,922,000
-------------
Total $ 15,783,000
=============
Rent expense was $2,906,000, $2,990,000 and $2,939,000 for fiscal years
2001, 2000 and 1999, respectively, including $337,000, $ 395,000 and
$236,000 for 2001, 2000 and 1999, respectively, for contingent rentals
which are payable on the basis of a percentage of sales in excess of
base rent amounts.
Restaurants such as those operated by the Company are subject to
litigation in the ordinary course of business, most of which the
Company expects to be covered by its general liability insurance.
However, punitive damage awards are not covered by general liability
insurance. Punitive damages are routinely claimed in litigation actions
F-22
10. Commitments and Contingencies (continued)
against the Company. No material causes of action are presently pending
against the Company. However, there can be no assurance that punitive
damages will not be given with respect to any actions that may arise in
the future.
The Company plans on new restaurant openings during 2002. The
restaurants will be structured as either joint ventures, LLCs or
management agreements. In connection with the building of the
restaurants, the Company may be obligated for a portion of the start-up
and/or construction costs.
11. Income Taxes
The provisions for income taxes for the fiscal years ended December 30,
2001 December 31, 2000 and December 26, 1999 are as follows:
2001 2000 1999
---- ---- ----
Current - federal $ - $ 9,700 $ -
Current - state 65,000 4,300 6,000
---------- ----------- --------
$ 65,000 $ 14,000 $ 6,000
========= =========== ========
The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:
2001 2000 1999
---- ---- ----
Federal tax rate 34.0% (34.0%) (34.0%)
State tax net of federal benefit 13.5% 6.20% 12.0%
Change in valuation allowance (33.0%) - -
Net operating loss for which no
tax benefit was realized - 47.4% 23.6%
Other 5.1% 11.1% -
----------- ----------- --------
Effective tax rate 19.6% 30.7% 1.6%
=========== =========== ========
F-23
11. Income Taxes (continued)
Deferred tax assets and liabilities consist of the following as of
December 30, 2001, December 31, 2000 and December 26, 1999:
2001 2000
---- ----
Deferred tax assets:
Net operating loss $ 1,212,000 $1,090,000
Fixed Assets 416,000 806,000
Intangibles 62,000 170,000
General business credit 640,000 721,000
Other 110,000 77,000
----------- ----------
Total gross deferred 2,440,000 2,864,000
tax assets
Less, Valuation allowance (2,260,000) (2,697,000)
----------- -----------
Net deferred tax assets 180,000 167,000
Deferred tax liabilities:
Intangible assets (180,000) (167,000)
----------- -----------
Net deferred tax
assets and liabilities $ - $ -
=========== ===========
At December 30, 2001, the Company has available federal and state net
operating loss carryforwards of $ 2,394,000 and $3,983,000
respectively, that may be utilized to offset future federal and state
taxable earnings. Federal net operating losses begin to expire in 2014.
The remaining state net operating losses begin expiring in 2002. A full
valuation allowance has been established to reduce net deferred tax
assets to the amount expected to be realized.
12. Store Openings
On December 31, 1998, the Company signed and executed a joint venture
agreement with Universal Studios, Inc. to open a Daily Grill restaurant
at Universal Studios CityWalk Hollywood, California. This restaurant
opened in July 1999 and has a year ending of June 30.
In connection with the building of a new restaurant in February 1999,
Chicago - The Grill on the Alley LLC ("Chicago LLC") was formed for the
operation of a "The Grill" restaurant at the Chicago Westin Hotel in
Chicago, Illinois. The Chicago LLC was financed through a combination
of equity capital and a secured convertible promissory note. See Note 6
for information on the terms of the note.
F-24
12. Store Openings (continued)
In connection with the building of a new restaurant in July 2001, The
Grill on Hollywood, LLC was formed for the operation of a Grill
restaurant at the new Hollywood and Highland upscale entertainment and
shopping complex in Hollywood, California. The construction of the
restaurant was financed through a combination of equity capital and
tenant improvement allowances. The restaurant opened on November 9,
2001.
The Company began management of a San Francisco hotel-based Daily Grill
restaurant in February 2002. The Company will be responsible for
approximately $250,000 of pre-opening costs in San Francisco.
Store Closings
In November 1999, the Company ceased to operate the Daily Grill
restaurant in Salt Lake City, Utah.
As noted in Note 8, the Company ceased to operate the Pizzeria Uno
restaurant in Media, Pennsylvania in July 2000.
In July 2001, the Company finalized its sale of its Pizzeria Uno
restaurant in South Plainfield, New Jersey for $700,000 less legal and
other sale related fees of $45,000. The gain of $225,000 from the sale
was reported as a reduction of restaurant operating expenses. The
Company is also seeking a suitable buyer for its Pizzeria Uno
restaurant located in Cherry Hill, New Jersey.
F-25
13. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for fiscal years 2001and 2000
is as follows:
Quarter Ended
---------------------------------------------------------------
April 1, July 1, September 30, December 30,
2001 2001 2001 2001
---------- ---------- ------------- ------------
Total revenues $ 12,435,000 $ 11,300,000 $ 10,140,000 $ 11,526,000
Gross profit 9,063,000 8,163,000 7,314,000 8,445,000
Income (loss) from operations 403,000 (18,000) 171,000 170,000
Net income (loss) 329,000 (74,000) 54,000 160,000
Basic net income (loss) per share $ 0.08 $ (0.02) $ 0.01 $ 0.03
Diluted net income (loss) per share $ 0.08 $ (0.02) $ 0.01 $ 0.03
March 28, June 25, September 24, December 31,
2000 2000 2000 2000
---------- ----------- ------------- ------------
Total revenues $ 10,826,000 $ 10,341,000 $ 10,933,000 $ 13,576,000
Gross profit 7,816,000 7,403,000 7,671,000 9,784,000
Income (loss) from operations 403,000 (223,000) (42,000) 295,000
Net income (loss) 273,000 (120,000) (120,000) 1,000
Basic net income (loss) per share $ 0.07 $ (0.03) $ (0.03) $ 0.00
Diluted net income (loss) per share
$ 0.07 $ (0.03) $ (0.03) $ 0.00
F-26