SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the transition period from to .
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Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of principal executive offices) (Zip Code)
(310) 820-5559
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(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May12, 2003, 5,537,071 shares of Common Stock of the issuer were
outstanding.
1
GRILL CONCEPTS, INC.
--------------------
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - March 30, 2003
and December 29, 2002 3
Consolidated Condensed Statements of Operations - For the three
months ended March 30, 2003 and March 31, 2002 5
Consolidated Condensed Statements of Cash Flows - For the three
months ended March 30, 2003 and March 31, 2002 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 30, December 29,
2003 2002
------------ --------------
(unaudited)
Current assets:
Cash and cash equivalents $ 984,000 $ 1,275,000
Inventories 491,000 469,000
Receivables, net of reserve ($46,000 in 2003 and 2002) 834,000 549,000
Prepaid expenses & other current assets 792,000 527,000
------------- --------------
Total current assets 3,101,000 2,820,000
Furniture, equipment and improvements, net 8,534,000 8,768,000
Goodwill 205,000 205,000
Liquor licenses 318,000 332,000
Restricted cash 150,000 616,000
Advance to managed outlets 351,000 351,000
Note receivable 122,000 121,000
Other assets 441,000 452,000
------------- --------------
Total assets $ 13,222,000 $ 13,665,000
============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
March 30, December 29,
2003 2002
------------- --------------
(unaudited)
Current liabilities:
Accounts payable $ 969,000 $ 978,000
Accrued expenses 2,159,000 2,454,000
Current portion of long term debt 412,000 403,000
Notes payable - related parties 310,000 306,000
------------- ----------------
Total current liabilities 3,850,000 4,141,000
Long-term debt 431,000 538,000
Notes payable - related parties 398,000 438,000
------------- ----------------
Total liabilities 4,679,000 5,117,000
Minority interest 2,018,000 2,370,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
Value; 1,000,000 shares authorized, none
Issued and outstanding in 2003 and 2002 - -
Series II, 10% Convertible Preferred Stock, $.001 par
Value; 1,000,000 shares authorized, 500 shares issued
And outstanding in 2003 and 2002 - -
Common stock, $.00004 par value; 12,000,000 shares
Authorized in 2003 and 2002, 5,537,071 issued and
Outstanding in 2003 and 2002 - -
Additional paid-in capital 13,152,000 13,152,000
Accumulated deficit (6,627,000) (6,974,000)
------------- ----------------
Total stockholders' equity 6,525,000 6,178,000
Total liabilities, minority interest and stockholders' equity $13,222,000 $ 13,665,000
============ ================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
------------------
March 30, March 31,
2003 2002
------------ ------------
Revenues:
Sales $11,667,000 $11,550,000
Management and license fees 255,000 222,000
------------ ------------
Total revenues 11,922,000 11,772,000
Cost of sales 3,174,000 3,181,000
------------ ------------
Gross Profit 8,748,000 8,591,000
------------ ------------
Operating expenses:
Restaurant operating expenses 6,995,000 7,033,000
Gain on disposal of assets (12,000) -
General and administrative 907,000 929,000
Depreciation and amortization 432,000 371,000
Pre-opening costs 187,000 -
------------ ------------
Total operating expenses 8,509,000 8,333,000
------------ ------------
Income from operations 239,000 258,000
Interest expense, net (48,000) (45,000)
------------ ------------
Income before provision for income taxes, equity in
loss of joint venture and minority interest 191,000 213,000
Provision for income taxes (55,000) (18,000)
Minority interest in net loss of subsidiaries 216,000 53,000
Equity in loss of joint venture (5,000) (5,000)
------------ ------------
Net income 347,000 243,000
------------ ------------
Preferred dividends accrued or paid (13,000) (13,000)
------------ ------------
Net income applicable to common stock $ 334,000 $ 230,000
============ ============
Net income per share applicable to common stock:
Basic net income $ 0.06 $ 0.04
============ ============
Diluted net income $ 0.06 $ 0.04
============ ============
Weighted average share outstanding:
Basic 5,537,071 5,537,071
============ ============
Diluted 5,537,071 5,537,071
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
--------------------
March 30, March 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 347,000 $ 243,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 432,000 371,000
Gain on sale of liquor license (12,000) -
Minority interest in loss of subsidiaries (216,000) (53,000)
Equity in loss of joint venture 5,000 5,000
Changes in operating assets and liabilities:
Inventories (22,000) 54,000
Receivables (285,000) (134,000)
Prepaid expenses and other current assets (269,000) (195,000)
Liquor licenses and other assets (4,000) (3,000)
Accounts payable (9,000) (14,000)
Accrued expenses (316,000) (288,000)
--------------- -----------
Net cash used in operating activities (349,000) (14,000)
--------------- -----------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (184,000) (360,000)
Release of restricted cash 466,000 -
Proceeds from liquor license 26,000 -
Advance to managed outlets - (250,000)
--------------- -----------
Net cash provided by (used in) investing activities 308,000 (610,000)
--------------- -----------
Cash flows from financing activities:
Payments on related party debt (36,000) (34,000)
Payments on long term debt (98,000) (89,000)
Return of capital to minority shareholder (72,000) -
Preferred return to minority shareholder (44,000) (44,000)
--------------- -----------
Net cash used in financing activities (250,000) (167,000)
--------------- -----------
Net decrease in cash and cash equivalents (291,000) (791,000)
Cash and cash equivalents, beginning of period 1,275,000 2,300,000
--------------- -----------
Cash and cash equivalents, end of period $ 984,000 $1,509,000
================ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 38,000 $ 50,000
Income taxes $ 16,000 $ 39,000
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have not
been audited by independent accountants. The December 29, 2002 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Form 10-K dated
December 29, 2002. In the opinion of management, these interim financial
statements reflect all adjustments of a normal recurring nature necessary for a
fair statement of the results for the interim periods presented. The current
period results of operations are not necessarily indicative of results, which
ultimately will be reported for the full year ending December 28, 2003.
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. RESTRICTED CASH
Capital contributions from both the Company and the minority member of The Daily
Grill at Continental Park, LLC ("South Bay Daily Grill") have been deposited
into an escrow account. The escrow agent is issuing checks directly to the
contractor or to the Company for payment to other vendors for expenses
associated with the construction of the new restaurant and pre-opening
activities.
3. RECENTLY ISSUSED ACCOUNTING REQUIREMENTS
In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Standards No. 145, ("SFAS 145"), "Rescission of FAS Nos. 4, 44 and
64, Amendment of FAS 13, and Technical Corrections." Among other things, SFAS
145 rescinds various pronouncements regarding early extinguishment of debt and
allows extraordinary accounting treatment for early extinguishment only when the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations and Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
are met. SFAS 145 provisions regarding early extinguishment of debt are
generally effective for fiscal years beginning after May 15, 2002. Adoption of
this statement has not had a material impact on our consolidated financial
statements.
In July 2002, the FASB issued Statement of Financial Standards No. 146, ("SFAS
146"), "Accounting for Costs Associated with Exit or Disposal Activities," which
superceded EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." SFAS 146 requires
that a liability for a cost associated with an exit activity or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. EITF Issue No. 94-3 requires recognition of a liability
at the date an entity commits to an exit plan. All provisions of SFAS 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002. Adoption of this statement has not had a material impact on our
consolidated financial statements.
7
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 required that upon
issuance of a guarantee, the entity (i.e., the guarantor) must recognize a
liability for the fair value of the obligation it assumes under the guarantee.
FIN 45's provisions for initial recognition and measurement will be effective on
a prospective basis to guarantees issued or modified after December 31, 2002.
Consistent with the provisions of FIN 45, the Company will apply this statement
prospectively. As required by FIN 45, the disclosure provisions, when required,
have been included in the Company's consolidated financial statements for the
three months ended March 30, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling interest' model of Accounting
Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial Statements" or,
alternatively, (2) whether the variable interest model under FIN 46 should be
used to account for existing and new entities. The variable interest model of
FIN 46 looks to identify the "primary beneficiary" of a variable interest
entity. The primary interest entity would be required to be consolidated if
certain conditions are met. FIN 46 effective dates and transition provisions
will be required to be applied to preexisting entities as of the first interim
period beginning after June 15, 2003. Management does not believe that the
adoption of this statement will have a material impact on our consolidated
financial statements.
4. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Operating Agreement for San Jose Grill LLC, stipulates that distributions of
distributable cash shall be made first, 10% to the manager and 90% to the
members in the ratio of their percentage interests until the members have
received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the members in the ratio of
their percentage interests until the additional capital contributions have been
repaid. Thereafter, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and of the balance 50.05% to the Company and
49.05% to the minority member. In March 2003 a distribution of distributable
cash in the amount of $72,000 was made to the minority member that reduced the
member's interest. The minority member's unrecovered capital contribution at
March 30, 2003 was $78,000.
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 capital contribution. Preferred return payments of $44,000
were paid to the non-manager member during the first quarter of 2003. These
payments are treated as a reduction of equity. Payments returning $11,000 of
converted capital contribution were made in the first quarter of 2003. The
minority member's unrecovered capital contribution at March 30, 2003 was
$706,000. If there is sufficient cash for distribution after payment of the
preferred return and converted capital, it would go first to the manager member
to repay capital contributions and thereafter, 60% to the Company and 40% to the
minority member.
8
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-manager 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 51% to the Company and 49% to the minority member. No
distribution of distributable cash has been made through March 30, 2003. The
minority member's unrecovered capital contribution at March 30, 2003 was
$1,200,000.
The Operating Agreement for the Daily Grill at Continental Park, LLC stipulates
that both members are entitled to a 10% preferred return on their unrecovered
capital contribution. Additionally, the manager member is entitled to a 10%
preferred return on unpaid management fees. Distributions of distributable cash
shall be made first to the manager member until all deferred management fees
have been paid. Second, ratably to the members until additional capital
contributions, it any, and preferred returns have been paid. Third, $300,000
payable 2/3 to the non-manager member and 1/3 to the manager member. Fourth, 90%
to the non-manager member and 10% to the manager member until the non-manager
member has received all accrued and unpaid preferred return. Fifth, 90% to
non-manager member and 10% to the manager member until the non-manager's capital
contribution has been recovered. Sixth, 90% to the manager member and 10% to the
non-manager member until the manager member has received any accrued and unpaid
preferred return. Seventh, 90% to the manager member and 10% to the non-manager
member until the manager member has recovered all their capital contribution.
Thereafter, 50.1% to the Company and 49.9% to the minority member. No
distribution of distributable cash has been made in 2003. The minority member's
unrecovered capital contribution at March 30, 2003 was $1,000,000.
5. 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.
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 the first quarter of 2003 and 2002 would have decreased net
income by $42,000 and $42,000, respectively on a pro forma basis.
9
2003 2002
-------- --------
Net income, as reported $334,000 $230,000
Net income (loss), pro forma $292,000 $188,000
Net income per share, as reported:
Basic $ 0.06 $ 0.04
Diluted $ 0.06 $ 0.04
Net income (loss) per share, pro forma:
Basic $ 0.05 $ 0.03
Diluted $ 0.05 $ 0.03
6. PER SHARE DATA
Pursuant to SFAS No. 128, "Earnings Per Share," basic net income per share is
computed by dividing the net income attributable to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income attributable to
common shareholders by the weighted-average number of common and common
equivalent shares outstanding during the period. Common share equivalents
included in the diluted computation represent shares issuable upon assumed
exercise of stock options, warrants and convertible preferred stocks using the
treasury stock method.
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the quarters ended March 30, 2003 and March 31, 2002 follow:
2003 2002
Earnings Shares Earnings Shares
--------------------------------------------
Net income $ 347,000 $ 243,000
Less: preferred stock dividend (13,000) (13,000)
---------- ----------
Earnings available for common stockholders
334,000 5,537,071 230,000 5,537,071
Dilutive securities:
Stock options - - - -
Warrants - - - -
---------- --------- ---------- ---------
Dilutive earnings available to common stockholders
$ 334,000 5,537,071 $ 230,000 5,537,071
==============================================
Stock options for 664,525 and 536,813 shares for 2003 and 2002, respectively,
were excluded from the calculation of diluted earnings per share because they
were anti-dilutive. Warrants for 1,922,786 and 2,297,786 shares for 2003 and
2002, respectively, were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. 500 shares of preferred stock were
excluded from the calculation of diluted earnings per share because they were
anti-dilutive for both 2003 and 2002.
10
7. ADVANCES TO MANAGED OUTLETS
On February 25, 2002 the Company began management of the San Francisco Daily
Grill in the Handlery Hotel near Union Square in San Francisco, California. The
Company advanced approximately $287,000 to the restaurant during 2002 that will
be reimbursed through future operations.
In July 2002 the Company began management of a Daily Grill restaurant in the
Westin Galleria in Houston, Texas. The Company advanced approximately $64,000
to the restaurant for initial working capital during 2002 that will be repaid
from future cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this Form
10-Q. Except for the historical information contained herein, the discussion in
this Form 10-Q contains certain forward looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward looking statements
wherever they appear in this Form 10-Q. The Company's actual results could
differ materially from those discussed here. For a discussion of certain factors
that could cause actual results to be materially different, refer to the
Company's Annual Report on Form 10-K for the year ended December 29, 2002.
11
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total operating revenues, except where otherwise noted.
Three Months Ended
------------------
March 30, March 31,
2003 2002
---------- ----------
% %
Revenues:
Company restaurant sales 97.9 98.1
Management and license fees 2.1 1.9
---------- ----------
Total revenues 100.0 100.0
Cost of sales 26.6 27.0
---------- ----------
Gross profit 73.4 73.0
---------- ----------
Restaurant operating expenses 58.7 59.7
Gain on sale of liquor license (0.1) -
General and administrative 7.6 7.9
Depreciation and amortization 3.6 3.2
Pre-opening costs 1.6 0.0
---------- ----------
Total operating expenses 71.4 70.8
---------- ----------
Operating income 2.0 2.2
Interest expense, net (0.4) (0.4)
---------- ----------
Income before taxes, equity in loss of joint
venture and minority interest 1.6 1.8
Provision for income taxes (0.5) (0.2)
Minority interest 1.8 0.5
Equity in loss of joint venture 0.0 0.0
---------- ----------
Net income 2.9 2.1
=========== ==========
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
First Quarter Total open at
Openings End of Quarter
------------------- ----------------
FY 2003 FY 2002 FY 2003 FY 2002
Daily Grill Restaurants:
Company owned 1 - 10 10
Managed and/or licensed - 1 6 5
Grill on the Alley restaurants:
Company owned - - 4 4
Pizza restaurants - - - 1
Other restaurants
Managed and/or licensed - - 1 1
------- ------- ------- -------
Total 1 1 21 21
======= ======= ======= =======
12
Three Months Ended
---------------------------------
March 30, 2003 March 31, 2002
---------------- ----------------
Weighted average weekly sales per company
owned restaurant:
Daily Grill $ 67,800 $ 61,200
Grill on the Alley 75,500 76,500
Pizza restaurants n.a. 31,100
Change in comparable restaurants (1)
Daily Grill 3.4% (8.7)%
Grill on the Alley (1.3)% (8.3)%
Pizza restaurants n.a. (11.9)%
Total Company revenues:
Daily Grill $ 7,739,000 $ 7,166,000
Grill on the Alley 3,928,000 3,980,000
Pizza restaurants - 404,000
Management and license fees 255,000 222,000
---------------- ----------------
Total consolidated revenues 11,922,000 11,772,000
---------------- ----------------
Managed restaurants sales 3,302,000 2,795,000
Licensed restaurants sales 2,295,000 1,447,000
Less management and license fees (255,000) (222,000)
---------------- ----------------
Total system sales $ 17,264,000 $ 15,792,000
================= ================
(1) When computing comparable restaurant sales, restaurants open for at
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 30,
2003 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002.
The Company's results fully consolidate sales for owned restaurants, but include
only management and license fee income from the managed and licensed
restaurants. The Company operated 14 owned restaurants, 4 managed restaurants
and licensed its name and recipes to 3 others during the quarter ended March 30,
2003. The Company operated 15 owned restaurants, 4 managed restaurants and
licensed its name and recipes to 2 others during the quarter ended March 31,
2002. The 2003 period includes the operations of the Company's South Bay Daily
Grill restaurant that opened in January 2003 and management fees for the San
Francisco Daily Grill that opened February 25, 2002 and the Houston Daily Grill
that opened July 10, 2002. The 2002 period includes the operations of the
Cherry Hill, New Jersey Pizzeria Uno restaurant that was sold in April 2002 and
the Encino Daily Grill that was closed in April 2002.
The Company's revenues for the quarter increased 1.3% to $11,922,000 from
$11,772,000 for the same period in 2002. Total revenues included $11,667,000 of
sales revenues and $255,000 of management and licensing fees in 2003 as compared
to $11,550,000 of sales revenues and $222,000 of management and licensing fees
in 2002. The increase of $117,000, or 1.0%, in sales revenues is primarily
attributable to the opening of the South Bay Daily Grill ($793,000), and
increased same store sales at Daily Grill restaurants ($233,000), partially
offset by lower same store sales at the Grill restaurants ($52,000) and the
closure of the Encino Daily Grill ($452,000) and Pizzeria Uno in Cherry Hill
($404,000). Same store sales (for restaurants open at least 12 months)
increased 1.7% due to increased guest traffic at the Daily Grill restaurants
($136,000) and increased average ticket at both the Daily Grill and Grill
restaurants ($461,000), partially offset by decreased guest traffic at Grill
restaurants ($415,000).
13
Cost of sales decreased 0.2% and decreased as a percentage of sales from 27.0%
to 26.6%. This decrease in cost of sales as a percentage of sales during the
2003 period is principally attributable to menu refinements and related sales
mix as well as cost reductions resulting from improved purchasing. As a result,
dollar gross profit increased 1.8% from $8,591,000 (73.0% of sales) in 2002 to
$8,748,000 (73.4% of sales) in 2003.
Restaurant operating expenses decreased 0.5% to $6,995,000 in 2003 from
$7,033,000 in 2002. The dollar decrease in restaurant operating expenses was
primarily attributable to the closure of the Encino Daily Grill ($355,000) and
the Cherry Hill Pizzeria Uno ($331,000), offset by an increase in variable costs
($65,000), payroll benefits ($40,000) and miscellaneous expenses ($24,000) for
comparable restaurants, and the opening of the South Bay Daily Grill ($522,000).
Restaurant operating expenses as a percentage of sales decreased from 59.7% in
2002 to 58.7% in 2003. The decrease in restaurant operating expense as a
percentage of sales reflects improved margins at newly opened restaurants as
compared to restaurants that closed during 2002 while comparable restaurants
remained flat.
Gain on sale of liquor license in 2003 was related to selling the Encino Daily
Grill's liquor license.
General and administrative expenses decreased 2.4% to represent 7.6% of sales in
the 2003 three month period while amounting to 7.9% of sales in the 2002 three
month period. Decreased spending in many expense categories, including
recruitment fees and professional services, resulted from cost savings
initiatives partially offset by increases in payroll and related benefits.
Depreciation and amortization expense increased 16.4% for the 2003 three month
period representing 3.6% of sales in 2003 and 3.2% of sales in 2002 primarily
due to the opening of the South Bay Daily Grill ($41,000).
The 2002 three month operations also reflect income due to a minority interest
in the net loss of subsidiaries of $216,000 from San Jose Grill, LLC, the
Chicago Grill on the Alley, LLC, The Grill on Hollywood, LLC and The Daily Grill
at Continental Park, LLC compared to $53,000 in 2002 from the San Jose Grill
LLC, the Chicago Grill on the Alley, LLC and The Grill on Hollywood, LLC. The
increase in the income due to a minority interest in the net loss of
subsidiaries is due to the Daily Grill at Continental Park, LLC ($147,000).
The Company incurred a charge in 2003 and 2002 of $5,000 for its equity in the
loss of joint venture, which reflects the Company's proportionate share of
contributed capital in the Daily Grill Short Order at Universal Studios
CityWalk.
The Company recorded $55,000 of income tax provision for the three month period
in 2003 compared to $18,000 in 2002 due to the loss of state net operating loss
carryforwards and increased minimum LLC taxes.
The Company reported accrued dividends on preferred stock of $13,000 in each of
the three-month periods ending March 30, 2003 and March 31, 2002.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At March 30, 2003 the Company had negative working capital of $0.7 million and a
cash balance of $1.0 million compared to negative working capital of $1.3
million and a cash balance of $1.3 million at December 29, 2002.
14
Net cash used in operations during the quarter ended March 30, 2003 totaled
$349,000 compared to $14,000 during the quarter ended March 31, 2002. The
adverse change in operating cash flow during the current period related
primarily to reducing accrued payroll by one week ($311,000), increasing
management fees receivable and other amounts from managed outlets ($141,000),
amounts receivable from hotel partners ($132,000), prepaid insurance ($197,000),
prepaid licenses ($28,000) and minority interest in subsidiaries ($216,000),
partially offset by operating income ($347,000) and depreciation and
amortization ($432,000).
Net cash provided by investing activities during the quarter ended March 30,
2003 totaled $308,000 as compared to cash used by investing activities of
$610,000 during the quarter ended March 31, 2002. Cash provided by investing
activities during the current period related to disbursements of restricted cash
for payment of construction and pre-opening costs at the South Bay Daily Grill
and proceeds from the sale of the Encino Daily Grill liquor license, partially
offset by the purchases of furniture, equipment and improvements.
Net cash used in financing activities during the quarter ended March 30, 2003
totaled $250,000 as compared to $167,000 during the quarter ended March 31,
2002. Cash used in financing activities during the current period related to
reductions in debt ($134,000), payment of preferred returns to minority
investors in Chicago - the Grill on the Alley, LLC ($44,000) and return of
capital contributions to the minority member of San Jose Grill, LLC ($72,000).
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of stock, the issuance of warrants, loans and tenant allowances from
certain of its landlords and, beginning in 1998, through joint venture
arrangements. At March 30, 2003, the Company had a bank credit facility with
nothing owing, a loan from a member of Chicago - The Grill on the Alley, LLC of
$0.4 million, an SBA loan of $0.1 million, loans from stockholders/officers of
$0.3 million, equipment loans of $0.7 million and loans/advances from a landlord
and others of $0.1 million.
Under certain of its operating and management agreements the Company has an
obligation to potentially make additional cash advances and/or contributions and
may not realize any substantial returns for some time. The CityWalk management
agreement requires that each member loan, interest free, to the joint venture 50
percent of any operating deficit forecast for the next quarter such loans to be
repaid out of the first cash available from operations. The management
agreement for the San Francisco Daily Grill stipulates that if in any month
there is insufficient working capital to pay operating expenses, excluding
payments to the Company or the Owner, the Company will pay one-half of the
required working capital; such advances are to be repaid prior to deferred
payments to the Company or Owner. The Operating Agreement and the Senior
Promissory Note for Chicago - The Grill on the Alley, LLC stipulates that the
non-manager member shall receive a preferred return of eight percent on their
capital contribution and a payment on their converted capital prior to any
distribution of cash. The Operating Agreement for The Grill on Hollywood, LLC
stipulates that 90% of distributable cash shall go to the non-manager member
until their preferred return, unrecovered contribution and any additional
contribution have been returned. The Operating Agreement for San Jose Grill,
LLC stipulates that distributable cash shall be paid first 10% to the manager
and 90% to the members in proportion to their ownership percentage until initial
capital is recovered, then as a preferred return on the capital contributions to
both members in proportion to their ownership percentage and finally 16 2/3% to
the manager and the balance to the members in proportion to their ownership
percentages.
15
Management anticipates that new non-hotel based restaurants will cost between $1
million and $2 million per restaurant to build and open depending upon the
location and available tenant allowances. Hotel based restaurants may involve
remodeling existing facilities. Substantial capital contributions from the
hotel operators and other factors will cause the cost to the Company of opening
such restaurants to be substantially less than the Company's cost to build and
open non-hotel based restaurants.
The Company may enter into investment/loan arrangements in the future on terms
similar to the LLC arrangements to provide for the funding of selected
restaurants. Management believes that the Company has adequate resources on
hand and operating cash flow to sustain operations for at least the following 12
months and to open at least one restaurant. In order to fund the opening of
additional restaurants, the Company may require additional capital that may be
raised through additional bank borrowings, 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.
In January 2003, the Company sold the liquor license of its Encino Daily Grill
for $26,000 resulting in a gain of $12,000.
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 four 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's 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.
16
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.
Based on the Company's review of its presently operating restaurants and other
long-lived assets, during the quarter ended March 30, 2003, the Company recorded
no impairments of its long-lived assets.
FUTURE ACCOUNTING REQUIREMENTS
In May 2002, the FASB issued SFAS 145, "Rescission of FAS 4, 44 and 64,
Amendment of FAS 13, and Technical Corrections." Among other things, SFAS 145
rescinds various pronouncements regarding early extinguishment of debt and
allows extraordinary accounting treatment for early extinguishment only when the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" are
met. SFAS 145 provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. Adoption of this
statement has not had a material impact on our consolidated financial
statements.
In July 2002, the FASB issued Statement of Financial Standards No. 146, ("SFAS
146"), "Accounting for Costs Associated with Exit or Disposal Activities," which
superceded EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." SFAS 146 requires
that a liability for a cost associated with an exit activity or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. EITF Issue No. 94-3 requires recognition of a liability
at the date an entity commits to an exit plan. All provisions of SFAS 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002. Adoption of this statement has not had a material impact on our
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 required that upon
issuance of a guarantee, the entity (i.e., the guarantor) must recognize a
liability for the fair value of the obligation it assumes under the guarantee.
FIN 45's provisions for initial recognition and measurement will be effective on
a prospective basis to guarantees issued or modified after December 31, 2002.
Consistent with the provisions of FIN 45, the Company will apply this statement
prospectively. As required by FIN 45, the disclosure provisions, when required,
have been included in the Company's consolidated financial statements for the
three months ended March 30, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results of operations.
17
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling interest' model of Accounting
Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial Statements" or,
alternatively, (2) whether the variable interest model under FIN 46 should be
used to account for existing and new entities. The variable interest model of
FIN 46 looks to identify the "primary beneficiary" of a variable interest
entity. The primary interest entity would be required to be consolidated if
certain conditions are met. FIN 46 effective dates and transition provisions
will be required to be applied to preexisting entities as of the first interim
period beginning after June 15, 2003. Management does not believe that the
adoption of this statement will have a material impact on our consolidated
financial statements.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of new restaurants during 2003 and the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 29, 2002, the following developments may impact future operating
results and financial condition.
In October 2002, the Company signed a lease to open a hotel-based Daily Grill
restaurant in the Hyatt Hotel in Bethesada, Maryland. The restaurant is
scheduled to open in the third quarter of 2003. The anticipated construction
and pre-opening cost of $2,164,000 will be funded by a landlord construction
allowance of $1,800,000 and $364,000 by the Company.
The Company is in discussions to open a managed Daily Grill in Portland, Oregon
in the third quarter of 2003.
The Company is subject to a claim filed with the California Labor Commissioner
relating to the alleged failure to provide required meal breaks to a former
employee. See "Part II - Item 1. Legal Proceedings."
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; or that additional hotels will elect to
retain the Company's hotel restaurant management services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its non-revolving credit facility (the "Credit
Facility"). There were no borrowings outstanding under the Credit Facility at
March 30, 2003. Borrowings under the Credit Facility bear interest at the
lender's reference rate plus 0.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c))
as of a date (the "Evaluation Date") within 90 days before the filing date of
this quarterly report, have concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed to ensure that
material information relating to us and our consolidated subsidiaries would be
made known to them by others within those entities.
There were no significant changes in our internal controls or to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the Evaluation Date.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2003 we were provided with a Notice of Claim and Conference from
the Labor Commissioner of the State of California relating to a claim asserted
by a former employee alleging that we failed to give the employee meal breaks as
required by California law. Under the California Labor Code, an employer must
pay each employee one additional hour of pay at the employee's regular rate of
compensation for each work day that the required meal or rest period is not
provided. The plaintiff also alleges that additional penalties are owed as a
consequence of a resulting failure to pay all wages due. The amount claimed by
the plaintiff to be owed for alleged violations of California meal break laws is
$3,663. A conference before the California Labor Commissioner is scheduled for
June 12, 2003 to consider the validity of the plaintiff's claims. We believe
that all of our employees were provided with the opportunity to take all
required meal and rest breaks. Additionally we believe all terminated employees
have been paid fairly and in compliance with federal, state and/or local laws
and as such, we intend to vigorously defend our position. Because a
determination has not as yet been made by the Labor Commissioner as to whether
we satisfied the requirements of California law relating to meal and rest
periods, we cannot estimate the potential liability, if any, which may arise
from such claim. However, if an adverse determination is made and is extended
to other employees we could potentially be liable for substantial amounts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: May 12, 2003
By: /s/ Robert Spivak
-------------------------------------
Robert Spivak
President and Chief Executive Officer
By: /s/ Daryl Ansel
-------------------------------------
Daryl Ansel
Principal Accounting Officer
20
CERTIFICATIONS
I, Robert Spivak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grill Concepts,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 12, 2003
By: /s/ Robert Spivak
-----------------------
Robert Spivak
Chief Executive Officer
21
I, Daryl Ansel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grill Concepts,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 12, 2003
By: /s/ Daryl Ansel
---------------------------
Daryl Ansel
Chief Financial Officer
22
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF TEHE SARBANES-OXLEY ACT OF 2002
I, Robert Spivak, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Grill Concepts, Inc. on Form 10-Q for the quarterly period ended March
30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-Q
fairly presents in all material respects the financial condition and results of
operations of Grill Concepts, Inc.
By: /s/Robert Spivak
------------------
Name: Robert Spivak
Title: Chief Executive Officer
May 12, 2003
I, Daryl Ansel, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
Grill Concepts, Inc.on Form 10-Q for the quarterly period ended March 30, 2003
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Form 10-Q fairly
presents in all material respects the financial condition and results of
operations of Grill Concepts, Inc.
By: /s/ Daryl Ansel
------------------
Name: Daryl Ansel
Title: Chief Financial Officer
May 12, 2003
23