SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
------------------ --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of principal executive offices)(Zip code)
(310) 820-5559
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 November 7, 2003, 5,537,071 shares of Common Stock of the issuer were
outstanding.
GRILL CONCEPTS, INC.
----------------------
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 28, 2003 and December 29, 2002 2
Consolidated Condensed Statements of Operations -
For the three months and nine months ended September
28, 2003 and September 29, 2002 4
Consolidated Condensed Statements of Cash Flows -
For the nine months ended September 28, 2003 and
September 29, 2002 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September 28, December 29,
2003 2002
------------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,082,000 $ 1,275,000
Inventories 509,000 469,000
Receivables, net of reserve ($46,000 in
2003 and 2002) 630,000 549,000
Prepaid expenses and other current assets 914,000 527,000
------------- -----------
Total current assets 3,135,000 2,820,000
Furniture, equipment, & improvements, net 8,161,000 8,768,000
Goodwill, net 205,000 205,000
Restricted cash 72,000 616,000
Note receivable 115,000 121,000
Liquor licenses 318,000 332,000
Advance to managed outlet 287,000 351,000
Other assets 441,000 452,000
------------- -----------
Total assets $ 12,734,000 $13,665,000
============= ===========
The accompanying notes are an integral part of these consolidated condensed financial statements.
2
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
September 28, December 29,
2003 2002
------------- ---------------
(unaudited)
Current liabilities:
Accounts payable $ 1,266,000 $ 978,000
Accrued expenses 2,261,000 2,454,000
Current portion of long term debt 365,000 403,000
Notes payable - related parties 313,000 306,000
------------- ---------------
Total current liabilities 4,205,000 4,141,000
Long-term debt 277,000 538,000
Notes payable - related parties 318,000 438,000
------------- ---------------
Total liabilities 4,800,000 5,117,000
Minority interest 1,521,000 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 shares
issued and outstanding in 2003 and 2002 - -
Additional paid-in capital 13,152,000 13,152,000
Accumulated deficit (6,739,000) (6,974,000)
------------- ---------------
Total stockholders' equity 6,413,000 6,178,000
------------- ---------------
Total liabilities, minority interest and
stockholders' equity $ 12, 734,000 $13,665,000
============= ===============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 28, September 29, September 28, September29,
2003 2002 2003 2002
----------- ------------- ------------ -----------
Revenues:
Sales $ 10,509,000 $ 9,231,000 $ 33,695,000 $ 30,843,000
Management and license fees 278,000 236,000 795,000 704,000
-------------- -------------- -------------- -------------
Total revenues 10,787,000 9,467,000 34,490,000 31,547,000
Cost of sales 2,968,000 2,610,000 9,364,000 8,571,000
-------------- -------------- -------------- -------------
Gross profit 7,819,000 6,857,000 25,126,000 22,976,000
-------------- -------------- -------------- -------------
Operating expenses:
Restaurant operating expenses 6,930,000 6,054,000 20,972,000 19,533,000
Gain on disposal of assets - - (12,000) (71,000)
General and administrative 934,000 926,000 2,750,000 2,792,000
Depreciation and amortization 411,000 364,000 1,200,000 1,092,000
Preopening expenses - - 187,000 -
-------------- -------------- -------------- -------------
Total operating expenses 8,275,000 7,344,000 25,097,000 23,346,000
-------------- -------------- -------------- -------------
Income (loss) from operations (456,000) (487,000) 29,000 (370,000)
Interest expense, net (49,000) (59,000) (141,000) (160,000)
-------------- -------------- -------------- -------------
Loss before benefit (provision) for
income taxes, equity in loss of joint
venture and minority interest (505,000) (546,000) (112,000) (530,000)
Benefit (provision) for income taxes 13,000 (2,000) (68,000) (22,000)
Minority interest 161,000 107,000 425,000 301,000
Equity in income (loss) of joint
venture 1,000 (1,000) (10,000) (13,000)
-------------- -------------- -------------- -------------
Net income (loss) (330,000) (442,000) 235,000 (264,000)
Preferred dividends accrued or paid (12,000) (12,000) (38,000) (38,000)
-------------- -------------- -------------- -------------
Net income (loss) applicable to
common stock $ (342,000) $ (454,000) $ 197,000 $ (302,000)
=============== ============== ============== =============
Net income (loss) per share applicable
to common stock:
Basic $(0.06) $(0.08) $0.04 $(0.05)
======== ======= ====== =========
Diluted $(0.06) $(0.08) $0.04 $(0.05)
======== ======= ====== =========
Weighted average shares outstanding:
Basic 5,537,071 5,537,071 5,537,071 5,537,071
=========== =========== =========== ==========
Diluted 5,537,071 5,537,071 5,613,527 5,537,071
=========== =========== =========== ==========
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------
September 28, September 29,
2003 2002
----------- ------------
Cash flows from operating activities:
Net income (loss) $ 235,000 $ (264,000)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,200,000 1,092,000
Gain on sale of assets (12,000) (71,000)
Minority interest in loss of subsidiaries (425,000) (301,000)
Equity in income (loss) of joint venture 10,000 13,000
Changes in operating assets and liabilities
Inventories (40,000) 139,000
Receivables (81,000) 49,000
Prepaid expenses and other current assets (399,000) (47,000)
Liquor licenses and other assets - 29,000
Accounts payable 288,000 (94,000)
Accrued liabilities (267,000) (765,000)
----------- ------------
Net cash provided by (used in) operating activities 509,000 (220,000)
----------- ------------
Cash flows from investing activities:
Proceeds from disposal of assets 26,000 144,000
Proceeds from note receivable payments 10,000 -
Release of restricted cash 544,000 -
Restricted cash for LLC restaurant construction - (1,260,000)
Advance to managed outlet - (351,000)
Advance repaid by managed outlet 64,000 -
Investment in non-consolidated entity (30,000) (47,000)
Additions to furniture, equipment and improvements (550,000) (594,000)
----------- ------------
Net cash provided by (used in) investing activities 64,000 (2,108,000)
----------- ------------
Cash flows from financing activities:
Proceeds from minority members' investment in LLC - 1,000,000
Preferred return to minority stockholders (132,000) (117,000)
Return of capital and profits to minority stockholders (222,000) (64,000)
Payments to related parties (113,000) (100,000)
Payments on long-term debt (299,000) (272,000)
----------- ------------
Net cash provided by (used in) financing activities (766,000) 447,000
----------- ------------
Net decrease in cash and cash equivalents (193,000) (1,881,000)
Cash and cash equivalents, beginning of period 1,275,000 2,300,000
----------- ------------
Cash and cash equivalents, end of period $1,082,000 $ 419,000
=========== ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 136,000 $ 215,000
Income taxes 119,000 81,000
Non cash transaction:
Note receivable from sale of assets $ - $ 117,000
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated condensed financial statements are prepared pursuant to
the requirements for reporting on Form 10-Q. These financial statements have not
been audited by independent auditors. The December 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. Amounts held in the escrow account are classified as restricted
cash. Upon disbursement from the escrow account, amounts are reclassified as
cash, if disbursed to the Company, or to appropriate asset or expense
categories.
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. The Company adopted SFAS 145 effective December 30, 2002. Adoption of
this statement has had no 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 are
effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this statement has not had a material impact on our consolidated
financial statements.
6
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
nine months ended September 28, 2003. Adoption of this statement has not had a
material impact on our consolidated financial statements.
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. As the Company has
not elected to change to the fair value based method of accounting for stock
based employee compensation, the adoption of SFAS No. 148 did not have a
material impact on the Company's financial position or results of operations.
All disclosure requirements of SFAS No. 148 have been adopted and are reflected
in these financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 provides 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. The Company is required to apply FIN 46 to
preexisting entities as of the first interim period ending after December 15,
2003. Management does not believe that the adoption of this statement will have
a material impact on our consolidated financial statements.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", was issued, which requires that
certain financial instruments must now be accounted for as liabilities. The
financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be applied to the Company's
existing financial instruments effective June 30, 2003, the beginning of the
first fiscal period after June 15, 2003. The adoption of SFAS No. 150 on June
30, 2003, did not have an impact on the Company's consolidated financial
statements or disclosures.
7
4. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners. In
connection with the financing of each of the LLCs, the minority members may have
certain rights to priority distributions of capital until they have received a
return of their initial investments ("Return of Member Capital") as well as
rights to receive defined preferred returns on their invested capital
("Preferred Return").
The following tables set forth a summary for each of the LLCs of (1) the initial
capital contributions of the Company and the minority LLC members (the
"Members"), (2) the distributions of capital to the Members and/or the Company
during the nine months ended September 28, 2003, (3) the unreturned balance of
the capital contributions of the Members and/or the Company at September 28,
2003, (4) the Preferred Return rate to Members and/or the Company, (5) the
accrued but unpaid preferred returns due to the Members and/or the Company at
September 28, 2003, (6) the management incentive fees, if any, payable to the
Company, and (7) a summary of the principal distribution provisions:
SAN JOSE GRILL LLC
Initial Capital Contribution: Members (a) $ 1,149,650
===================
Company $ 350,350
===================
Distributions of capital, preferred
return and profit during nine
months ended September 28, 2003: Members $ 222,000
===================
Company $ 222,000
===================
Unreturned Initial Capital
Contributions at September 28, Members
2003: $ 0
====================
Company $ 0
====================
Preferred Return rate: Members 10%
Company 10%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
====================
Company $ 0
====================
Management Fee: Company 5%
8
Principal Distribution Provisions:
Order of Distributions Allocation
------------------------ -----------
1 Until Return of Initial Capital 10% to Company (Manager)
50.05% of 90% to Company
49.95% of 90% to Members
2 Until Return of Preferred Return 50.05% to Company
49.05% to Members
3 Until Return of Additional
Contributions 50.05% to Company
49.95% to Members
Thereafter:
4 Balance of distributable cash 16.67% to Company (Manager)
50.05% of 83.33% to Company
49.95% of 83.33% to Members
CHICAGO - GRILL ON THE ALLEY
Initial Capital Contribution: Members (b) $ 1,700,000
===================
Company $ 0
====================
Distributions of capital and note
repayments during nine months Members (b) $ 165,000
ended September 28, 2003:
====================
Unreturned Initial Capital
Contributions at September 28, Members
2003: $ 999,000
====================
Preferred Return rate: Members 8%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
====================
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until Return of Members Capital 100% to Members
2 Until Return of Preferred Return 100% to Members
Thereafter:
3 Balance of distributable cash 60% to Company
40% to Members
9
THE GRILL ON HOLLYWOOD LLC
Initial Capital Contribution: Members $ 1,200,000
===================
Company $ 250,000
===================
Distributions of capital during nine
months ended September 28, 2003: Members $ 0
===================
Company $ 0
===================
Unreturned Initial Capital
Contributions at September 28, Members
2003: $ 1,200,000
===================
Company $ 250,000
===================
Preferred Return rate: Members 12%
Company 12%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
Company $ 0
===================
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until Return of Members Capital 10% to Company (Manager)
and Preferred Return 90% to Members
2 Until Return of Company's Capital 90% to Company (Manager)
and Preferred Return 10% to Members
Thereafter:
3 Balance of distributable cash 51% to Company
49% to Members
10
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Initial Capital Contribution: Members $ 1,000,000
===================
Company $ 350,000
===================
Distributions of capital during nine
months ended September 28, 2003: Members $ 0
===================
Company $ 0
===================
Unreturned Initial Capital
Contributions at September 28, Members
2003: $ 1,000,000
===================
Company $ 350,000
===================
Preferred Return rate: Members 10%
Company (c) 10%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 70,000
===================
Company $ 25,000
===================
Management Fee: Company 5%
11
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until payment in full of all deferred management fees 100% to
Company (Manager)
2 Until Return of Any Additional Contributions
and Preferred Returns thereon Ratably to Company
and Members
3 Until $300,000 is paid 33.3% to Company
66.7% to Members
4 Until Return of Members accrued and unpaid
preferred returns 10% to Company
90% to Members
5 Until Members Capital Contribution Returned 10% to Company
90% to Members
6 Until Return of Company's Preferred Return 90% to Company
10% to Members
7 Until Return of Company's Capital Contribution 90% to Company
10% to Members
Thereafter
8 Balance of distributable cash 50.1% to Company
49.9% to Members
(a) The initial capital contributions of the Members of San Jose Grill LLC
consisted of a capital contribution of $349,650 and a loan of $800,000.
(b) The initial capital contributions of the Members of Chicago - Grill on the
Alley LLC consisted of a capital contribution of $1,000 and a loan of
$1,699,000. $1,189,000 of the loan was converted to capital in 1999.
Distribution of capital as of September 28, 2003 includes $132,000 of
capital and preferred return and $33,000 of payment on the loan.
(c) The Company's preferred return with respect to the South Bay Daily Grill is
based on unrecovered capital contribution and accrued but unpaid management
fees.
12
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" as amended by SFAS No. 148. 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 and 148,
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 on a pro forma basis for the nine
months is indicated on the table below:
September 28 September 29,
2003 2002
---------- ----------
Net income (loss) applicable to
common stock $ 197,000 $(302,000)
Compensation expense (133,000) (138,000)
---------- ----------
Net income (loss) applicable to
common stock, pro forma $ 64,000 $(440,000)
Net income (loss) per share
applicable to common stock, as
reported:
Basic $ 0.04 $ (0.05)
Diluted $ 0.04 $ (0.05)
Net income (loss) per share
applicable to common stock,
pro forma:
Basic $ 0.01 $ (0.08)
Diluted $ 0.01 $ (0.08)
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 nine and three month periods ended September 28, 2003 and
September 29, 2002 follow:
Nine months 2003 2002
Earnings Shares Earnings Shares
--------------------------------------------
Net income (loss) $235 ,000 $ (264,000)
Less: preferred stock dividend (38,000) (38,000)
---------- -----------
Earnings available for common
stockholders 197,000 5,537,071 (302,000) 5,537,071
Dilutive securities:
Stock options - 31,667 - -
Warrants - 44,789 - -
---------- ----------- ---------- ---------
Dilutive earnings available to
common stockholders $ 197,000 5,613,527 $(302,000) 5,537,071
==============================================
For the nine months ended September 28, 2003, 465,700 options, 1,722,787
warrants and 500 shares of convertible preferred stock were excluded from the
calculation because they were anti-dilutive. For the nine months ended
September 29, 2002, 658,550 options, 1,922,787 warrants and 500 shares of
convertible preferred stock were excluded from the calculation because they were
anti-dilutive.
Three months 2003 2002
Earnings Shares Earnings Shares
---------------------------------------------
Net income (loss) $(330,000) $ (442,000)
Less: preferred stock dividend (12,000) (12,000)
---------- -----------
Earnings available for common
Stockholders (342,000) 5,537,071 (454,000) 5,537,071
Dilutive securities:
Stock options - - -
Warrants - - - -
---------- ----------- ---------- ---------
Dilutive earnings available to
common stockholders $(342,000) 5,537,071 $(454,000) 5,537,071
================================================
For the three months ended September 28, 2003, 744,450 options, 1,912,787
warrants and 500 shares of convertible preferred stock were excluded from the
calculation because they were anti-dilutive. For the three months ended
September 29, 2002, 658,550 options, 1,922,787 warrants and 500 shares of
convertible preferred stock were excluded from the calculation because they were
anti-dilutive.
14
7. ADVANCE TO MANAGED OUTLET
On February 25, 2002 the Company began management of a San Francisco hotel-based
Daily Grill restaurant. The Company advanced approximately $287,000 to the
restaurant during the first six months of 2002, which 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 was repaid in May
2003.
8. ADDITIONAL INVESTMENT IN NON-CONSOLIDATED ENTITY
In April 2003 the Company contributed an additional $30,000 to the Universal
CityWalk joint venture. Although the management agreement for Universal Grill
Joint Venture requires the Company and the other member to make an interest free
loan to the joint venture of fifty percent of anticipated negative cash flows,
both members agreed to make this payment a capital contribution. A similar
contribution totaling $47,000 was made in April 2002.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated condensed statements of operations expressed as
a percentage of total operating revenues, except where otherwise noted.
Percentages may not add due to rounding.
15
Three Months Ended Nine Months Ended
---------------------- -----------------------
September September September September
28, 2003 29, 2002 28, 2003 29, 2002
--------- --------- --------- --------
Revenues: % % % %
Company restaurant sales 97.4 97.5 97.7 97.8
Management and license fees 2.6 2.5 2.3 2.2
--------- --------- --------- --------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales 27.5 27.6 27.1 27.2
--------- --------- --------- --------
Gross profit 72.5 72.4 72.9 72.8
--------- --------- --------- --------
Restaurant operating expense 64.2 64.0 60.8 61.9
Gain on disposal of assets - - - (0.2)
General and administrative expense 8.7 9.8 8.0 8.8
Depreciation and amortization 3.8 3.8 3.5 3.5
Preopening expenses - - 0.5 -
--------- --------- --------- --------
Total operating expenses 76.7 77.6 72.8 74.0
--------- --------- --------- --------
Operating income (loss) (4.2) (5.1) 0.1 (1.2)
Interest expense, net (0.5) (0.6) (0.4) (0.5)
--------- --------- --------- --------
Loss before benefit (provision) for
Income taxes, minority interest and
equity in loss of joint venture (4.7) (5.8) (0.3) (1.7)
Benefit (provision) for income taxes 0.1 - (0.2) (0.1)
Minority interest 1.5 1.1 1.2 1.0
Equity in income (loss) of joint venture - - - -
--------- --------- --------- --------
Net income (loss) (3.1) (4.7) 0.7 (0.8)
========= ========= ========= ========
16
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
Third Quarter Year-to-date Total open at
Openings Openings/Closings End of Quarter
---------------- ----------------- ----------------
FY 2003 FY 2002 FY 2003 FY 2002 FY 2003 FY 2002
------- ------- ------- ------- ------- -------
Daily Grill restaurants:
Company owned - - 1 (1) 10 9
Managed and/or licensed 1 1 1 2 7 6
Grill on the Alley restaurants:
Company owned - - - - 4 4
Pizza restaurants - - - (1) - -
Other restaurants:
Managed and/or licensed - - - - 1 1
------- ------- ------- ------- ------- -------
Total 1 1 2 - 22 20
======= ======= ======= ======= ======= =======
Three Months Ended Nine Months Ended
------------------ --------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
----------- ------------ ------------ ------------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 56,734 $ 56,160 $ 62,699 $ 56,861
Grill on the Alley 74,445 65,183 75,846 71,205
Pizza restaurants - n.a. - 29,239
Change in comparable restaurant (1):
Daily Grill 4.0% (3.7)% 5.8% (5.9)%
Grill on the Alley 14.2% (3.3)% 6.5% (4.7)%
Total Company revenues:
Daily Grill $ 6,638,000 $ 5,841,000 $21,863,000 $ 19,238,000
Grill on the Alley 3,871,000 3,390,000 11,832,000 11,108,000
Pizza restaurants - - - 497,000
Management and license fees 278,000 236,000 795,000 704,000
----------- ------------ -------------- ------------
Total consolidated revenues $10,787,000 $ 9,467,000 $34,490,000 $ 31,547,000
----------- ------------ -------------- ------------
Managed restaurants 3,842,000 3,720,000 10,968,000 10,088,000
Licensed restaurants 2,220,000 1,786,000 6,700,000 5,033,000
Less: management and license fee (278,000) (236,000) (795,000) (704,000)
----------- ------------ -------------- ------------
Total system sales $16,571,000 $14,737,000 $51,363,000 $45,964,000
=========== ============ ============== ============
(1) When computing comparable restaurant sales, restaurants open for at least 12 months are compared from period to
period.
17
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 28, 2003 AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 29,
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, 5 managed restaurants
and licensed its name and recipes to 3 others during the quarter and nine months
ended September 28, 2003 as compared to 15 owned restaurants, 4 managed
restaurants and 3 licensed during the quarter and nine months ended September
29, 2002. Restaurants operated for a portion of the current year and/or prior
year period include the Daily Grill at Continental Park ("South Bay Daily
Grill") restaurant that opened in January 2003, the Portland Daily Grill that
opened under a management agreement in September 2003, the Houston Daily Grill
that opened under a management agreement in July 2002, the San Francisco Daily
Grill that opened under a management agreement in February 2002, Pizzeria Uno
Cherry Hill that was sold in April 2002, and Encino Daily Grill that was closed
in April 2002.
The Company's revenues for the third quarter of fiscal 2003 increased to $10.8
million, 13.9% over the $9.5 million generated for the same quarter of fiscal
2002. Total revenues included $10.5 million of sales revenues and $278,000 of
management and licensing fees for the 2003 quarter compared to $9.2 million of
sales revenues and $236,000 of management and licensing fees for the 2002
quarter. The $1.3 million, or 13.8%, increase in sales revenues for the quarter
was primarily attributable to a increase in same store sales ($715,000) and 13
weeks of sales for South Bay Daily Grill ($564,000).
Revenues for the nine months ended September 28, 2003 increased 9.3% to $34.5
million from the $31.5 million generated for the same period of fiscal 2002.
Total revenues included $33.7 million of sales revenues and $795,000 of
management and licensing fees for the first nine months of 2003, compared to
$30.8 million of sales revenues and $704,000 of management and licensing fees
for the first nine months of 2002. The increase in sales revenues for the nine
months ($2.9 million, or 9.3%) was primarily attributable to an increase in same
store sales ($1,804,000) and the opening of South Bay Daily Grill ($2,102,000)
partially offset by the closure of the Pizzeria Unos in Cherry Hill ($497,000)
and the Encino Daily Grill ($556,000).
Same store sales (for restaurants open at least 12 months) increased 7.7% for
the quarter and 6.1% for the nine months. For the quarter, this increase was
due to an increase in the number of guests at the Daily Grills ($53,000) and the
Grill on the Alley restaurants ($450,000), combined with an increase in average
check price at the Daily Grill restaurants ($179,000), and at the Grill on the
Alley restaurants ($33,000). For the nine months the increase was due to an
increase in the number of guests at the Daily Grill restaurants ($632,000) and
the Grill on the Alley restaurants ($282,000) plus an increase in average check
price at the Daily Grill restaurants ($448,000) and the Grill on the Alley
restaurants ($445,000). Management and licensing fees for the quarter increased
($42,000 or 17.8%) primarily due to increased sales at the Houston, LAX and
Burbank Daily Grills . Management and licensing fees increased for the nine
months ($91,000 or 12.9%) primarily due to a full 39 weeks of sales at the
Houston Daily Grill compared to 12 weeks in 2002 and increased sales at the
Burbank and LAX Daily Grills.
18
In addition to the 14 restaurants owned by the Company during the quarter and
nine months ended September 28, 2003, the Company also managed or licensed eight
other restaurants. Total revenues for all restaurants owned, managed and
licensed by the Company were $16,571,000 and $14,737,000 for the quarters and
$51,363,000 and $45,964,000 for the nine months ended September 28, 2003 and
September 29, 2002, respectively. This represents an increase of $1,834,000, or
12.4%, for the quarter and $5,399,000, or 11.7%, for the nine months.
Cost of sales increased by $358,000, or 13.7%, for the quarter and $793,000, or
9.3%, for the nine months ended September 28, 2003 as compared to the same
periods in 2002 primarily due to the increase in sales and, for the quarter, an
increase in beef costs, partially offset by improved purchasing and menu
refinements. Cost of sales as a percentage of total revenues was 27.5% for the
quarter and 27.1% for the nine months ended September 28, 2003 as compared to
27.6% for the third quarter and 27.2% for the nine months in 2002.
Restaurant operating expenses increased by $876,000, or 14.5%, for the quarter
and $1,439,000, or 7.4%, for the nine months as compared to the same periods in
2002. The dollar increase in restaurant operating expenses for the quarter was
primarily attributable to the opening of the South Bay Daily Grill in January
2003 ($475,000) and an increase in payroll ($136,000), benefits ($59,000) and
occupancy costs ($103,000) at comparable restaurants. The dollar increase in
operating expenses for the nine months was primarily attributable to the opening
of the South Bay Daily Grill ($1,520,000) and an increase in payroll ($205,000),
benefits ($161,000), variable costs ($190,000) and utilities ($114,000) at
comparable restaurants partially offset by the closure of the Encino Daily Grill
($471,000) and Cherry Hill Pizzeria Uno location ($427,000). Restaurant
operating expenses, as a percentage of revenues, increased in the third quarter
from 64.0% in 2002 to 64.2% in 2003. The major contributors to the increase as
a percentage of sales was occupancy (0.6%) and payroll (0.2%) partially offset
by a decrease in variable costs (0.5%). For the nine months, the percentages
decreased from 61.9% in 2002 to 60.8% in 2003. The major contributor to the
decrease as a percentage of sales for the nine month period was improved labor
controls providing 0.7% of the decrease and occupancy which provided 0.4%.
General and administrative expense increased 0.9% for the quarter and decreased
1.5% for the nine months as compared to the same periods in 2002. As a
percentage of total revenues, general and administrative expense totaled 8.7%
for the quarter and 8.0% for the nine months as compared to 9.8% for the quarter
and 8.8% for the nine months in 2002. The decrease in total general and
administrative expense of $42,000, or 1.5%, for the nine months during 2003 was
primarily attributable to cost reduction in recruitment fees, professional
services and travel and entertainment offset by an increase in salaries and
worker's compensation insurance. The increase in total general and
administrative expense of $8,000, or 0.9%, for the 2003 quarter is attributable
to increased payroll and benefits offset by decreased travel and entertainment
expenses and professional services.
Depreciation and amortization expense increased 12.9% for the quarter and
increased 9.9% for the nine months compared to 2002, representing 3.5% of sales
for the nine months of 2003 and 2002. The increase in depreciation and
amortization expense for the nine months was primarily due to the addition of
the South Bay Daily Grill offset by the closure of the Encino Daily Grill and
Pizzeria Uno location.
19
Interest expense, net, decreased by $10,000, or 17.0%, during the quarter and
$19,000, or 11.9%, during the nine months compared to the same periods in 2002.
The decrease in interest expense resulted from the elimination of loan interest
due to the continuing reduction of long-term debt.
The Company recorded $68,000 of income taxes for the nine months compared to
$22,000 in 2002. The Company still has available federal net operating loss
carryforwards that can be utilized to offset federal taxable earnings; however,
in the states where most of the Company's income is earned there are no net
operating losses available making the earnings subject to state income taxes.
Results for the quarter and nine months reflect minority interest in the net
losses of subsidiaries of $161,000 and $425,000 respectively, compared with
$107,000 and $301,000 in the same periods in 2002. The increase in the amount
of net losses allocated to minority interests during the third quarter resulted
primarily from the losses generated by the South Bay Daily Grill. The increase
in the amount of net losses allocated to minority interest during the nine
months resulted primarily from the losses generated by the South Bay Daily Grill
partially offset by the improved operating performance at the Grill on
Hollywood.
The company incurred a charge of $10,000 for its equity in loss of joint venture
during the nine months of 2003 compared to $13,000 in 2002, which reflects the
Company's 50% interest in the Daily Grill Short Order at Universal Studios City
Walk.
The Company reported dividends on preferred stock of $12,500 in each of the
quarters and $37,500 in each of the nine months ended September 28, 2003 and
September 29, 2002.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At September 28, 2003 the Company had negative working capital of $1.1 million
and a cash balance of $1.1 million compared to negative working capital of $1.3
million and a cash balance of $1.3 million at December 29, 2002.
Net cash provided by operations during the nine months ended September 28, 2003
totaled $509,000 compared to $220,000 used in operations during the nine months
ended September 29, 2002. The positive change in operating cash flow during the
nine months was related to improved profits and an increase in accounts payable
during the 2003 period compared to a decrease in payables during the 2002 period
offset by an increase in prepaid expenses in 2003.
Net cash provided by investing activities during the nine months ended September
28, 2003 totaled $64,000 compared to $2,108,000 used in investing activities
during the nine months ended September 29, 2002. Cash provided by investing
activities during the current period were primarily for the release of
restricted cash for construction of the South Bay Daily Grill ($544,000) and the
return of advance to managed outlet ($64,000), partially offset by the purchase
of furniture, fixtures and equipment ($550,000).
Net cash used in financing activities during the nine months ended September 28,
2003 totaled $766,000 compared to $447,000 provided by financing activities
during the nine months ended September 29, 2002. Cash used in financing
activities during the current period related to reductions in debt ($412,000),
preferred returns to minority investors in Chicago - the Grill on the Alley, LLC
($132,000) and return of capital and profit distribution to the minority
investor in San Jose Grill, LLC ($222,000).
20
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, loans and tenant allowances
from certain of its landlords and, beginning in 1998, through joint venture
arrangements.
At September 28, 2003, the Company had a bank credit facility with nothing
owing, a SBA loan of $0.1 million, loans from stockholders/officers of $0.6
million, equipment loans of $0.5 million and loans/advances from a landlord and
others of $0.1 million. Although no amounts have been borrowed under the credit
facility since 2001, availability under the line has been reducing in accordance
with its terms. Borrowings available to the Company under the credit facility
are $0.6 million at September 28, 2003 and will ratably reduce to $0.5 million
by the end of fiscal year 2003.
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 agreements and
arrangements under which the Company may be required to make cash advances or
contributions, guarantee obligations or defer receipt of cash are:
CITYWALK. 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.
SAN FRANCISCO DAILY GRILL. 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.
CHICAGO - THE GRILL ON THE ALLEY. 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 GRILL ON HOLLYWOOD. 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.
SAN JOSE GRILL. 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, then to the manager and non-manager
members in proportion to their ownership percentage until the additional capital
contribution is recovered, and finally 16 2/3% to the manager and the balance to
the members in proportion to their ownership percentages.
21
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners. In
connection with the financing of each of the LLCs, the minority members may have
certain rights to priority distributions of capital until they have received a
return of their initial investments ("Return of Member Capital") as well as
rights to receive defined preferred returns on their invested capital
("Preferred Return").
The following tables set forth a summary for each of the LLCs of (1) the initial
capital contributions of the Company and the minority LLC members (the
"Members"), (2) the distributions of capital to the Members and/or the Company
during the nine months ended September 28, 2003, (3) the unreturned balance of
the capital contributions of the Members and/or the Company at September 28,
2003, (4) the Preferred Return rate to Members and/or the Company, (5) the
accrued but unpaid preferred returns due to the Members and/or the Company at
September 28, 2003, (6) the management incentive fees, if any, payable to the
Company, and (7) a summary of the principal distribution provisions:
SAN JOSE GRILL LLC
Initial Capital Contribution: Members (a) $ 1,149,650
==================
Company $ 350,350
===================
Distributions of capital, preferred
return and profit during nine months
ended September 28, 2003: Members $ 222,000
===================
Company $ 222,000
===================
Unreturned Initial Capital
Contributions at September 29,
2003: Members $ 0
===================
Company $ 0
===================
Preferred Return rate: Members 10%
Company 10%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
===================
Company $ 0
===================
Management Fee: Company 5%
22
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until Return of Initial Capital 10% to Company (Manager)
50.05% of 90% to Company
49.95% of 90% to Members
2 Until Return of Preferred Return 50.05% to Company
49.05% to Members
3 Until Return of Additional Contributions 50.05% to Company
49.95% to Members
Thereafter:
4 Balance of distributable cash 16.67% to Company (Manager)
50.05% of 83.33% to Company
49.95% of 83.33% to Members
CHICAGO - GRILL ON THE ALLEY
Initial Capital Contribution: Members (b) $ 1,700,000
===================
Company $ 0
===================
Distributions of capital and note
repayments during nine months
ended September 28, 2003: Members (b) $ 165,000
===================
Unreturned Initial Capital
Contributions at September 28,
2003: Members $ 999,000
===================
Preferred Return rate: Members 8%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
===================
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until Return of Members Capital 100% to Members
2 Until Return of Preferred Return 100% to Members
Thereafter:
3 Balance of distributable cash 60% to Company
40% to Members
23
THE GRILL ON HOLLYWOOD LLC
Initial Capital Contribution: Members $ 1,200,000
===================
Company $ 250,000
===================
Distributions of capital during nine
months ended September 28,
2003: Members $ 0
===================
Company $ 0
===================
Unreturned Initial Capital
Contributions at September 28, 2003: Members $ 1,200,000
===================
Company $ 250,000
===================
Preferred Return: Members 12%
Company 12%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 0
===================
Company $ 0
===================
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until Return of Members Capital
and Preferred Return 10% to Company (Manager)
90% to Members
2 Until Return of Company's Capital
and Preferred Return 90% to Company (Manager)
10% to Members
Thereafter:
3 Balance of distributable cash 51% to Company
49% to Members
24
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Initial Capital Contribution: Members $ 1,000,000
====================
Company $ 350,000
===================
Distributions of capital during nine
months ended September 28, 2003:
Members $ 0
====================
Company $ 0
====================
Unreturned Initial Capital
Contributions at September 28,
2003: Members $ 1,000,000
====================
Company $ 350,000
====================
Preferred Return rate: Members 10%
Company (c) 10%
Accrued but unpaid Preferred
Returns at September 28, 2003: Members $ 70,000
====================
Company $ 25,000
====================
Management Fee: Company 5%
25
Principal Distribution Provisions:
Order of Distributions Allocation
---------------------- ----------
1 Until payment in full of all
deferred management fees 100% to Company (Manager)
2 Until Return of Any Additional
Contributions and Preferred
Returns thereon Ratably to Company and Members
3 Until $300,000 is paid 33.3% to Company
66.7% to Members
4 Until Return of Members accrued
and unpaid preferred returns 10% to Company
90% to Members
5 Until Members Capital Contribution
Returned 10% to Company
90% to Members
6 Until Return of Company's
Preferred Return 90% to Company
10% to Members
7 Until Return of Company's
Capital Contribution 90% to Company
10% to Members
Thereafter
8 Balance of distributable cash 50.1% to Company
49.9% to Members
(a) The initial capital contributions of the Members of San Jose Grill LLC
consisted of a capital contribution of $349,650 and a loan of $800,000.
(b) The initial capital contributions of the Members of Chicago - Grill on the
Alley LLC consisted of a capital contribution of $1,000 and a loan of
$1,699,000. $1,189,000 of the loan was converted to capital in 1999.
Distribution of capital as of September 28, 2003 includes $132,000 of
capital and preferred return and $33,000 of payment on the loan.
(c) The Company's preferred return with respect to the South Bay Daily Grill is
based on unrecovered capital contribution and accrued but unpaid management
fees.
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.
26
The Company may enter into investment/loan arrangements in the future on terms
similar to the San Jose Fairmont Grill and Chicago Westin Grill 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.
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.
Principles 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.
27
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.
Based on the Company's review of its presently operating restaurants and other
long-lived assets, during the quarter ended September 29, 2003, the Company
recorded no impairments of its long-lived assets.
Valuation of Accounts Receivable
-----------------------------------
The Company reviews all of its accounts receivable on a regular basis to
determine the collectability of each account based on age, response to
collection efforts, and other factors. The Company establishes a reserve for
those accounts where collection seems doubtful. If a determination is made that
the customer will definitely not pay, the amount is written off against the
reserve.
Based on the Company's review at September 28, 2003, the current reserve for
uncollectible accounts receivable is adequate.
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. The Company adopted SFAS 145 effective December 30, 2002. Adoption of
this statement has had no impact on our consolidated financial statements.
28
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 are
effective for exit or disposal activities 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
nine months ended September 28, 2003. Adoption of this statement has not a
material impact on our consolidated financial statements.
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. As the Company has
not elected to change to the fair value based method of accounting for stock
based employee compensation, the adoption of SFAS No. 148 did not have a
material impact on the Company's financial position or results of operations.
All disclosure requirements of SFAS No. 148 have been adopted and are reflected
in these financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 provides 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. The Company is required to apply FIN 46 to
preexisting entities as of the first interim period ending after December 15,
2003. Management does not believe that the adoption of this statement will have
a material impact on our consolidated financial statements.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", was issued, which requires that
certain financial instruments must now be accounted for as liabilities. The
financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be applied to the Company's
existing financial instruments effective June 30, 2003, the beginning of the
first fiscal period after June 15, 2003. The adoption of SFAS No. 150 on June
30, 2003, did not have an impact on the Company's consolidated financial
statements or disclosures.
29
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the planned opening of the new restaurants during 2003, as
described above, 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.
In October 2002, the Company signed a lease to open a hotel-based Daily Grill
restaurant in the Hyatt Hotel in Bethesda, Maryland. The restaurant is
scheduled to open early in 2004. 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.
In September 2003, the Company opened a managed Daily Grill in the Portland
Westin Hotel in Portland, Oregon.
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
September 28, 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
As of the end of the period covered by this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our chief
executive officer ("CEO") and our chief financial officer ("CFO"). Based on
this evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal control subsequent to the evaluation.
30
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 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
On August 14, 2003, we reported on Form 8-K, Item 9, that we issued a press
release on August 13, 2003 announcing financial results for the quarter ended
June 29, 2003.
31
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.
Signature Title Date
/s/ Robert Spivak President and Chief November 12, 2003
------------------- Executive Officer
Robert Spivak
/s/ Daryl Ansel Principal Accounting November 12, 2003
------------------- Officer
Daryl Ansel
32
Exhibit 31.1
CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 10A,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respect
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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) [omitted in accordance with SEC Release Nos. 33-8238 and 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
33
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
Date: November 12, 2003 /s/ Robert Spivak
-------------------------------------
Robert Spivak
President and Chief Executive Officer
34
Exhibit 31.2
CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 10A,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respect
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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) [omitted in accordance with SEC Release Nos. 33-8238 and 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
35
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
Date: November 12, 2003 /s/ Daryl Ansel
----------------------------
Daryl Ansel
Chief Financial Officer
36
Exhibit 32.1
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
September 28, 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
November 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 September 28,
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
November 12, 2003
37