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 June 26, 2005
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 August 10, 2005, 5,660,546 shares of Common Stock of the issuer were
outstanding.
GRILL CONCEPTS, INC.
----------------------
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 26, 2005 and December 26, 2004 (unaudited) 2
Condensed Consolidated Statements of Operations -
For the three months and six months ended June
26, 2005 and June 27, 2004 (restated) (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 26, 2005 and
June 27, 2004 (restated) (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits 33
SIGNATURES 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 26, December 26,
2005 2004
----------- -----------
Current assets:
Cash and cash equivalents $ 1,537,000 $ 1,407,000
Inventories 675,000 620,000
Receivables, net of reserve ($182,000 in
2005 and $143,000 in 2004) 860,000 836,000
Reimbursement receivables from
managed outlets 806,000 928,000
Prepaid expenses 675,000 2,372,000
----------- -----------
Total current assets 4,553,000 6,163,000
Furniture, equipment, & improvements, net 14,179,000 11,864,000
Goodwill, net 205,000 205,000
Restricted cash 1,042,000 882,000
Note receivable 88,000 101,000
Liquor licenses 411,000 350,000
Other assets 178,000 184,000
----------- -----------
Total assets $20,656,000 $19,749,000
=========== ===========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
June 26, December 26,
2005 2004
--------------- ---------------
Current liabilities:
Accounts payable $ 1,659,000 $ 1,988,000
Accrued expenses 2,983,000 2,548,000
Accrued managed outlet operating expenses 806,000 928,000
Current portion of long term debt 111,000 196,000
Current portion notes payable - related parties 303,000 294,000
--------------- ---------------
Total current liabilities 5,862,000 5,954,000
Long-term debt 227,000 148,000
Notes payable - related parties 752,000 829,000
Other long-term liabilities 7,725,000 8,054,000
--------------- ---------------
Total liabilities 14,566,000 14,985,000
Minority interest 1,429,000 934,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2005 and 2004 - -
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares, authorized, 500 shares
issued and outstanding in 2005 and 2004 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2005 and 2004, 5,660,546 shares
issued and outstanding in 2005, 5,650,146 shares
issued and outstanding in 2004 - -
Additional paid-in capital 13,673,000 13,649,000
Accumulated deficit (9,012,000) (9,819,000)
--------------- ---------------
Total stockholders' equity 4,661,000 3,830,000
--------------- ---------------
Total liabilities, minority interest and
stockholders' equity $ 20,656,000 $19,749,000
=============== ===============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
June 26, 2005 June 27, 2004 June 26, 2005 June 27, 2004
--------------- --------------- --------------- ---------------
Revenues: (restated) (restated)
Sales $13,417,000 $12,181,000 $26,804,000 $25,194,000
Cost reimbursements 5,085,000 2,903,000 8,554,000 6,093,000
Management and license fees 369,000 306,000 725,000 602,000
--------------- --------------- --------------- ---------------
Total revenues 18,871,000 15,390,000 36,083,000 31,889,000
Operating expenses:
Cost of sales 3,814,000 3,607,000 7,552,000 7,379,000
Restaurant operating expenses 8,047,000 7,627,000 15,748,000 15,299,000
Reimbursed costs 5,085,000 2,903,000 8,554,000 6,093,000
General and administrative 1,224,000 1,041,000 2,270,000 2,221,000
Depreciation and amortization 482,000 485,000 943,000 964,000
Pre-opening costs 153,000 1,000 244,000 148,000
--------------- --------------- --------------- ---------------
Total operating expenses 18,805,000 15,664,000 35,311,000 32,104,000
--------------- --------------- --------------- ---------------
Income (loss) from operations 66,000 (274,000) 772,000 (215,000)
Interest expense, net (43,000) (66,000) (80,000) (132,000)
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes and minority interest 23,000 (340,000) 692,000 (347,000)
Provision for income taxes (131,000) (5,000) (209,000) (28,000)
Minority interest in loss of subsidiaries 233,000 214,000 324,000 361,000
--------------- --------------- --------------- ---------------
Net income (loss) 125,000 (131,000) 807,000 (14,000)
Preferred dividends accrued (12,000) (12,000) (25,000) (25,000)
--------------- --------------- --------------- ---------------
Net income (loss) applicable to
common stock $ 113,000 $ (143,000) $ 782,000 $ (39,000)
=============== =============== =============== ===============
Net income (loss) per share applicable
to common stock:
Basic net income (loss) $ 0.02 $ (0.03) $ 0.14 $ (0.01)
=============== =============== =============== ===============
Diluted net income (loss) $ 0.02 $ (0.03) $ 0.13 $ (0.01)
=============== =============== =============== ===============
Weighted average shares outstanding:
Basic 5,652,230 5,590,445 5,651,188 5,568,155
=============== =============== =============== ===============
Diluted 6,064,781 5,590,445 6,018,508 5,568,155
=============== =============== =============== ===============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
--------------------------
June 26, June 27,
2005 2004
------------ ------------
Cash flows from operating activities: (restated)
Net income (loss) $ 807,000 $ (14,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 943,000 964,000
Stock based compensation expense - 71,000
Allowance for doubtful accounts 39,000 6,000
Amortized deferred rent and lease incentives (329,000) (174,000)
Gain on sale of assets - (1,000)
Minority interest in loss of subsidiaries (324,000) (361,000)
Changes in operating assets and liabilities:
Inventories (55,000) (1,000)
Receivables (63,000) 45,000
Reimbursable costs receivable 122,000 41,000
Prepaid expenses and other current assets (75,000) (151,000)
Tenant improvement allowances 1,772,000 1,002,000
Other assets (4,000) 28,000
Accounts payable (329,000) 736,000
Accrued expenses 419,000 (181,000)
Reimburseable costs payable (122,000) (41,000)
------------ ------------
Net cash provided by operating activities 2,801,000 1,969,000
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets - 1,000
Restricted cash (160,000) -
Purchase of liquor license (61,000) (5,000)
Purchase of furniture, equipment and improvements (3,248,000) (1,431,000)
------------ ------------
Net cash used in investing activities (3,469,000) (1,435,000)
------------ ------------
Cash flows from financing activities:
Proceeds from minority interest in LLC 976,000 35,000
Return of capital and profits to minority shareholder (143,000) (135,000)
Collections on note receivable 15,000 -
Proceeds from equipment financing 118,000 -
Proceeds from exercise of stock options 24,000 -
Payments to related parties (68,000) (116,000)
Payments on long-term debt (124,000) (182,000)
------------ ------------
Net cash provided by (used in) financing activities 798,000 (398,000)
------------ ------------
Net increase in cash and cash equivalents 130,000 136,000
Cash and cash equivalents, beginning of period 1,407,000 1,496.000
------------ ------------
Cash and cash equivalents, end of period $ 1,537,000 $ 1,632,000
============ ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 81,000 $ 100,000
Income taxes 129,000 93,000
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim condensed consolidated financial statements are prepared pursuant to
the requirements for reporting on Form 10-Q. These financial statements have not
been audited by our independent registered public accounting firm. The December
26, 2004 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 for the year ended December 26, 2004. In the opinion of management,
these interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair presentation 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 25, 2005.
2004 RESTATEMENT OF FINANCIAL STATEMENTS
The Company began a review of its lease accounting policies following
announcements in February 2005 that the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing the SEC staff's views relating to
certain lease accounting issues. As a result of this review, the Company revised
its accounting for leases in 2004 and restated its historical financial
statements as of June 27, 2004 to correct for these errors in its lease
accounting.
Historically, the Company recognized straight-line rents and amortized tenant
improvement allowances using the initial non-cancelable term of the lease
commencing on the date rent payments began. Under generally accepted accounting
principles, as highlighted in the SEC guidance, the Company should have
recognized rent expense (net of the related tenant improvement allowance
amortization) on a straight-line basis over the initial non-cancelable term of
the lease, beginning on the later of when the Company had access to the site or
the lease was executed. The impact of correctly calculating rent expense was to
decrease restaurant operating expenses and decrease general and administrative
expenses by $2,000 and $1,000, respectively, for the three months and by $4,000
and $2,000 for the six months ended June 27, 2004.
6
In closing the 2004 books and records, the Company reviewed the estimated
useful lives that it was using to amortize its leasehold improvements. In the
case of six restaurants, it was found that the incorrect lives had been used.
The Company has revised the amortization period to reflect the shorter of their
estimated useful lives or the initial lease term. The impact of the change is to
increase depreciation and amortization expense by $30,000 and $61,000 for the
three and six months ended June 27, 2004.
A portion of the above adjustments was recorded on the books of the LLC's in
which we have a majority ownership or we consolidate under FIN 46. As discussed
in the footnotes to Form 10K dated December 26, 2004, the Company allocates
results to the minority interests based on the underlying economics of the
investment. The impact of the above adjustments increased the amount of loss
allocated to the minority interests by $48,000 and $95,000, respectively for the
three and six months ended June 27, 2004.
During fourth quarter of 2004, the Company eliminated amounts that had
previously been recorded as restaurant sales revenue arising from complimentary
meals and promotional activities. The Company's previous method of recording
these activities as restaurant sales revenue with a corresponding increase in
operating expense is not in accordance with generally accepted accounting
principles. Historically the amounts associated with complimentary meals and
promotional activities have been recorded as restaurant revenues, with an
offsetting amount in restaurant operations and corporate general and
administrative expenses. As revised, the Company has eliminated all amounts for
complimentary meals and promotional activities. As a result of these
adjustments, revenues were decreased by $465,000 in the second quarter 2004,
restaurant operating expenses decreased by $424,000 and general and
administrative expenses decreased by $41,000. The adjustments for the full six
month period ended June 27, 2004 was a decrease in revenues of $962,000, a
decrease in restaurant operating expenses of $875,000 and a decrease in general
and administrative expenses of $87,000. These adjustments have no impact on
previously reported income and are non-cash.
The effects of our revisions to previously reported Consolidated Financial
Statements as of and for the quarter ended June 27, 2004 are summarized as
follows.
7
The following table reflects the effects of the restatement on the Consolidated
Statement of Operations:
JUNE 27, 2004
THREE MONTHS SIX MONTHS
AS PREVIOUSLY RESTATED AS PREVIOUSLY RESTATED
REPORTED REPORTED
Sales 12,646,000 12,181,000 26,156,000 25,194,000
Total Revenue 15,855,000 15,390,000 32,851,000 31,889,000
Restaurant operating expenses 8,054,000 7,628,000 16,179,000 15,300,000
General & administrative 1,083,000 1,041,000 2,310,000 2,221,000
Depreciation & amortization 454,000 485,000 903,000 964,000
Total operating expenses 12,494,000(1)15,664,000 25,632,000 32,104,000
Loss from operations (246,000) (274,000) (160,000) (215,000)
Loss before taxes (312,000) (340,000) (292,000) (347,000)
Loss before minority interest (317,000) (345,000) (320,000) (375,000)
Minority interest 166,000 214,000 266,000 361,000
Net loss (151,000) (131,000) (54,000) (14,000)
Net loss applicable to common stock (163,000) (143,000) (79,000) (39,000)
Net loss per share applicable to common stock:
Basic ($0.03) ($0.03) ($0.01) ($0.01)
Diluted ($0.03) ($0.03) ($0.01) ($0.01)
(1) Includes cost of sales amounts that were not included in the "Total operating expenses" subtotal in
prior financial statements.
The following table reflects the effects of the restatement on the Consolidated
Statement of Cash Flows:
JUNE 27, 2004
AS PREVIOUSLY REPORTED RESTATED
Cash flows from operating activities
Net loss (54,000) (14,000)
Depreciation and amortization 903,000 964,000
Minority interest in net loss of subsidiaries (266,000) (361,000)
Tenant improvement allowances - 1,002,000
Other long term liabilities (167,000) (174,000)
Net cash provided by operating activities 968,000 1,969,000
Tenant improvement allowances 1,002,000 -
Net cash provided by (used in) financing activities 603,000 (398,000)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
8
2. PRO-FORMA 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. Because, prior
to June 30, 2004, grants under the plan required variable accounting treatment
due to the cashless exercise feature of those options (described below),
compensation expense was, through that date, remeasured at each balance sheet
date based on the difference between the current market price of the Company's
stock and the option exercise price. An accrual for compensation expense was
determined based on the proportionate vested amount of each option as prescribed
by Financial Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans." Each period, adjustments to the
accrual are recognized in the income statement. 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.
On June 1, 1995, the Company's Board of Directors adopted the Grill Concepts,
Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12, 1998 the 1998
Stock Option Plan (the "1998 Plan") was adopted. These Plans provide for options
to be issued to the Company's employees and others. The exercise price of the
shares under option shall be equal to or exceed 100% of the fair market value of
the shares at the date of grant. The options generally vest over a five-year
period. The terms of the option grants originally allowed the employee to
exercise the option by surrendering a portion of the vested shares in lieu of
paying cash, subject to the terms of the plan including the rights of the
Compensation Committee to amend grants in any manner that the committee in its
sole discretion deems to not adversely impact the option holders.
On June 23, 2004, the Company's Compensation Committee, as administrators of the
Company's stock option plan, resolved that the cashless exercise feature in the
Company's stock option plan will not be permitted, and a notification was
subsequently given to all employees on July 30, 2004. Effective with this date,
the Company reverted back to accounting for its options under the fixed
accounting treatment.
9
The Company has adopted the disclosure-only provisions of SFAS No. 123, and will
continue to use the intrinsic value-based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." During the six-month
period ended June 26, 2005 there were no options granted. There were options
exercised and cancelled. Pro forma compensation expense for the Company's stock
option plans determined based on the fair value at the grant date for awards is
as follows:
Three Months Six Months
2005 2004 2005 2004
---- ---- ---- ----
(restated) (restated)
Net income (loss), as reported $ 125,000 $ (131,000) $807,000 $(14,000)
Add: stock compensation expense
recorded, net of taxes - (116,000) - 71,000
Deduct: stock compensation
expense under fair value method,
net of taxes (36,000) (43,000) (76,000) (73,000)
----------------------------------------------
Net income (loss), pro forma $ 89,000 $ (290,000) $731,000 $(16,000)
==============================================
Net income (loss) per share, as
reported:
Basic $ 0.02 $ (0.03) $ 0.14 $ (0.01)
Diluted $ 0.02 $ (0.03) $ 0.13 $ (0.01)
Net income (loss) per share, pro
forma:
Basic $ 0.01 $ (0.05) $ 0.12 $ (0.01)
Diluted $ 0.01 $ (0.05) $ 0.12 $ (0.01)
3. RESTRICTED CASH
In January 2004 a $700,000 certificate of deposit was established at Union Bank
to act as collateral for the Standby Letter of Credit opened to support our
Workers Compensation policy. In January 2005 an additional $160,000 was added to
the certificate of deposit. Other restricted cash consists of $72,000 held in
escrow for the Daily Grill at Continental Park in El Segundo, California and
$110,000 that was placed with our insurance claims processor in 2004 for
worker's compensation claims.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Most lease agreements contain one or more of the following; tenant improvement
allowances, rent holidays, rent escalation clauses and/or contingent rent
provisions.
Rent is recognized on a straight-line basis, including the restaurant build-out
period. This period is normally prior to the commencement of rent payments and
is commonly called the rent holiday period. The build-out period generally
begins when the Company enters the space and begins to make improvements in
preparation for intended use. The Company expenses rent on a straight-line basis
during the build-out period. Tenant improvement allowances are also recognized
on a straight-line basis beginning at the same time as the commencement of the
straight-line rent expense.
10
Prepaid expenses and other current assets at June 26, 2005 and December 26, 2004
were comprised of:
2005 2004
-------- ----------
Lease incentive receivables $ 79,000 $1,851,000
Prepaid expenses, other 596,000 521,000
-------- ----------
Total prepaid assets and other
current assets $675,000 $2,372,000
======== ==========
5. LONG TERM DEBT
During the second quarter of 2005, we borrowed $118,000 under the equipment
financing portion of our credit facility. This financing has a term of 5 years
and an interest rate of approximately 8.1%.
The Company is negotiating an extension of the equipment financing portion of
the credit facility. The credit facility also contains a $500,000 line of credit
that is available in its entirety. The line of credit has been extended and has
a termination date of August 2006.
6. OTHER LONG-TERM LIABILITIES
In connection with certain of the Company's leases, the landlord has provided
the Company with tenant improvement allowances. These lease incentives have been
recorded as long-term liabilities and are being amortized over the life of the
lease. Additionally, the Company recognizes a liability for deferred rent where
lease payments are lower than rental expense recognized on a straight-line
basis.
Other Long-Term Liabilities at June 26, 2005 and December 26, 2004 were
comprised of:
2005 2004
---------- ----------
Lease Incentives $5,397,000 $5,653,000
Deferred Rent 2,328,000 2,401,000
---------- ----------
Total Other Long-Term Liabilities $7,725,000 $8,054,000
========== ==========
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2004, the EITF reached final consensus on EITF 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128," which
requires companies that have participating securities to calculate earnings per
share using the two-class method. This method requires the allocation of
undistributed earnings to the common shares and participating securities based
on the proportion of undistributed earnings that each would have been entitled
to had all the periods earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company adopted EITF 03-06 for the quarter ended June 27, 2004,
however there has been no impact on the Company's financial statements as the
preferred shares are not participating securities.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.
11
As permitted by Statement 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method may have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share in note 2 above.
We expect to adopt Statement 123(R) in the first quarter of 2006.
8. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood,
South Bay Daily Grill and Downtown 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
some of whom have participating rights in the joint venture such as the ability
to approve operating and capital budgets and the borrowing of money. 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 Universal CityWalk Daily Grill is owned by a partnership ("the CityWalk
Partnership") for which we serve as manager. Our partner has certain rights to
priority distribution of capital from the CityWalk Partnership until they have
received their initial investment ("Return of Member Capital").
The following tables set forth a summary for each of the LLCs and the CityWalk
Partnership of (1) the distributions of capital to the Members and/or the
Company during the six months ended June 26, 2005, (2) the unreturned balance of
the capital contributions of the Members and/or the Company at June 26, 2005,
and (3) the accrued but unpaid preferred returns due to the Members and/or the
Company at June 26, 2005:
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the six
months ended June 26, 2005: Members $ 143,000
===================
Company $ 144,000
===================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ -
===================
Company $ -
===================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ -
===================
Company $ -
===================
12
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the six months
ended June 26, 2005: Members (a) $ 126,000
===================
Company $ -
===================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 992,000
===================
Company $ -
===================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ -
===================
Company $ -
===================
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
six months ended June 26, 2005: Members $ -
===================
Company $ -
===================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 1,200,000
===================
Company $ 250,000
===================
Accrued but unpaid
PreferredReturns at June 26, 2005: Members (b) $ -
===================
Company $ -
===================
13
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
six months ended June 26, 2005: Members $ -
===================
Company $ -
===================
Unreturned Initial and Additional
Capital Contributions at June 26,
2005: Members $ 1,100,000
===================
Company $ 450,000
===================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members (b) $ -
===================
Company $ -
===================
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during the
six months ended June 26, 2005: Members $ -
===================
Company $ -
===================
Unreturned Initial and Additional
Capital Contributions at June 26,
2005: Members $ 1,346,106
===================
Company $ 246,106
===================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members (b) $ -
===================
Company $ -
===================
DOWNTOWN DAILY GRILL (612 FLOWER DAILY GRILL, LLC)
Distributions of capital during the
six months ended June 26, 2005: Members $ -
===================
Company $ -
===================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 846,000
===================
Company $ 222,000
===================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ 14,134
===================
Company $ 6,626
===================
14
(a) Distribution of capital and note repayments as of June 26, 2005
includes $84,000 of capital and note repayments and $42,000 of interest and
preferred return.
(b) Due to the under performance of the restaurants the preferred return
is not being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation of the
subsidiary entity. If preferred returns were accrued for The Grill on
Hollywood the member would have an accrued preferred return of $652,000 and
the Company would have an accrued preferred return of $136,000. If
preferred returns were accrued for the South Bay Daily Grill the member
would have an accrued preferred return of $283,000 and the Company would
have an accrued preferred return of $131,000. If preferred returns were
accrued for the CityWalk Partnership the Member would have an accrued
preferred return of $474,000.
9. 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 six and three-month periods ended June 26, 2005 and June 27, 2004
follow:
Six months 2005 2004
Earnings Shares Earnings Shares
(restated)
---------------------------------------------
Net income (loss) $807,000 $ (14,000)
Less: preferred stock dividend (25,000) (25,000)
--------- ---------
Earnings (deficit) available for
common stockholders 782,000 5,651,188 (39,000) 5,568,155
Dilutive securities:
Stock options - 93,196 - -
Warrants - 274,124 - -
--------- ----------- --------- ---------
Dilutive earnings (deficit)
available to common stockholders $782,000 6,018,508 $(39,000) 5,568,155
============================================
15
For the six months ended June 26, 2005, 303,375 options, 58,620 warrants and 500
shares of convertible preferred stock were excluded from the calculation because
they were anti-dilutive. For the six months ended June 27, 2004, 763,175
options, 1,722,787 warrants and 500 shares of convertible preferred stock were
excluded from the calculation because they were anti-dilutive.
Three months 2005 2004
Earnings Shares Earnings Shares
(restated)
---------------------------------------------
Net income (loss) $125,000 $ (131,000)
Less: preferred stock dividend (12,000) (12,000)
--------- ----------
Earnings (deficit) available for
common stockholders 113,000 5,652,230 (143,000) 5,590,445
Dilutive securities:
Stock options - 99,561 - -
Warrants - 312,990 - -
--------- ----------- ---------- ---------
Dilutive earnings (deficit)
available to common stockholders $113,000 6,064,781 $(143,000) 5,590,445
=============================================
For the three months ended June 26, 2005, 303,375 options, 58,620 warrants and
500 shares of convertible preferred stock were excluded from the calculation
because they were anti-dilutive. For the three months ended June 27, 2004,
763,175 options, 1,722,787 warrants and 500 shares of convertible preferred
stock were excluded from the calculation because they were anti-dilutive.
10. LITIGATION CONTINGENCIES
In June 2004, one of our former hourly restaurant employees filed a class action
lawsuit against us in the Superior Court of California of Orange County. We
requested and were granted a motion to move the suit from Orange County to Los
Angeles County. The lawsuit was then filed in the Superior Court of California
of Los Angeles in December 2004. The plaintiff has alleged violations of
California labor laws with respect to providing meal and rest breaks. The
lawsuit sought unspecified amounts of penalties and other monetary payments on
behalf of the plaintiffs and other purported class members. We believe that all
of our employees were provided with the opportunity to take all required meal
and rest breaks. The Court has issued a total stay on the case until the Court
of Appeals hears two similar cases. Our next hearing is scheduled for October
2005. Concurrently, discovery is continuing in these matters and we intend to
vigorously defend our position in all of these matters although the outcome
cannot be ascertained at this time.
In November 2004, a sexual harassment case was filed against us in the Superior
Court of California of Los Angeles. We filed a motion to dismiss and the case
was dismissed with the plaintiff having the right to re-file. The plaintiff
re-filed the case. We are pursuing settlement, discovery will begin in August
and we filed a third motion to dismiss in July 2005 as we believe the suit is
unfounded. We have accrued legal costs up to our insurance deductible of $50,000
in this matter.
16
11. SUBSEQUENT EVENTS
CLOSURE OF THE LA CIENEGA DAILY GRILL
As of July 31, 2005 the lease for the La Cienega Daily Grill expired and the
restaurant was closed. The shopping center where this restaurant was is being
renovated; after completion of renovations we intend to reevaluate the
feasibility of re-opening in the center.
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 26, 2004.
2004 RESTATEMENT OF FINANCIAL STATEMENTS
The Company began a review of its lease accounting policies following
announcements in February 2005 that the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing the SEC staff's views relating to
certain lease accounting issues. As a result of this review, the Company revised
its accounting for leases in 2004 and restated its historical financial
statements as of and for each fiscal year end 2003, 2002, 2001 and 2000 to
correct for these errors in its lease accounting. The accompanying consolidated
financial statements for the six months ended June 27, 2004 have been restated
from those originally issued to reflect the change in lease accounting.
Historically, the Company recognized straight-line rents and amortized tenant
improvement allowances using the initial non-cancelable term of the lease
commencing on the date rent payments began. Under generally accepted accounting
principles, as highlighted in the SEC guidance, the Company should have
recognized rent expense (net of the related tenant improvement allowance
amortization) on a straight-line basis over the initial non-cancelable term of
the lease, beginning on the later of when the Company had access to the site or
the lease was executed. The impact of correctly calculating rent expense was to
decrease restaurant operating expenses and decrease general and administrative
expenses by $2,000 and $1,000, respectively, for the three months and by $4,000
and $2,000 for the six months ended June 27, 2004.
17
In closing the 2004 books and records, the Company reviewed the estimated useful
lives that it was using to amortize its leasehold improvements. In the case of
six restaurants, it was found that the incorrect lives had been used. The
Company has revised the depreciation period to reflect the shorter of their
estimated useful lives or the initial lease term. The impact of the change is to
increase depreciation and amortization expense by $30,000 and $61,000 for the
three and six months ended June 27, 2004.
A portion of the above adjustments was recorded on the books of the LLC's in
which we have a majority ownership or we consolidate under FIN 46. As discussed
in the footnotes to the consolidated financial statements to Form 10K dated
December 26, 2004, the Company allocates results to the minority interests based
on the underlying economics of the investment. The impact of the above
adjustments increased the amount of loss allocated to the minority interests by
$48,000 and $95,000 for the three and six months ended June 27, 2004.
During fourth quarter of 2004, the Company eliminated amounts that had
previously been recorded as restaurant sales revenue arising from complimentary
meals and promotional activities. The Company's previous method of recording
these activities as restaurant sales revenue is not in accordance with generally
accepted accounting principles. Historically the amounts associated with
complimentary meals and promotional activities have been recorded as restaurant
revenues, with an offsetting amount in restaurant operations and corporate
general and administrative expenses. As revised, the Company has eliminated all
amounts for complimentary meals and promotional activities. As a result of these
adjustments, revenue and expenses were decreased by $465,000 for the second
quarter 2004, restaurant operating expenses decreased by $424,000 and general
and administrative expenses decreased by $41,000. The adjustments for the full
six month period ended June 27, 2004 was a decrease in revenues of $962,000, a
decrease in restaurant operating expenses of $875,000 and a decrease in general
and administrative expenses of $87,000. These adjustments have no impact on
previously reported income and are non-cash.
The effects of our revisions to previously reported Consolidated Financial
Statements as of and for the quarter ended June 27, 2004 are summarized as
follows.
18
The following table reflects the effects of the restatement on the Consolidated
Statement of Operations:
JUNE 27, 2004
THREE MONTHS SIX MONTHS
AS PREVIOUSLY RESTATED AS PREVIOUSLY RESTATED
REPORTED REPORTED
Sales 12,646,000 12,181,000 26,156,000 25,194,000
Total Revenue 15,855,000 15,390,000 32,851,000 31,889,000
Restaurant operating expenses 8,054,000 7,628,000 16,179,000 15,300,000
General & administrative 1,083,000 1,041,000 2,310,000 2,221,000
Depreciation & amortization 454,000 485,000 903,000 964,000
Total operating expenses 12,494,000(1)15,664,000 25,632,000 32,104,000
Loss from operations (246,000) (274,000) (160,000) (215,000)
Loss before taxes (312,000) (340,000) (292,000) (347,000)
Loss before minority interest (317,000) (345,000) (320,000) (375,000)
Minority interest 166,000 214,000 266,000 361,000
Net loss (151,000) (131,000) (54,000) (14,000)
Net loss applicable to common stock (163,000) (143,000) (79,000) (39,000)
Net loss per share applicable to common
stock:
Basic ($0.03) ($0.03) ($0.01) ($0.01)
Diluted ($0.03) ($0.03) ($0.01) ($0.01)
(1) Includes cost of sales amounts that were not included in the "Total operating expenses"
subtotal in prior financial statements.
The following table reflects the effects of the restatement on the Consolidated
Statement of Cash Flows:
JUNE 27, 2004
AS PREVIOUSLY REPORTED RESTATED
Cash flows from operating activities
Net loss (54,000) (14,000)
Depreciation and amortization 903,000 964,000
Minority interest in net loss of subsidiaries (266,000) (361,000)
Tenant improvement allowances - 1,002,000
Other long term liabilities (167,000) (174,000)
Net cash provided by operating activities 968,000 1,969,000
Tenant improvement allowances 1,002,000 -
Net cash provided by (used in) financing activities 603,000 (398,000)
19
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.
Three Months Ended Six Months Ended
------------------------- -------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
------ ------ ------ ------
(restated) (restated)
Revenues: % % % %
Company restaurant sales 71.1 79.1 74.3 79.0
Reimbursed managed outlet
Operating expenses 26.9 18.9 23.7 19.1
Management and license fees 2.0 2.0 2.0 1.9
------ ------ ------ ------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales 20.2 23.4 20.9 23.1
Restaurant operating expense 42.6 49.6 43.6 48.0
Managed outlet operating expense 26.9 18.9 23.7 19.1
General and administrative expense 6.5 6.8 6.3 7.0
Depreciation and amortization 2.6 3.2 2.6 3.0
Pre-opening expenses 0.8 - 0.7 0.5
------ ------ ------ ------
Total operating expenses 99.6 101.9 97.8 100.7
------ ------ ------ ------
Operating income (loss) 0.4 (1.9) 2.2 (0.7)
Interest expense, net (0.2) (0.4) (0.2) (0.4)
------ ------ ------ ------
Income (loss) before provision for
income taxes, minority interest and
equity in loss of joint venture 0.2 (2.3) 2.0 (1.1)
Provision for income taxes (0.7) (0.0) (0.6) (0.1)
Minority interest in net loss
of subsidiaries 1.2 1.4 0.9 1.1
------ ------ ------ ------
Net income (loss) 0.7 (0.9) 2.3 (0.1)
====== ====== ====== ======
The following table sets forth, for the periods indicated, information deprived
from the Company's consolidated financial statements of operations expressed as
a percentage of total restaurant sales.
Three Months Ended Six Months Ended
------------------------- -------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
------ ------ ------ ------
(restated) (restated)
Revenues: % % % %
Company restaurant sales 100.0 100.0 100.0 100.0
Cost of sales 28.4 29.6 28.2 29.3
Restaurant operating expenses 60.0 62.6 58.8 60.7
20
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
Second Quarter Year-to-date Total open at
Openings Openings End of Quarter
---------------- --------------- ----------------
FY 2005 FY 2004 FY 2005 FY2004 FY 2005 FY 2004
------- ------- ------- ------ ------- -------
Daily Grill restaurants:
Company owned 1 - 2 1 13 11
Managed and/or licensed - - - - 8 7
Grill on the Alley restaurants:
Company owned - - - - 4 4
Other restaurants
Managed and/or licensed - - - - - 1
------- ------- ------- ------ ------- -------
Total 1 - 2 1 25 23
======= ======= ======= ====== ======= =======
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 58,824 $ 59,554 $ 61,792 $ 61,900
Grill on the Alley 79,939 70,480 80,826 73,798
Change in comparable restaurant (1):
Daily Grill (1.5)% 3.3% (1.3)% 6.1%
Grill on the Alley 13.4% (5.9)% 9.5% (0.1)%
Total sales:
Daily Grill $ 9,260,000 $ 8,516,000 $18,398,000 $17,519,000
Grill on the Alley 4,157,000 3,665,000 8,406,000 7,675,000
------------ ------------ ------------ ------------
Total consolidated sales $13,417,000 $12,181,000 $26,804,000 $25,194,000
============ ============ ============ ============
(1) When computing comparable restaurant sales, restaurants open for at least 12 months
are compared from period to period.
We also earn management and license fee revenue based on a percentage of gross
sales at restaurants under management and licensing arrangements. Our management
and license fee revenue typically is earned at a rate of five to eight percent
of reported sales at these restaurants. The sales of managed and licensed
restaurants are not included in our statements of operations. However, we
consider the disclosure of these sales to be a key indicator of brand strength
and important to understanding how changes in sales at the managed and licensed
restaurants impact our revenue.
21
Sales at non-Company owned Grill Concepts-branded restaurants, categorized as,
managed and licensed restaurants were as follows:
Three Months Ended Six Months Ended
------------------------ --------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
----------- ----------- ------------ ------------
Managed Daily Grills 4,512,000 3,579,000 9,113,000 7,473,000
Licensed Daily Grills 1,961,000 2,061,000 3,770,000 4,270,000
----------- ----------- ------------ ------------
$6,473,000 $5,640,000 $12,883,000 $11,743,000
=========== =========== ============ ============
Management and license fees
Percent of gross sales 5.7% 5.4% 5.6% 5.1%
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 26, 2005 AS COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 27, 2004
Revenues. Total revenues increased 22.6% to $18.9 million from $15.4 million
for the 2005 second quarter in the 2004 second quarter and increased 13.2% to
$36.1 million for the 2005 year-to-date period from $31.9 million for the 2004
year-to-date period. For the quarter, total revenues consisted of sales
revenues of $13.4 million, up 10.2% from $12.2 million in the 2004 quarter,
management and license fee of $369,000, up 20.6% from $306,000 in the 2004
quarter, and reimbursed managed outlet expenses of $5.1 million, up 75.2% from
$2.9 million in the 2004 quarter. For the year-to-date period, total revenues
consisted of sales revenues of $26.8 million, up from $25.2 million in the 2004
year-to-date period, management and license fees of $725,000, up 20.4% from,
$602,000 in the 2004 year-to-date period, and reimbursed managed outlet expenses
of $8.6 million, up 41% from $6.1 million in the 2004 year-to-date period.
Sales for Daily Grill restaurants increased by 8.7% from $8.5 million in the
2004 quarter to $9.3 million in the 2005 period. The increase in sales revenues
for the Daily Grill restaurants from 2004 to 2005 was primarily attributable to
opening of the Santa Monica Daily Grill ($0.6 million) and the Downtown Daily
Grill ($0.3 million) partially offset by a decrease in same store sales of 1.5%
($0.1 million) for restaurants open for the entire 26 weeks in both 2004 and
2005. The decrease in same store sales was principally attributable to the La
Cienega Daily Grill, which accounted for $0.1 million, or 75.6%, of the decrease
in same store sales.
Sales for Daily Grill restaurants increased by 5.0% from $17.5 million for the
six months in 2004 to $18.4 million in 2005. The increase in sales revenues for
the Daily Grill restaurants from 2004 to 2005 was primarily due to the opening
of the Santa Monica Daily Grill, the Downtown Daily Grill and the Bethesda Daily
Grill ($1.1 million) partially offset by a decrease in same store sales ($0.2
million). Management considers performance of same store or comparable store
sales to be an important measure of growth when evaluating performance. Weighted
average weekly sales at the Daily Grill restaurants decreased 0.2% from $61,900
in 2004 to $61,792 in 2005. Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 2005 reflected a decrease in
guest counts during the period partially offset by improved average checks. The
decrease in same store sales and average weekly sales was principally
attributable to the La Cienega Daily Grill where average weekly sales decreased
9.5% for the six months of 2005 compared to 2004 due to a decrease in guest
counts.
22
Sales for Grill restaurants increased by 13.4% from $3.7 million in the 2004
quarter to $4.2 million in 2005. The increase in sales revenues for the Grill
restaurants from 2004 to 2005 was primarily attributable to increased guest
counts and partially by improved check averages.
Sales for Grill restaurants increased 9.5% from $7.7 million to $8.4 million for
the six month periods. The increase in sales revenues for the Grill restaurants
from 2004 to 2005 was attributable to improved check averages and guest counts.
Weighted average weekly sales at the Grill restaurants increased 9.5% from
$73,798 in 2004 to $80,826 in 2005.
Management and license fee revenues were attributable to hotel restaurant
management services which accounted for $300,000 of management fees during the
2005 quarter as compared to $250,000 during the 2004 quarter and licensing fees
of $69,000 during the 2005 quarter compared to $56,000 during the 2004 quarter.
The increase in management and license fees during 2005 was attributable to
management of the Long Beach Daily Grill beginning in November 2004 and improved
sales at the Burbank, Houston and LAX Daily Grills.
For the year-to-date period, management and license fee revenues were
attributable to hotel restaurant management services which accounted for
$605,000 of management fees during the 2005 period as compared to $488,000
during the 2004 period and licensing fees of $120,000 during the 2005 period as
compared to $114,000 during the 2004 period. The increase in management and
license fees during 2005 was attributable to management of the Long Beach Daily
Grill beginning in November 2004 and improved sales at the San Francisco,
Georgetown, Burbank, Houston and LAX Daily Grills.
Reimbursed managed outlet expenses represent amounts incurred by the Company on
behalf of managed outlets for which the Company receives reimbursement from the
owner. The increase in revenues attributable to reimbursed managed outlet
expenses for both the quarter and year-to-date period was attributable to the
opening of the Long Beach Daily Grill in November 2004 and increased cost of
goods and payroll at the San Francisco and Georgetown Daily Grills due to
improved sales.
Operating Expenses and Operating Results. Total operating expenses, including
cost of sales, restaurant operating expenses, reimbursable costs, general and
administrative expense, depreciation and amortization, and pre-opening costs,
increased 20.1% to $18.8 million in the 2005 quarter (representing 99.7% of
revenues) from $15.7 million in 2004 (representing 101.8% of revenues). For the
six months, total operating expenses increased 10.0% to $35.3 million
(representing 97.9% of revenues) from $32.1 million in 2004 (representing 100.7%
of revenues).
23
Cost of Sales. While sales revenues increased by 10.2% ($1,236,000) in the 2005
quarter and 6.4% ($1,610,000) for the six months as compared to 2004, total cost
of sales increased by 5.7%, or $207,000, for the quarter and 2.3% or $173,000,
for the six months ended June 26, 2005 as compared to the same periods in 2004.
The dollar increase in cost of sales is primarily due to the opening of the
Santa Monica and Downtown Daily Grills ($245,000 for the quarter and $274,000
for the six months). Cost of sales as a percentage of restaurant sales was 28.4%
for the quarter and 28.2% for the six months ended June 26, 2005 as compared to
29.6% for the second quarter and 29.3% for the year-to-date period in 2004. The
decrease in cost of sales as a percentage of total sales was attributable to
menu changes during the second quarter and six months of 2005.
Restaurant operating expenses. Restaurant operating expenses increased by
$419,000, or 5.5%, for the quarter and $448,000, or 2.9%, for the six months as
compared to the same periods in 2004. The dollar increase in restaurant
operating expenses for the quarter was primarily attributable to the opening of
the Santa Monica Daily Grill in March 2005 ($355,000), the opening of the
Downtown Daily Grill in May 2005 ($163,000) and an increase in professional fees
($47,000) and repairs and maintenance ($38,000) at comparable restaurants
partially offset by a decrease in operating expenses at the Bethesda Daily Grill
in its second year ($122,000) and decreased payroll and benefits ($39,000) at
comparable restaurants. The dollar increase in operating expenses for the six
months was primarily attributable to the opening of the Santa Monica Daily Grill
($420,000) and the Downtown Daily Grill ($177,000), an increase in repairs and
maintenance ($84,000) and professional fees ($54,000) at comparable restaurants
partially offset by a reduction in operating costs at the Bethesda Daily Grill
($117,000) and decreased occupancy costs ($92,000) and payroll ($76,000) at
comparable restaurants. Restaurant operating expenses, as a percentage of
restaurant sales, decreased in the second quarter from 62.6% in 2004 to 60.0% in
2005. For the six months, the percentages were 60.7% in 2004 and 58.8% in 2005.
Reimbursed Costs. Reimbursed costs increased 75.2% from $2.9 million to $5.1
million for the quarter and 40.4% from $6.1 million in to $8.6 million in 2005
for the six months. These expenses represent the operating costs for which we
are the primary obligor of the restaurants we do not consolidate. The increase
is primarily due to the opening of the Long Beach Daily Grill in November 2004
and increased cost of goods and payroll at the San Francisco and Georgetown
Daily Grills due to improved sales.
General and Administrative. General and administrative expense increased 17.6%
for the quarter and 2.2% for the six months as compared to the same periods in
2004. As a percentage of revenues, general and administrative expense totaled
6.5% for the quarter and 6.3% for the six months as compared to 6.8% for the
quarter and 7.0% for the six months in 2004. The increase in total general and
administrative expense of $183,000, or 17.6%, for the 2005 quarter was primarily
attributable to increases in wages and related benefits. The increase in total
general and administrative expense of $49,000, or 2.2%, for the 2005 six month
period is attributable to increases in wages and related benefits offset by
reduced travel costs and office expenses.
Depreciation and Amortization. Depreciation and amortization expense decreased
by 0.6% for the quarter and decreased 2.2% for the six months compared to 2004,
representing 3.5% of restaurant sales for the six months of 2005 and 3.8% of
sales in 2004. The decrease in depreciation and amortization expense for the six
months was primarily due to the completion of depreciation of equipment at a
number of the Daily Grill restaurants.
24
Pre-opening Costs. Pre-opening costs totaled $153,000 in the 2005 quarter as
compared to $1,000 in the 2004 quarter and $244,000 in the 2005 six month period
as compared with $148,000 in 2004. These pre-opening costs were attributable to
the opening in January 2004 of the Bethesda Daily Grill and the opening of the
Santa Monica and Downtown Daily Grills in 2005.
Interest Expense. Total interest expense, net, decreased by $23,000, or 34.9%,
during the quarter and $52,000, or 39.4%, during the six months compared to the
same periods in 2004. The decrease in interest expense was primarily
attributable to substantially reduced warrant amortization in 2005.
Provision for income taxes. The income tax provision for the quarter was
$131,000 an increase of $126,000 over the prior year and for the six months was
$209,000 an increase of $181,000 over the prior year. The tax provision is
comprised of state taxes, alternative minimum taxes for 2005 and several large
credits (in 2004 the Company had federal net operating loss to carry forward,
which were utilized in fiscal 2004). The tax rates in 2005 and 2004 were
comprised of the federal and state statutory rates, less any permanent items and
tax credits based on the annual estimated effective tax rates for the respective
years.
Minority Interest. We reported a minority interest in the loss of our majority
owned subsidiaries of $233,000 during the 2005 second quarter as compared to
$214,000 during the 2004 quarter. For the six months, we reported a minority
interest in the loss of majority owned subsidiaries of $324,000 during 2005 and
$361,000 during 2004. The change in minority interest in loss for the quarter
and six months was primarily attributable to pre-opening costs for the Downtown
Daily Grill partially offset by improved operating results at the South Bay
Daily Grill and the Hollywood Grill.
Net Income. We reported net income of $125,000 for the second quarter and
$807,000 for the six months of 2005 as compared to a net loss of $131,000 for
the second quarter and $14,000 for the six months in 2004.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At June 26, 2005 we had negative working capital of $1.3 million and a cash
balance of $1.5 million compared to positive working capital of $0.2 million and
a cash balance of $1.4 million at December 26, 2004.
Net cash provided by operations during the six months ended June 26, 2005
totaled $2,801,000 compared to $1,969,000 during the six months ended June 27,
2004. The increase in cash provided by operations primarily resulted from
increased profitability of $821,000 and in tenant improvement allowances of
$770,000 partially offset by changes in operating assets and liabilities.
Net cash used in investing activities during the six months ended June 26, 2005
totaled $3,469,000 compared to $1,435,000 during the six months ended June 27,
2004. Cash used in investing activities related primarily to the purchases of
furniture, fixtures and equipment for the Santa Monica Daily Grill ($1,141,000)
and the Downtown Daily Grill ($1,802,000).
Net cash provided by financing activities during the six months ended June 26,
2005 totaled $798,000 compared to $398,000 used in financing activities during
the six months ended June 27, 2004. Cash provided by financing activities
during the current period related to proceeds from LLC members ($976,000),
equipment financing ($118,000), and exercise of stock option ($24,000) offset by
reductions in debt ($192,000) and distribution of profits to the minority
investor in San Jose Grill, LLC ($143,000).
25
Financing Facilities. At June 26, 2005, the Company had $157,000 owing under
equipment lease financing transactions, a loan from a member of Chicago - The
Grill on the Alley, LLC of $0.9 million, equipment loans of $0.1 million, loans
from stockholders/officers of $0.2 million, and loans/advances from a landlord,
the SBA and others of $0.1 million. Construction of the Santa Monica Daily Grill
was paid for through a $2.2 million tenant improvement allowance of which
$1,327,000 was received during the first six months of 2005. Construction of
the Downtown Daily Grill was funded through a $600,000 tenant improvement
allowance, minority member contribution of $1,250,000 and the Company's capital
contribution of $251,000. As of June 26, 2005, $575,000 of the tenant
improvement allowance on the Downtown Daily Grill has been received. These
tenant incentive allowances have been recorded in other long-term liabilities
and are being amortized against rent expense over the lease terms.
In June 2004, we finalized an agreement with respect to the establishment of a
new bank credit facility. Under the terms of the new bank credit facility, we
have been provided with financing in the form of a revolving line of credit in
the amount of $500,000, an irrevocable standby letter of credit in the amount of
$700,000, increased to $860,000 in January 2005 and equipment financing in the
amount of $500,000. As of June 26, 2005 we have utilized $162,000 of the
equipment financing. The facility has a one-year term, is secured by assets and
is subject to certain standard borrowing covenants. The bank has renewed the
credit facility extending the term to August 4, 2006.
Operating Leases and Contractual Obligations. At June 26, 2005, we were
obligated under eighteen leases covering the premises in which our Daily Grill
and Grill Restaurants are located as well as leases on our executive offices.
Such restaurant leases and the executive office lease contain minimum rent
provisions which provide for the payment of minimum aggregate rental payments of
approximately $25.1 million over the life of those leases, with minimum annual
rental payments of $3.3 million in 2005, $6.1 million between 2006 and 2007,
$4.8 million between 2008 and 2009, and $10.9 million thereafter. There were no
material changes in our obligations under operating leases or other contracts
during the quarter ended June 26, 2005 as compared to those described in the
Company's Form 10-K for the year ended December 26, 2004.
Commitments Relating to Managed Restaurants and LLCs. Under certain of our
operating and management agreements we have 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
we may be required to make cash advances or contributions, guarantee obligations
or defer receipt of cash are described in the Company's Form 10-K for the year
ended December 26, 2004. There were no material developments with respect to
those agreements and arrangements during the quarter ended June 26, 2005.
Detailed information regarding the initial capital contributions to the LLCs and
the CityWalk Partnership, Preferred Returns for each, management fees payable to
the Company and principal distribution provisions are included in the Company's
Form 10-K for the year ended December 26, 2004. The following tables set forth
a summary for each of the LLCs and the CityWalk Partnership of (1) the
distributions of capital to the Members and/or the Company during the six months
ended June 26, 2005, (2) the unreturned balance of the capital contributions of
the Members and/or the Company at June 26, 2005, and the accrued but unpaid
preferred returns due to the Members and/or the Company at June 26, 2005:
26
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the six
months ended June 26, 2005: Members $ 143,000
========================
Company $ 144,000
========================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ -
========================
Company $ -
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ -
========================
Company $ -
========================
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the six months
ended June 26, 2005: Members (a) $ 126,000
========================
Company $ -
========================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 992,000
========================
Company $ -
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ -
========================
Company $ -
========================
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
six months ended June 26, 2005 Members $ -
========================
Company $ -
========================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 1,200,000
========================
Company $ 250,000
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members (b) $ -
========================
Company (b) $ -
========================
27
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
six months ended June 26, 2005: Members $ -
========================
Company $ -
========================
Unreturned Initial and Additional
Capital Contributions at June 26,
2005: Members $ 1,100,000
========================
Company $ 450,000
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members (b) $ -
========================
Company (b) $ -
========================
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during the
six months ended June 26, 2005: Members $ -
========================
Company $ -
========================
Unreturned Initial and Additional
Capital Contributions at June 26,
2005: Members $ 1,346,106
========================
Company $ 246,106
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members (b) $ -
========================
Company $ -
========================
DOWNTOWN DAILY GRILL (612 FLOWER DAILY GRILL, LLC)
Distributions of capital during the
six months ended June 26, 2005: Members $ -
========================
Company $ -
========================
Unreturned Initial Capital
Contributions at June 26, 2005: Members $ 846,000
========================
Company $ 222,000
========================
Accrued but unpaid Preferred
Returns at June 26, 2005: Members $ 14,134
========================
Company $ 6,626
========================
28
a) Distribution of capital and note repayments as of June 26, 2005
includes $84,000 of capital and note repayments and $42,000 of interest and
preferred return.
b) Due to the under performance of the restaurants the preferred return
is not being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation of the
subsidiary entity. If preferred returns were accrued for The Grill on
Hollywood the Member would have an accrued preferred return of $652,000 and
the Company would have an accrued preferred return of $136,000. If
preferred returns were accrued for the South Bay Daily Grill the Member
would have an accrued preferred return of $283,000 and the Company would
have a preferred return of $131,000. If preferred returns were accrued for
the CityWalk Partnership the Member would have an accrued preferred return
of 474,000.
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 certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company's
critical accounting policies is set forth in the Company's Form 10-K for the
year ended December 26, 2004. As of, and for the quarter ended, June 26, 2005,
there have been no material changes or updates to the Company's critical
accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2004, the EITF reached final consensus on EITF 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128," which
requires companies that have participating securities to calculate earnings per
share using the two-class method. This method requires the allocation of
undistributed earnings to the common shares and participating securities based
on the proportion of undistributed earnings that each would have been entitled
to had all the periods earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company adopted EITF 03-06 for the quarter ended June 27, 2004,
however there has been no impact on the Company's financial statements as the
preferred shares are not participating securities.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
29
As permitted by Statement 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method may have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share in note 2 to the financial statements.
We expect to adopt Statement 123(R) in the first quarter of 2006.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of the new restaurants during 2005, the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 26, 2004, the following developments may impact future operating
results and financial results.
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 $156,000 of borrowings outstanding under the Credit
Facility at June 26, 2005. Borrowings under the Credit Facility, which
terminates in August 2006, bear interest at prime rate. A hypothetical 1%
interest rate change would not have a material impact on the Company's results
of operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
30
An evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on their
evaluation, our certifying officers concluded that these disclosure controls and
procedures are effective in providing reasonable assurance that the information
required to be disclosed by us in our periodic reports filed with the Securities
and Exchange Commission ("SEC") is recorded, processed, summarized and reported
within the time periods specified by the SEC's rules and SEC reports.
There have been no changes in our internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2005, the Company issued 25,709 shares of common stock to Lewis Wolff,
Trustee for the Wolff Revocable Trust of 1993, pursuant to the exercise of
75,000 warrants held by the Wolff Trust. Mr. Wolff is a director of the Company.
The exercise price of the warrant, $2.12 per share, was paid by means of a
cashless exercise. The warrants were originally issued to the Wolff Revocable
Trust of 1993 pursuant to an agreement by Mr. Wolff to guarantee certain bank
indebtedness of the Company.
In June 2005, the Company issued 3,077 shares of common stock to Stephen Ross,
Co-Trustee for the Ross Family Trust, pursuant to the exercise of 16,029
warrants held by the Ross Family Trust. Mr. Ross is a director of the Company.
The exercise price of the warrant, $2.77 per share, was paid by means of a
cashless exercise. The warrants were originally issued to the Trust pursuant to
a loan given by the Trust to the Company.
31
In June 2005, the Company issued 3,077 shares of common stock to Stephen Ross,
Co-Trustee for the Mazel Family Trust, pursuant to the exercise of 16,029
warrants held by the Mazel Trust. Mr. Ross is a Director with the Company. The
exercise price of the warrant, $2.77 per share, was paid by means of a cashless
exercise. The warrants were originally issued to the Trust pursuant to a loan
given by the Trust to the Company.
In June 2005, the Company issued 31,486 shares of common stock to Michael
Weinstock pursuant to the exercise of 75,000 warrants held by Michael Weinstock
Family Trust. Mr. Weinstock is Chairman of the Company. The exercise price of
the warrants, $2.12 per share, was paid by means of a cashless exercise. The
warrants were originally issued to the Trust pursuant to an agreement by Mr.
Weinstock to guarantee certain bank indebtedness of the Company.
The issuance of the shares of our common stock described above was pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended and related state private offering exemptions. The
purchasers were accredited investors as defined in the Securities Act who took
the shares for investment purposes without a view to distribution and had access
to information concerning the Company and its business prospects, as required by
the Securities Act.
In addition, there was no general solicitation or advertising in connection with
the issuance of the shares.
No commissions were paid in connection with the issuance described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Grill Concepts, Inc. was held on July 27,
2005, the stockholders voted on two proposals: the election of directors and
ratification of the appointment of MossAdams LLP as the Company's independent
registered public accounting firm.
The first matter voted on was a proposal to elect Robert Spivak, Michael
Weinstock, Glenn Golenberg, Lewis Wolff, Stephen Ross, Bruce Schwartz and
Richard Dantas, as directors of the Company. All director nominees were elected.
The following table sets forth the votes in such election:
Votes For Votes Against
--------- ------------
Robert Spivak 3,433,648 23,106
Michael Weinstock 3,433,028 23,726
Glenn Golenberg 3,448,273 8,481
Lewis Wolff 3,433,648 23,106
Stephen Ross 3,448,273 8,481
Bruce Schwartz 3,447,648 9,106
Richard Dantas 3,448,273 8,481
In addition to the election of directors as noted above, the following matter
was voted upon at such meeting:
32
Proposal 2, to ratify the appointment of MossAdams LLP as the Company's
independent registered public accounting firm was approved with 3,444,946 votes
cast for, 5,463 votes cast against, and 8,630 votes abstained.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Description
----------- -----------
31.1 Section 302 Certification of CEO
31.2 Section 302 Certification of CFO
32.1 Certification of CEO Pursuant to 18.U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of CFO Pursuant to 18.U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
33
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 August 11, 2005
----------------- Executive Officer
Robert Spivak
/s/ Philip Gay Executive Vice President and August 11, 2005
------------------ Chief Financial Officer
Philip Gay
34