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 25, 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
--------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)
(310) 820-5559
-------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 2, 2005, 5,726,495 shares of Common Stock of the issuer were
outstanding.
GRILL CONCEPTS, INC.
----------------------
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 25, 2005 and December 26, 2004 (unaudited) 2
Condensed Consolidated Statements of Operations -
For the three months and nine months ended September
25, 2005 and September 26, 2004 (restated) (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 25, 2005 and
September 26, 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 32
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 5. Other Information 33
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
September 25, December 26,
2005 2004
----------- -----------
Current assets:
Cash and cash equivalents $ 1,659,000 $ 1,407,000
Inventories 642,000 620,000
Receivables, net of reserve ($203,000 in
2005 and $143,000 in 2004) 771,000 836,000
Reimbursement receivables from
managed outlets 782,000 928,000
Prepaid expenses and other current assets 418,000 2,372,000
----------- -----------
Total current assets 4,272,000 6,163,000
Furniture, equipment, & improvements, net 13,992,000 11,864,000
Goodwill, net 205,000 205,000
Restricted cash 1,042,000 882,000
Note receivable 90,000 101,000
Liquor licenses 421,000 350,000
Other assets 234,000 184,000
----------- -----------
Total assets $20,256,000 $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
September 25, December 26,
2005 2004
----------- ------------
Current liabilities:
Accounts payable $ 1,184,000 $ 1,988,000
Accrued expenses 3,185,000 2,548,000
Accrued managed outlet operating expenses 782,000 928,000
Current portion of long term debt 63,000 196,000
Current portion notes payable - related parties 308,000 294,000
------------ ------------
Total current liabilities 5,522,000 5,954,000
Long-term debt 216,000 148,000
Notes payable - related parties 711,000 829,000
Other long-term liabilities 7,681,000 8,054,000
------------ ------------
Total liabilities 14,130,000 14,985,000
Minority interest 1,644,000 934,000
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, 5,726,495 shares
issued and outstanding in 2005, 5,650,146 shares
issued and outstanding in 2004 - -
Additional paid-in capital 13,682,000 13,649,000
Accumulated deficit (9,200,000) (9,819,000)
------------ ------------
Total stockholders' equity 4,482,000 3,830,000
------------ ------------
Total liabilities, minority interest and
stockholders' equity $20,256,000 $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 Nine Months Ended
--------------------------- ---------------------------
September 25, September 26, September 25, September 26,
-------------- -------------- -------------- --------------
2005 2004 2005 2004
--------- --------- --------- ---------
(restated) (restated)
Revenues:
Sales $13,298,000 $11,721,000 $40,102,000 $36,915,000
Cost reimbursements 1,710,000 2,615,000 10,264,000 8,708,000
Management and license fees 402,000 308,000 1,127,000 910,000
-------------- -------------- -------------- --------------
Total revenues 15,410,000 14,644,000 51,493,000 46,533,000
Operating expenses:
Cost of sales 3,743,000 3,367,000 11,295,000 10,746,000
Restaurant operating expenses 8,256,000 7,342,000 24,004,000 22,641,000
Reimbursed costs 1,710,000 2,615,000 10,264,000 8,708,000
General and administrative 1,147,000 1,081,000 3,417,000 3,302,000
Depreciation and amortization 660,000 484,000 1,603,000 1,448,000
Pre-opening costs 11,000 - 255,000 148,000
-------------- -------------- -------------- --------------
Total operating expenses 15,527,000 14,889,000 50,838,000 46,993,000
-------------- -------------- -------------- --------------
Income (loss) from operations (117,000) (245,000) 655,000 (460,000)
Interest expense, net (43,000) (59,000) (123,000) (191,000)
-------------- -------------- -------------- --------------
Income (loss) before provision for
income taxes and minority interest (160,000) (304,000) 532,000 (651,000)
Provision for income taxes (68,000) (6,000) (277,000) (34,000)
Minority interest in loss of subsidiaries 40,000 132,000 364,000 493,000
-------------- -------------- -------------- --------------
Net income (loss) (188,000) (178,000) 619,000 (192,000)
Preferred dividends accrued (13,000) (13,000) (38,000) (38,000)
-------------- -------------- -------------- --------------
Net income (loss) applicable to
common stock $ (201,000) $ (191,000) $ 581,000 $ (230,000)
============== ============== =============== ==============
Net income (loss) per share applicable
to common stock:
Basic net income (loss) $ (0.04) $ (0.03) $ 0.10 $ (0.04)
============== ============== =============== ==============
Diluted net income (loss) $ (0.04) $ (0.03) $ 0.09 $ (0.04)
============== ============== =============== ==============
Weighted average shares outstanding:
Basic 5,652,230 5,647,707 5,679,752 5,594,672
============== ============== =============== ==============
Diluted 5,652,230 5,647,707 6,217,285 5,594,672
============== ============== =============== ==============
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)
Nine Months Ended
----------------------
September 25, September 26,
2005 2004
------------ ------------
(restated)
Cash flows from operating activities:
Net income (loss) $ 619,000 $ (192,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,603,000 1,448,000
Stock based compensation - (84,000)
Provision for doubtful accounts 60,000 8,000
Amortized deferred rent and lease incentives (484,000) (127,000)
Gain on sale of assets (5,000) (3,000)
Minority interest in loss of subsidiaries (364,000) (493,000)
Changes in operating assets and liabilities:
Inventories (22,000) 15,000
Receivables 5,000 90,000
Reimbursable costs receivable 146,000 51,000
Prepaid expenses and other current assets 103,000 (32,000)
Tenant improvement allowances 1,962,000 1,049,000
Other assets (65,000) 50,000
Accounts payable (804,000) 597,000
Accrued expenses 619,000 (438,000)
Reimburseable costs payable (146,000) (51,000)
------------ ------------
Net cash provided by operating activities 3,227,000 1,888,000
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 5,000 5,000
Restricted cash (160,000) (60,000)
Purchase of liquor license (71,000) (5,000)
Purchase of furniture, equipment and improvements (3,716,000) (1,774,000)
------------ ------------
Net cash used in investing activities (3,942,000) (1,834,000)
------------ ------------
Cash flows from financing activities:
Capital Contributions from minority interest
members in LLCs 1,274,000 35,000
Return of capital and profits to minority shareholder (186,000) (147,000)
Collections on note receivable 15,000 15,000
Proceeds from equipment financing 118,000 -
Proceeds from exercise of stock options and warrants 33,000 -
Payments on notes payable - related parties (104,000) (159,000)
Payments on long-term debt (183,000) (198,000)
------------ ------------
Net cash provided by (used in) financing activities 967,000 (454,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 252,000 (400,000)
Cash and cash equivalents, beginning of period 1,407,000 1,496.000
------------ ------------
Cash and cash equivalents, end of period $ 1,659,000 $ 1,096,000
============ ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 141,000 $ 107,000
Income taxes 263,000 119,000
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 our 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
We began a review of our 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, we revised our accounting for
leases in 2004 and restated our historical financial statements as of September
26, 2004 to correct for these errors in our lease accounting.
6
Historically, we 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, we 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 we 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 $6,000 and $3,000 for the nine months
ended September 26, 2004.
In closing the 2004 books and records, we reviewed the estimated useful lives
that we were using to amortize our leasehold improvements. In the case of six
restaurants, it was found that the incorrect lives had been used. We have
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 $91,000 for the three and
nine months ended September 26, 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 for the year ended December 26, 2004, we allocate
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 $143,000, respectively for
the three and nine months ended September 26, 2004.
During fourth quarter of 2004, we eliminated amounts that had previously been
recorded as restaurant sales revenue arising from complimentary meals and
promotional activities. Our 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, we
have eliminated all amounts for complimentary meals and promotional activities.
As a result of these adjustments, revenues were decreased by $448,000 in the
third quarter 2004, restaurant operating expenses decreased by $406,000 and
general and administrative expenses decreased by $42,000. The adjustments for
the full nine month period ended September 26, 2004 was a decrease in revenues
of $1,410,000, a decrease in restaurant operating expenses of $1,281,000 and a
decrease in general and administrative expenses of $129,000. 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 September 26, 2004 are summarized as
follows.
7
The following table reflects the effects of the restatement on the
Consolidated Statement of Operations:
SEPTEMBER 26, 2004
THREE MONTHS NINE MONTHS
AS PREVIOUSLY RESTATED AS PREVIOUSLY RESTATED
REPORTED REPORTED
Sales 12,169,000 11,721,000 38,325,000 36,915,000
Total Revenue 15,092,000 14,644,000 47,943,000 46,533,000
Restaurant operating expenses 7,752,000 7,344,000 23,928,000 22,641,000
General & administrative 1,124,000 1,081,000 3,434,000 3,302,000
Depreciation & amortization 454,000 484,000 1,357,000 1,448,000
Total operating expenses 15,310,000(1)14,889,000 48,321,000 46,993,000
Loss from operations (218,000) (245,000) (378,000) (460,000)
Loss before taxes (277,000) (304,000) (569,000) (651,000)
Loss before minority interest (283,000) (310,000) (603,000) (685,000)
Minority interest 84,000 132,000 350,000 493,000
Net loss (199,000) (178,000) (253,000) (192,000)
Net loss applicable to common stock (212,000) (191,000) (291,000) (230,000)
Net loss per share applicable to common
stock:
Basic ($0.04) ($0.03) ($0.05) ($0.04)
Diluted ($0.04) ($0.03) ($0.05) ($0.04)
(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:
SEPTEMBER 26, 2004
AS PREVIOUSLY REPORTED RESTATED
Cash flows from operating activities
Net loss (253,000) (192,000)
Depreciation and amortization 1,357,000 1,448,000
Minority interest in net loss of subsidiaries (350,000) (493,000)
Tenant improvement allowances - 1,049,000
Other long term liabilities (118,000) (127,000)
Net cash provided by operating activities 839,000 1,888,000
Tenant improvement allowances 1,049,000 -
Net cash provided by (used in) financing activities 595,000 (454,000)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
8
2. PRO-FORMA STOCK-BASED COMPENSATION
We account 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 comply 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 our 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 our 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. We account 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, our 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 our 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, our Compensation Committee, as administrators of our stock
option plan, resolved that the cashless exercise feature in our stock option
plan will not be permitted, and a notification was subsequently given to all
employees on July 30, 2004. Effective with this date, we reverted back to
accounting for our options under the fixed accounting treatment.
We have 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
nine-month period ended September 25, 2005 there were 117,250 options granted,
11,200 options exercised and 64,050 options cancelled. Pro forma compensation
expense for our stock option plans determined based on the fair value at the
grant date for awards is as follows:
9
Three Months Nine Months
2005 2004 2005 2004
---- ---- ---- ----
(restated) (restated)
Net income (loss), as reported $ (188,000) $ (178,000) $ 619,000 $(192,000)
Add: stock compensation expense
recorded, net of taxes - (155,000) - (84,000)
Deduct: stock compensation
expense under fair value method,
net of taxes (125,000) (71,000) (201,000) (144,000)
----------- ----------- ---------- ----------
Net income (loss), pro forma $ (313,000) $ (404,000) $ 418,000 $(420,000)
=========== =========== ========== ==========
Net income (loss) per share, as
reported:
Basic $ (0.04) $ (0.03) $ 0.10 $ (0.04)
Diluted $ (0.04) $ (0.03) $ 0.09 $ (0.04)
Net income (loss) per share, pro
forma:
Basic $ (0.06) $ (0.07) $ 0.07 $ (0.08)
Diluted $ (0.06) $ (0.07) $ 0.06 $ (0.08)
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 we have access to the space and begin to make improvements in
preparation for intended use. We expense 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.
Prepaid expenses and other current assets at September 25, 2005 and December 26,
2004 were comprised of:
2005 2004
-------- ----------
Lease incentive receivables $ - $1,851,000
Prepaid expenses, other 418,000 521,000
-------- ----------
Total prepaid assets and other
current assets $418,000 $2,372,000
======== ==========
10
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%.
We are 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 portion of the credit facility has
been extended and has a termination date of August 2006.
6. OTHER LONG-TERM LIABILITIES
In connection with certain of our leases, the landlord has provided us 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, we recognize a liability for deferred rent where lease payments
are lower than rental expense recognized on a straight-line basis.
Other Long-Term Liabilities at September 25, 2005 and December 26, 2004 were
comprised of:
2005 2004
---------- ----------
Lease Incentives $5,380,000 $5,653,000
Deferred Rent 2,301,000 2,401,000
---------- ----------
Total Other Long-Term Liabilities $7,681,000 $8,054,000
========== ==========
7. RECENT ACCOUNTING PRONOUNCEMENTS
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.
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
11
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 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 we serve as manager and own 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 nine months ended September 25, 2005, (2) the unreturned
balance of the capital contributions of the Members and/or the Company at
September 25, 2005, and (3) the accrued but unpaid preferred returns due to the
Members and/or the Company at September 25, 2005:
12
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the nine
months ended September 25, 2005: Members $ 186,000
=============
Company $ 187,000
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ -
=============
Company $ -
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ -
=============
Company $ -
=============
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the nine months
ended September 25, 2005: Members (a) $ 189,000
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 948,000
=============
Company $ -
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ -
=============
Company $ -
=============
13
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 1,200,000
=============
Company $ 250,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial and Additional
Capital Contributions at September
25, 2005: Members $ 1,100,000
=============
Company $ 450,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
14
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial and Additional
Capital Contributions at September
25, 2005: Members $ 1,346,000
=============
Company $ 246,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
DOWNTOWN DAILY GRILL (612 FLOWER DAILY GRILL, LLC)
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 1,145,000
=============
Company $ 248,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ 43,000
=============
Company $ 11,000
=============
(a) Distribution of capital and note repayments as of September 25, 2005
includes $128,000 of capital and note repayments and $61,000 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 $708,000 and
the Company would have an accrued preferred return of $148,000. If
preferred returns were accrued for the South Bay Daily Grill the member
would have an accrued preferred return of $318,000 and the Company would
have an accrued preferred return of $123,000. If preferred returns were
accrued for the CityWalk Partnership the Member would have an accrued
preferred return of $500,000.
15
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 nine and three-month periods ended September 25, 2005 and
September 26, 2004 follow:
Nine months 2005 2004
Earnings Shares Earnings Shares
(restated)
--------- ----------- ---------- ---------
Net income (loss) $619,000 $ (192,000)
Less: preferred stock dividend (38,000) (38,000)
--------- ----------
Earnings (deficit) available for
common stockholders 581,000 5,679,752 (230,000) 5,594,672
Dilutive securities:
Stock options - 126,111 - -
Warrants - 411,422 - -
--------- ----------- ---------- ---------
Dilutive earnings (deficit)
available to common stockholders $581,000 6,217,285 $(230,000) 5,594,672
========= =========== ========== =========
For the nine months ended September 25, 2005, 324,625 options, 203,645 warrants
and 500 shares of convertible preferred stock were excluded from the calculation
because they were anti-dilutive. For the nine months ended September 26, 2004,
632,425 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 loss $(188,000) $ (178,000)
Less: preferred stock dividend (13,000) (13,000)
---------- -----------
Deficit available for common
stockholders (201,000) 5,726,003 (191,000) 5,647,707
Dilutive securities:
Stock options - - - -
Warrants - - - -
---------- ----------- ---------- ---------
Dilutive deficit available to
common stockholders $(201,000) 5,726,003 $(191,000) 5,647,707
========== =========== ========== =========
16
For the three months ended September 25, 2005, 726,675 options, 1,359,896
warrants and 500 shares of convertible preferred stock were excluded from the
calculation because they were anti-dilutive. For the three months ended
September 26, 2004, 632,425 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 is waiting until the State Supreme Court hears the
cases currently before the Court of Appeals related to the meal and rest breaks
before scheduling any further action in our case. 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 a settlement while discovery continues. We
have accrued legal costs up to our insurance deductible of $50,000 in this
matter.
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 our
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 our 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. Our 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 our Annual Report on Form 10-K for
the year ended December 26, 2004.
17
2004 RESTATEMENT OF FINANCIAL STATEMENTS
We began a review of our 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, we revised our accounting for
leases in 2004 and restated our 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
nine months ended September 26, 2004 have been restated from those originally
issued to reflect the change in lease accounting.
Historically, we 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, we 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 we 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 $6,000 and $3,000 for the nine months
ended September 26, 2004.
In closing the 2004 books and records, we reviewed the estimated useful lives
that we were using to amortize our leasehold improvements. In the case of six
restaurants, it was found that the incorrect lives had been used. We have
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 $91,000 for the three and
nine months ended September 26, 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 for the
year ended December 26, 2004, we allocate 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 $143,000 for the three and nine months ended September 26, 2004.
During fourth quarter of 2004, we eliminated amounts that had previously been
recorded as restaurant sales revenue arising from complimentary meals and
promotional activities. Our 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, we have eliminated all amounts for
complimentary meals and promotional activities. As a result of these
18
adjustments, revenue and expenses were decreased by $448,000 for the third
quarter 2004, restaurant operating expenses decreased by $406,000 and general
and administrative expenses decreased by $42,000. The adjustments for the full
nine month period ended September 26, 2004 was a decrease in revenues of
$1,410,000, a decrease in restaurant operating expenses of $1,281,000 and a
decrease in general and administrative expenses of $129,000. 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 September 26, 2004 are summarized as
follows.
The following table reflects the effects of the restatement on the Consolidated
Statement of Operations:
SEPTEMBER 26, 2004
THREE MONTHS NINE MONTHS
AS PREVIOUSLY RESTATED AS PREVIOUSLY RESTATED
REPORTED REPORTED
Sales 12,169,000 11,721,000 38,325,000 36,915,000
Total Revenue 15,092,000 14,644,000 47,943,000 46,533,000
Restaurant operating expenses 7,752,000 7,344,000 23,928,000 22,641,000
General & administrative 1,124,000 1,081,000 3,434,000 3,302,000
Depreciation & amortization 454,000 484,000 1,357,000 1,448,000
Total operating expenses 15,310,000(1)14,889,000 48,321,000 46,993,000
Loss from operations (218,000) (245,000) (378,000) (460,000)
Loss before taxes (277,000) (304,000) (569,000) (651,000)
Loss before minority interest (283,000) (310,000) (603,000) (685,000)
Minority interest 84,000 132,000 350,000 493,000
Net loss (199,000) (178,000) (253,000) (192,000)
Net loss applicable to common stock (212,000) (191,000) (291,000) (230,000)
Net loss per share applicable to common
stock:
Basic ($0.04) ($0.03) ($0.05) ($0.04)
Diluted ($0.04) ($0.03) ($0.05) ($0.04)
(1) Includes cost of sales amounts that were not included in the "Total
operating expenses" subtotal in prior financial statements.
19
The following table reflects the effects of the restatement on the Consolidated
Statement of Cash Flows:
SEPTEMBER 26, 2004
AS PREVIOUSLY REPORTED RESTATED
Cash flows from operating activities
Net loss (253,000) (192,000)
Depreciation and amortization 1,357,000 1,448,000
Minority interest in net loss of subsidiaries (350,000) (493,000)
Tenant improvement allowances - 1,049,000
Other long term liabilities (118,000) (127,000)
Net cash provided by operating activities 839,000 1,888,000
Tenant improvement allowances 1,049,000 -
Net cash provided by (used in) financing activities 595,000 (454,000)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from our consolidated statements of operations expressed as a percentage of
total operating revenues.
Three Months Ended Nine Months Ended
---------------------- -----------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
---- ---- ---- ----
(restated) (restated)
Revenues: % % % %
Company restaurant sales 86.3 80.0 77.9 79.3
Reimbursed managed outlet
operating expenses 11.1 17.9 20.0 18.7
Management and license fees 2.6 2.1 2.1 2.0
-------- --------- --------- -------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales 24.3 23.0 22.0 23.1
Restaurant operating expense 53.6 50.2 46.6 48.7
Reimbursed managed outlet
operating expenses 11.1 17.9 20.0 18.7
General and administrative expense 7.4 7.4 6.6 7.1
Depreciation and amortization 4.3 3.3 3.1 3.1
Pre-opening expenses 0.1 - 0.4 0.3
-------- --------- --------- -------
Total operating expenses 100.8 101.7 98.7 101.0
-------- --------- --------- -------
Operating income (loss) (0.8) (1.7) 1.3 (1.0)
Interest expense, net (0.2) (0.4) (0.3) (0.4)
-------- --------- --------- -------
Income (loss) before provision for income
taxes, minority interest and equity in loss of
joint venture (1.0) (2.1) 1.0 (1.4)
Provision for income taxes (0.5) (0.0) (0.5) (0.1)
Minority interest in net loss of subsidiaries 0.3 0.9 0.7 1.1
-------- --------- --------- -------
Net income (loss) (1.2) (1.2) 1.2 (0.4)
======== ========= ========= ========
20
The following table sets forth, for the periods indicated, information derived
from our consolidated financial statements of operations expressed as a
percentage of total restaurant sales.
Three Months Ended Nine Months Ended
---------------------- -----------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
---- ---- ---- ----
(restated) (restated)
Revenues: % % % %
Company restaurant sales 100.0 100.0 100.0 100.0
Cost of sales 28.1 28.7 28.2 29.1
Restaurant operating expenses 62.1 62.6 59.9 61.3
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
Third Quarter Year-to-date Total open at
Openings Openings End of Quarter
---------------- --------------- ----------------
FY 2005 FY 2004 FY 2005 FY 2004 FY 2005 FY 2004
-------- -------- -------- ------- -------- -------
Daily Grill restaurants:
Company owned (1) - 1 1 12 11
Managed and/or licensed - - - - 8 7
Grill on the Alley restaurants:
Company owned - - - - 4 4
Other restaurants
Managed and/or licensed - (1) - (1) - -
-------- -------- -------- ------- -------- -------
Total (1) (1) 1 - 24 22
======== ======== ======== ======= ======== =======
21
Three Months Ended Nine Months Ended
--------------------- -----------------
September 25, September26, September 25, September 26,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 55,344 $ 55,569 $ 58,735 $ 59,768
Grill on the Alley 81,969 72,571 81,207 73,389
Change in comparable restaurant (1):
Daily Grill 1.1% 3.7% 0.0% 5.1%
Grill on the Alley 13.0% 1.3% 10.7% 0.4%
Total sales:
Daily Grill $ 9,036,000 $ 7,947,000 $27,434,000 $25,466,000
Grill on the Alley 4,262,000 3,774,000 12,668,000 11,449,000
------------ ------------ ------------ ------------
Total consolidated sales $13,298,000 $11,721,000 $40,102,000 $36,915,000
============ ============ ============ ============
(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.
Sales at non-Company owned Grill Concepts-branded restaurants, categorized as,
managed and licensed restaurants were as follows:
Three Months Ended Nine Months Ended
--------------------- -----------------
September 25, September26, September 25, September 26,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Managed Daily Grills $ 4,926,000 $ 4,115,000 $ 14,039,000 $ 11,880,000
Licensed Daily Grills 2,173,000 1,861,000 5,943,000 6,130,000
------------ ------------ ------------ ------------
$ 7,099,000 $ 5,976,000 $ 19,982,000 $ 18,010,000
============ ============ ============ ============
Management and license fees
Percent of gross sales 5.7% 5.2% 5.6% 5.1%
22
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 25, 2005 AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 26,
2004
Revenues. For the 2005 third quarter total revenues increased 5.2% to $15.4
million from $14.6 million for the 2004 third quarter and increased 10.7% to
$51.5 million for the 2005 year-to-date period from $46.5 million for the 2004
year-to-date period. For the quarter, total revenues consisted of sales
revenues of $13.3 million, up 13.5% from $11.7 million in the 2004 quarter,
management and license fee of $402,000, up 30.5% from $308,000 in the 2004
quarter, and reimbursed managed outlet expenses of $1.7 million, down 34.6% from
$2.6 million in the 2004 quarter. For the year-to-date period, total revenues
consisted of sales revenues of $40.1 million, up 8.6% from $36.9 million in the
2004 year-to-date period, management and license fees of $1,127,000, up 23.9%
from, $910,000 in the 2004 year-to-date period, and reimbursed managed outlet
expenses of $10.3 million, up 17.9% from $8.7 million in the 2004 year-to-date
period.
Sales for Daily Grill restaurants increased by 13.7% from $7.9 million in the
2004 quarter to $9.0 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 ($0.9 million) and an increase in same store sales of 1.1% ($0.1 million)
for restaurants open for the entire 13 weeks in both 2004 and 2005 partially
offset by a $0.5 million decrease due to the closure of the La Cienega Daily
Grill.
Sales for Daily Grill restaurants increased by 7.7% from $25.5 million for the
nine months in 2004 to $27.4 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 ($1.3 million) and the Downtown Daily
Grill ($1.1 million) partially offset by the closure of the La Cienega Daily
Grill ($0.5 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 1.7% from $59,768 in 2004 to $58,735 in 2005. Comparable restaurant
sales at the Daily Grill restaurants in 2005 reflected improved sales at a
number of restaurants offset by a decline in guests at two restaurants adversely
impacted by external factors and renovation issues. Our intent is to address
the renovation issues in early 2006. Same store sales were flat year over year
and the decrease in average weekly sales was principally attributable to the La
Cienega Daily Grill where average weekly sales decreased 8.8% for the nine
months of 2005 compared to 2004 due to a decrease in guest counts leading up to,
and resulting from, closure of the restaurant following expiration of the
restaurant's lease.
Sales for Grill restaurants increased by 13.0% from $3.8 million in the 2004
quarter to $4.3 million in 2005. Approximately two-thirds of the increase in
sales revenues for the Grill restaurants from 2004 to 2005 was attributable to
increased guest counts and one-third to improved check averages.
Sales for Grill restaurants increased 10.7% from $11.4 million to $12.7 million
for the nine month period. The increase in sales revenues for the Grill
restaurants from 2004 to 2005 was attributable to improved guest counts (60%)
and check averages (40%). Weighted average weekly sales at the Grill restaurants
increased 10.7% from $73,389 in 2004 to $81,207 in 2005.
23
Management and license fee revenues were attributable to hotel restaurant
management services which accounted for $348,000 of management fees during the
2005 quarter as compared to $250,000 during the 2004 quarter and licensing fees
of $54,000 during the 2005 quarter compared to $58,000 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 and San Francisco Daily Grills.
For the year-to-date period, management and license fee revenues were
attributable to hotel restaurant management services which accounted for
$954,000 of management fees during the 2005 period as compared to $738,000
during the 2004 period and licensing fees of $173,000 during the 2005 period as
compared to $172,000 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 the year-to-date period was attributable to the opening of the Long
Beach Daily Grill in November 2004 and increased cost of goods at the San
Francisco Daily Grill and increased restaurant operating expenses at the San
Francisco, Georgetown and Burbank 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 4.3% to $15.5 million in the 2005 quarter (representing 100.8% of
revenues) from $14.9 million in 2004 (representing 101.7% of revenues). For the
nine months, total operating expenses increased 8.2% to $50.8 million
(representing 98.7% of revenues) from $47.0 million in 2004 (representing 101.0%
of revenues).
Cost of Sales. While sales revenues increased by 13.5% ($1,577,000) in the 2005
quarter and 8.6% ($3,187,000) for the nine months as compared to 2004, total
cost of sales increased by 11.2%, or $376,000, for the quarter and 5.1% or
$549,000, for the nine months ended September 25, 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 ($410,000 for the quarter
and $684,000 for the nine months). Cost of sales as a percentage of restaurant
sales was 28.1% for the quarter and 28.2% for the nine months ended September
25, 2005 as compared to 28.7% for the third quarter and 29.1% 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 third quarter and nine
months of 2005.
Restaurant operating expenses. Restaurant operating expenses increased by
$917,000, or 12.5%, for the quarter and $1,365,000, or 6.0%, for the nine months
as compared to the same periods in 2004. The dollar increase in restaurant
operating expenses for the quarter was primarily attributable to restaurants
opening in 2005 - the Santa Monica Daily Grill ($359,000) and the Downtown Daily
Grill ($548,000). The dollar increase in operating expenses for the nine months
was primarily attributable to the opening of the Santa Monica Daily Grill
($779,000) and the Downtown Daily Grill ($725,000). Restaurant operating
expenses, as a percentage of restaurant sales, decreased in the third quarter
from 62.6% in 2004 to 62.1% in 2005. For the nine months, the percentages were
61.3% in 2004 and 59.9% in 2005.
24
Reimbursed Costs. Reimbursed costs decreased 34.6% from $2.6 million to $1.7
million for the quarter and increased by 17.9% from $8.7 million to $10.3
million in 2005 for the nine 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 sales at the San Francisco
Daily Grill and increased restaurant operating expenses at the San Francisco,
Georgetown and Burbank Daily Grills due to improved sales.
General and Administrative. General and administrative expense increased 6.1%
for the quarter and 3.5% for the nine months as compared to the same periods in
2004. As a percentage of revenues, general and administrative expense totaled
7.4% for the quarter and 6.6% for the nine months as compared to 7.4% for the
quarter and 7.1% for the nine months in 2004. The increase in total general and
administrative expense of $66,000 for the 2005 quarter was primarily
attributable to accruing a management bonus, increases in professional services
and provision for bad debts related to Portland management fees offset by a
decrease in office expenses. The increase in total general and administrative
expense of $115,000 for the 2005 nine month period is attributable to accruing a
management team bonus, increases in wages and related benefits and provision for
bad debts related to Portland management fees offset by reduced travel costs and
office expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
by 36.4% for the quarter and 10.7% for the nine months compared to 2004,
representing 4.0% of restaurant sales for the nine months of 2005 and 3.9% of
sales in 2004. The increase in depreciation and amortization expense for the
nine months was primarily due to the abandonment of assets at the La Cienega
restaurant which closed July 31, 2005 and the opening of the Santa Monica and
Downtown Daily Grills in 2005.
Pre-opening Costs. Pre-opening costs totaled $11,000 in the 2005 quarter as
compared to zero in the 2004 quarter and $255,000 in the 2005 nine 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 $16,000, or 27.1%,
during the quarter and $68,000, or 35.6%, during the nine months compared to the
same periods in 2004. The decrease in interest expense was primarily
attributable to substantially reduced warrant amortization in 2005.
Minority Interest. We reported a minority interest in the loss of our majority
owned subsidiaries of $40,000 during the 2005 third quarter as compared to
$132,000 during the 2004 quarter. For the nine months, we reported a minority
interest in the loss of majority owned subsidiaries of $364,000 during 2005 and
$493,000 during 2004. The decrease in minority interest in loss for the quarter
and nine months was primarily attributable to having more of the losses of the
Hollywood Grill allocated to us offset by improved operations at the South Bay
Daily Grill.
25
Provision for Income Taxes. The income tax provision for 2005 is due to
alternative minimum tax and state taxes with only minor NOLs and large business
credits to offset the federal tax. In 2004 there were larger federal NOLs
resulting in a tax provision which consisted of state income taxes only.
Net Income. We reported net loss of $188,000 for the third quarter and net
income of $619,000 for the nine months of 2005 as compared to a net loss of
$178,000 for the third quarter and a net loss of $192,000 for the nine months in
2004.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At September 25, 2005 we had negative working capital of $1.3 million and a cash
balance of $1.7 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 nine months ended September 25, 2005
totaled $3,227,000 compared to $1,888,000 during the nine months ended September
26, 2004. The increase in cash provided by operations primarily resulted from
increased profitability of $811,000, increased tenant improvement allowances
received of $913,000 and by changes in operating assets and liabilities.
Net cash used in investing activities during the nine months ended September 25,
2005 totaled $3,942,000 compared to $1,834,000 during the nine months ended
September 26, 2004. Cash used in investing activities related primarily to the
purchases of furniture, fixtures and equipment for the Santa Monica Daily Grill
($1,275,000) and the Downtown Daily Grill ($2,060,000).
Net cash provided by financing activities during the nine months ended September
25, 2005 totaled $967,000 compared to $454,000 used in financing activities
during the nine months ended September 26, 2004. Cash provided by financing
activities during the current year related to capital contributions from LLC
minority members ($1,274,000), equipment financing ($118,000), and exercise of
stock option ($33,000) offset by reductions in debt ($287,000) and distribution
of profits to the minority investor in San Jose Grill, LLC ($186,000).
Financing Facilities. At September 25, 2005, the Company had $150,000 owing
under equipment lease financing transactions, a loan from a member of Chicago -
The Grill on the Alley, LLC of $0.9 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 $1,517,000 was received
during the first nine months of 2005. Construction of the Downtown Daily Grill
was funded through a $600,000 tenant improvement allowance, minority member
capital contribution of $1,250,000 and the Company's capital contribution of
$251,000. As of September 25, 2005, $600,000 of the tenant improvement
allowance on the Downtown Daily Grill has been received. These tenant
improvement 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 September 25, 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.
26
Operating Leases and Contractual Obligations. In September 2005, we entered into
a lease relating to a restaurant scheduled to open in the summer of 2006.
Including that lease, at September 25, 2005, we were obligated under eighteen
leases covering the premises in which our Daily Grill and Grill Restaurants are
located, or will be 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 during the quarter
ended September 25, 2005 as compared to those described in the Company's Form
10-K for the year ended December 26, 2004.
On August 8, 2005 the Compensation Committee of our Board approved entry into
change of control agreements with four executives. Pursuant to the agreements
each of the executives would be entitled to payments in an amount equal to 1.5
times their annual salary in the event of termination of their employment
following a change in control of the Company. The agreements were approved by
the full Board at their September 21, 2005 meeting.
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 our 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 September 25, 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 nine
months ended September 25, 2005, (2) the unreturned balance of the capital
contributions of the Members and/or the Company at September 25, 2005, and the
accrued but unpaid preferred returns due to the Members and/or the Company at
September 25, 2005:
27
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the nine
months ended September 25, 2005: Members $ 186,000
=============
Company $ 187,000
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ -
=============
Company $ -
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ -
=============
Company $ -
=============
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the nine months
ended September 25, 2005: Members (a) $ 189,000
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 948,000
=============
Company $ -
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ -
=============
Company $ -
=============
28
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 1,200,000
=============
Company $ 250,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial and Additional
Capital Contributions at September
25, 2005: Members $ 1,100,000
=============
Company $ 450,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
29
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial and Additional
Capital Contributions at September
25, 2005: Members $ 1,346,000
=============
Company $ 246,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members (b) $ -
=============
Company $ -
=============
DOWNTOWN DAILY GRILL (612 FLOWER DAILY GRILL, LLC)
Distributions of capital during the
nine months ended September 25,
2005: Members $ -
=============
Company $ -
=============
Unreturned Initial Capital
Contributions at September 25,
2005: Members $ 1,145,000
=============
Company $ 248,000
=============
Accrued but unpaid Preferred
Returns at September 25, 2005: Members $ 43,000
=============
Company $ 11,000
=============
a) Distribution of capital and note repayments as of September 25, 2005
includes $128,000 of capital and note repayments and $61,000 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 $708,000 and
the Company would have an accrued preferred return of $148,000. If
preferred returns were accrued for the South Bay Daily Grill the Member
would have an accrued preferred return of $318,000 and the Company would
have a preferred return of $123,000. If preferred returns were accrued for
the CityWalk Partnership the Member would have an accrued preferred return
of $500,000.
30
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
We believe certain critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial statements. A
description of our critical accounting policies is set forth in our Form 10-K
for the year ended December 26, 2004. As of, and for the quarter ended,
September 25, 2005, there have been no material changes or updates to our
critical accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
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 our Annual Report on Form 10-K for the year ended December
26, 2004, the following developments may impact future operating results and
financial results.
In September 2005, we signed a lease to open a wholly owned Grill on the Alley
restaurant in the Galleria shopping center in Dallas, Texas. We anticipate
beginning the build-out in January of 2006 with completion by the summer of
2006. Construction of the restaurant will be financed primarily through a
tenant improvement allowance of $1,965,700.
31
There can be no assurance that we will be successful in opening new restaurants
in accordance with our 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 our
hotel restaurant management services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on funded debt.
This exposure relates to our non-revolving credit facility (the "Credit
Facility"). There was $150,000 of borrowings outstanding under the equipment
financing portion of the Credit Facility at September 25, 2005. There were no
borrowings under the line of credit portion of the Credit Facility, which
terminates in August 2006 and bears 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
We maintain 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 our 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 our management, including our 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.
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.
32
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 21, 2005, the Company entered into Change of Control Agreements
with four executives, Michael Weinstock, Philip Gay, John Sola and Louie
Feinstein. Pursuant to the agreements each of the executives would be entitled
to payments in an amount equal to 1.5 times their annual salary in the event of
termination of their employment following a change in control of the Company.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
10.1 Change of Control Severence Agreement Form
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 November 8, 2005
----------------- Executive Officer
Robert Spivak
/s/ Philip Gay Executive Vice President and November 8, 2005
----------------- Chief Financial Officer
Philip Gay
34