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 27, 2004
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
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(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
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(Registrant's telephone number, including area code)
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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, 2004, 5,643,211 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
Consolidated Balance Sheets -
June 27, 2004 and December 28, 2003 (restated) (unaudited) . . . . . 2
Consolidated Statements of Operations -
For the three months and six months ended June
27, 2004 and June 29, 2003 (restated) (unaudited). . . . . . . . . . 4
Consolidated Statements of Cash Flows -
For the six months ended June 27, 2004 and
June 29, 2003 (restated) (unaudited) . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . 44
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 46
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 46
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 47
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 27, December 28,
2004 2003
----------- --------------
(restated)
Current assets:
Cash and cash equivalents $ 1,632,000 $ 1,496,000
Inventories 586,000 585,000
Receivables, net of reserve ($19,000 in
2004 and $13,000 in 2003) 607,000 658,000
Reimbursable costs receivable 539,000 580,000
Prepaid expenses 763,000 612,000
----------- --------------
Total current assets 4,127,000 3,931,000
Furniture, equipment, & improvements, net 11,597,000 11,061,000
Goodwill, net 205,000 205,000
Restricted cash 72,000 72,000
Note receivable 114,000 111,000
Liquor licenses 355,000 350,000
Other assets 239,000 275,000
----------- --------------
Total assets $16,709,000 $ 16,005,000
=========== ==============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
June 27, December 28,
2004 2003
------------ --------------
(restated)
Current liabilities:
Accounts payable $ 1,782,000 $ 1,046,000
Accrued expenses 2,323,000 2,400,000
Reimbursable costs payable 539,000 580,000
Current portion of long term debt 217,000 298,000
Current portion notes payable - related parties 296,000 345,000
------------ --------------
Total current liabilities 5,157,000 4,669,000
Long-term debt 184,000 285,000
Notes payable - related parties 902,000 969,000
Other long-term liabilities 3,568,000 2,734,000
------------ --------------
Total liabilities 9,811,000 8,657,000
Minority interest 1,636,000 2,058,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2004 and 2003 - -
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares, authorized, 500 shares
issued and outstanding in 2004 and 2003 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2004 and 2003, 5,643,211 shares
issued and outstanding in 2004, 5,537,071 shares
issued and outstanding in 2003 - -
Additional paid-in capital 13,627,000 13,601,000
Accumulated deficit (8,365,000) (8,311,000)
------------ --------------
Total stockholders' equity 5,262,000 5,290,000
------------ --------------
Total liabilities, minority interest and
stockholders' equity $16,709,000 $ 16,005,000
============ ==============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
--------------- --------------- --------------- ---------------
Revenues: (restated) (restated)
Sales $ 12,646,000 $ 12,050,000 $ 26,156,000 $ 24,184,000
Cost reimbursements 2,903,000 2,217,000 6,093,000 4,284,000
Management and license fees 306,000 235,000 602,000 466,000
--------------- --------------- --------------- ---------------
Total revenues 15,855,000 14,502,000 32,851,000 28,934,000
Cost of sales (exclusive of depreciation,
presented separately below) 3,607,000 3,354,000 7,379,000 6,637,000
--------------- --------------- --------------- ---------------
Gross profit 12,248,000 11,148,000 25,472,000 22,297,000
--------------- --------------- --------------- ---------------
Operating expenses:
Restaurant operating expenses 8,054,000 7,444,000 16,179,000 14,751,000
Reimbursed costs 2,903,000 2,217,000 6,093,000 4,284,000
General and administrative 1,083,000 993,000 2,310,000 1,903,000
Depreciation and amortization 454,000 428,000 903,000 930,000
Pre-opening costs 1,000 - 148,000 187,000
Gain on sale of assets (1,000) - (1,000) (11,000)
--------------- --------------- --------------- ---------------
Total operating expenses 12,494,000 11,082,000 25,632,000 22,044,000
--------------- --------------- --------------- ---------------
Income (loss) from operations (246,000) 66,000 (160,000) 253,000
Interest expense, net (66,000) (80,000) (132,000) (162,000)
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes and minority interest (312,000) (14,000) (292,000) 91,000
Provision for income taxes (5,000) (26,000) (28,000) (81,000)
Minority interest in loss of subsidiaries 166,000 88,000 266,000 284,000
--------------- --------------- --------------- ---------------
Net income (loss) (151,000) 48,000 (54,000) 294,000
Preferred dividends accrued (12,000) (12,000) (25,000) (25,000)
--------------- --------------- --------------- ---------------
Net income (loss) applicable to
common stock $ (163,000) $ 36,000 $ (79,000) $ 269,000
=============== =============== =============== ===============
Net income (loss) per share applicable
to common stock:
Basic net income (loss) $ (0.03) $ 0.01 $ (0.01) $ 0.05
=============== =============== =============== ===============
Diluted net income (loss) $ (0.03) $ 0.01 $ (0.01) $ 0.05
=============== =============== =============== ===============
Weighted average shares outstanding:
Basic 5,590,445 5,537,071 5,568,155 5,537,071
=============== =============== =============== ===============
Diluted 5,590,445 5,563,370 5,568,155 5,547,389
=============== =============== =============== ===============
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------
June 27, June 29,
2004 2003
------------ -----------
Cash flows from operating activities: (restated)
Net income (loss) $ (54,000) $ 294,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 903,000 930,000
Stock based compensation expense 71,000 140,000
Allowance for doubtful accounts 6,000 -
Gain on sale of assets (1,000) (11,000)
Minority interest in loss of subsidiaries (266,000) (284,000)
Changes in operating assets and liabilities:
Inventories (1,000) (29,000)
Receivables 45,000 (62,000)
Reimbursable costs receivable 41,000 (86,000)
Prepaid expenses (151,000) (224,000)
Other assets 28,000 (4,000)
Accounts payable 736,000 222,000
Accrued liabilities (181,000) (87,000)
Reimbursable costs payable (41,000) 86,000
Other long-term liabilities (167,000) (51,000)
------------ -----------
Net cash provided by operating activities 968,000 834,000
------------ -----------
Cash flows from investing activities:
Proceeds on sale of assets 1,000 26,000
Restricted cash for Daily Grill at Continental Park, LLC - 466,000
Purchase of liquor license (5,000) -
Advance repaid by managed outlet - 64,000
Purchase of furniture, equipment and improvements (1,431,000) (263,000)
------------ -----------
Net cash provided by (used in) investing activities (1,435,000) 293,000
------------ -----------
Cash flows from financing activities:
Tenant improvement allowances 1,002,000 -
Proceeds from minority interest 35,000 30,000
Return of capital and profits to minority shareholder (135,000) (173,000)
Payments on related party debt (116,000) (105,000)
Payments on long-term debt (183,000) (217,000)
------------ -----------
Net cash provided by (used in) financing activities 603,000 (465,000)
------------ -----------
Net increase in cash and cash equivalents 136,000 662,000
Cash and cash equivalents, beginning of period 1,496,000 1,290,000
------------ -----------
Cash and cash equivalents, end of period $ 1,632,000 $1,952,000
============ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 100,000 $ 130,000
Income taxes 93,000 34,000
The accompanying notes are an integral part of these unaudited consolidated financial
statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have
not been audited by our independent registered public accounting firm. The
December 28, 2003 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 28,
2003, as amended on October 15, 2004. In the opinion of management, these
interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair statement of the results for the interim
periods presented. The current period results of operations are not
necessarily indicative of results, which ultimately will be reported for
the full year ending December 26, 2004.
RESTATEMENT FOR CORRECTION OF ERRORS AND RETROACTIVE ADOPTION OF FIN 46
The accompanying consolidated financial statements as of December 28, 2003
and for the three and six-month periods ended June 29, 2003 were restated
on May 14, 2004 from those originally issued to reflect certain adjustments
related to stock compensation and other miscellaneous adjustments, and were
subsequently restated on October 15, 2004 to further reflect additional
adjustments to revise the accounting for certain of the Company's joint
ventures, record costs and revenues associated with reimbursed costs under
management agreements and make other miscellaneous corrections.
Additionally, the Company has corrected its initial adoption of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," (FIN 46) which was first effective for the
quarter ended March 28, 2004. (Note - Except where there is no change to
diluted earnings per share, the impact of each adjustment on diluted
earnings per share has been identified below.)
RETROACTIVE ADOPTION OF FIN 46
------------------------------
Effective December 29, 2003 (the first day of fiscal year 2004), the
Company adopted the provisions of FIN 46. The Company has elected to
retroactively adopt the provisions of FIN 46. The impact of the retroactive
adoption is to consolidate The San Jose Grill LLC, Chicago - the Grill on
the Alley, LLC, the Daily Grill at Continental Park, LLC and the Universal
CityWalk Daily Grill prior to fiscal year 2004. There is no impact on net
income (loss) in any period as a result of the retroactive adoption. Errors
in the prior accounting for these entities are discussed in the following
sections. See further discussion of the adoption of FIN 46 under the
accounting policy note below.
6
CORRECTIONS OF ERRORS
---------------------
Stock Compensation and Miscellaneous Adjustments
In May 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," this cashless exercise feature requires the
Company to account for its option plan using a variable accounting
treatment. Under variable accounting, compensation expense must be
remeasured each balance sheet date based on the difference between the
current market price of the Company's stock and the option's exercise
price. An accrual for compensation expense is 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. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant. The impact of this adjustment was to increase operating expenses and
net loss by $135,000 ($0.02 per share) and $140,000 ($0.03 per share) for
the three and six month periods ended June 29, 2003. Results for the first
quarter of fiscal 2004 were originally reported correctly and did not
require restatement.
In addition to this change, the Company also recorded additional general
and administrative expense of $28,000 in the fourth quarter of fiscal year
2003 to correctly state its liability for payroll and other costs. This
adjustment increased accumulated deficit as of December 28, 2003. Lastly,
the Company increased additional paid-in capital and accumulated deficit by
$55,000 ($0.01 per share) as of each fiscal yearend in the period from 1998
through 2003 to properly reflect the fair value of fully vested stock
options issued in connection with severance agreements arranged in fiscal
year 1998 which had not been previously expensed.
Joint Venture Accounting and Miscellaneous Adjustments
Deconsolidation of The San Jose Grill LLC, Chicago - the Grill on the
Alley, LLC and the Daily Grill at Continental Park, LLC Pursuant to SOP
78-9
In August 2004, the Company reevaluated its consolidation policies with
respect to its investments in four restaurants held by limited liability
companies (LLCs). Previously, all four of the LLCs were consolidated due to
the Company's majority ownership in these entities. However, the terms of
three agreements gave the minority interests certain voting rights which,
when evaluated under the relevant terms of Statement of Position No. 78-9,
"Accounting for Investments in Real Estate Ventures," precluded
consolidation. Therefore, the Company restated previously reported results
to show the investments in the San Jose Grill LLC, Chicago - The Grill on
the Alley, LLC and the Daily Grill at Continental Park, LLC under the
equity method, rather than as consolidated subsidiaries. The fourth LLC,
The Grill on Hollywood, LLC, remained consolidated. There was no impact on
net income as a result of this change. See further discussion below
regarding other errors in the accounting for the Company's joint ventures
and the consolidation of all the Company's partially-owned entities upon
the adoption of FIN 46.
7
Correction of Adoption of FIN 46
FIN 46 was first effective for the Company for the quarter ended March 28,
2004. At that time, the Company was consolidating all of its LLCs
(incorrectly, in some cases, as indicated above), namely The San Jose Grill
LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood, LLC and
the Daily Grill at Continental Park, LLC, and was accounting for its
investment in the Universal CityWalk Daily Grill partnership under the
equity method. Upon the initial adoption of FIN 46, the Company made no
changes to its accounting for the LLCs and partnership as it believed them
to already be appropriately consolidated.
As part of the restatement process undertaken in September 2004, the
Company reevaluated its adoption of FIN 46, which became even more relevant
given the deconsolidation of many of the LLCs pursuant to SOP 78-9. The
Company assessed all entities which are not wholly owned to determine if
these entities would be considered variable interest entities and whether
the Company would be considered the primary beneficiary. The Company
determined that all of the following entities would be considered variable
interest entities: The San Jose Grill LLC, Chicago - The Grill on the
Alley, LLC, The Grill on Hollywood LLC, The Daily Grill at Continental Park
LLC, and the Universal CityWalk Daily Grill partnership. The Company also
determined that it is the primary beneficiary for all these entities which
has resulted in consolidation of these entities. The Company has elected to
retroactively adopt the provisions of FIN 46 and present these variable
interest entities as consolidated subsidiaries for the prior periods
presented in these financial statements.
Chicago - The Grill on the Alley, LLC Loss Allocation and Interest Charge
In August 2004, the Company reevaluated the accounting for its venture
relating to the Chicago Grill on the Alley restaurant. The stated venture
was established in 1999 and is administered under an operating agreement
whereby the Company owns a 60% stated interest and the minority investor,
the Michigan Avenue Group (MAG), owns the remaining interests. The venture
was originally funded by an eight percent, $1.7 million loan from MAG which
was used to build the restaurant and fund initial operations. GCI made no
financial contribution and was not credited with any capital for the
trademarks and restaurant expertise it contributed to the venture. MAG had
the right to convert all or part of the loan into capital of the venture
and in 2000 upon completion of the initial build-out, it converted
approximately $1.2 million of the loan into Capital. There was no change in
the voting, ownership or profit sharing interests as a result of this
conversion. The terms of the equity interest into which the loan was
converted were such that MAG was entitled to an eight percent return on its
capital balance (defined as the "Preferred Return") which was identical to
the interest rate on the note. Additionally, the venture was obligated to
repay converted original capital amounts under an identical
payment/amortization schedule as the note. GCI guaranteed the venture's
repayment of both the loan and MAG converted capital amounts.
Historically, the Company had consolidated the entity due to its belief
that it had a controlling voting interest (see separate comment above
regarding deconsolidation of this entity) and recognized a minority
interest at an amount equal to MAG's capital contribution reduced by 40% of
the venture's losses and any return of capital amounts and allocated
losses. The restaurant has operated at a loss since inception and losses
were allocated based on the stated 40% interest noted above.
8
In reviewing this accounting, it was determined that the venture's
obligation to return MAG's capital should have been recognized as a
liability of the joint venture rather than treated as equity. As the joint
venture is a consolidated entity pursuant to FIN 46, the Company's accounts
should also recognize this liability rather than reflect it as minority
interest. Furthermore, interest expense should have been recorded in the
statement of operations related to the Preferred Return as opposed to
treating the amounts as dividends. Lastly, the Company determined that
losses should not have been allocated to the minority interest member given
that MAG had no equity at risk. The impact of these adjustments was to
decrease the minority interest in loss of subsidiary by $2,000 and $13,000
in the three and six month periods ended June 27, 2004, respectively, and
$22,000 and $63,000 ($0.01 per share) in the three and six month periods
ended June 29, 2003, respectively; and increase interest expense by $17,000
and $34,000 ($0.01 per share) in the three and six month periods ended June
27, 2004, respectively, and $19,000 and $38,000 ($0.01 per share) in the
three and six month periods ended June 29, 2003, respectively.
Chicago Grill on the Alley Warrants
In the process of evaluating prior accounting for this joint venture, it
was noted that warrants to purchase approximately 203,000 shares of GCI
stock were given to MAG in connection with the issuance of the original
note. In accordance with APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," the Company determined that the fair
value of such warrants should have been recognized as a debt discount and
recorded as a reduction to the loan balance, with accretion of the discount
recognized as additional interest expense using the effective interest
method. The effect of this adjustment was to increase additional paid-in
capital by $322,000 as of each fiscal year-end in the period from 1999 to
2003 and as of June 27, 2004. Amortization of this amount has increased
interest expense by $9,000 and $18,000 in the three and six month periods
ended June 27, 2004, respectively, and $9,000 and $19,000 in the three and
six month periods ended June 29, 2003, respectively.
Other Joint Venture Loss Allocations
The Company also reviewed its accounting for its other joint ventures,
specifically, those that had been generating losses. Based on the terms of
these agreements, losses are typically allocated in proportion to the
recorded amount of each member's capital account balances. The recorded
capital balances differ from the actual ownership percentages and the
method to distribute cash flows in the event of a liquidation of the
venture. As noted above, while the Company usually has a majority ownership
percentage, the minority partner usually contributes the majority of the
capital. The venture agreements specify that the minority member is
entitled to cash distributions before the Company so that its investment is
returned prior to the Company's.
The Company determined that its previous loss allocations to the minority
partners were incorrect because they do not reflect the underlying
economics at book value of the investments. The Company determined that a
hypothetical liquidation model should be utilized to allocate losses for
each reporting period based on
9
the prescribed order of cash distributions upon liquidation. The change in
the amounts allocated to the individual members based on this process, as
adjusted for actual contributions and distributions, determines the
allocation of profits or losses each period. The impact of this adjustment
was to increase the minority interest in loss of subsidiaries by $27,000
and $50,000 ($0.01 per share) in the three and six month periods ended June
27, 2004, respectively; increase the minority interest in loss of
subsidiaries by $18,000 for the three months ended June 29, 2003; and
reduce the minority interest in loss of subsidiary by $5,000 for the six
months ended June 29, 2003.
Reimbursed Costs
The Company operates a number of restaurants under management agreements
whereby it is responsible for the operation of each restaurant. For its
services, the Company typically receives a management fee based on a
percentage of revenue, an incentive fee which is usually a profit sharing
arrangement (collectively, "Fees") and a reimbursement of the Company's
direct costs of operating the restaurant. Management agreements are in
place for restaurants in which the Company has a non-controlling ownership
percentage as well as a number of restaurants in which the Company has no
ownership. For non-consolidated restaurants, the Company previously only
reflected its Fees as revenue in the consolidated accounts. In August 2004,
the Company reviewed these arrangements considering the primary obligor
criteria as described in EITF 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." Under the
terms of the management agreements, the Company is hired as an independent
contractor and is responsible for settlement of all liabilities of the
restaurant. Additionally, all employees are employees of the Company, not
the individual restaurant. Although payroll and other operating expenses
are paid out of an agency bank account belonging to the restaurant, based
on the weight of the indicators identified in EITF 01-14 and EITF 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," the
Company determined it should recognize the reimbursement of restaurant
expenses of the unconsolidated outlets as revenues in its financial
statements and the related expenses.
The impact of these adjustments was to increase revenues by $2,903,000 and
$6,093,000 in the three and six month periods ended June 27, 2004,
respectively and to increase operating expenses by a similar amount for
both periods. The impact on the three and six months periods ended June 29,
2003 was to increase revenues by $2,217,000 and $4,295,000, respectively
and to increase operating expenses by a similar amount for both periods.
In evaluating certain transactions related to the San Francisco managed
outlet, the Company also determined that advances made to the restaurant in
prior periods should have been expensed in the period incurred instead of
capitalized and deferred. The impact of this adjustment was to increase
revenue by $29,000 ($0.01 per share) for the six months ended June 27,
2004.
Accounting for Lease Incentives
In 2003, the Company began recording reimbursements received for tenant
improvement allowances as a liability. Consistent with the guidance set
forth in SFAS No. 13, "Accounting for Leases," and FASB Technical Bulletin
No. 88-1, "Issues Related to the Accounting for Leases," these lease
incentives are amortized over the life of the lease as a credit to rent
expense. Prior to 2003, however, the Company had recorded such
reimbursements as a reduction to the value of the fixed asset. As part of
this restatement process, the Company has corrected its prior accounting
practice and recorded the unamortized value of previously unrecorded lease
incentives as an increase to fixed assets and increase to other long-term
liabilities. This adjustment totaled $835,000 and $765,000 as of December
28, 2003 and June 27, 2004, respectively. There was no impact on net income
or earnings-per-share as a result of this adjustment, however, depreciation
expense was increased and restaurant operating expenses were decreased by
$35,000 for the three months ended June 29, 2003 and June 27, 2004 and by
$70,000 for the six months ended June 29, 2003 and June 27, 2004. Upon
retroactive adoption of FIN 46, the adjustment increased fixed assets and
other long-term liabilities by $1,238,000 and $1,150,000 as of December 28,
2003 and June 28, 2004, respectively, and increased depreciation expense
and decreased restaurant operating expenses by $44,000 for the second
quarters of fiscal year 2003 and 2004 and by $88,000 for the six months
ended June 29, 2003 and June 27, 2004.
Other Equity Award Adjustments
The Company recorded additional interest expense of $5,000 in each of the
first two quarters of fiscal year 2003 and 2004 to correct the amortization
of the fair value of warrants issued to two principal shareholders in
connection with their guarantee of the Company's credit facility. Such
amortization should have been recognized over the three-year term of the
10
guarantee but was incorrectly being amortized over the term of the
warrants. Additional paid-in capital was increased by $27,000 as of each
fiscal yearend from 2000 to 2003 to adjust the fair value of these
warrants. The Company also increased additional paid-in capital and
accumulated deficit by $45,000 as of each fiscal yearend in the period from
2000 through 2003 and as of June 27, 2004 to recognize the fair value of
warrants to purchase 50,000 shares of the Company's stock, pursuant to EITF
96-18, "Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Such warrants were issued to a professional advisor for services
rendered in fiscal year 2000 and had not been previously recognized.
SUMMARY
-------
The above revisions impacted the balance sheets as of December 28, 2003 and
the statements of operations and cash flows for the three and six-month
periods ended June 29, 2003. The revisions have had no impact to our income
tax provisions. The impact of this restatement, which has been reflected
throughout the consolidated financial statements and accompanying notes, is
as follows (amounts in thousands):
11
December 28, 2003
-----------------------------------------------------
As restated for
correction of
errors and
As restated for retroactive
As previously correction of adoption of FIN
reported (1) errors 46
Current assets:
Cash and cash equivalents $ 1,473 $ 972 $ 1,496
Inventories 570 355 585
Receivables 741 747 658
Reimbursable costs receivable - 1,503 580
Prepaid and other current assets 608 535 612
-----------------------------------------------------
Total current assets 3,392 4,112 3,931
Furniture, equipment and improvements 9,020 5,690 11,061
Goodwill 205 205 205
Restricted cash 72 - 72
Advances to managed outlets 331 - -
Note receivable 111 111 111
Liquor licenses 330 264 350
Other assets 426 1,320 275
-----------------------------------------------------
$ 13,887 $ 11,702 $ 16,005
=====================================================
Current liabilities:
Accounts payable $ 998 $ 676 $ 1,046
Accrued expenses 2,315 1,134 2,400
Reimbursable costs payable - 1,503 580
Current portion of debt 254 82 298
Note payable related party 269 346 345
-----------------------------------------------------
Total current liabilities 3,836 3,741 4,669
-----------------------------------------------------
Long term debt 283 106 285
Note payable related party 323 230 969
Other long term liabilities 1,496 1,632 2,734
-----------------------------------------------------
Total liabilities 5,938 5,709 8,657
-----------------------------------------------------
Minority interest 1,521 703 2,058
Stockholders' equity
Preferred stock - - -
Common stock - - -
Additional paid-in capital 13,207 13,601 13,601
Accumulated deficit (6,779) (8,311) (8,311)
-----------------------------------------------------
Total stockholders' equity 6,428 5,290 5,290
-----------------------------------------------------
$ 13,887 $ 11,702 $ 16,005
=====================================================
(1) The Company previously restated its consolidated financial statements as of
December 28, 2003 to reflect the accounting for employee stock options using
variable accounting treatment and to make other miscellaneous corrections. The
effect of this restatement was to increase accrued liabilities by $197,000,
increase additional paid-in capital by $55,000 and increase accumulated deficit
by $252,000 as of December 28, 2003. These "As previously reported" amounts
already reflect these adjustments and represent the amounts presented in the
Company's Amended Annual Report of Form 10-K/A filed on May 27, 2004.
12
Six Months Ended
June 27, 2003
----------------------------------------------------
As restated for
correction of
errors and
As restated for retroactive
As previously correction of adoption of FIN
reported errors 46
Revenues
Sales $ 23,186 $ 17,262 $ 24,184
Cost reimbursements - 12,232 4,284
Management Fees 517 633 466
-----------------------------------------------------
Total Revenues 23,703 30,127 28,934
Cost of sales 6,396 4,656 6,637
-----------------------------------------------------
Gross Profit 17,307 25,471 22,297
-----------------------------------------------------
Operating expenses
Restaurant and operating expenses 14,042 10,249 14,751
Reimbursed costs 12,232 4,284
General and administrative 1,816 1,902 1,903
Depreciation and amortization 788 586 930
Pre-opening costs 187 - 187
Gain on sale of assets (11) (11) (11)
-----------------------------------------------------
Total operating expenses 16,822 24,958 22,044
-----------------------------------------------------
Loss from operations 485 513 253
Interest expense, net (92) (64) (162)
-----------------------------------------------------
Income (loss) before provision
from income taxes, minority
interest and equity in loss of joint
venture 393 449 91
Provision for income taxes (81) (74) (81)
-----------------------------------------------------
Income (loss) before minority
interest and equity in loss of joint
venture 312 375 10
Minority interest in loss
(earnings) of subsidiaries 264 100 284
Equity in loss of joint venture (11) (181) -
--------------- ----------------- -----------------
Net income (loss) 565 294 294
Preferred dividends accrued (25) (25) (25)
-----------------------------------------------------
Net income available for common shareholders $ 540 $ 269 $ 269
=====================================================
Net income per share applicable
to common stock:
Basic Net Income $ 0.10 $ 0.05 $ 0.05
Diluted Net Income $ 0.10 $ 0.05 $ 0.05
Average-weighted shares
outstanding
Basic 5,537 5,537 5,537
Diluted 5,547 5,547 5,547
13
For the Three Months Ended
June 27,2003
------------------------------------------------
As restated for
correction of
As restated errors and
As for retroactive
previously correction of adoption
reported errors FIN 46
Revenues
Sales $ 11,519 $ 8,571 $ 12,050
Cost reimbursements 5,426 2,217
Management Fees 262 300 235
------------------------------------------------
Total Revenues 11,781 14,297 14,502
Cost of sales 3,222 2,340 3,354
------------------------------------------------
Gross Profit 8,559 11,957 11,148
------------------------------------------------
Operating expenses
Restaurant and operating expenses 7,047 5,132 7,444
Reimbursed costs 5,426 2,217
General and administrative 909 992 993
Depreciation and amortization 357 274 428
Pre-opening costs - - -
Gain on sale of assets - - -
------------------------------------------------
Total operating expenses 8,313 11,824 11,082
------------------------------------------------
Income (loss) from operations 246 133 66
Interest expense, net (44) (31) (80)
------------------------------------------------
Income (loss) before
provision from income
taxes, minority interest and
Equity in loss of joint venture 202 102 (14)
Provision for income taxes (26) (21) (26)
------------------------------------------------
Income (loss) before
minority interest in loss
loss of joint venture 176 81 (40)
Minority interest in loss
(earnings) of subsidiaries 48 10 88
Equity in loss of joint venture (6) (43) -
------------------------------------------------
Net income (loss) 218 48 48
Preferred dividends accrued (12) (12) (12)
------------------------------------------------
Net income available for common
shareholders $ 206 $ 36 $ 36
================================================
Net income per share
applicable to common
Basic Net Income $ 0.04 $ 0.01 $ 0.01
Diluted Net Income $ 0.04 $ 0.01 $ 0.01
Average-weighted shares outstanding
outstanding
Basic 5,537 5,537 5,537
Diluted 5,563 5,563 5,563
14
For the Six months ended
June 29, 2003
-----------------------------------------------------
As restated for
correction of
errors and
As restated for retroactive
As previously correction of adoption of FIN
reported errors 46
Cash flows from operating activities
Net income $ 565 $ 294 $ 294
Adjustments to reconciliate net income
Depreciation and amortization 788 586 930
Stock based compensation 140
Gain on sale of assets (11) (11) (11)
Minority interest in net loss (264) (100) (284)
Equity in loss of JV 11 181 -
Changes in operating assets and liabilities:
Inventories (26) (19) (29)
Receivables (99) (185) (62)
Reimburseable costs receivable (67) (86)
Prepaid expenses & other current assets (206) (156) (224)
Other assets (14) 298 (4)
Accounts payable 201 137 222
Accrued expenses (40) (38) (87)
Reimburseable costs payable - 67 86
Other long-term liabilities - (71) (51)
-----------------------------------------------------
Net cash provided operating activities 905 916 834
-----------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of assets 26 26 26
Restricted cash for DGCP, LLC 466 - 466
Advances repaid by managed outlets 64 (30) 64
Purchases of furniture, equipment and improvements (260) (104) (263)
Investment in non consolidated entity (30) 64 -
-----------------------------------------------------
Net cash used by investing activities 266 (44) 293
-----------------------------------------------------
Cash flows from financing activities:
Proceeds from minority interest investment - (126) 30
Return of capital to minority interests (173) - (173)
Payments to related parties (74) (15) (105)
Payments on long-term debt (197) - (217)
Preferred return to minority shareholders (88) - -
-----------------------------------------------------
Net cash used by financing activities (532) (141) (465)
-----------------------------------------------------
Net increase(decrease) in cash 639 731 662
Cash and cash equivalents at beginning of the year 1,275 581 1,290
-----------------------------------------------------
Cash and cash equivalents at end of the year $ 1,914 $ 1,312 $ 1,952
=====================================================
15
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. RESTRICTED CASH
Restricted cash consists of amounts held in escrow for the Daily Grill at
Continental Park in El Segundo, California which was opened in January 2003
and all but $72,000 was released in 2003.
3. WORKER'S COMPENSATION LOSS RESERVE
In the first quarter of 2004, the Company obtained a large deductible
worker's compensation policy for 2004 that includes a deductible per
occurrence of $250,000 subject to an aggregate loss of $1.7 million. The
Company has established a loss reserve to cover the potential deductible
amounts. The loss reserve is determined by estimating the ultimate cost to
the Company utilizing information on current accidents, prior year
experience and the carrier's loss development and loss trend factors.
4. OTHER LONG-TERM LIABILITIES
Construction of the Bethesda Daily Grill was paid for through a $1.8
million tenant improvement allowance of which $1,002,000 was received
during the first six months of 2004. This tenant incentive allowance has
been recorded in other long-term liabilities and is being amortized on a
straight-line basis against rent expense over the 15 year lease term.
5. OPERATING LEASES AND CONTRACTUAL OBLIGATIONS
During the quarter ended March 28, 2004, we entered into a lease relating
to a restaurant scheduled to open in the first quarter of 2005.
Accordingly, at June 29, 2004, we were obligated under seventeen 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 $22.5 million over the life of those leases, with minimum
annual rental payments of $3.1 million in 2004, $5.3 million between 2005
and 2006, $4.3 million between 2007 and 2008, and $9.8 million thereafter.
16
With the exception of entering into the referenced lease, there were no
material changes in our obligations under operating leases or other
contracts during the six months ended June 27, 2004 as compared to those
described in the Company's Form 10-K for the year ended December 28, 2003,
as amended.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Effective December 29, 2003 (the first day of fiscal year 2004), the
Company adopted the provisions of FIN 46. In light of the changes resulting
from the current restatement process, the Company has elected to
retroactively adopt the provisions of FIN 46 so that the financial
presentation in this Quarterly Report on Form 10-Q is more consistent with
the presentation of the Company's ongoing financial position and results of
operations.
Under FIN 46, an entity is considered to be a variable interest entity
("VIE") when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it
to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is
determined that the investor is the primary beneficiary and will absorb a
majority of the VIE's expected losses or residual returns if they occur.
Management has assessed all entities which are not wholly owned by the
Company to determine if these entities would be considered VIEs and whether
the Company would be considered the primary beneficiary. It was determined
that all of the following entities would be considered VIEs: Chicago - The
Grill on the Alley, San Jose Grill, South Bay Daily Grill, Hollywood Grill
and Universal Daily Grill. Of these entities, the Company has been
determined to be the primary beneficiary for Chicago - The Grill on the
Alley, San Jose Grill, South Bay Daily Grill and Universal Daily Grill.
Chicago - The Grill on the Alley LLC, an Illinois limited liability company
("Chicago Grill"), was formed in February 1999 and commenced operations on
June 12, 2000. The Chicago Grill was formed for the purpose of owning and
operating "The Grill on the Alley" restaurant located in the Westin Hotel
in Chicago, Illinois. All of the business of the Company is conducted under
the name "The Grill on the Alley," patterned after The Grill on the Alley
in Beverly Hills, California.
The members of the Chicago Grill are the Company, which holds a member's
percentage interest of 60%, and The Michigan Avenue Group, a general
partnership which holds the remaining member's percentage interest of 40%.
The Chicago Grill is managed exclusively by the Company who has full,
complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the Chicago Grill. In return,
the Chicago Grill pays the Company a management fee of 5% of gross
restaurant revenues. Total assets and revenues of the Chicago Grill as of
and for the six months ended June 27, 2004 were approximately $2.5 million
and $2.2 million, respectively.
San Jose Grill LLC, a California limited liability company ("San Jose
Grill"), was formed in July 1997 and commenced operations on May 13, 1998.
San Jose Grill was formed for the purpose of owning and operating "The
Grill on the Alley" restaurant located in the Fairmont Hotel in San Jose,
California. All of the business of the Company is conducted under the name
"The Grill on
17
the Alley," also patterned after The Grill on the Alley in Beverly Hills,
California, owned by the Company.
The members of the San Jose Grill are the Company, which holds a member's
percentage interest of 50.05%, and Light Tower Restaurant Associates LLC, a
California limited liability company, which holds the remaining member's
percentage interest of 49.95% and is an affiliate of the San Jose Fairmont
Hotel. The San Jose Grill is managed exclusively by the Company who has
full, complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the San Jose Grill. In
return, the San Jose Grill pays the Company a management fee of 5% of gross
restaurant sales. Total assets and revenues of the San Jose Grill as of and
for the six months ended June 27, 2004 were approximately $1.5 million and
$2.1 million, respectively.
Daily Grill at Continental Park, LLC, a California limited liability
company (the "Daily Grill at Continental Park"), was formed on May 28, 2002
and commenced operations on January 16, 2003. The South Bay Daily Grill was
formed for the purpose of owning and operating the Daily Grill at
Continental Park restaurant located in the Plaza in El Segundo, California.
All of the business of the entity is conducted under the name Daily Grill
at Continental Park, LLC and is patterned after Daily Grill restaurants,
owned by the Company.
The members of Daily Grill at Continental Park are Grill Concepts
Management Inc., which holds an ownership's percentage interest of 50.1%,
and Continental Plaza Restaurant Corporation ("CPR"), a California
corporation which holds the remaining ownership percentage interest of
49.9%. The operations are managed exclusively by the Company who has full,
complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the entity. In return, the
Daily Grill at Continental Park pays the Company a management fee of 5% of
the adjusted gross restaurant's revenues. Total assets and restaurant sales
of the Daily Grill at Continental Park as of and for the six months ended
June 27, 2004 were approximately $1.3 million and $1.5 million,
respectively.
The Grill on Hollywood LLC, a California limited liability company (the
"Grill on Hollywood"), was formed on July 26, 2001 and commenced operations
on November 9, 2001. The entity was formed for the purpose of owning and
operating "The Grill on Hollywood" restaurant located in the Hollywood and
Highland entertainment and shopping complex in Hollywood, California. All
of the business of the entity is conducted under the name "The Grill on
Hollywood," patterned after The Grill on the Alley in Beverly Hills,
California, owned by the Company.
The members of the Grill on Hollywood are the Company which holds a
member's percentage interest of 51%, and TH Grill, Inc., a Delaware
corporation, which holds the remaining member's percentage interest of 49%
and is an affiliate of the TrizecHahn Hollywood, LLC. The entity is managed
exclusively by the Company. In return, the Grill on Hollywood pays the
Company a management fee of 5% of gross restaurant revenues. Total assets
and restaurant sales of the Grill on Hollywood as of and for the six months
ended June 27, 2004 were approximately $1 million and $1.4 million,
respectively.
Universal Grill Joint Venture, a California general partnership (the
"Universal Grill"), was formed in December 1998 and commenced operations on
June 28, 1999. Universal Grill was
18
formed for the purpose of owning and operating "Daily Grill Short Order"
restaurant located in the retail and entertainment district of Universal
CityWalk Hollywood in Universal City, California. All of the business of
the entity is conducted under the name "Daily Grill Short Order," patterned
after Daily Grill in Brentwood, California, owned by the Company.
The partners of the Universal Grill are Universal Grill Concepts, Inc., a
wholly owned subsidiary of the Company, which holds a partner's percentage
interest of 50%, and Universal Studios Development Venture Six, a
California corporation which holds the remaining partnership percentage
interest of 50%. The Universal Grill is managed exclusively by the Company
who has full, complete and exclusive authority, power, and discretion to
manage and control the business, property and affairs of the entity. In
return, the Universal Grill pays the Company a management fee of 5.5% of
the adjusted gross restaurant's revenues. Total assets and restaurant sales
of the Universal Grill as of and for the six months ended June 27, 2004
were approximately $0.9 million and $1.1 million, respectively.
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
June 30, 2004 and earnings per share reported in prior periods presented
must be retroactively adjusted in order to comply with EITF 03-06. The
Company has adopted EITF 03-06 for the quarter ended June 30, 2004, however
there has been no impact on the Company's financial statements as the
preferred shares are not participating securities.
7. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on
Hollywood and South Bay (Continental Park) 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 following tables set forth a summary for each of the LLCs of (1) the
distributions of capital to the Members and/or the Company during the six
months ended June 27, 2004, (2) the unreturned balance of the capital
contributions of the Members and/or the Company at June 27, 2004, and (3)
the accrued but unpaid preferred returns due to the Members and/or the
Company at June 27, 2004:
19
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the six
months ended June 27, 2004: Members $135,000
========
Company $136,000
========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $ 0
========
Company $ 0
========
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
========
Company $ 0
========
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the six months
ended June 27, 2004: Members (a) $ 127,000
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,042,000
==========
Company $ 0
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
==========
Company $ 0
==========
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
six months ended June 27, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,200,000
==========
Company $ 250,000
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
==========
Company $ 80,000
==========
20
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
six months ended June 27, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,000,000
==========
Company $ 350,000
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 156,000
==========
Company $ 55,000
==========
(a) Distribution of capital as of June 27, 2004 includes $60,000 of
payments of capital and loan and $67,000 of payments on interest and
preferred return.
8. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," which amends SFAS No. 123. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results of operations. As the Company has
not elected to change to the fair value based method of accounting for
stock based employee compensation, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial position or results of
operations. All disclosure requirements of SFAS No. 148 have been adopted
and are reflected in these financial statements.
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 grants under the plan require variable
accounting treatment due to the cashless exercise feature of those options,
compensation expense is remeasured at each balance sheet
21
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 is 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
allow 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.
The Company has adopted the disclosure-only provisions of SFAS No. 148 and
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," except for the awards requiring variable accounting
treatment as described above, 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:
2004 2003
--------- -----------
(restated)
Net income (loss), as reported $(54,000) $ 294,000
Add: stock compensation expense
recorded 71,000 140,000
Deduct: stock compensation expense
under fair value method (73,000) (88,000)
Net income (loss), pro forma (56,000) 346,000
Net income (loss) per share applicable to
common stock, as reported:
Basic $ (0.01) $ 0.05
Diluted $ (0.01) $ 0.05
Net income (loss) per share applicable to
common stock, pro forma:
Basic $ (0.02) $ 0.06
Diluted $ (0.02) $ 0.06
22
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 27, 2004 and June 29,
2003 follow:
Six months 2004 2003
Earnings Earnings
(restated) Shares (restated) Shares
----------------------------------------------
Net income (loss) $ (54,000) $ 294,000
Less: preferred stock dividend (25,000) (25,000)
----------- -----------
Earnings (deficit) available for
common stockholders (79,000) 5,568,155 269,000 5,537,071
Dilutive securities:
Stock options - - - -
Warrants - - - 10,318
----------- --------- ----------- ---------
Dilutive earnings (deficit)
available to common stockholders $ (79,000) 5,568,155 $ 269,000 5,547,389
==============================================
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. For the six months ended June
29, 2003, 751,575 options, 1,732,786 warrants and 500 shares of convertible
preferred stock were excluded from the calculation because they were
anti-dilutive.
Three months 2004 2003
Earnings Earnings
(restated) Shares (restated) Shares
----------------------------------------------
Net income (loss) $ (151,000) $ 48,000
Less: preferred stock dividend (12,000) (12,000)
----------- -----------
Earnings (deficit) available for
common stockholders (163,000) 5,590,445 36,000 5,537,071
Dilutive securities:
Stock options - - - 2,564
Warrants - - - 23,735
----------- --------- ----------- ---------
Dilutive earnings (deficit)
available to common stockholders $ (163,000) 5,590,445 $ 36,000 5,563,370
==============================================
23
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. For the three months ended
June 29, 2003, 679,275 options, 1,732,786 warrants and 500 shares of
convertible preferred stock were excluded from the calculation because they
were anti-dilutive.
11. 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. The plaintiff 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. Discovery is currently
continuing in these matters. We believe that all of our employees were
provided with the opportunity to take all required meal and rest breaks and
intend to vigorously defend our position in all of these matters although
the outcome cannot be ascertained at this time.
12. SUBSEQUENT EVENTS
On June 29, 2004, the Company formed 612 Flower Daily Grill, LLC, a limited
liability company to open and operate a Daily Grill in downtown Los
Angeles. The investor member of the limited liability company will invest
$1,250,000 and own a 41.5% interest in the LLC and the Company will invest
$251,000 and own a 58.41% interest in the LLC. A subsidiary of the Company
will manage the downtown Daily Grill for which it will receive a management
fee of 5% of sales. The restaurant is scheduled to open in 2005. The newly
formed LLC signed a 15 year lease. The Company is assessing whether the
newly formed LLC will be consolidated under FIN 46.
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 28, 2003, as
amended on October 15, 2004.
24
RESTATEMENT FOR CORRECTION OF ERRORS AND RETROACTIVE ADOPTION OF FIN 46
The accompanying consolidated financial statements as of December 28, 2003 and
for the three and six-month periods ended June 29, 2003 were restated on May 14,
2004 from those originally issued to reflect certain adjustments related to
stock compensation and other miscellaneous adjustments, and were subsequently
restated on October 15, 2004 to further reflect additional adjustments to revise
the accounting for certain of the Company's joint ventures, record costs and
revenues associated with reimbursed costs under management agreements and make
other miscellaneous corrections. Additionally, the Company has corrected its
initial adoption of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," (FIN 46) which was first
effective for the quarter ended March 28, 2004. (Note - Except where there is no
change to diluted earnings per share, the impact of each adjustment on diluted
earnings per share has been identified below.)
RETROACTIVE ADOPTION OF FIN 46
- ------------------------------
Effective December 29, 2003 (the first day of fiscal year 2004), the Company
adopted the provisions of FIN 46. The Company has elected to retroactively adopt
the provisions of FIN 46. The impact of the retroactive adoption is to
consolidate The San Jose Grill LLC, Chicago - the Grill on the Alley, LLC, the
Daily Grill at Continental Park, LLC and the Universal CityWalk Daily Grill
prior to fiscal year 2004. There is no impact on net income (loss) in any period
as a result of the retroactive adoption. Errors in the prior accounting for
these entities are discussed in the following sections. See further discussion
of the adoption of FIN 46 under the accounting policy note below.
CORRECTIONS OF ERRORS
- ---------------------
Stock Compensation and Miscellaneous Adjustments
In May 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," this cashless exercise feature requires the Company to
account for its option plan using a variable accounting treatment. Under
variable accounting, compensation expense must be remeasured each balance sheet
date based on the difference between the current market price of the Company's
stock and the option's exercise price. An accrual for compensation expense is
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. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant. The impact of this adjustment was to increase operating expenses and net
loss by $135,000 ($0.02 per share) and $140,000 ($0.03 per share) for the three
and six month periods ended June 29, 2003. Results for the first quarter of
fiscal 2004 were originally reported correctly and did not require restatement.
25
In addition to this change, the Company also recorded additional general and
administrative expense of $28,000 in the fourth quarter of fiscal year 2003 to
correctly state its liability for payroll and other costs. This adjustment
increased accumulated deficit as of December 28, 2003. Lastly, the Company
increased additional paid-in capital and accumulated deficit by $55,000 ($0.01
per share) as of each fiscal yearend in the period from 1998 through 2003 to
properly reflect the fair value of fully vested stock options issued in
connection with severance agreements arranged in fiscal year 1998 which had not
been previously expensed.
Joint Venture Accounting and Miscellaneous Adjustments
Deconsolidation of The San Jose Grill LLC, Chicago - the Grill on the Alley, LLC
and the Daily Grill at Continental Park, LLC Pursuant to SOP 78-9
In August 2004, the Company reevaluated its consolidation policies with respect
to its investments in four restaurants held by limited liability companies
(LLCs). Previously, all four of the LLCs were consolidated due to the Company's
majority ownership in these entities. However, the terms of three agreements
gave the minority interests certain voting rights which, when evaluated under
the relevant terms of Statement of Position No. 78-9, "Accounting for
Investments in Real Estate Ventures," precluded consolidation. Therefore, the
Company restated previously reported results to show the investments in the San
Jose Grill LLC, Chicago - The Grill on the Alley, LLC and the Daily Grill at
Continental Park, LLC under the equity method, rather than as consolidated
subsidiaries. The fourth LLC, The Grill on Hollywood, LLC, remained
consolidated. There was no impact on net income as a result of this change. See
further discussion below regarding other errors in the accounting for the
Company's joint ventures and the consolidation of all the Company's
partially-owned entities upon the adoption of FIN 46.
Correction of Adoption of FIN 46
FIN 46 was first effective for the Company for the quarter ended March 28, 2004.
At that time, the Company was consolidating all of its LLCs (incorrectly, in
some cases, as indicated above), namely The San Jose Grill LLC, Chicago - The
Grill on the Alley, LLC, The Grill on Hollywood, LLC and the Daily Grill at
Continental Park, LLC, and was accounting for its investment in the Universal
CityWalk Daily Grill partnership under the equity method. Upon the initial
adoption of FIN 46, the Company made no changes to its accounting for the LLCs
and partnership as it believed them to already be appropriately consolidated.
As part of the restatement process undertaken in September 2004, the Company
reevaluated its adoption of FIN 46, which became even more relevant given the
deconsolidation of many of the LLCs pursuant to SOP 78-9. The Company assessed
all entities which are not wholly owned to determine if these entities would be
considered variable interest entities and whether the Company would be
considered the primary beneficiary. The Company determined that all of the
following entities would be considered variable interest entities: The San Jose
Grill LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood LLC,
The Daily Grill at Continental Park LLC, and the Universal CityWalk Daily Grill
partnership. The Company also determined that it is the primary beneficiary for
all these entities which has resulted in consolidation of these entities. The
Company has elected to retroactively adopt the provisions of FIN 46 and present
these variable interest entities as consolidated subsidiaries for the prior
periods presented in these financial statements.
26
Chicago - The Grill on the Alley, LLC Loss Allocation and Interest Charge
In August 2004, the Company reevaluated the accounting for its venture relating
to the Chicago Grill on the Alley restaurant. The stated venture was established
in 1999 and is administered under an operating agreement whereby the Company
owns a 60% stated interest and the minority investor, the Michigan Avenue Group
(MAG), owns the remaining interests. The venture was originally funded by an
eight percent, $1.7 million loan from MAG which was used to build the restaurant
and fund initial operations. GCI made no financial contribution and was not
credited with any capital for the trademarks and restaurant expertise it
contributed to the venture. MAG had the right to convert all or part of the loan
into capital of the venture and in 2000 upon completion of the initial
build-out, it converted approximately $1.2 million of the loan into Capital.
There was no change in the voting, ownership or profit sharing interests as a
result of this conversion. The terms of the equity interest into which the loan
was converted were such that MAG was entitled to an eight percent return on its
capital balance (defined as the "Preferred Return") which was identical to the
interest rate on the note. Additionally, the venture was obligated to repay
converted original capital amounts under an identical payment/amortization
schedule as the note. GCI guaranteed the venture's repayment of both the loan
and MAG converted capital amounts.
Historically, the Company had consolidated the entity due to its belief that it
had a controlling voting interest (see separate comment above regarding
deconsolidation of this entity) and recognized a minority interest at an amount
equal to MAG's capital contribution reduced by 40% of the venture's losses and
any return of capital amounts and allocated losses. The restaurant has operated
at a loss since inception and losses were allocated based on the stated 40%
interest noted above.
In reviewing this accounting, it was determined that the venture's obligation to
return MAG's capital should have been recognized as a liability of the joint
venture rather than treated as equity. As the joint venture is a consolidated
entity pursuant to FIN 46, the Company's accounts should also recognize this
liability rather than reflect it as minority interest. Furthermore, interest
expense should have been recorded in the statement of operations related to the
Preferred Return as opposed to treating the amounts as dividends. Lastly, the
Company determined that losses should not have been allocated to the minority
interest member given that MAG had no equity at risk. The impact of these
adjustments was to decrease the minority interest in loss of subsidiary by
$2,000 and $13,000 in the three and six month periods ended June 27, 2004,
respectively, and $22,000 and $63,000 ($0.01 per share) in the three and six
month periods ended June 29, 2003, respectively; and increase interest expense
by $17,000 and $34,000 ($0.01 per share) in the three and six month periods
ended June 27, 2004, respectively, and $19,000 and $38,000 ($0.01 per share) in
the three and six month periods ended June 29, 2003, respectively.
27
Chicago Grill on the Alley Warrants
In the process of evaluating prior accounting for this joint venture, it was
noted that warrants to purchase approximately 203,000 shares of GCI stock were
given to MAG in connection with the issuance of the original note. In accordance
with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants," the Company determined that the fair value of such warrants
should have been recognized as a debt discount and recorded as a reduction to
the loan balance, with accretion of the discount recognized as additional
interest expense using the effective interest method. The effect of this
adjustment was to increase additional paid-in capital by $322,000 as of each
fiscal year-end in the period from 1999 to 2003 and as of June 27, 2004.
Amortization of this amount has increased interest expense by $9,000 and $18,000
in the three and six month periods ended June 27, 2004, respectively, and $9,000
and $19,000 in the three and six month periods ended June 29, 2003,
respectively.
Other Joint Venture Loss Allocations
The Company also reviewed its accounting for its other joint ventures,
specifically, those that had been generating losses. Based on the terms of these
agreements, losses are typically allocated in proportion to the recorded amount
of each member's capital account balances. The recorded capital balances differ
from the actual ownership percentages and the method to distribute cash flows in
the event of a liquidation of the venture. As noted above, while the Company
usually has a majority ownership percentage, the minority partner usually
contributes the majority of the capital. The venture agreements specify that the
minority member is entitled to cash distributions before the Company so that its
investment is returned prior to the Company's.
The Company determined that its previous loss allocations to the minority
partners were incorrect because they do not reflect the underlying economics at
book value of the investments. The Company determined that a hypothetical
liquidation model should be utilized to allocate losses for each reporting
period based on the prescribed order of cash distributions upon liquidation. The
change in the amounts allocated to the individual members based on this process,
as adjusted for actual contributions and distributions, determines the
allocation of profits or losses each period. The impact of this adjustment was
to increase the minority interest in loss of subsidiaries by $27,000 and $50,000
($0.01 per share) in the three and six month periods ended June 27, 2004,
respectively; increase the minority interest in loss of subsidiaries by $18,000
for the three months ended June 29, 2003; and reduce the minority interest in
loss of subsidiary by $5,000 for the six months ended June 29, 2003.
Reimbursed Costs
The Company operates a number of restaurants under management agreements whereby
it is responsible for the operation of each restaurant. For its services, the
Company typically receives a management fee based on a percentage of revenue, an
incentive fee which is usually a profit sharing arrangement (collectively,
"Fees") and a reimbursement of the Company's direct costs of operating the
restaurant. Management agreements are in place for restaurants in which the
Company has a non-controlling ownership percentage as well as a number of
restaurants in which the Company has no ownership. For non-consolidated
restaurants, the Company previously only reflected its Fees as revenue in the
28
consolidated accounts. In August 2004, the Company reviewed these arrangements
considering the primary obligor criteria as described in EITF 01-14, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred." Under the terms of the management agreements, the Company is
hired as an independent contractor and is responsible for settlement of all
liabilities of the restaurant. Additionally, all employees are employees of the
Company, not the individual restaurant. Although payroll and other operating
expenses are paid out of an agency bank account belonging to the restaurant,
based on the weight of the indicators identified in EITF 01-14 and EITF 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," the Company
determined it should recognize the reimbursement of restaurant expenses of the
unconsolidated outlets as revenues in its financial statements and the related
expenses.
The impact of these adjustments was to increase revenues by $2,903,000 and
$6,093,000 in the three and six month periods ended June 27, 2004, respectively
and to increase operating expenses by a similar amount for both periods. The
impact on the three and six months periods ended June 29, 2003 was to increase
revenues by $2,217,000 and $4,295,000, respectively and to increase operating
expenses by a similar amount for both periods.
In evaluating certain transactions related to the San Francisco managed outlet,
the Company also determined that advances made to the restaurant in prior
periods should have been expensed in the period incurred instead of capitalized
and deferred. The impact of this adjustment was to increase revenue by $29,000
($0.01 per share) for the six months ended June 27, 2004.
Accounting for Lease Incentives
In 2003, the Company began recording reimbursements received for tenant
improvement allowances as a liability. Consistent with the guidance set forth in
SFAS No. 13, "Accounting for Leases," and FASB Technical Bulletin No. 88-1,
"Issues Related to the Accounting for Leases," these lease incentives are
amortized over the life of the lease as a credit to rent expense. Prior to 2003,
however, the Company had recorded such reimbursements as a reduction to the
value of the fixed asset. As part of this restatement process, the Company has
corrected its prior accounting practice and recorded the unamortized value of
previously unrecorded lease incentives as an increase to fixed assets and
increase to other long-term liabilities. This adjustment totaled $835,000 and
$765,000 as of December 28, 2003 and June 27, 2004, respectively. There was no
impact on net income or earnings-per-share as a result of this adjustment,
however, depreciation expense was increased and restaurant operating expenses
were decreased by $35,000 for the three months ended June 29, 2003 and June 27,
2004 and by $70,000 for the six months ended June 29, 2003 and June 27, 2004.
Upon retroactive adoption of FIN 46, the adjustment increased fixed assets and
other long-term liabilities by $1,238,000 and $1,150,000 as of December 28, 2003
and June 28, 2004, respectively, and increased depreciation expense and
decreased restaurant operating expenses by $44,000 for the second quarters of
fiscal year 2003 and 2004 and by $88,000 for the six months ended June 29, 2003
and June 27, 2004.
Other Equity Award Adjustments
The Company recorded additional interest expense of $5,000 in each of the first
two quarters of fiscal year 2003 and 2004 to correct the amortization of the
fair value of warrants issued to two principal shareholders in connection with
their guarantee of the Company's credit facility. Such amortization should have
been recognized over the three-year term of the guarantee but was incorrectly
being amortized over the term of the warrants. Additional paid-in capital was
increased by $27,000 as of each fiscal yearend from 2000 to 2003 to adjust the
fair value of these warrants. The Company also increased additional paid-in
capital and accumulated deficit by $45,000 as of each fiscal yearend in the
period from 2000 through 2003 and as of June 27, 2004 to recognize the fair
value of warrants to purchase 50,000 shares of the Company's stock, pursuant to
EITF 96-18, "Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Such warrants were issued to a professional advisor for services rendered in
fiscal year 2000 and had not been previously recognized.
SUMMARY
- -------
The above revisions impacted the balance sheets as of December 28, 2003 and the
statements of operations and cash flows for the three and six-month periods
ended June 29, 2003. The revisions have had no impact to our income tax
provisions. The impact of this restatement, which has been reflected throughout
the consolidated financial statements and accompanying notes, is as follows
(amounts in thousands):
29
December 28, 2003
----------------------------------------------------------
As restated for
correction of
errors and
retroactive
As previously As restated for adoption of FIN
reported (1) correction of errors 46
Current assets:
Cash and cash equivalents $ 1,473 $ 972 $ 1,496
Inventories 570 355 585
Receivables 741 747 658
Reimbursable costs receivable - 1,503 580
Prepaid and other current assets 608 535 612
----------------------------------------------------------
Total current assets 3,392 4,112 3,931
Furniture, equipment and
improvements 9,020 5,690 11,061
Goodwill 205 205 205
Restricted cash 72 - 72
Advances to managed outlets 331 - -
Note receivable 111 111 111
Liquor licenses 330 264 350
Other assets 426 1,320 275
----------------------------------------------------------
$ 13,887 $ 11,702 $ 16,005
==========================================================
Current liabilities:
Accounts payable $ 998 $ 676 $ 1,046
Accrued expenses 2,315 1,134 2,400
Reimbursable costs payable - 1,503 580
Current portion of debt 254 82 298
Note payable related party 269 346 345
----------------------------------------------------------
Total current liabilities 3,836 3,741 4,669
----------------------------------------------------------
Long term debt 283 106 285
Note payable related party 323 230 969
Other long term liabilities 1,496 1,632 2,734
----------------------------------------------------------
Total liabilities 5,938 5,709 8,657
----------------------------------------------------------
Minority interest 1,521 703 2,058
Stockholders' equity
Preferred stock - - -
Common stock - - -
Additional paid-in capital 13,207 13,601 13,601
Accumulated deficit (6,779) (8,311) (8,311)
----------------------------------------------------------
Total stockholders' equity 6,428 5,290 5,290
----------------------------------------------------------
$ 13,887 $ 11,702 $ 16,005
==========================================================
(1) The Company previously restated its consolidated financial statements as of
December 28, 2003 to reflect the accounting for employee stock options using
variable accounting treatment and to make other miscellaneous corrections. The
effect of this restatement was to increase accrued liabilities by $197,000,
increase additional paid-in capital by $55,000 and increase accumulated deficit
by $252,000 as of December 28, 2003. These "As previously reported" amounts
already reflect these adjustments and represent the amounts presented in the
Company's Amended Annual Report of Form 10-K/A filed on May 27, 2004.
30
Six Months Ended
June 27,2003
----------------------------------------------------
As restated for
correction of
errors and
As restated retroactive
As previously for correction adoption of
reported of errors FIN 46
Revenues
Sales $ 23,186 $ 17,262 $ 24,184
Cost reimbursements - 12,232 4,284
Management Fees 517 633 466
----------------------------------------------------
Total Revenues 23,703 30,127 28,934
Cost of sales 6,396 4,656 6,637
----------------------------------------------------
Gross Profit 17,307 25,471 22,297
----------------------------------------------------
Operating expenses
Restaurant and operating
expenses 14,042 10,249 14,751
Reimbursed costs 12,232 4,284
General and administrative 1,816 1,902 1,903
Depreciation and
amortization 788 586 930
Pre-opening costs 187 187
Gain on sale of assets (11) (11) (11)
----------------------------------------------------
Total operating expenses 16,822 24,958 22,044
----------------------------------------------------
Income (loss) from operations 485 513 253
Interest expense, net (92) (64) (162)
----------------------------------------------------
Income (loss) before provision
from income taxes, minority
interest and equity in loss of
joint venture 393 449 91
Provision for income taxes (81) (74) (81)
----------------------------------------------------
Income (loss) before minority
interest and equity in loss of
joint venture 312 375 10
Minority interest in loss
(earnings) of subsidiaries 264 100 284
Equity in loss of joint venture (11) (181) -
----------------------------------------------------
Net income (loss) 565 294 294
Preferred dividends accrued (25) (25) (25)
----------------------------------------------------
Net income available for
common shareholders $ 540 $ 269 $ 269
====================================================
Net income per share
applicable to common stock :
Basic Net Income $ 0.10 $ 0.05 $ 0.05
Diluted Net Income $ 0.10 $ 0.05 $ 0.05
Average-weighted shares outstanding
Basic 5,537 5,537 5,537
Diluted 5,547 5,547 5,547
31
For the Three Months Ended
June 27,2003
----------------------------------------------------------
As restated for
correction of errors
As restated for and retroactive
As previously correction of adoption of FIN
reported errors 46
Revenues
Sales $ 11,519 $ 8,571 $ 12,050
Cost reimbursements 5,426 2,217
Management Fees 262 300 235
----------------------------------------------------------
Total Revenues 11,781 14,297 14,502
Cost of sales 3,222 2,340 3,354
----------------------------------------------------------
Gross Profit 8,559 11,957 11,148
----------------------------------------------------------
Operating expenses
Restaurant and operating
expenses 7,047 5,132 7,444
Reimbursed costs 5,426 2,217
General and administrative 909 992 993
Depreciation and amortization 357 274 428
Pre-opening costs - - -
Gain on sale of assets - - -
----------------------------------------------------------
Total operating expenses 8,313 11,824 11,082
----------------------------------------------------------
Income (loss) from operations 246 133 66
Interest expense, net (44) (31) (80)
----------------------------------------------------------
Income (loss) before provision
from income taxes, minority
interest and equity in loss of joint
venture 202 102 (14)
Provision for income taxes (26) (21) (26)
----------------------------------------------------------
Income (loss) before minority
interest and equity in loss of joint
venture 176 81 (40)
Minority interest in loss (earnings)
of subsidiaries 48 10 88
Equity in loss of joint venture (6) (43) -
----------------------------------------------------------
Net income (loss) 218 48 48
Preferred dividends accrued (12) (12) (12)
----------------------------------------------------------
Net income available for common
shareholders $ 206 $ 36 $ 36
==========================================================
Net income per share applicable to
common stock :
Basic Net Income $ 0.04 $ 0.01 $ 0.01
Diluted Net Income $ 0.04 $ 0.01 $ 0.01
Average-weighted shares
outstanding
Basic 5,537 5,537 5,537
Diluted 5,563 5,563 5,563
32
For the Six months ended
June 29, 2003
-----------------------------------------------------
As restated for
correction of
errors and
As restated for retroactive
As previously correction of adoption of FIN
reported errors 46
Cash flows from operating activities
Net income $ 565 $ 294 $ 294
Adjustments to reconciliate net income
Depreciation and amortization 788 586 930
Stock based compensation 140
Gain on sale of assets (11) (11) (11)
Minority interest in net loss (264) (100) (284)
Equity in loss of JV 11 181 -
Changes in operating assets and liabilities:
Inventories (26) (19) (29)
Receivables (99) (185) (62)
Reimburseable costs receivable (67) (86)
Prepaid expenses & other current assets (206) (156) (224)
Other assets (14) 298 (4)
Accounts payable 201 137 222
Accrued expenses (40) (38) (87)
Reimburseable costs payable - 67 86
Other long-term liabilites - (71) (51)
-----------------------------------------------------
Net cash provided operating activities 905 916 834
-----------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of assets 26 26 26
Restricted cash for DGCP, LLC 466 - 466
Advances repaid by managed outlets 64 (30) 64
Purchases of furniture, equipment and improvements (260) (104) (263)
Investment in non consolidated entity (30) 64 -
-----------------------------------------------------
Net cash used by investing activities 266 (44) 293
-----------------------------------------------------
Cash flows from financing activities:
Proceeds from minority interest investment - (126) 30
Return of capital to minority interests (173) - (173)
Payments to related parties (74) (15) (105)
Payments on long-term debt (197) - (217)
Preferred return to minority shareholders (88) - -
-----------------------------------------------------
Net cash used by financing activities (532) (141) (465)
-----------------------------------------------------
Net increase(decrease) in cash 639 731 662
Cash and cash equivalents at beginning of the year 1,275 581 1,290
-----------------------------------------------------
Cash and cash equivalents at end of the year $ 1,914 $ 1,312 $ 1,952
=====================================================
33
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total operating revenues, except where otherwise noted. We
typically analyze our operating expenses as a percentage of sales revenues, not
total revenues.
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
--------- ---------- --------- ----------
(restated) (restated)
Revenues: % % % %
Company restaurant sales 79.8 83.1 79.6 83.6
Cost reimbursements 18.3 15.3 18.5 14.8
Management and license fees 1.9 1.6 1.8 1.6
--------- ---------- --------- ----------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales (exclusive of depreciation,
presented separately below) 22.7 23.1 22.5 22.9
--------- ---------- --------- ----------
Gross profit 77.3 76.9 77.5 77.1
--------- ---------- --------- ----------
Restaurant operating expense 50.8 51.3 49.2 51.0
Reimbursed costs 18.3 15.3 18.5 14.8
Gain on sale of assets - - - -
General and administrative expense 6.8 6.8 7.0 6.6
Depreciation and amortization 2.9 2.9 2.8 3.2
Pre-opening expenses - - 0.5 0.6
--------- ---------- --------- ----------
Total operating expenses 78.8 76.3 78.0 76.2
--------- ---------- --------- ----------
Operating income (loss) (1.6) 0.6 (0.5) 0.9
Interest expense, net (0.4) (0.6) (0.4) (0.6)
--------- ---------- --------- ----------
Income (loss) before provision for income
taxes and minority interest (2.0) (0.0) (0.9) 0.3
Provision for income taxes (0.0) (0.2) (0.1) (0.3)
Minority interest in net loss of subsidiaries 1.0 0.6 0.8 1.0
--------- ---------- --------- ----------
Net income (loss) (1.0) 0.4 (0.2) 1.0
========= ========== ========= ==========
34
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 2004 FY 2003 FY 2004 FY 2003 FY 2004 FY 2003
------- ------- ------- ------- ------- -------
Daily Grill restaurants:
Company owned - - 1 1 11 10
Managed and/or licensed - - - - 7 6
Grill on the Alley restaurants:
Company owned - - - - 4 4
Other restaurants
Managed and/or licensed - - - - 1 1
------- ------- ------- ------- ------- -------
Total - - 1 1 23 21
======= ======= ======= ======= ======= =======
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 63,444 $ 63,986 $ 66,271 $ 65,766
Grill on the Alley 73,221 75,551 76,668 76,546
Change in comparable restaurant (1):
Daily Grill 1.3% 10.0% 5.0% 6.6%
Grill on the Alley (5.6)% 7.9% 0.2% 3.1%
Total Company revenues:
Daily Grill $ 8,838,000 $ 8,017,000 $18,182,000 $16,223,000
Grill on the Alley 3,808,000 4,033,000 7,974,000 7,961,000
Costs reimbursements 2,903,000 2,217,000 6,093,000 4,284,000
Management and license fees 306,000 235,000 602,000 466,000
------------ ------------ ------------ ------------
Total consolidated revenues $15,855,000 $14,502,000 $32,851,000 $28,934,000
------------ ------------ ------------ ------------
Managed restaurants 4,027,000 3,203,000 8,048,000 6,037,000
Licensed restaurants 2,221,000 2,184,000 4,269,000 4,479,000
Less: Reimbursed costs (2,903,000) (2,217,000) (6,093,000) (4,284,000)
Less: management and license fees (306,000) (235,000) (602,000) (466,000)
------------ ------------ ------------ ------------
Total system sales $18,894,000 $17,437,000 $38,473,000 $34,700,000
============ ============ ============ ============
35
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 27, 2004 AS COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 29, 2003
Revenues. Revenues for the 2004 second quarter increased 9.3% to $15.9 million
from $14.5 million in the 2003 period. Sales revenues increased 5.0% to $12.6
million in 2004 from $12.1 million in 2003. Cost reimbursements increased 30.9%
to $2.9 million from $2.2 million in 2003. Management and license fee revenues
increased to $306,000 in 2004 from $235,000 in 2003. System-wide sales for the
quarter, including sales of non-consolidated restaurants operated under license,
management or partnership agreements, totaled $18.9 million in 2004, an increase
of 8.4% from $17.4 million in 2003. System-wide sales, which is a non-GAAP
measure, is computed by adding to total revenues the revenues of unconsolidated
restaurants and subtracting license and management fees reported from those
restaurants, this non-GAAP measure is considered by management to be an
indicator of brand strength. See reconciliation of system-wide sales to revenues
above.
Revenues for the six months ended June 27, 2004 increased 13.5% to $32.9 million
from the $28.9 million generated for the same period of fiscal 2003. Total
revenues included $26.2 million of sales revenues, $6.1 million of cost
reimbursements and $602,000 of management and licensing fees for the first six
months of 2004, compared to $24.2 million of sales revenues, $4.3 million of
cost reimbursements and $466,000 of management and licensing fees for the first
six months of 2003. System-wide sales for the six months, including sales of
non-consolidated restaurants operated under license, management or partnership
agreements, totaled $38.5 million in 2004, an increase of 10.9% from $34.7
million in 2003.
Sales for Daily Grill restaurants increased by 10.2% from $8.0 million in the
2003 quarter to $8.8 million in the 2004 period. The increase in sales revenues
for the Daily Grill restaurants from 2003 to 2004 was primarily attributable to
an increase in same store sales of 2.9% ($0.2 million) for restaurants open for
12 months in both 2003 and 2004 and opening of the Bethesda Daily Grill ($0.8
million), partially offset by a decrease in sales at the South Bay Daily Grill
($0.2 million).
Sales for Daily Grill restaurants increased by 12.1% from $16.2 million for the
six months in 2003 to $18.2 million in 2004. The increase in sales revenues for
the Daily Grill restaurants from 2003 to 2004 was primarily due to the opening
of Bethesda Daily Grill ($1.5 million) and an increase in same store sales ($0.8
million) partially offset by a decrease in sales at the South Bay Daily Grill
($0.3 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 increased 0.8% from
$65,766 in 2003 to $66,271 in 2004. Comparable restaurant sales and weighted
average weekly sales at the Daily Grill restaurants in 2004 reflected both
increased guest counts and improved average checks during the period.
Sales for Grill restaurants decreased by 5.6% from $4.0 million in the 2003
quarter to $3.8 million in 2004. The decrease in sales revenues for the Grill
restaurants from 2003 to 2004 was attributable to decreased guest counts only
partially offset by improved check averages.
36
Sales for Grill restaurants remained flat between the 2003 and 2004 six month
periods. The slight increase in sales revenues for the Grill restaurants from
2003 to 2004 was attributable to improved check averages almost entirely offset
by decreased guest counts. Weighted average weekly sales at the Grill
restaurants increased 0.2% from $76,546 in 2003 to $76,668 in 2004.
Reimbursed costs, which represent cost of goods, wages and benefits, and fixed
and variable operating expenses, increased in 2004 primarily due to the opening
of the Portland Daily Grill in September 2003.
Management and license fee revenues during the 2004 quarter were attributable to
hotel restaurant management services which accounted for $250,000 of management
fees and licensing fees from the LAX Daily Grill, Skokie, Illinois Daily Grill
and the San Jose City Bar and Grill which totaled $56,000. The increase in
management fees during 2004 was attributable to management of the Portland Daily
Grill beginning in September 2003 and improved sales at other managed locations.
Management and license fee revenues during the 2004 six months were attributable
to hotel restaurant management services which accounted for $488,000 of
management fees and licensing fees from the LAX Daily Grill, Skokie, Illinois
Daily Grill and the San Jose City Bar and Grill which totaled $114,000. The
increase in management fees during 2004 was attributable to management of the
Portland Daily Grill beginning in September 2003 and improved sales at other
managed locations.
Cost of Sales and Gross Profit. While sales revenues increased by 5.0%
($596,000) in the 2004 quarter and 8.2% ($1,972,000) for the six months as
compared to 2003, total cost of sales increased by 7.5%, or $253,000, for the
quarter and 11.2% or $742,000, for the six months ended June 27, 2004 as
compared to the same periods in 2003. The dollar increase in cost of sales is
primarily due to the opening of the Bethesda Daily Grill, $234,000 for the
quarter and $422,000 for the six months. Cost of sales as a percentage of
restaurant sales was 28.5% for the quarter and 28.2% for the six months ended
June 27, 2004 as compared to 27.8% for the second quarter and 27.4% for the
year-to-date period in 2003. The increase in cost of sales as a percentage of
total sales was attributable to higher costs for a variety of food and grocery
products, including dairy, poultry and seafood during the second quarter and six
months of 2004.
Gross profit for the quarter increased 9.9% from $11.1 million in 2003 to $12.2
million in 2004 and 14.2% from $22.3 million to $25.5 for the six months. Gross
profit on restaurant operations increased for the second quarter 3.9% from $8.7
million (71.1% of sales) in 2003 to $9.0 million (71.4% of sales) in 2004. For
the six months gross profit on restaurant operations increased 7.4% from $17.5
million (72.6% of sales) in 2003 to $18.8 million (71.8% of sales) in 2004.
Operating Expenses and Operating Results. Total operating expenses, including
restaurant operating expenses, reimbursed costs, general and administrative
expense, depreciation and amortization, and pre-opening costs, increased 12.7%
to $12.5 million in the 2004 quarter (representing 78.8% of total revenues) from
$11.1 million in 2003 (representing 76.4% of total revenues), and for the six
months increased 16.3% to $25.6 million (representing 78.0% of total revenues)
from $22.1 million (representing 76.2% of total revenues).
37
Restaurant operating expenses increased by $610,000, or 8.2%, for the quarter
and $1,428,000, or 9.7%, for the six months as compared to the same periods in
2003. The dollar increase in restaurant operating expenses for the quarter was
primarily attributable to the opening of the Bethesda Daily Grill in January
2004 ($566,000) and an increase in utilities ($39,000) and occupancy costs
($34,000) at comparable restaurants partially offset by a decrease in payroll
and benefits ($64,000). The dollar increase in operating expenses for the six
months was primarily attributable to the opening of the Bethesda Daily Grill
($1,024,000), an increase in payroll and benefits ($89,000), promotions and
local advertising ($193,000), credit card discounts ($103,000) and occupancy
($130,000) at comparable restaurants partially offset by a reduction in fixed
costs ($103,000) and a reduction in overall operating expenses at South Bay
Daily Grill now in their second year of operations. Restaurant operating
expenses, as a percentage of restaurant sales, increased in the second quarter
from 61.8% in 2003 to 63.7% in 2004. For the six months, the percentages were
61.0% in 2003 and 61.9% in 2004. The major contributor to the increase as a
percentage of sales was increased promotional costs.
Reimbursed costs increased 30.9% for the quarter and 42.2% 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 Portland Daily Grill.
General and administrative expense increased 9.0% for the quarter and 21.4% for
the six months as compared to the same periods in 2003. As a percentage of total
revenue, general and administrative expense totaled 6.8% for the quarter and
7.0% for the six months as compared to 6.8% for the quarter and 6.6% for the six
months in 2003. The increase in total general and administrative expense of
$90,000, or 9.1%, for the 2004 quarter was primarily attributable to increases
in payroll and benefits, travel and entertainment, and professional services
offset by a decrease in stock option compensation. The increase in total general
and administrative expense of $407,000, or 21.4%, for the 2004 six month period
is attributable to increased payroll and benefits, professional services and
travel and entertainment expenses.
Depreciation and amortization expense increased by 6.1% for the quarter and
decreased 2.9% for the six months compared to 2003, representing 3.5% of
restaurant sales for the six months of 2004 and 3.8% of sales in 2003. The
decrease in depreciation and amortization expense for the six months was
primarily due to the completion of amortization of the covenant not to compete
in 2003.
Pre-opening costs totaled $148,000 in the 2004 six month period as compared with
$187,000 in 2003. These pre-opening costs were attributable to the opening in
January 2003 of the South Bay Daily Grill and the opening of the Bethesda Daily
Grill in January 2004.
Total Interest Expense. Total interest expense, net, decreased by $14,000, or
17.5%, during the quarter and $30,000, or 18.5%, during the six months compared
to the same periods in 2003. The decrease in interest expense was primarily
attributable to the reduction in long-term debt.
Minority Interest. We reported a minority interest in the loss of our majority
owned subsidiaries of $166,000 during the 2004 second quarter as compared to
$88,000 during the 2003 quarter. For the six months, we reported a minority
interest in the loss of majority subsidiaries of
38
$266,000 during 2004 and $284,000 during 2003. The decrease in minority interest
in loss for the six months was primarily attributable to improved operating
results at the Grill on Hollywood.
We reported net loss of $151,000 for the second quarter and $54,000 for the six
months of 2004 as compared to net income of $48,000 for the second quarter and
$294,000 for the six months in 2003.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At June 27, 2004 we had negative working capital of $1.4 million and a cash
balance of $1.6 million compared to negative working capital of $0.7 million and
a cash balance of $1.5 million at December 28, 2003.
Net cash provided by operations during the six months ended June 27, 2004
totaled $968,000 compared to $834,000 during the six months ended June 29, 2003.
The increase in cash provided by operations primarily resulted from a larger
increase in accounts payable due to increased days outstanding during the 2004
period as compared to 2003 that was partially offset by the loss for the current
year period and other changes in working capital.
Net cash used in investing activities during the six months ended June 27, 2004
totaled $1,435,000 compared to $293,000 provided by investing activities during
the six months ended June 29, 2003. Cash used in investing activities related
primarily to the purchases of furniture, fixtures and equipment for the Bethesda
Daily Grill ($1,273,000).
Net cash provided by financing activities during the six months ended June 27,
2004 totaled $603,000 compared to $465,000 used in financing activities during
the six months ended June 29, 2003. Cash provided by financing activities during
the current period related to tenant improvement allowances ($1,002,000),
reductions in debt ($299,000), and distribution of profits to the minority
investor in San Jose Grill, LLC ($135,000).
Financing Facilities. At June 27, 2004, the Company had a bank credit facility
with nothing owing, a loan from a member of Chicago - The Grill on the Alley,
LLC of $1.0 million, equipment loans of $0.2 million, loans from
stockholders/officers of $0.2 million, and loans/advances from a landlord, the
SBA and others of $0.2 million. Construction of the Bethesda Daily Grill was
paid for through a $1.8 million tenant improvement allowance of which $1,002,000
was received during the first six months of 2004. This tenant incentive
allowance has been recorded in other long-term liabilities and is being
amortized against rent expense over the 15 year lease term.
In June 2004, we finalized an agreement with respect to the establishment of a
new bank credit facility to replace our facility that expires in October 2004.
Under the terms of the new bank credit facility, we will be 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 and equipment
financing in the amount of $500,000. The facility will have a one-year term, be
secured by assets and is subject to certain standard borrowing covenants.
39
Operating Leases and Contractual Obligations. During the quarter ended March 28,
2004, we entered into a lease relating to a restaurant scheduled to open in the
fourth quarter of 2004. Accordingly, at June 27, 2004, we were obligated under
seventeen 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 $22.5 million over the life of those leases, with minimum annual
rental payments of $3.1 million in 2004, $5.3 million between 2005 and 2006,
$4.3 million between 2007 and 2008, and $9.8 million thereafter. With the
exception of entering into the referenced lease, there were no material changes
in our obligations under operating leases or other contracts during the quarter
ended June 27, 2004 as compared to those described in the Company's Form 10-K
for the year ended December 28, 2003, as amended.
Commitments Relating to Managed Restuarants 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 28, 2003, as amended. Developments with respect to those
agreements and arrangements during the quarter ended June 27, 2004 include:
Pursuant to the obligation of the owner of the Portland Daily Grill to provide
working capital advances of not less than $50,000 and not more than $150,000,
after which the Company is required to make working capital advances, the owner
had advanced $100,000 as of June 27, 2004.
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners, 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").
Detailed information regarding the initial capital contributions to the LLCs,
Preferred Returns for each LLC, management fees payable to the Company and
principal distribution provisions are included in the Company's Form 10-K for
the year ended December 28, 2003, as amended. The following tables set forth a
summary for each of the LLCs of (1) the distributions of capital to the Members
and/or the Company during the six months ended June 27, 2004, (2) the unreturned
balance of the capital contributions of the Members and/or the Company at June
27, 2004, and the accrued but unpaid preferred returns due to the Members and/or
the Company at June 27, 2004:
40
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the six
months ended June 27, 2004: Members $135,000
========
Company $136,000
========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $ 0
Company $ 0
========
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
========
Company $ 0
========
CHICAGO - GRILL ON THE ALLEY LLC
Distributions of capital and note
repayments during the six months
ended June 27, 2004: Members (a) $ 127,000
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,042,000
==========
Company $ 0
==========
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
==========
Company $ 0
==========
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during the
six months ended June 27, 2004 Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,200,000
==========
Company $ 250,000
==========
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 0
==========
Company $ 80,000
==========
41
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during the
six months ended June 27, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at June 27, 2004: Members $1,000,000
==========
Company $ 350,000
==========
Accrued but unpaid Preferred
Returns at June 27, 2004: Members $ 156,000
==========
Company $ 55,000
==========
(a) Distribution of capital as of June 27, 2004 includes $60,000 of
payments of capital and loan and $67,000 of payments on interest and
preferred return.
The Company may enter into investment/loan arrangements in the future on terms
similar to the San Jose Fairmont Grill and Chicago Westin Grill arrangements to
provide for the funding of selected restaurants. Management believes that the
Company has adequate resources on hand and operating cash flow to sustain
operations for at least the following 12 months and to open at least one
restaurant. In order to fund the opening of additional restaurants, the Company
may require additional capital that may be raised through additional bank
borrowings, the issuance of debt or equity securities, or the formation of
additional investment/loan arrangements, or a combination thereof.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes 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 28, 2003, as amended. As of, and for the quarter ended,
June 27, 2004, there have been no material changes or updates to the Company's
critical accounting policies other than the establishment of a workers
compensation loss reserve.
Worker's Compensation Loss Reserves
- -----------------------------------
In the first quarter of 2004, the Company obtained a large deductible worker's
compensation policy for 2004. The Company has established a loss reserve to
cover the potential deductible amounts. The loss reserve is determined by
estimating the ultimate cost to the Company utilizing information on current
accidents, prior year experience and the carrier's loss development and
42
loss trend factors. The Company has reduced costs during the six months ended
June 27, 2004 by $71,000 resulting from savings of $137,000 due to lower premium
costs net of the establishment of a loss reserve of $66,000.
Based on the Company's review at June 27, 2004, the current loss reserve is
adequate.
RECENTLY ADOPTED ACCOUNTING REQUIREMENTS
Effective December 29, 2003 (the first day of fiscal year 2004), the Company
adopted the provisions of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." In light of the changes
resulting from the current restatement process, the Company has elected to
retroactively adopt the provisions of FIN 46 so that the financial presentation
in this Quarterly Report on Form 10-Q is more consistent with the presentation
of the Company's ongoing financial position and results of operations.
Under FIN 46, an entity is considered to be a variable interest entity ("VIE")
when it has equity investors which lack the characteristics of a controlling
financial interest, or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation of a
VIE by an investor is required when it is determined that the investor is the
primary beneficiary and will absorb a majority of the VIE's expected losses or
residual returns if they occur.
Management has assessed all entities which are not wholly owned by the Company
to determine if these entities would be considered VIEs and whether the Company
would be considered the primary beneficiary. Upon adoption of FIN 46, it was
determined that all of the following entities would be considered VIEs: The San
Jose Grill LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood,
LLC, The Daily Grill at Continental Park LLC and the Universal CityWalk Daily
Grill partnership. The Company has determined it is the primary beneficiary for
all these entities.
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 period's earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after June 30, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company has adopted EITF 03-06 for the quarter ended June 30,
2004, however there has been no impact on the Company's financial statements as
the preferred shares are not participating securities.
43
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of the new restaurants during 2004, the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 28, 2003, as amended the following developments may impact future
operating results and financial results.
In March 2004, the Company signed a lease to open an owned Daily Grill in an
office park in Santa Monica, California. The landlord will provide a turn-key
location built to our specifications. The restaurant is scheduled to open in
the first quarter of 2005.
On June 29, 2004, the Company formed 612 Flower Daily Grill, LLC, a limited
liability company to open and operate a Daily Grill in downtown Los Angeles.
The investor member of the limited liability company will invest $1,250,000 and
own a 41.5% interest in the LLC and the Company will invest $251,000 and own a
58.41% interest in the LLC. A subsidiary of the Company will manage the
downtown Daily Grill for which it will receive a management fee of 5% of sales.
The restaurant is scheduled in open in early 2005. The newly formed LLC signed
a 15 year lease. The Company is assessing whether the newly formed LLC will be
consolidated under FIN 46.
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.
Variable accounting, as required, for employee stock options may result in
substantial fluctuations in the Company's compensation expense and accrued
compensation based on movements in stock price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its non-revolving credit facility (the "Credit
Facility"). There were no borrowings outstanding under the Credit Facility at
June 27, 2004. Borrowings under the Credit Facility, which terminates in October
2004, bear interest at the lender's reference rate plus 0.25%. Borrowings under
the new Credit Facility 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. EVALUATION OF DISCLOSURE 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
44
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 has been
carried out under the supervision and with the participation of our management,
including our chief executive officer and chief 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"). This evaluation has been
performed in light of the restatements described in the following paragraph.
During the review of our first quarter 2004 financial statements, the Company
was informed by its independent accountants that, our stock options plans which
had been accounted for using fixed accounting should have been accounted for
using variable accounting. After re-evaluation of our accounting practices for
stock options, our management determined to restate our consolidated financial
statements as of and for the year ended December 28, 2003 and for the first
three quarters of fiscal 2003 and 2002. During this restatement process, we
also elected to make other miscellaneous corrections which were previously
identified but passed upon due to their immaterial impact on our consolidated
financial statements. During the review of our second quarter 2004 financial
statements, the Company's independent accountants informed the Company that (i)
the Company's accounting for its joint ventures including loss allocations,
guarantees of returns, consolidation decisions and initial adoption of FIN 46
was incorrect, (ii) reimbursed costs related to management agreements should be
presented on a grossed-up basis as both revenue and expense, and (iii) the
accounting for certain equity awards needed to be adjusted. These instances
were considered to be material weaknesses in the selection and application of
accounting principles and policies. After re-evaluation of our accounting
practices for joint ventures, reimbursed costs and equity awards, our management
determined to restate our consolidated financial statements again as of and for
the year ended December 28, 2003 and for the first three quarters of fiscal 2003
and 2002 as well as the first quarter ended March 28, 2004.
In conjunction with the decisions to restate our financial statements,
management re-evaluated our disclosure controls and procedures over the
selection and application of accounting principles, in particular, accounting
for stock options, joint ventures, reimbursed costs and equity awards, and
concluded that these controls were not effective as of June 27, 2004. During
the second and third quarters of 2004, we took steps to identify, rectify and
prevent the recurrence of the circumstances that resulted in our determination
to restate prior period financial statements, including reviewing the terms of
our stock option grant agreements in relation to the option plan agreement,
reviewing the terms of all our joint venture and related agreements, reviewing
the accounting for reimbursed costs under our management agreements and
reviewing the accounting for all our equity awards. As part of this
undertaking, we have consulted with our independent registered public accounting
firm, increased emphasis on continuing education for our accounting personnel
and increased emphasis on reviewing applicable accounting literature, all
relating to
45
the selection and application of accounting principles pertaining to these
areas. In addition, in July 2004, we hired a new chief financial officer. We
believe these enhancements to our system of internal controls and our disclosure
controls and procedures will be adequate to provide reasonable assurance that
the control objectives will be met.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2004, one of our former hourly restaurant employees filed a class action
lawsuit against us in Superior Court of California in the County of Orange. The
plaintiff 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. Discovery is currently continuing in these matters. We believe that
all of our employees were provided with the opportunity to take all required
meal and rest breaks and intend to vigorously defend our position in all of
these matters although the outcome cannot be ascertained at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2004, the Company issued 39,272 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, $1.4062 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 2004, the Company issued 7,960 shares of common stock to Stephen Ross,
Co-Trustee for the Ross Family Trust, pursuant to the exercise of 20,000
warrants held by the Ross Family Trust. Mr. Ross is a director of the Company.
The exercise price of the warrant, $1.4062 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 2004, the Company issued 7,960 shares of common stock to Stephen Ross,
Co-Trustee for the Mazel Family Trust, pursuant to the exercise of 20,000
warrants held by the Mazel Trust. Mr. Ross is a Director with the Company. The
exercise price of the warrant, $1.4062 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.
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.
46
In addition, there was no general solicitation or advertising in connection with
the issuance of the shares. All certificates for our shares contain a
restrictive legend. Finally, our stock transfer agent has been instructed not to
transfer any of such shares, unless such shares are registered for resale or
there is an exemption with respect to their transfer.
No commissions were paid in connection with the issuance described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an annual meeting of shareholders of Grill Concepts, Inc. held on June 23,
2004, the stockholders voted on two proposals: the election of directors and
ratification of the appointment of PricewaterhouseCoopers LLP as the Company's
independent registered public accounting firm.
The first matter voted on was a proposal to elect Robert Spivak, Michael
Weinstock, Charles Frank, Glenn Golenberg, Lewis Wolff, Stephen Ross, Norman
MacLeod and Bruce Schwatrz, 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 3,526,829 108,761
Michael Weinstock 3,526,454 109,136
Glenn Golenberg 3,526,804 108,786
Lewis Wolff 3,626,529 9,061
Stephen Ross 3,526,904 108,686
Norman MacLeod 3,526,876 10,871
Bruce Schwartz 3,522,876 112,714
In addition to the election of directors as noted above, the following matter
was voted upon at such meeting:
Proposal 2, to ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent registered public accounting firm was approved with
3,633,537 votes cast for, 11,621 votes cast against, and 1,378 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Employment agreement dated June 22, 2004 with Philip Gay
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.
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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.
(b) Reports on Form 8-K
On May 27, 2004, we reported on Form 8-K, Item 12, that we issued a
press release on May 26, 2004 announcing financial results for the
quarter ended March 28, 2004.
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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 October 13, 2004
- ----------------- Executive Officer
Robert Spivak
/s/ Philip Gay Executive Vice President October 13, 2004
- ----------------- and Chief Financial Officer
Philip Gay
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