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 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
- --------------------------------- ------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of principal executive offices)(Zip code)
(310) 820-5559
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of August 13, 2002, 5,537,071 shares of Common Stock of the issuer were
outstanding.
GRILL CONCEPTS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 2002 and December 30, 2001.......................... 2
Consolidated Condensed Statements of Operations -
For the three months and six months ended June
30, 2002 and July 1, 2001.................................... 4
Consolidated Condensed Statements of Cash Flows -
For the six months ended June 30, 2002 and
July 1, 2001................................................. 5
Notes to Consolidated Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
SIGNATURES.............................................................. 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
June 30, December 30,
2002 2001
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,076,000 $ 2,300,000
Inventories 520,000 590,000
Receivables 667,000 602,000
Prepaid expenses 605,000 575,000
----------- ------------
Total current assets 2,868,000 4,067,000
Furniture, equipment, & improvements, net 8,602,000 9,066,000
Goodwill, net 205,000 205,000
Note receivable 117,000 -
Liquor licenses 332,000 454,000
Advance to managed outlet 287,000 -
Other assets 551,000 552,000
----------- -------------
Total assets $12,962,000 $ 14,344,000
=========== =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
June 30, December 30,
2002 2001
(unaudited)
-------------- ------------
Current liabilities:
Accounts payable $ 883,000 $ 1,179,000
Accrued expenses 2,236,000 2,919,000
Current portion of long term debt 386,000 369,000
Notes payable - related parties 300,000 293,000
----------- -----------
Total current liabilities 3,805,000 4,760,000
Long-term debt 747,000 943,000
Notes payable - related parties 516,000 591,000
------------ -----------
Total liabilities 5,068,000 6,294,000
Minority interest 1,671,000 2,005,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2002 and 2001 - -
Series II, 10% Convertible Preferred Stock, $.001
par value; 1,000,000
shares, authorized, 500 shares
issued and outstanding in 2002 and 2001 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2002 and 2001, 5,537,071 shares
issued and outstanding in 2002 and 2001 - -
Additional paid-in capital 13,152,000 13,152,000
Accumulated deficit (6,929,000) (7,107,000)
------------ ------------
Total stockholders' equity 6,223,000 6,045,000
------------ ------------
Total liabilities, minority interest and
stockholders' equity $12,962,000 $14,344,000
=========== ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- ------------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Revenues:Sales $ 10,062,000 $11,042,000 $21,612,000 $23,321,000
Management and license fees 246,000 258,000 468,000 414,000
------------ ---------- ------------ -----------
Total revenues 10,308,000 11,300,000 22,080,000 23,735,000
Cost of sales 2,780,000 3,137,000 5,961,000 6,509,000
------------ ---------- ------------ ----------
Gross profit 7,528,000 8,163,000 16,119,000 17,226,000
------------ ---------- ------------ ----------
Operating expenses:Restaurant
operating expenses 6,375,000 6,960,000 13,408,000 14,287,000
General and administrative 937,000 874,000 1,866,000 1,897,000
Depreciation and amortization 357,000 346,000 728,000 656,000
----------- ---------- ------------ ----------
Total operating expenses 7,669,000 8,180,000 16,002,000 16,840,000
----------- ---------- ------------ ----------
(Loss) income from operations (141,000) (17,000) 117,000 386,000
Interest expense, net (56,000) (104,000) (101,000) (194,000)
----------- ---------- ------------ ----------
(Loss) income before provision for
income taxes, equity in loss of joint
venture and minority interest (197,000) (121,000) 16,000 192,000
Provision for income taxes (2,000) (2,000) (20,000) (2,000)
Minority interest 141,000 53,000 194,000 69,000
Equity in loss of joint venture (7,000) (4,000) (12,000) (4,000)
----------- ---------- ------------ -----------
Net (loss) income (65,000) (74,000) 178,000 255,000
Preferred dividends accrued or paid (12,000) (12,000) (25,000) (25,000)
----------- ---------- ------------ -----------
Net (loss) income applicable to
common stock $(77,000) $ (86,000) $153,000 $ 230,000
=========== ========== ============ ===========
Net (loss) income per share applicable
to common stock:
Basic $ (0.01) $ (0.02) $ 0.03 $ 0.05
=========== ========== ============ ==========
Diluted $ (0.01) $ (0.02) $ 0.03 $ 0.05
=========== ========== ============ ==========
Weighted average shares outstanding:
Basic 5,537,071 4,203,738 5,537,071 4,203,738
=========== ========= ============ ==========
Diluted 5,537,071 4,203,738 5,562,651 4,338,353
=========== ========= ============ ==========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
--------------------------
June 30, July 1,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 178,000 $ 255,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 728,000 656,000
Gain on sale of assets (71,000) -
Minority interest in earnings (loss) of subsidiaries (194,000) (69,000)
Equity in loss of joint venture 12,000 4,000
Changes in operating assets and liabilities
Inventories 70,000 (63,000)
Receivables (65,000) 157,000
Prepaid expenses and other current assets (37,000) (257,000)
Liquor licenses and other assets 15,000 (167,000)
Accounts payable (296,000) (384,000)
Accrued liabilities (573,000) 119,000
------------ ----------
Net cash (used in) provided by operating activities (233,000) 251,000
------------ ----------
Cash flows from investing activities:
Proceeds from sale of assets 144,000 -
Advance to managed outlet (287,000) -
Investment in non-consolidated entity (47,000) -
Additions to furniture, equipment and improvements (402,000) (55,000)
----------- --------
Net cash used in investing activities (592,000) (55,000)
----------- --------
Cash flows from financing activities:Preferred return
to minority stockholders (88,000) (134,000)
Return of capital to minority stockholders (64,000) (90,000)
Payments to related parties (68,000) (21,000)
Payments on long-term debt (179,000) (426,000)
---------- ----------
Net cash used in financing activities (399,000) (671,000)
---------- ----------
Net decrease in cash and cash equivalents (1,224,000) (475,000)
Cash and cash equivalents, beginning of period 2,300,000 623,000
---------- ----------
Cash and cash equivalents, end of period $1,076,000 $ 148,000
========== ==========
Supplemental cash flow information: Cash paid during
the period for:
Interest $ 90,000 $ 160,000
Income taxes 85,000 13,000
Non cash transaction:
Note receivable from sale of assets $ 117,000 -
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have
not been audited by independent accountants. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Form 10-K dated
December 30, 2001. 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 29, 2002. Certain prior year amounts have been reclassified to
conform to current year presentation.
2. RECENTLY ISSUSED ACCOUNTING REQUIREMENTS
Accounting Pronouncements Adopted December 31, 2001
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 142, which changes the accounting for goodwill and
indefinite-lived intangible assets from an amortization method to an
impairment-only approach, is effective for the Company for fiscal year
2002. Adoption of SFAS 142 reduced amortization expense by $ 4,000 for the
first six months of 2002. The Company has not identified any impairment
losses that need to be recognized.
In August 2001, the FASB also issued Statement of Financial Standards No.
144, ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which replaces SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived to be Disposed Of'" and also replaces
and broadens the provisions of Accounting Principles Board Opinion No. 30,
("APB No. 30") "Reporting Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 establishes one
accounting model, based on the framework established in SFAS No. 121, for
recognition, measurement and reporting of impairment of long-lived assets
to be held and used and measurement of long-lived assets to be disposed of
by sale. SFAS 144 was required for our fiscal year beginning December 31,
2001 and did not have a significant impact on our consolidated financial
position, results of operations and cash flows.
6
Future Accounting Requirements
In May 2002, the FASB issued Statement of Financial Standards No. 145,
("SFAS 145"), "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13,
and Technical Corrections." Among other things, SFAS 145 rescinds various
pronouncements regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only when the
provisions of APB No. 30, are met. SFAS 145 provisions regarding early
extinguishment of debt are generally effective for fiscal years beginning
after May 15, 2002. Management does not believe that the adoption of this
statement will have a material impact on our consolidated financial
statements.
In July 2002, the FASB issued Statement of Financial Standards No. 146,
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which superceded EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS 146 requires that a liability for a cost associated with an
exit activity or disposal activity be recognized and measured initially at
fair value only when the liability is incurred. EITF Issue No. 94-3
requires recognition of a liability at the date an entity commits to an
exit plan. All provisions of SFAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. Management
does not believe that the adoption of this statement will have a material
impact on our consolidated financial statements.
3. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Operating Agreement for San Jose Grill LLC, stipulates that
distributions of distributable cash shall be made first, 10% to the manager
and 90% to the members in the ratio of their percentage interests until the
members have received the amount of their initial capital contribution.
Second, to the payment of the preferred return of ten percent per annum on
the unpaid balance of the member's adjusted capital contribution until the
entire accrued but unpaid preferred return has been paid. Third, to the
members in the ratio of their percentage interests until the additional
capital contributions have been repaid. Thereafter, distributions of
distributable cash will be made first, 16 2/3% as an incentive to the
manager and the balance to the members in the ratio of their percentage
interests. In April 2002 a distribution of distributable cash in the amount
of $64,000 was made to the minority member that reduced the member's
interest. The minority member's unrecovered capital contribution at June
30, 2002 was $195,000.
The Operating Agreement and the Senior Promissory Note for Chicago - The
Grill on the Alley, LLC stipulates that the non-manager member of Chicago -
The Grill on the Alley, LLC is entitled to a cumulative preferred return of
eight percent annually of their capital contribution. Preferred return
payments of $88,000 were paid to the non-manager member during the first
six months of 2002. These payments are treated as a reduction of equity.
Payments returning $20,000 of converted capital contribution were made in
the first six months of 2002. The minority member's unrecovered capital
contribution at June 30, 2002 was $838,000.
The Operating Agreement for The Grill on Hollywood, LLC stipulates that
distributions of distributable cash shall be made first, 90% to the
non-manager member and 10% to the manager member until non-manager member's
preferred return, unrecovered contribution account and additional
contribution account are reduced to zero. Second, 90% to the manager member
and 10% to the non-manager member until the manager member's preferred
return and unrecovered contribution account have been reduced to zero.
Thereafter, distributions of distributable cash shall be made to the
members in proportion to their respective percentage interests. No
distribution of distributable cash has been made. The minority member's
unrecovered combined capital and additional capital contribution at June
30, 2002 was $1,200,000.
7
4. PER SHARE DATA
Basic earnings per share data is based upon the weighted average number of
common shares outstanding. Diluted earnings per share data is based upon
the weighted average number of common shares outstanding plus the number of
common shares potentially issuable for dilutive securities such as stock
options and warrants.
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
-------------- ------------- ------------- ------------
Common stock outstanding 5,537,071 4,203,738 5,537,071 4,203,738
Dilutive securities:
Stock options - - 2,572 37,837
Convertible preferred stock - - - -
Warrants - - 25,580 96,778
---------- ----------- ---------- -----------
Dilutive securities used in 5,537,071 4,203,738 5,562,651 4,338,353
calculation ========== =========== ========== ===========
For the three months ended June 30, 2002 675,113 options, 2,297,786
warrants and 500 shares of convertible preferred stock were excluded from
the calculation because they were anti-dilutive. For the six months ended
June 30, 2002 592,813 options, 2,107,786 warrants and 500 shares of
convertible preferred stock were excluded from the calculation because they
are anti-dilutive.
5. ADVANCE TO MANAGED OUTLET
On February 25, 2002 the Company began management of a San Francisco
hotel-based Daily Grill restaurant. The Company has advanced approximately
$287,000 to the restaurant during the first six months of 2002 which will
be reimbursed through future operations.
6. SALE OF COMPANY ASSETS
On April 23, 2002 the sale of the assets of the Cherry Hill Pizzeria Uno
was finalized. The price was $325,000 less legal and other sale related
fees of $61,000. The Company received $175,000 in cash and a non-interest
bearing note for the remaining $150,000. The note receivable was recorded
net of a discount of $33,000. The profit from the sale was $46,000 which
was recorded as a reduction to restaurant operating expenses.
In April 2002 the lease for the Encino Daily Grill expired and was not
renewed. In May 2002 equipment and fixtures from the Encino Daily Grill,
having a net book value of $5,000, were sold for $30,000. The profit from
the sale was recorded as a reduction to restaurant operating expenses.
8
7. ADDITIONAL INVESTMENT IN NON-CONSOLIDATED ENTITIY
In April the Company contributed an additional $47,000 to the Universal
CityWalk joint venture. Although the management agreement for Universal
Grill Joint Venture requires the Company and the other member to make an
interest free loan to the joint venture of fifty percent of anticipated
negative cash flows, both members agreed to make this payment a capital
contribution.
8. SUBSEQUENT EVENTS
On July 10, 2002 the Company began management of the hotel based Daily
Grill Houston. This restaurant is located in the Westin Galleria in
Houston, Texas. This is the first restaurant to be opened under the
Development Agreement signed last July with Starwood Hotels and Resorts.
In connection with the building of a new restaurant a limited liability
company was formed for the operation of the Daily Grill at Continental Park
in El Segundo, California of which the Company owns 50.1%. Construction of
the restaurant will be funded primarily by a capital contribution of
$1,000,000 from the minority interest member of the limited liability
company and a tenant improvement allowance of $500,000. The Company
contributed a capital contribution of $350,000 in July 2002. The restaurant
is scheduled to open in the fourth quarter of 2002.
9
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 30, 2001.
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.
Percentages may not add due to rounding.
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- -------- ---------- --------
Revenues: % % % %
Company restaurant sales 97.6 97.7 97.9 98.3
Management and license fees 2.4 2.3 2.1 1.7
-------- -------- ------- -------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales 27.0 27.8 27.0 27.4
-------- -------- ------- -------
Gross profit 73.0 72.2 73.0 72.6
-------- -------- ------- -------
Restaurant operating expense 61.8 61.6 60.7 60.2
General and administrative expense 9.1 7.7 8.5 8.0
Depreciation and amortization 3.5 3.1 3.3 2.8
-------- ------- ------- -------
Total operating expenses 74.4 72.4 72.5 71.0
-------- ------- ------- -------
Operating (loss) income (1.4) (0.2) 0.5 1.6
Interest expense, net (0.5) (0.9) (0.5) (0.8)
------- ------- ------- -------
(Loss) income before provision for income
taxes, minority interest and equity in loss of
joint venture (1.9) (1.1) 0.0 0.8
Provision for income taxes 0.0 0.0 (0.1) 0.0
Minority interest 1.4 0.5 0.9 0.3
Equity in loss of joint venture (0.1) (0.1) 0.0 0.0
-------- ------- ------- -------
Net (loss) income (0.6) (0.7) 0.8 1.1
======== ======= ======= =======
10
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 2002 FY 2001 FY 2002 FY 2001 FY 2002 FY 2001
------- -------- ------- ------- ------- -------
Daily Grill restaurants:
Company owned (1) - (1) - 9 10
Managed and/or licensed - - 1 - 5 4
Grill on the Alley restaurants:
Company owned - - - - 4 3
Pizza restaurants (1) - (1) - - 2
Other restaurants
Managed and/or licensed - - - - 1 1
------- ------ ------ ----- ---- ----
Total (2) - (1) - 19 20
======= ====== ====== ===== ==== ====
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 56,231 $ 59,833 $ 58,513 $ 63,441
Grill on the Alley 71,890 81,165 74,216 85,542
Pizza restaurants 30,986 33,715 31,067 34,688
Change in comparable restaurant
(1):Daily Grill (5.7)% 2.9% (7.0)% 5.9%
Grill on the Alley (2.0)% 0.4% (5.3)% 2.9%
Pizza restaurants n.a. (6.0)% n.a. (3.3)%
Total Company revenues:
Daily Grill $ 6,230,000 $ 7,000,000 $13,396,000 $14,845,000
Grill on the Alley 3,739,000 3,165,000 7,719,000 6,672,000
Pizza restaurants 93,000 877,000 497,000 1,804,000
Management and license fees 246,000 258,000 468,000 414,000
---------- ----------- ------------ ------------
Total consolidated revenues $10,308,000 $11,300,000 $22,080,000 $23,735,000
=========== =========== ============ ============
Managed restaurants 3,267,000 2,694,000 6,352,000 5,528,000
Licensed restaurants 1,801,000 2,136,000 3,248,000 4,080,000
Less: management and license fees (246,000) (258,000) (468,000) (414,000)
Total system sales --------- --------- ----------- -----------
$15,130,000 $15,872,000 $31,212,000 $32,929,000
========= =========== =========== ===========
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
11
Material Changes in Results of Operations for the Three and Six Months Ended
June 30, 2002 as compared to the Three and Six Months Ended July 1, 2001
The Company operated 15 owned restaurants, 4 managed restaurants and licensed
its name and recipes to 2 others during the quarter and six months ended June
30, 2002 as compared to 15 owned restaurants, 3 managed restaurants and 2
licensed during the quarter and six months ended July 1, 2001. The Company's
results fully consolidate sales for owned restaurants, but include only
management fee income from the managed and licensed restaurants. Restaurants
operated for a portion of the current year and/or prior year period include the
Grill on Hollywood restaurant that opened in November 2001, the San Francisco
Daily Grill that opened under a management agreement in February 2002, Pizzeria
Uno Cherry Hill that was sold in April 2002, Encino Daily Grill that was closed
in April 2002 and Pizzeria Uno South Plainfield that was sold in July 2001.
The Company's revenues for the second quarter of fiscal 2002 decreased to $10.3
million, 8.8% under the $ 11.3 million generated for the same quarter of fiscal
2001. Total revenues included $10.1 million of sales revenues and $ 246,000 of
management and licensing fees for the 2002 quarter compared to $11.0 million of
sales revenues and $258,000 of management and licensing fees for the 2001
quarter. This $ 1.0 million, or 8.8%, decrease in sales revenues for the quarter
was primarily attributable to a decrease in same store sales ($436,000) and the
closure of the Pizzeria Unos in South Plainfield ($464,000) and Cherry Hill
($323,000) and the closure of Encino ($397,000), partially offset by a full 13
weeks of sales for The Grill on Hollywood ($636,000).
Revenues for the six months ended June 30, 2002 decreased 7.0% to $ 22.1 million
from the $ 23.7 million generated for the same period of fiscal 2001. Total
revenues included $ 21.6 million of sales revenues and $ 468,000 of management
and licensing fees for the first six months of 2002, compared to $ 23.3 million
of sales revenues and $414,000 of management and licensing fees for the first
six months of 2001. The decrease in sales revenues for the six months ($1.7
million, or 7.3%) was primarily attributable to a decrease in same store sales
($1,323,000) and the closure of the Pizzeria Unos in South Plainfield ($933,000)
and Cherry Hill ($377,000) and the closure of the Encino Daily Grill ($478,000),
partially offset by sales at The Grill on Hollywood ($1,399,000).
Same store sales (for restaurants open at least 12 months) decreased 4.5% for
the quarter and 6.5% for the six months. For the quarter, this decrease was due
to a decrease in the number of guests at the Daily Grills ($771,000) and the
Grill on the Alley restaurants ($102,000), partially offset by an increase in
average check price at the Daily Grill restaurants ($396,000), and at the Grill
on the Alley restaurants ($39,000). For the six months the decrease was due to a
decrease in the number of guests at both the Daily Grill and Grill on the Alley
restaurants ($2,150,000) which was only partially offset by an increase in
average check price increases at the Daily Grill restaurants ($762,000) and the
Grill on the Alley restaurants ($62,000). Management and licensing fees for the
quarter decreased ($12,000 or 4.6%) primarily due to decreased sales at the
Daily Grill at Los Angeles International Airport. Management and licensing fees
increased for the six months ($54,000 or 13.0%) primarily due to the opening of
the San Francisco Daily Grill in February 2002.
12
In addition to the 15 restaurants owned by the Company during the quarter and
six months ended June 30, 2002, the Company also managed or licensed six other
restaurants. Total revenues for all restaurants owned, managed and licensed by
the Company were $15,130,000 and $15,872,000 for the quarters and $31,212,000
and $32,929,000 for the six months ended June 30, 2002 and July1, 2001,
respectively. This represents a decrease of $742,000, or 4.7%, for the quarter
and $1,717,000, or 5.2%, for the six months.Cost of sales decreased by $357,000,
or 11.4%, for the quarter and $548,000, or 8.4%, for the six months ended June
30, 2002 as compared to the same periods in 2001 primarily due to the decrease
in sales combined with improved purchasing and menu refinements. Cost of sales
decreased as a percentage of sales revenues.
Cost of sales was 27.0% for both the quarter and six months as compared to 27.8
% for the second quarter of 2001 and 27.4% for the year-to-date period in 2001.
The decrease in cost of sales as a percentage of sales during the 2002 six
months was primarily the result of menu refinements and related sales mix as
well as cost reductions resulting from improved purchasing.
Restaurant operating expenses decreased by $585,000, or 8.4%, for the quarter
and $879,000, or 6.2%, for the six months as compared to the same periods in
2001. The dollar decrease in restaurant operating expenses for the quarter was
primarily attributable to the closure of the Pizzeria Uno locations in South
Plainfield and Cherry Hill ($729,000), a reduction in payroll and benefits
($239,000) and variable costs ($150,000) at comparable restaurants, offset by
the opening of The Grill on Hollywood ($529,000). The dollar decrease in
operating expenses for the six months was primarily attributable to the closure
of the Pizzeria Uno locations ($1,129,000), a reduction in payroll and benefits
($461,000) and variable costs ($324,000) at comparable restaurants, offset by
the opening of The Grill on Hollywood ($1,040,000). Restaurant operating
expenses, as a percentage of revenues, increased in the second quarter from 61.6
% in 2001 to 61.8 % in 2002. For the six months, the percentages were 60.2 % in
2001 and 60.7% in 2002. The major contributor to the increase as a percentage of
sales was insurance costs.
General and administrative expense increased 7.2 % for the quarter and decreased
1.6 % for the six months as compared to the same periods in 2001. As a
percentage of total revenues, general and administrative expense totaled 9.1 %
for the quarter and 8.5% for the six months as compared to 7.7% for the quarter
and 8.0 % for the six months in 2001. The decrease in total general and
administrative expense of $31,000, or 1.6%, for the six months during 2002 was
primarily attributable to cost reduction in professional services and travel and
entertainment offset by an increase in payroll and related benefits. The
increase in total general and administrative expense of $63,000, or 7.2% for the
2002 quarter is attributable to increased payroll and benefits.
Depreciation and amortization expense increased by 3.2 % for the quarter and
11.0 % for the six months compared to 2001, representing 3.3% of sales for the
six months of 2002 compared to 2.8% in 2001. The increase in depreciation and
amortization expense for both the quarter and the six months was primarily due
to the addition of The Grill on Hollywood offset by the closure of the Pizzeria
Uno locations.
Interest expense, net, decreased by $48,000, or 46.2%, during the quarter and
$93,000, or 47.9%, during the six months compared to the same periods in 2001.
The decrease in interest expense resulted from the elimination of bank interest
due to the elimination of bank debt.
13
The Company recorded $20,000 of income taxes for the six months compared to
$2,000 in 2001. Only minimal taxes have been required due to the available
federal and state net operating loss carryforwards that can be utilized to
offset federal and state taxable earnings; however, some of the state
carryforwards have expired.
Results for the quarter and six months reflect minority interest in the net
losses of subsidiaries of $141,000 and $53,000 respectively, compared with
$194,000 and $69,000 in the same periods in 2001. This increase in the amount of
net losses allocated to minority interests resulted primarily from the opening
of The Grill on Hollywood in November 2001.
The company incurred a charge of $12,000 for its equity in loss of joint venture
during the six months of 2002 compared to $4,000 in 2001, which reflects the
Company's 50% interest in the Daily Grill Short Order at Universal Studios City
Walk.
The Company reported dividends on preferred stock of $12,500 in each of the
quarters and $25,000 in each of the six months ended June 30, 2002 and July 1,
2001.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At June 30, 2002 the Company had negative working capital of $0.9 million and a
cash balance of $1.1 million compared to negative working capital of $0.7
million and a cash balance of $2.3 million at December 30, 2001.
Net cash used in operations during the six months ended June 30, 2002 totaled
$233,000 compared to $251,000 provided by operations during the six months ended
July 1, 2001. The adverse change in operating cash flow during the six months
was related to reducing accounts payable ($296,000) and accrued liabilities
($573,000).
Net cash used in investing activities during the six months ended June 30, 2002
totaled $592,000 compared to $55,000 during the six months ended July 1, 2001.
Cash used in investing activities during the current period were for the remodel
of the Newport Beach Daily Grill ($396,000), advances made to the San Francisco
Daily Grill ($287,000) and a additional contribution to the Universal CityWalk
joint venture ($47,000), partially offset by the proceeds from the sale of
assets from Pizzeria Uno Cherry Hill ($114,000) and Encino Daily Grill
($30,000).
Net cash used in financing activities during the six months ended June 30, 2002
totaled $399,000 compared to $671,000 during the six months ended July 1, 2001.
Cash used in financing activities during the current period related to
reductions in debt ($247,000), preferred returns to minority investors in
Chicago - the Grill on the Alley, LLC ($88,000) and return of capital to
minority investor in San Jose Grill, LLC ($64,000).
14
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, loans and tenant allowances
from certain of its landlords and, beginning in 1998, through joint venture
arrangements. At June 30, 2002, the Company had a bank credit facility with
nothing owing, a SBA loan of $ 0.1 million, loans from stockholders/officers of
$0.8 million, equipment loans of $0.9 million and loans/advances from a landlord
and others of $0.1 million.
On February 25, 2002 the Company began management of a San Francisco hotel-based
Daily Grill restaurant. The Company advanced approximately $287,000 to the
restaurant that will be reimbursed through future operations.
The Company began management of a hotel-based Daily Grill in Houston, Texas on
July 10, 2002. Under terms of the Management Agreement, the Company may be
required to loan up to $80,000 to the restaurant for initial working capital.
In connection with the construction of a new restaurant a limited liability
company was formed for the operation of the Daily Grill at Continental Park in
El Segundo, California of which the Company owns 50.1%. Construction of the
restaurant will be funded primarily by a capital contribution of $1,000,000 from
the minority interest member of the limited liability company and a tenant
improvement allowance of $500,000. The Company made a capital contribution of
$350,000 in July 2002. The restaurant is scheduled to open in the fourth quarter
of 2002.
Under certain of its operating and management agreements the Company has an
obligation to potentially make additional cash advances and/or contributions and
may not realize any substantial returns for some time. The CityWalk management
agreement requires that each member loan, interest free, to the joint venture 50
percent of any operating deficit forecast for the next quarter such loans to be
repaid out of the first cash available from operations. The management agreement
for the San Francisco Daily Grill stipulates that if in any month there is
insufficient working capital to pay operating expenses, excluding payments to
the Company or the Owner, the Company will pay one-half of the required working
capital; such advances are to be repaid prior to deferred payments to the
Company or Owner. The Operating Agreement and the Senior Promissory Note for
Chicago - The Grill on the Alley, LLC stipulates that the non-manager member
shall receive a preferred return of eight percent on their capital contribution
and a payment on their converted capital prior to any distribution of cash. The
Operating Agreement for The Grill on Hollywood, LLC stipulates that 90% of
distributable cash shall go to the non-manager member until their preferred
return, unrecovered contribution and any additional contribution have been
returned. The Operating Agreement for San Jose Grill, LLC stipulates that
distributable cash shall be paid first 10% to the manager and 90% to the members
in proportion to their ownership percentage until initial capital is recovered,
then as a preferred return on the capital contributions to both members in
proportion to their ownership percentage and finally 16 2/3% to the manager and
the balance to the members in proportion to their ownership percentages.
15
Management anticipates that new non-hotel based restaurants will cost between $1
million and $2 million per restaurant to build and open depending upon the
location and available tenant allowances. Hotel based restaurants may involve
remodeling existing facilities. Substantial capital contributions from the hotel
operators and other factors will cause the cost to the Company of opening such
restaurants to be substantially less than the Company's cost to build and open
non-hotel based restaurants.
The Company may enter into investment/loan arrangements in the future on terms
similar to the 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. The Company
presently has no commitments in that regard, except for funding of the El
Segundo restaurant discussed above.
In April 2002, the Company sold the assets of its Cherry Hill, New Jersey
franchised pizza restaurant for $325,000 less legal and other sale related fees
of $61,000. The Company received $175,000 of cash and a ten-year non-interest
bearing note for $150,000.
Future Accounting Requirements
In May 2002, the FASB issued SFAS 145, "Rescission of FAS 4, 44 and 64,
Amendment of FAS 13, and Technical Corrections." Among other things, SFAS 145
rescinds various pronouncements regarding early extinguishment of debt and
allows extraordinary accounting treatment for early extinguishment only when the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" are
met. SFAS 145 provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. Management does not
believe that the adoption of this statement will have a material impact on our
consolidated financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which superceded EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS 146 requires that a liability for a cost associated with an exit
activity or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. EITF Issue No. 94-3 requires recognition of
a liability at the date an entity commits to an exit plan. All provisions of
SFAS 146 will be effective for exit or disposal activities that are initiated
after December 31, 2002. Management does not believe that the adoption of this
statement will have a material impact on our consolidated financial statements.
16
Certain Factors Affecting Future Operating Results
In addition to the planned opening of the new restaurants during 2002, as
described above, and the various factors described in the Company's Annual
Report on Form 10-K for the year ended December 30, 2001, the following
developments may impact future operating results.
On April 23, 2002 the Company finalized the sale of assets of its franchised
Cherry Hill, New Jersey Pizza Restaurant for $325,000 less $61,000 of legal and
other sale related fees. The proceeds from the sale will be used for future
capital projects.
In April 2002 the lease for the Encino Daily Grill expired and the restaurant
was closed. In May 2002 the Company sold equipment and fixtures from the Encino
Daily Grill for $30,000.
The San Francisco Daily Grill restaurant opened in February 2002. The Company
advanced $287,000 for initial working capital during the first six months of
2002 that is to be repaid through future operations.
The Daily Grill Houston opened in July 2002. The Company may advance up to
$80,000 for initial working capital that will be repaid from future operations.
The Daily Grill Houston is located in a Starwood property. Discussions are
ongoing with Starwood Hotels and Resorts regarding other development locations.
The current economic downturn has had a negative impact, and may continue to
have a negative impact, on the Company's revenues. Decreases in consumer
spending will have a significant impact on the business.
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; or that additional hotels will elect to
retain the Company's hotel restaurant management services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its non-revolving credit facility (the "Credit
Facility"). There were no borrowings outstanding under the Credit Facility at
June 30, 2002. Borrowings under the Credit Facility bear interest at the
lender's reference rate plus 0.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At an annual meeting of shareholders of Grill Concepts, Inc. held on June 26,
2002, the stockholders voted on two proposals: the election of directors and
ratification of the appointment of PricewaterhouseCoopers LLP as the Company's
independent certifying accountants.
The first matter voted on was a proposal to elect Robert Spivak, Michael
Weinstock, Charles Frank, Glenn Golenberg, Lewis Wolff, Stephen Ross and Norman
MacLeod, 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 3,698,659 84
Michael Weinstock 3,698,653 90
Charles Frank 3,698,659 84
Glenn Golenberg 3,698,659 84
Lewis Wolff 3,698,656 90
Stephen Ross 3,698,654 89
Norman MacLeod 3,698,631 112
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 certifying accountants was approved with 3,684,010 votes
cast for, 15,109 votes cast against, and 808 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ---------------
99.1 Certification Pursuant to 18.U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Signature Title Date
- ---------- ------- ------
/s/ Robert Spivak
- ------------------ President and Chief August 13, 2002
Robert Spivak Executive Officer
/s Daryl Ansel Principal Accounting August 13, 2002
- ----------------- Officer
Daryl Ansel
19