SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 29, 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 November 8, 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 -
September 29, 2002 and December 30, 2001............................. 2
Consolidated Condensed Statements of Operations - For the three months
and nine months ended September
29, 2002 and September 30, 2001...................................... 4
Consolidated Condensed Statements of Cash Flows - For the nine months
ended September 29, 2002 and
September 30, 2001................................................... 5
Notes to Consolidated Condensed Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 17
Item 4. Controls and Procedures................................................ 17
PART II - OTHER INFORMATION
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
September 29, December 30,
2002 2001
(unaudited)
Current assets:
Cash and cash equivalents $ 419,000 $ 2,300,000
Restricted cash 1,260,000 -
Inventories 451,000 590,000
Receivables 553,000 602,000
Prepaid expenses and other current assets 610,000 575,000
----------- -----------
Total current assets 3,293,000 4,067,000
Furniture, equipment, & improvements, net 8,445,000 9,066,000
Goodwill, net 205,000 205,000
Note receivable 117,000 -
Liquor licenses 332,000 454,000
Advances to managed outlets 351,000 -
Other assets 526,000 552,000
----------- -----------
Total assets $13,269,000 $ 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
September 29, December 30,
2002 2001
--------------- --------------
(unaudited)
Current liabilities:
Accounts payable $ 1,085,000 $ 1,179,000
Accrued liabilities 2,044,000 2,919,000
Current portion of long term debt 396,000 369,000
Notes payable - related parties 303,000 293,000
------------ ------------
Total current liabilities 3,828,000 4,760,000
Long-term debt 644,000 943,000
Notes payable - related parties 481,000 591,000
------------ ------------
Total liabilities 4,953,000 6,294,000
Minority interest 2,535,000 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 (7,371,000) (7,107,000)
------------ ------------
Total stockholders' equity 5,781,000 6,045,000
------------ ------------
Total liabilities, minority interest and
stockholders' equity $13,269,000 $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 Nine Months Ended
------------------------------ ---------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Revenues:
Sales $ 9,231,000 $9,955,000 $30,843,000 $33,276,000
Management and license fees 236,000 185,000 704,000 599,000
----------- ------------ ------------ ------------
Total revenues 9,467,000 10,140,000 31,547,000 33,875,000
Cost of sales 2,610,000 2,826,000 8,571,000 9,335,000
----------- ------------ ------------ ------------
Gross profit 6,857,000 7,314,000 22,976,000 24,540,000
----------- ------------ ------------ ------------
Operating expenses:
Restaurant operating expenses 6,054,000 6,203,000 19,533,000 20,490,000
Gain on disposal of assets - (225,000) (71,000) (225,000)
General and administrative 926,000 846,000 2,792,000 2,743,000
Depreciation and amortization 364,000 319,000 1,092,000 975,000
---------- ----------- ----------- ------------
Total operating expenses 7,344,000 7,143,000 23,346,000 23,983,000
---------- ----------- ----------- ------------
(Loss) income from operations (487,000) 171,000 (370,000) 557,000
Interest expense, net (59,000) (164,000) (160,000) (358,000)
---------- ----------- ------------ -------------
(Loss) income before provision for
income taxes, equity in loss of joint
venture and minority interest (546,000) 7,000 (530,000) 199,000
Provision for income taxes (2,000) (3,000) (22,000) (5,000)
Minority interest 107,000 50,000 301,000 119,000
Equity in loss of joint venture (1,000) - (13,000) (4,000)
---------- ----------- ------------ -------------
Net (loss) income (442,000) 54,000 (264,000) 309,000
Preferred dividends accrued or paid (12,000) (12,000) (38,000) (37,000)
---------- ----------- ------------ -------------
Net (loss) income applicable to
common stock $(454,000) $ 42,000 $(302,000) $ 272,000
=========== =========== ============ =============
Net (loss) income per share
applicable to common stock:
Basic $ (0.08) $ 0.01 $ (0.05) $ 0.06
=========== =========== ============ =============
Diluted $ (0.08) $ 0.01 $ (0.05) $ 0.06
=========== =========== ============ =============
Weighted average shares outstanding:
Basic 5,537,071 5,170,771 5,537,071 4,526,082
=========== =========== ============ =============
Diluted 5,537,071 5,309,999 5,537,071 4,694,192
=========== =========== ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------
September 29, September 30,
2002 2001
----------- ----------
Cash flows from operating activities:
Net (loss) income $ (264,000) $ 309,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,092,000 975,000
Gain on sale of assets (71,000) (225,000)
Minority interest in loss of subsidiaries (301,000) (119,000)
Equity in loss of joint venture 13,000 4,000
Changes in operating assets and liabilities:
Inventories 139,000 (34,000)
Receivables 49,000 195,000
Prepaid expenses and other current assets (47,000) (364,000)
Liquor licenses and other assets 29,000 (103,000)
Accounts payable (94,000) (67,000)
Accrued liabilities (765,000) (461,000)
------------ ----------
Net cash (used in) provided by operating activities (220,000) 110,000
------------ ----------
Cash flows from investing activities:
Proceeds from sale of assets 144,000 655,000
Advances to managed outlets (351,000) -
Investment in non-consolidated entity (47,000) -
Restricted cash for LLC restaurant construction (1,260,000) -
Additions to furniture, equipment and improvements (594,000) (1,088,000)
----------- -----------
Net cash used in investing activities (2,108,000) (433,000)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 1,862,000
Proceeds from minority members' investment in LLCs 1,000,000 1,041,000
Preferred return to minority member (117,000) (75,000)
Return of capital to minority member (64,000) (162,000)
Payments to related parties (100,000) (105,000)
Payments under line of credit - (100,000)
Payments on long-term debt (272,000) (539,000)
--------- ----------
Net cash provided by financing activities 447,000 1,922,000
--------- ----------
Net (decrease) increase in cash and cash equivalents (1,881,000) 1,599,000
Cash and cash equivalents, beginning of period 2,300,000 623,000
---------- ----------
Cash and cash equivalents, end of period $ 419,000 $ 2,222,000
========== ===========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 215,000 $ 317,000
Income taxes 81,000 17,000
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. RESTRICTED CASH
Capital contributions from both the Company and the minority member of The
Daily Grill at Continental Park, LLC have been deposited into an escrow
account. The escrow agent is issuing checks directly to the contractor or
to the Company for payment to other vendors for expenses associated with
the construction of the new restaurant and pre-opening.
3. MINORITY INTEREST - THE DAILY GRILL AT CONTINENTAL PARK, LLC
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 has been 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 cash of $350,000 in July 2002 as its investment in the limited
liability company. The restaurant is scheduled to open in the first quarter
of 2003. The consolidated financial statements include the accounts of the
limited liability company with minority interest reflected.
4. 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 $ 6,000 for the
first nine months of 2002. The Company has not identified any impairment
losses that need to be recognized.
6
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.
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.
5. 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
September 29, 2002 was $195,000.
7
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 $117,000 were paid to the non-manager member during the first
nine months of 2002. These payments are treated as a reduction of equity.
Payments returning $27,000 of converted capital contribution were made in
the first nine months of 2002. The minority member's unrecovered capital
contribution at September 29, 2002 was $808,000.
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
September 29, 2002 was $1,200,000.
6. 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 Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Common stock outstanding 5,537,071 5,170,771 5,537,071 4,526,082
Dilutive securities:
Stock options - 24,713 - 32,996
Convertible - - -
preferred stock
Warrants - 114,515 - 135,114
----------- ---------- ----------- -------------
Dilutive securities used
in calculation 5,537,071 5,309,999 5,537,071 4,694,192
=========== ========== =========== =============
For the three months ended September 29, 2002, 658,550 options, 1,922,787
warrants and 500 shares of convertible preferred stock were excluded from
the calculation because they were anti-dilutive. For the nine months ended
September 29, 2002, 658,550 options, 1,922,787 warrants and 500 shares of
convertible preferred stock were excluded from the calculation because they
are anti-dilutive.
8
7. ADVANCES TO MANAGED OUTLETS
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 nine months of 2002 that will
be reimbursed through future operations.
In July 2002 the Company began management of a Houston Daily Grill
restaurant. The Company has advanced approximately $64,000 to the
restaurant during the first nine months of 2002 that will be reimbursed
through future operations.
8. 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.
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.
9. 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.
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.
9
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 Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- ------------
Revenues: % % % %
Company restaurant sales 97.5 98.2 97.8 98.2
Management and license fees 2.5 1.8 2.2 1.8
---------- --------- -------- -------
Total operating revenues 100.0 100.0 100.0 100.0
Cost of sales 27.6 27.9 27.2 27.6
--------- --------- ------- -------
Gross profit 72.4 72.1 72.8 72.4
--------- --------- ------- -------
Restaurant operating expense 64.0 61.2 61.9 60.5
Gain on disposal of assets 0.0 (2.2) (0.2) (0.7)
General and administrative expense 9.8 8.3 8.8 8.1
Depreciation and amortization 3.8 3.1 3.5 2.9
--------- --------- ------- ------
Total operating expenses 77.6 70.4 74.0 70.8
--------- --------- ------- ------
Operating (loss) income (5.1) 1.7 (1.2) 1.6
Interest expense, net (0.6) (1.6) (0.5) (1.1)
--------- --------- ------- ------
(Loss) income before provision for
income taxes, minority interest and
equity in loss of joint venture (5.8) 0.1 (1.7) 0.6
Provision for income taxes 0.0 0.0 (0.1) 0.0
Minority interest 1.1 0.5 1.0 0.4
Equity in loss of joint venture (0.0) 0.0 0.0 0.0
--------- --------- ------- -------
Net (loss) income (4.7) 0.5 (0.8) 0.9
========= ========= ======= =======
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.
Third 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) - 9 10
Managed and/or licensed 1 - 2 - 6 4
Grill on the Alley restaurants:
Company owned - - - - 4 3
Pizza restaurants - (1) (1) (1) - 1
Other restaurants
Managed and/or licensed - - - - 1 1
------ ------- ------ ------- ------ ------
Total 1 (1) - (1) 20 19
====== ======= ====== ======= ====== ======
Three Months Ended Nine Months Ended
-------------------- -------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------- ------- --------- --------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 56,160 $ 55,821 $ 56,861 $ 60,901
Grill on the Alley 65,183 74,956 71,205 82,013
Pizza restaurants n.a. 33,735 29,239 34,560
Change in comparable restaurant (1):
Daily Grill (3.7)% 1.9 % (5.9)% 4.6%
Grill on the Alley (3.3)% (4.7)% (4.7)% 0.5%
Pizza restaurants n.a. (6.6)% n.a. (5.5)%
Total Company revenues:
Daily Grill $5,841,000 $ 6,531,000 $19,238,000 $21,376,000
Grill on the Alley 3,390,000 2,923,000 11,108,000 9,596,000
Pizza restaurants - 501,000 497,000 2,304,000
Management and license fees 236,000 185,000 704,000 599,000
----------- ----------- ------------ ------------
Total consolidated revenues $9,467,000 $10,140,000 $31,547,000 $33,875,000
=========== =========== ============ ===========
Managed restaurants 3,720,000 2,615,000 10,088,000 8,143,000
Licensed restaurants 1,786,000 1,921,000 5,033,000 6,001,000
Less: management and license fees (236,000) (185,000) (704,000) (599,000)
----------- ----------- ------------ ------------
Total system sales $14,737,000 $14,491,000 $45,964,000 $47,420,000
=========== =========== ============ ============
(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 Nine Months Ended
September 29, 2002 as compared to the Three and Nine Months Ended September 30,
2001
The Company operated 15 owned restaurants, 5 managed restaurants and licensed
its name and recipes to 2 others during the quarter and nine months ended
September 29, 2002 as compared to 15 owned restaurants, 3 managed restaurants
and 2 licensed during the quarter and nine months ended September 30, 2001. The
Company's results fully consolidate sales for owned restaurants, but include
only management and license 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, the Houston Daily Grill that opened under a management agreement
in July 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 third quarter of fiscal 2002 decreased to $9.5
million, 6.6% lower than the $10.1 million generated for the same quarter of
fiscal 2001. Total revenues included $9.2 million of sales revenues and $236,000
of management and licensing fees for the 2002 quarter compared to $10.0 million
of sales revenues and $185,000 of management and licensing fees for the 2001
quarter. This $0.7 million, or 7.3%, decrease in sales revenues for the quarter
was primarily attributable to a decrease in same store sales ($318,000) and the
closure of the Pizzeria Unos in South Plainfield ($68,000) and Cherry Hill
($432,000) and the closure of Encino ($486,000), partially offset by a full 13
weeks of sales for The Grill on Hollywood ($564,000).
Revenues for the nine months ended September 29, 2002 decreased 6.9% to $31.5
million from the $33.9 million generated for the same period of fiscal 2001.
Total revenues included $30.8 million of sales revenues and $704,000 of
management and licensing fees for the first nine months of 2002, compared to
$33.3 million of sales revenues and $599,000 of management and licensing fees
for the first nine months of 2001. The decrease in sales revenues for the nine
months ($2.4 million, or 7.3%) was primarily attributable to a decrease in same
store sales ($1,623,000) and the closure of the Pizzeria Unos in South
Plainfield ($1,001,000) and Cherry Hill ($811,000) and the closure of the Encino
Daily Grill ($964,000), partially offset by sales at The Grill on Hollywood
($1,963,000).
Same store sales (for restaurants open at least 12 months) decreased 3.5% for
the quarter and 5.5% for the nine months. For the quarter, this decrease was due
to a decrease in the number of guests at the Daily Grills ($382,000) and the
Grill on the Alley restaurants ($106,000), partially offset by an increase in
average check price at the Daily Grill restaurants ($161,000), and at the Grill
on the Alley restaurants ($9,000). For the nine months the decrease was due to a
decrease in the number of guests at both the Daily Grill restaurants
($2,118,000) and Grill on the Alley restaurants ($520,000) which was only
partially offset by an increase in average check price increases at the Daily
Grill restaurants ($947,000) and the Grill on the Alley restaurants ($71,000).
The decrease in guest counts for both the quarter and the nine month period is
believed to be primarily attributable to poor economic conditions in the
Company's principal markets. Management and licensing fees for the quarter
increased ($51,000 or 27.6%) primarily due to the opening of the San Francisco
Daily Grill in February 2002 and the Houston Daily Grill in July 2002.
Management and licensing fees increased for the nine months ($105,000 or 17.5%)
primarily due to the opening of the San Francisco Daily Grill in February 2002
and the Houston Daily Grill in July 2002 partially offset by decreased sales at
the Daily Grills at Los Angeles International Airport and Skokie
12
In addition to the 15 restaurants owned by the Company during the quarter and
nine months ended September 29, 2002, the Company also managed or licensed seven
other restaurants. Total revenues for all restaurants owned, managed and
licensed by the Company were $14,737,000 and $14,491,000 for the quarters and
$45,964,000 and $47,420,000 for the nine months ended September 29, 2002 and
September 30, 2001, respectively. This represents an increase of $246,000, or
1.7%, for the quarter and a decrease of $1,456,000, or 3.1%, for the nine
months.
Cost of sales decreased by $216,000, or 7.6%, for the quarter and $764,000, or
8.2%, for the nine months ended September 29, 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 27.6% for the quarter and 27.2% for the nine
months as compared to 27.9% for the third quarter of 2001 and 27.6% for the
year-to-date period in 2001. The decrease in cost of sales as a percentage of
sales during the 2002 nine 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 $149,000, or 2.4%, for the quarter
and decreased by $957,000, or 4.7%, for the nine 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 ($160,000), a decrease in payroll and
benefits ($113,000), variable costs ($44,000) and occupancy ($28,000) at
comparable restaurants, partially offset by to the opening of The Grill on
Hollywood ($400,000). The dollar decrease in operating expenses for the nine
months was primarily attributable to the closure of the Pizzeria Uno locations
($1,256,000), a reduction in payroll and benefits ($583,000), variable costs
($397,000) and occupancy ($121,000) at comparable restaurants, offset by the
opening of The Grill on Hollywood ($1,440,000). Restaurant operating expenses,
as a percentage of revenues, increased in the third quarter from 61.2 % in 2001
to 64.0 % in 2002. For the nine months, the percentages were 60.5 % in 2001 and
61.9% in 2002. The major contributor to the increase as a percentage of sales
was insurance costs.
Gain on disposal of assets in both 2002 and 2001 was related to selling assets
associated with the closure of restaurants. In the quarter ending September 2002
there were no sales of assets compared to the same quarter of 2001 when the sale
of the assets of the South Plainfield Pizzeria Uno was completed ($225,000). For
the nine months ending September 29, 2002 the Company recorded gains from the
sale of the assets of the Cherry Hill Pizzeria Uno ($46,000) and the Encino
Daily Grill ($25,000) compared to $225,000 for the nine month period in 2001.
General and administrative expense increased 9.5% for the quarter and 1.8% for
the nine months as compared to the same periods in 2001. As a percentage of
total revenues, general and administrative expense totaled 9.8% for the quarter
and 8.9% for the nine months as compared to 8.3% for the quarter and 8.1% for
the nine months in 2001. The increase in total general and administrative
expense of $49,000, or 1.8%, for the nine months during 2002 was primarily
attributable to an increase in payroll and related benefits partially offset by
cost reduction in professional services and travel and entertainment expenses.
The increase in total general and administrative expense of $80,000, or 9.5% for
the 2002 quarter is attributable to increased payroll and benefits.
13
Depreciation and amortization expense increased by 14.1% for the quarter and
12.0% for the nine months compared to 2001, representing 3.5% of sales for the
nine months of 2002 compared to 2.9% in 2001. The increase in depreciation and
amortization expense for both the quarter and the nine months was primarily due
to the addition of The Grill on Hollywood offset by the closure of the Pizzeria
Uno locations and the Encino Daily Grill.
Interest expense, net, decreased by $105,000, or 64.0% during the quarter and
$198,000, or 55.3%, during the nine 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.
The Company recorded $22,000 of income taxes for the nine months compared to
$5,000 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 nine months reflect minority interest in the net
losses of subsidiaries of $107,000 and $301,000 respectively, compared with
$50,000 and $119,000 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 $13,000 for its equity in loss of joint venture
during the nine 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 $37,500 in each of the nine months ended September 29, 2002 and
September 30, 2001.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At September 29, 2002 the Company had negative working capital of $0.5 million
and a cash balance of $0.4 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 nine months ended September 29, 2002
totaled $220,000 compared to $110,000 provided by operations during the nine
months ended September 30, 2001. The adverse change in operating cash flow
during the nine months was related to operating loss ($264,000), reducing
accounts payable ($94,000) and accrued liabilities ($764,000) offset by
depreciation and amortization ($1,092,000).
Net cash used in investing activities during the nine months ended September 29,
2002 totaled $2,108,000 compared to $433,000 during the nine months ended
September 30, 2001. Cash used in investing activities during the current period
were for the construction of the Daily Grill at Continental Park ($1,260,000),
the remodel of the Newport Beach Daily Grill ($396,000), advances made to the
San Francisco Daily Grill and Houston Daily Grill ($351,000) 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).
14
Net cash provided by financing activities during the nine months ended September
29, 2002 totaled $447,000 compared to $1,922,000 during the nine months ended
September 30, 2001. Cash provided by financing activities during the current
period related to the minority member's investment in the Daily Grill at
Continental Park, LLC ($1,000,000) partially offset by reductions in debt
($372,000), preferred returns to minority investors in Chicago - the Grill on
the Alley, LLC ($117,000) and return of capital to minority investor in San Jose
Grill, LLC ($64,000).
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, loans and tenant allowances
from certain of its landlords and, beginning in 1998, through joint venture
arrangements. At September 29, 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 $0.8 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 has loaned
$64,000 to the restaurant for initial working capital to be repaid from future
operations.
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 January 2003.
Under certain of its operating and management agreements the Company has an
obligation to potentially make additional cash advances and/or contributions and
may not realize any substantial returns for some time. The 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 2003, 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 has advanced $64,000
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.
In July 2002, the Company made a capital contribution of $350,000 to the Daily
Grill at Continental Park, LLC. The Company has a 50.01% ownership interest in
the limited liability company. Construction of the restaurant is being funded
primarily by a capital contribution from the minority member of $1,000,000 and a
tenant improvement allowance of $500,000. The restaurant is scheduled to open in
January 2003.
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
September 29, 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
Item 4. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in
our internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.
PART II - OTHER INFORMATION
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 November 12, 2002
- ---------------------
Robert Spivak Executive Officer
/s/ Daryl Ansel Principal Accounting November 12, 2002
- ----------------------
Daryl Ansel Officer
19
CERTIFICATIONS
I, Robert Spivak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grill Concepts, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
By: /s/ Robert Spivak
Robert Spivak
Chief Executive Officer
I, Daryl Ansel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grill Concepts, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
By: /s/ Daryl Ansel
Daryl Ansel
Chief Financial Officer