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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 March 27, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS 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 of (IRS Employer
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 past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 5, 2005, 5,650,146 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 - March 27, 2005 and
December 26, 2004 3
Consolidated Condensed Statements of Operations - For the three
months ended March 27, 2005 and March 28, 2004 (restated) 5
Consolidated Condensed Statements of Cash Flows - For the three
months ended March 27, 2005 and March 28, 2004 (restated) 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 6. Exhibits 29
SIGNATURES 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 27, December 26,
2005 2004
------------ -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,639,000 $ 1,407,000
Inventories 627,000 620,000
Receivables, net of reserve ($162,000 in 2005 and
$143,000 in 2004) 934,000 836,000
Reimbursable costs receivable 993,000 928,000
Prepaid expenses & other current assets 733,000 2,372,000
------------ -----------
Total current assets 4,926,000 6,163,000
Furniture, equipment and improvements, net 12,864,000 11,864,000
Goodwill, net 205,000 205,000
Liquor licenses 367,000 350,000
Restricted cash 1,042,000 882,000
Note receivable 102,000 101,000
Other assets 178,000 184,000
------------ -----------
Total assets $ 19,684,000 $19,749,000
============ ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
March 27, December 26,
2005 2004
------------ -----------
(unaudited)
Current liabilities:
Accounts payable $ 1,321,000 $ 1,988,000
Accrued expenses 2,618,000 2,548,000
Reimbursable costs payable 993,000 928,000
Current portion of long term debt 142,000 196,000
Current portion notes payable - related parties 298,000 294,000
------------ -----------
Total current liabilities 5,372,000 5,954,000
Long-term debt 136,000 148,000
Notes payable - related parties 791,000 829,000
Other long-term liabilities 7,885,000 8,054,000
------------ -----------
Total liabilities 14,184,000 14,985,000
Minority interest 988,000 934,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2005 and 2004 - -
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, 500 shares issued
and outstanding in 2005 and 2004 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2005 and 2004, 5,650,146 issued and
outstanding in 2005 and 5,588,019 issued and
outstanding 2004
Additional paid-in capital 13,649,000 13,649,000
Accumulated deficit (9,137,000) (9,819,000)
------------ -----------
Total stockholders' equity 4,512,000 3,830,000
------------ -----------
Total liabilities, minority interest
and stockholders' equity $19,684,000 $19,749,000
============ ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
------------------------
March 27, March 28,
2005 2004
------------ -----------
(restated)
Revenues:
Sales $13,387,000 $13,013,000
Cost reimbursements 3,469,000 3,190,000
Management and license fees 356,000 296,000
------------ -----------
Total revenues 17,212,000 16,499,000
Operating expenses:
Cost of sales 3,738,000 3,772,000
Restaurant operating expenses 7,701,000 7,672,000
Reimbursed costs 3,469,000 3,190,000
General and administrative 1,046,000 1,180,000
Depreciation and amortization 461,000 479,000
Pre-opening costs 91,000 147,000
------------ -----------
Total operating expenses 16,506,000 16,440,000
------------ -----------
Income from operations 706,000 59,000
Interest expense, net (37,000) (66,000)
------------ -----------
Income (loss) before provision for income taxes
and minority interest 669,000 (7,000)
Provision for income taxes (78,000) (23,000)
Minority interest in net loss of subsidiaries 91,000 147,000
------------ -----------
Net income 682,000 117,000
Preferred dividends accrued (13,000) (13,000)
------------ -----------
Net income applicable to common stock $ 669,000 $ 104,000
============ ===========
Net income per share applicable to common stock:
Basic net income $ 0.12 $ 0.02
============ ===========
Diluted net income $ 0.11 $ 0.02
============ ===========
Weighted average share outstanding:
Basic 5,650,146 5,545,864
============ ===========
Diluted 6,092,223 6,192,910
============ ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
------------------------
March 27, March 28,
2005 2004
------------ -----------
(restated)
Cash flows from operating activities:
Net income $ 682,000 $ 117,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 461,000 479,000
Lease incentives and deferred rent amortization (169,000) (86,000)
Stock based compensation expense - 187,000
Allowance for doubtful accounts 19,000 -
Minority interest in loss of subsidiaries (91,000) (147,000)
Changes in operating assets and liabilities:
Inventories (7,000) (1,000)
Receivables (117,000) 170,000
Reimbursable costs receivable (65,000) 38,000
Prepaid expenses and other current assets 79,000 (287,000)
Lease incentive receivables 1,560,000 885,000
Other assets 2,000 28,000
Accounts payable (667,000) 301,000
Accrued expenses 69,000 (276,000)
Reimbursable costs payable 65,000 (38,000)
------------ -----------
Net cash provided by operating activities 1,821,000 1,370,000
------------ -----------
Cash flows from investing activities:
Purchase of furniture, equipment and improvements (1,457,000) (1,241,000)
Restricted cash (160,000) -
Purchase of liquor license (17,000) -
------------ -----------
Net cash used in investing activities (1,634,000) (1,241,000)
------------ -----------
Cash flows from financing activities:
Proceeds from minority interest in LLC 145,000 35,000
Payments to related parties (34,000) (58,000)
Payments on long term debt (66,000) (119,000)
Return of capital and profits to minority shareholder - (68,000)
------------ -----------
Net cash provided by (used in) financing activities 45,000 (210,000)
------------ -----------
Net increase (decrease) in cash and cash equivalents 232,000 (81,000)
Cash and cash equivalents, beginning of period 1,407,000 1,496,000
------------ -----------
Cash and cash equivalents, end of period $ 1,639,000 $ 1,415,000
============ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 27,000 $ 51,000
Income taxes $ - $ 36,000
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
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 our independent registered public accounting firm. The December
26, 2004 balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should be read
in conjunction with the financial statements and notes included in the Company's
Form 10-K for the year ended December 26, 2004. In the opinion of management,
these interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair 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 25, 2005.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company began a review of its lease accounting policies following
announcements in February 2005 that the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing the SEC staff's views relating to
certain lease accounting issues. As a result of this review, the Company
revised its accounting for leases in 2004 and restated its historical financial
statements as of March 28, 2004 to correct for these errors in its lease
accounting.
Historically, the Company recognized straight-line rents and amortized tenant
improvement allowances using the initial non-cancelable term of the lease
commencing on the date rent payments began. Under generally accepted accounting
principles, as highlighted in the SEC guidance, the Company should have
recognized rent expense (net of the related tenant improvement allowance
amortization) on a straight-line basis over the initial non-cancelable term of
the lease, beginning on the later of when the Company had access to the site or
the lease was executed. The impact of correctly calculating rent expense was to
decrease restaurant operating expenses and decrease general and administrative
expenses by $2,000 and $1,000, respectively, for the three months ended March
28, 2004.
In closing the 2004 books and records, the Company reviewed the estimated useful
lives that it was using to amortize its leasehold improvements. In the case of
six restaurants, it was found that the incorrect lives had been used. The
Company has revised the amortization period to reflect the shorter of their
estimated useful lives or the initial lease term. The impact of the change is to
increase depreciation and amortization expense by $30,000 for the three months
ended March 28, 2004.
A portion of the above adjustments was recorded on the books of the LLC's in
which we have a majority ownership or we consolidate under FIN 46. As discussed
in the footnotes below, the Company allocates results to the minority interests
based on the underlying economics of the investment. The impact of the above
adjustments increased the amount of loss allocated to the minority interests by
$47,000 for the three months ended March 28, 2004.
During fourth quarter of 2004, the Company eliminated amounts that had
previously been recorded as restaurant sales revenue arising from complimentary
meals and promotional activities. The Company's previous method of recording
these activities as restaurant sales revenue with a corresponding increase in
operating expense is not in accordance with generally accepted accounting
principles. Historically the amounts associated with complimentary meals and
promotional activities have been recorded as restaurant revenues, with an
offsetting amount in restaurant operations and corporate general and
administrative expenses. As revised, the Company has eliminated all amounts for
complimentary meals and promotional activities. As a result of these
adjustments, revenues were decreased by $497,000 in the first quarter 2004,
restaurant operating expenses decreased by $451,000 and general and
administrative expenses decreased by $46,000. These adjustments have no impact
on previously reported income and are non-cash.
The effects of our revisions to previously reported Consolidated Financial
Statements as of and for the quarter ended March 28, 2004 are summarized as
follows.
The following table reflects the effects of the restatement on the
Consolidated Statement of Operations:
MARCH 28, 2004
AS PREVIOUSLY RESTATED
REPORTED
Sales 13,510,000 13,013,000
Total Revenue 16,996,000 16,499,000
Restaurant operating expenses 8,125,000 7,672,000
General & administrative 1,227,000 1,180,000
Depreciation & amortization 449,000 479,000
Total operating expenses 16,910,000(1) 16,440,000
Income from operations 86,000 59,000
Income (loss) before taxes 20,000 (7,000)
Loss before minority interest (3,000) (30,000)
Minority interest 100,000 147,000
Net income 97,000 117,000
Net income applicable to common stock 84,000 104,000
Net income per share applicable to
common stock:
Basic $ 0.02 $ 0.02
Diluted $ 0.01 $ 0.02
(1) Includes cost of sales amounts that were not included in the "Total
operating expenses" subtotal in prior financial statements.
The following table reflects the effects of the restatement on the Consolidated
Statement of Cash Flows:
MARCH 28, 2004
AS PREVIOUSLY RESTATED
REPORTED
Cash flows from operating activities
Net Income 97,000 117,000
Depreciation and amortization 449,000 479,000
Minority interest in net loss of subsidiaries (100,000) (147,000)
Other long term liabilities (83,000) (86,000)
Tenant improvement allowances - 885,000
Net cash provided by operating activities 485,000 1,370,000
Tenant improvement allowances 885,000 -
Net cash provided by (used in) financing activities 675,000 (210,000)
8
2. PRO-FORMA STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, compensation expense is based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock. Because, prior
to June 30, 2004, grants under the plan required variable accounting treatment
due to the cashless exercise feature of those options (described below),
compensation expense was, through that date, remeasured at each balance sheet
date based on the difference between the current market price of the Company's
stock and the option exercise price. An accrual for compensation expense was
determined based on the proportionate vested amount of each option as prescribed
by Financial Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans." Each period, adjustments to
the accrual are recognized in the income statement. The Company accounts for
stock and options to non-employees at fair value in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue
No. 96-18.
On June 1, 1995, the Company's Board of Directors adopted the Grill Concepts,
Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12, 1998 the 1998
Stock Option Plan (the "1998 Plan") was adopted. These Plans provide for
options to be issued to the Company's employees and others. The exercise price
of the shares under option shall be equal to or exceed 100% of the fair market
value of the shares at the date of grant. The options generally vest over a
five-year period. The terms of the option grants originally allowed the
employee to exercise the option by surrendering a portion of the vested shares
in lieu of paying cash, subject to the terms of the plan including the rights of
the Compensation Committee to amend grants in any manner that the committee in
its sole discretion deems to not adversely impact the option holders.
On June 23, 2004, the Company's Compensation Committee, as administrators of the
Company's stock option plan, resolved that the cashless exercise feature in the
Company's stock option plan will not be permitted, and a notification was
subsequently given to all employees on July 30, 2004. Effective with this date,
the Company reverted back to accounting for its options under the fixed
accounting treatment.
The Company has adopted the disclosure-only provisions of SFAS No. 123, and will
continue to use the intrinsic value-based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." During the
three-month period ended March 27, 2005 there were no options granted, exercised
or cancelled. Pro forma compensation expense for the Company's stock option
plans determined based on the fair value at the grant date for awards is as
follows:
2005 2004
----------- ---------
(restated)
Net income, as reported $ 682,000 $117,000
Add: stock compensation expense
recorded, net of taxes - 187,000
Deduct: stock compensation expense
under fair value method, net of taxes (40,000) (30,000)
----------- ---------
Net income, pro forma $ 642,000 $274,000
=========== =========
Net income per share, as reported:
Basic $ 0.12 $ 0.02
Diluted $ 0.11 $ 0.02
Net income per share, pro forma:
Basic $ 0.11 $ 0.05
Diluted $ 0.10 $ 0.04
9
3. RESTRICTED CASH
In January 2004 a $700,000 certificate of deposit was established at Union Bank
to act as collateral for the Standby Letter of Credit opened to support our new
Workers Compensation policy. In January 2005 an additional $160,000 was added to
the certificate of deposit. Other restricted cash consists of $72,000 held in
escrow for the Daily Grill at Continental Park in El Segundo, California and
$110,000 that was placed with our insurance claims processor in 2004 for
worker's compensation claims.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Most lease agreements contain one or more of the following; tenant improvement
allowances, rent holidays, rent escalation clauses and/or contingent rent
provisions.
Rent is recognized on a straight-line basis, including the restaurant build-out
period. This period is normally prior to the commencement of rent payments and
is commonly called the rent holiday period. The build-out period generally
begins when the Company enters the space and begins to make improvements in
preparation for intended use. The Company expenses rent on a straight-line basis
during the build-out period. Tenant improvement allowances are also recognized
on a straight- line basis beginning at the same time as the commencement of the
straight-line rent expense.
Prepaid expenses and other current assets at March 27, 2005 and December 26,
2004 were comprised of:
2005 2004
-------- ----------
Lease incentive receivables $291,000 $1,851,000
Prepaid expenses, other 442,000 521,000
-------- ----------
Total prepaid assets and other
Current assets $733,000 $2,372,000
======== ==========
5. OTHER LONG-TERM LIABILITIES
In connection with certain of the Company's leases, the landlord has provided
the Company with tenant improvement allowances. These lease incentives have been
recorded as long-term liabilities and are being amortized over the life of the
lease. Additionally, the Company recognizes a liability for deferred rent where
lease payments are lower than rental expense recognized on a straight-line
basis.
10
Other Long-Term Liabilities at March 27, 2005 and December 26, 2004 were
comprised of:
2005 2004
---------- ----------
Lease Incentives $5,525,000 $5,653,000
Deferred Rent 2,360,000 2,401,000
---------- ----------
Total Other Long-Term Liabilities $7,885,000 $8,054,000
========== ==========
6. RECENTLY ISSUSED ACCOUNTING REQUIREMENTS
In April 2004, the EITF reached final consensus on EITF 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128," which
requires companies that have participating securities to calculate earnings per
share using the two-class method. This method requires the allocation of
undistributed earnings to the common shares and participating securities based
on the proportion of undistributed earnings that each would have been entitled
to had all the periods earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company adopted EITF 03-06 for the quarter ended June 27, 2004,
however there has been no impact on the Company's financial statements as the
preferred shares are not participating securities.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.
As permitted by Statement 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method may have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share below.
We expect to adopt Statement 123(R) in the first quarter of 2006.
7. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners some of
whom have participating rights in the joint venture such as the ability to
approve operating and capital budgets and the borrowing of money. In connection
with the financing of each of the LLCs, the minority members may have certain
rights to priority distributions of capital until they have received a return of
their initial investments ("Return of Member Capital") as well as rights to
receive defined preferred returns on their invested capital ("Preferred
Return").
11
The Universal CityWalk Daily Grill is owned by a partnership ("the CityWalk
Partnership") for which we serve as manager. Our partner has certain rights to
priority distribution of capital from the CityWalk Partnership until they have
received their initial investments ("Return of Member Capital").
The following tables set forth a summary for each of the LLCs and the CityWalk
Partnership of (1) the distributions of capital to the Members and/or the
Company during the quarter ended March 27, 2005, (2) the unreturned balance of
the capital contributions of the Members and/or the Company at March 27, 2005,
and (3) the accrued but unpaid preferred returns due to the Members and/or the
Company at March 27, 2005:
SAN JOSE GRILL LLC
Distributions of capital, preferred return
and profit during the three months
ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital Contributions
at March 27, 2005: Members $ -
============
Company $ -
============
Accrued but unpaid Preferred Returns
at March 27, 2005: Members $ -
============
Company $ -
============
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 27, 2005: Members (a) $ 63,000
============
Company $ -
============
Unreturned Initial Capital Contributions
at March 27, 2005: Members $ 1,034,000
============
Company $ -
============
Accrued but unpaid Preferred Returns
at March 27, 2005: Members $ -
============
Company $ -
============
12
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital Contributions
at March 27, 2005: Members $ 1,200,000
============
Company $ 250,000
============
Accrued but unpaid Preferred Returns
at March 27, 2005: Members (b) $ -
============
Company (b) $ -
============
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital Contributions
at March 27, 2005: Members $ 1,000,000
============
Company $ 350,000
============
Accrued but unpaid Preferred Returns
at March 27, 2005: Members (b) $ -
============
Company (b) $ -
============
13
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during the three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial and Additional
Capital Contributions at March 27,
2005: Members $ 1,301,106
============
Company $ 201,106
============
Accrued but unpaid Preferred Returns
at March 27, 2005: Members (b) $ -
============
Company $ -
============
(a) Distribution of capital and note repayments as of March 27, 2005 includes
$42,000 of capital and note repayments and $21,000 of interest and
preferred return.
(b) Due to the poor performance of the restaurant the preferred return is not
being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation of the
subsidiary entity. If preferred returns were accrued for The Grill on
Hollywood the member would have an accrued preferred return of $597,000 and
the Company would have an accrued preferred return of $124,000. If
preferred returns were accrued for the South Bay Daily Grill the member
would have an accrued preferred return of $249,000 and the Company would
have an accrued preferred return of $113,000. If preferred returns were
accrued for the CityWalk Partnership the Member would have an accrued
preferred return of $451,000.
8. PER SHARE DATA
Pursuant to SFAS No. 128, "Earnings Per Share," basic net income per share is
computed by dividing the net income attributable to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income attributable to
common shareholders by the weighted-average number of common and common
equivalent shares outstanding during the period. Common share equivalents
included in the diluted computation represent shares issuable upon assumed
exercise of stock options, warrants and convertible preferred stocks using the
treasury stock method.
14
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the quarters ended March 27, 2005 and March 28, 2004 follow:
2005 2004
---- ----
Earnings Shares Earnings Shares
------------------------------------------------
(restated)
Net income $ 682,000 $ 117,000
Less: preferred stock dividend (13,000) (13,000)
----------- -----------
Earnings available for common
stockholders 669,000 5,650,146 104,000 5,545,864
Dilutive securities:
Stock options - 85,875 - 142,215
Warrants - 231,202 - 504,831
Convertible Stock 125,000 -
------------------------------------------------
Dilutive earnings available to
common stockholders $ 669,000 6,092,223 $ 104,000 6,192,910
================================================
Stock options for 338,875 and 230,750 shares for 2005 and 2004, respectively,
were excluded from the calculation of diluted earnings per share because they
were anti-dilutive. Warrants for 235,703 and 203,645 shares for 2005 and 2004,
respectively, were excluded from the calculation of diluted earnings per share
because they were anti-dilutive. 500 shares of preferred stock were excluded
from the calculation of diluted earnings per share because they were
anti-dilutive for 2004.
9. LITIGATION CONTINGENCIES
In June 2004, one of our former hourly restaurant employees filed a class action
lawsuit against us in the Superior Court of California of Orange County. We
requested and were granted a motion to move the suit from Orange County to Los
Angeles County. The lawsuit was then filed in the Superior Court of California
of Los Angeles in December 2004. The plaintiff has alleged violations of
California labor laws with respect to providing meal and rest breaks. The
lawsuit sought unspecified amounts of penalties and other monetary payments on
behalf of the plaintiffs and other purported class members. We believe that all
of our employees were provided with the opportunity to take all required meal
and rest breaks. The Court has issued a total stay on the case until the Court
of Appeals hears two similar cases. Our next hearing is scheduled for October
2005. Concurrently, discovery is continuing in these matters and we intend to
vigorously defend our position in all of these matters although the outcome
cannot be ascertained at this time.
15
In November 2004, a sexual harassment case was filed against us in the Superior
Court of California of Los Angeles. We filed a motion to dismiss and the case
was dismissed with the plaintiff having the right to re-file. The plaintiff
re-filed the case. While we are moving forward with mediation we filed a second
motion to dismiss in March 2005 as we believe the suit is unfounded. We have
accrued legal costs up to our insurance deductible of $50,000 in this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this Form
10-Q. Except for the historical information contained herein, the discussion in
this Form 10-Q contains certain forward looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward looking statements
wherever they appear in this Form 10-Q. The Company's actual results could
differ materially from those discussed here. For a discussion of certain factors
that could cause actual results to be materially different, refer to the
Company's Annual Report on Form 10-K for the year ended December 26, 2004.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company began a review of its lease accounting policies following
announcements in February 2005 that the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing the SEC staff's views relating to
certain lease accounting issues. As a result of this review, the Company
revised its accounting for leases in 2004 and restated its historical financial
statements as of and for each fiscal year end 2003, 2002, 2001 and 2000 to
correct for these errors in its lease accounting. The accompanying consolidated
financial statements for the three months ended March 28, 2004 have been
restated from those originally issued to reflect the change in lease accounting.
Historically, the Company recognized straight-line rents and amortized tenant
improvement allowances using the initial non-cancelable term of the lease
commencing on the date rent payments began. Under generally accepted accounting
principals, as highlighted in the SEC guidance, the Company should have
recognized rent expense (net of the related tenant improvement allowance
amortization) on a straight-line basis over the initial non-cancelable term of
the lease, beginning on the later of when the Company had access to the site or
the lease was executed. The impact of correctly calculating rent expense was to
decrease restaurant operating expenses and decrease general and administrative
expenses by $2,000 and $1,000, respectively, for the three months ended March
28, 2004.
In closing the 2004 books and records, the Company reviewed the estimated useful
lives that it was using to amortize its leasehold improvements. In the case of
six restaurants, it was found that the incorrect lives had been used. The
Company has revised the depreciation period to reflect the shorter of their
estimated useful lives or the initial lease term. The impact of the change was
to increase depreciation and amortization expense by $30,000 for the three
months ended March 28, 2004.
A portion of the above adjustments was recorded on the books of the LLC's in
which we have a majority ownership or we consolidate under FIN 46. As discussed
in the footnotes to the consolidated financial statements, the Company allocates
results to the minority interests based on the underlying economics of the
investment. The impact of the above adjustments increased the amount of loss
allocated to the minority interests by $47,000 for the three months ended March
28, 2004.
16
During fourth quarter of 2004, the Company eliminated amounts that had
previously been recorded as restaurant sales revenue arising from complimentary
meals and promotional activities. The Company's previous method of recording
these activities as restaurant sales revenue is not in accordance with generally
accepted accounting principles. Historically the amounts associated with
complimentary meals and promotional activities have been recorded as restaurant
revenues, with an offsetting amount in restaurant operations and corporate
general and administrative expenses. As revised, the Company has eliminated all
amounts for complimentary meals and promotional activities. As a result of these
adjustments, revenue and expenses were decreased by $497,000 for the first
quarter 2004, restaurant operating expenses decreased by $451,000 and general
and administrative expenses decreased by $46,000. These adjustments have no
impact on previously reported income and are non-cash.
The effects of our revisions to previously reported Consolidated Financial
Statements as of and for the quarter ended March 28, 2004 are summarized as
follows.
The following table reflects the effects of the restatement on the
Consolidated Statement of Operations:
MARCH 28, 2004
AS PREVIOUSLY RESTATED
REPORTED
Sales 13,510,000 13,013,000
Total Revenue 16,996,000 16,499,000
Restaurant operating expenses 8,125,000 7,672,000
General & administrative 1,227,000 1,180,000
Depreciation & amortization 449,000 479,000
Total operating expenses 16,910,000(1) 16,440,000
Income from operations 86,000 59,000
Income (loss) before taxes 20,000 (7,000)
Loss before minority interest (3,000) (30,000)
Minority interest 100,000 147,000
Net income 97,000 117,000
Net income applicable to
common stock 84,000 104,000
Net income per share applicable to common stock
Basic $ 0.02 $ 0.02
Diluted $ 0.01 $ 0.02
(1) Includes cost of sales amounts that were not included in the "Total
operating expenses" subtotal in prior financial statements.
17
The following table reflects the effects of the restatement on the Consolidated
Statement of Cash Flows:
MARCH 28, 2004
AS PREVIOUSLY RESTATED
REPORTED
Cash flows from operating activities
Net Income 97,000 117,000
Depreciation and amortization 449,000 479,000
Minority interest in net loss of subsidiaries (100,000) (147,000)
Other long term liabilities (83,000) (86,000)
Tenant improvement allowances - 885,000
Net cash provided by operating activities 485,000 1,370,000
Tenant improvement allowances 885,000 -
Net cash provided by (used in)
financing activities 675,000 (210,000)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total operating revenues, except where otherwise noted. We
typically analyze our operating expenses as a percentage of sales revenues, not
total revenues.
Three Months Ended
---------------------
March 27, March 28,
2005 2004
---------- -----------
(restated)
% %
Revenues:
Company restaurant sales 77.8 78.9
Reimbursable costs 20.1 19.3
Management and license fees 2.1 1.8
---------- -----------
Total revenues 100.0 100.0
Cost of sales 21.7 22.9
Restaurant operating expenses 44.8 46.6
Reimbursable costs 20.1 19.3
General and administrative 6.1 7.2
Depreciation and amortization 2.7 2.9
Pre-opening costs 0.5 0.9
---------- -----------
Total operating expenses 95.9 99.8
---------- -----------
Operating income 4.1 0.2
Interest expense, net (0.2) (0.4)
---------- -----------
Income (loss) before taxes and
minority interest 3.9 (0.2)
Provision for income taxes (0.5) (0.1)
Minority interest 0.5 0.9
---------- -----------
Net income 3.9 0.6
========== ===========
18
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.
First Quarter Total open at
Openings End of Quarter
FY 2005 FY 2004 FY 2005 FY 2004
---------------- ----------------
Daily Grill Restaurants:
Company owned 1 1 12 11
Managed and/or licensed - - 8 7
Grill on the Alley restaurants:
Company owned - - 4 4
Other restaurants
Managed and/or licensed - - - 1
------ ------ ------ ------
Total 1 1 24 23
====== ====== ====== ======
Three Months Ended
--------------------------
March 27, March 28,
2005 2004
------------ ------------
(restated)
Weighted average weekly sales per company
owned restaurant:
Daily Grill $ 61,850 $ 70,639
Grill on the Alley 81,714 77,116
Change in comparable restaurants (1)
Daily Grill (1.0%) 8.7%
Grill on the Alley 6.0% 6.1%
Total sales:
Daily Grill $ 9,138,000 $ 9,003,000
Grill on the Alley 4,249,000 4,010,000
------------ ------------
Total consolidated sales $13,387,000 $13,013,000
============ ============
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
We also earn management and license fee revenue based on a percentage of gross
sales at restaurants under management and under licensing arrangements. Our
management and license fee revenue typically is earned at a rate of five to
eight percent of reported sales at these restaurants. The sales of managed and
licensed restaurants are not included in our statements of operations. However,
we consider the disclosure of these sales to be a key indicator of brand
strength and important to understanding how changes in sales at the managed and
licensed restaurants impact our revenue.
19
Sales at non-Company owned Grill Concepts-branded restaurants, categorized as,
managed and licensed restaurants were as follows:
2005 2004
----------- -----------
Sales
Managed Daily Grills $4,601,000 $3,895,000
Licensed Daily Grills 1,809,000 2,208,000
----------- -----------
$6,410,000 $6,103,000
=========== ===========
Management and license fees $ 356,000 $ 296,000
=========== ===========
Percent of gross sales 5.6% 4.9%
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 27,
2005 AS COMPARED TO THE THREE MONTHS ENDED MARCH 28, 2004
Revenues. Total revenues for the 2005 quarter increased 4.3% to $17.2 million
from $16.5 million in the 2004 period. Sales revenues increased 2.9% to $13.4
million in 2005 from $13.0 million in 2004. Management and license fee revenues
increased to $356,000 in 2005 from $296,000 in 2004.
Sales for Daily Grill restaurants increased by 1.5% from $9.0 million in the
2004 quarter to $9.1 million in the 2005 period. The increase in sales revenues
for the Daily Grill restaurants from 2004 to 2005 was primarily attributable to
the Bethesda Daily Grill being open the whole period compared to 10 weeks in
2004 ($0.1 million) and the Santa Monica Daily Grill ($0.1 million) in March
2005 partially off-set by a decrease in same store sales of 1.0% ($0.1 million)
for restaurants open for 12 months in both 2004 and 2005. Weighted average
weekly sales at the Daily Grill restaurants decreased 12.4% from $70,639 in 2004
to $61,850 in 2005 driven by lower weekly sales at CityWalk (11.7%), Bethesda
(6.6%) and La Cienega (5.7%). Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 2005 reflected a 5.4% decrease in
the number of guests only partially offset by an increase in the average check.
Sales for Grill restaurants increased by 6.0% from $4.0 million in the 2004
quarter to $4.2 million in 2005. The increase in sales revenues for the Grill
restaurants from 2004 to 2005 was attributable to increased guests and check
averages. Weighted average weekly sales at the Grill restaurants increased 6.0%
from $77,116 in 2004 to $81,714 in 2005.
Management and license fee revenues during the 2005 quarter were attributable to
(1) hotel restaurant management services which accounted for $306,000 of
management fees and (2) licensing fees from the LAX Daily Grill, and Skokie,
Illinois Daily Grill which totaled $50,000. The increase in management fees
during 2005 was attributable to management of the Long Beach Daily Grill which
opened in November 2004 and improved sales at the San Francisco Daily Grill,
Burbank Daily Grill and Los Angeles airport Daily Grill offset by the closing of
the San Jose Bar and Grill.
Operating Expenses and Operating Results. Total operating expenses, including
cost of sales, restaurant operating expenses, reimbursable costs, general and
administrative expense, depreciation and amortization, and pre-opening costs,
increased 0.4% to $16.5 million in the 2005 quarter (representing 95.9% of
revenues) from $16.4 million in 2004 (representing 99.8% of revenues).
Cost of Sales. While sales revenues increased by 2.9% ($0.4 million) in
the 2005 quarter as compared to 2004, cost of sales decreased by 0.9% ($34,000)
and decreased as a percentage of sales from 28.9% in 2004 to 27.9% in 2005. The
decrease in cost of sales was attributable to improved purchasing and menu
modifications.
20
Restaurant Operating Expenses. Restaurant operating expenses increased
0.4% to $7.7 million in the 2005 quarter from $7.7 million in 2004. As a
percentage of revenues, restaurant operating expenses represented 44.7% in 2005
compared to 46.5% in 2004. The dollar increase in restaurant operating expenses
was primarily attributable to the opening of Santa Monica ($65,000), increased
occupancy costs ($90,000) at comparable restaurants partially offset by a
reduction in variable costs ($73,000). The decrease in operating expenses as a
percentage of revenues resulted from a 0.8% decrease in occupancy costs as a
percentage of revenues.
Reimbursed Costs. Reimbursed costs increased 8.8% from $3.2 million in
2004 to $3.5 million in 2005. These expenses represent the operating costs for
which we are the primary obligor of the restaurants we do not consolidate. The
increase is primarily due to the opening of the Long Beach Daily Grill in
November 2004.
General and Administrative. General and administrative expenses decreased
11.4% to $1.0 million in the 2005 quarter compared to $1.2 million in 2004.
General and administrative expenses represented 6.1% of revenues in 2005 as
compared to 7.2% of revenues in 2004. The decrease in general and
administrative expense was attributable to decreases in payroll and related
costs, professional fees and travel expenses.
Depreciation and Amortization. Depreciation and amortization expense
decreased 3.8% for the 2005 quarter representing 2.7% of revenues in 2005 and
2.9% of revenues in 2004 primarily due to higher revenues with relatively fixed
depreciation amounts.
Pre-opening Costs. Pre-opening costs totaled $91,000 in the 2005 period as
compared with $147,000 in 2004. These pre-opening costs were attributable to the
opening in January 2005 of the Santa Monica Daily Grill and the opening of the
Bethesda Daily Grill in January 2004.
Interest Expense. Interest expense, net, totaled $37,000 during the 2005
quarter as compared to $66,000 in 2004. The decrease in interest expense was
primarily attributable to a reduction in warrant amortization and reduced debt
levels as a result of the maturing debt.
Provision for income taxes. The income tax provisions for 2005 and 2004 are due
mainly to state taxes as the Company has a federal net operating loss to carry
forward and several large credits. The tax rates in 2005 and 2004 were
comprised of the federal and state statutory rates, less any permanent items and
tax credits based on the annual estimated effective tax rates for the respective
years
Minority Interest. We reported a minority interest in the loss of our majority
owned subsidiaries of $91,000 during the 2005 quarter as compared to $147,000
during the 2004 quarter. The decrease in minority interest in loss was
primarily attributable to improved operating results from The Grill on Hollywood
and the South Bay Daily Grill.
Net Income. We reported net income of $682,000 in the 2005 quarter as compared
to a net income of $117,000 for 2004.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At March 27, 2005 the Company had negative working capital of $446,000 and a
cash balance of $1,639,000 compared to positive working capital of $209,000 and
a cash balance of $1,407,000 at December 26, 2004.
21
Net cash provided by operations during the quarter ended March 27, 2005 totaled
$1,821,000 compared to $1,370,000 during the quarter ended March 28, 2004. The
positive change in cash flows from operations resulted from significantly
improved net income and receipt of tenant improvement allowances of $1,115,000
related to the Santa Monica Daily Grill and $445,000 related to the Downtown
Daily Grill.
Net cash used in investing activities during the quarter ended March 27, 2005
totaled $1,634,000 as compared to $1,241,000 during the quarter ended March 28,
2004. Cash used in investing activities, during the current period, related
primary to purchases of property, plant and equipment for the Santa Monica Daily
Grill ($894,000) and Downtown Daily Grill ($463,000).
Net cash provided by financing activities during the quarter ended March 27,
2005 totaled $45,000 as compared to $210,000 used in operations during the
quarter ended March 28, 2004. Cash provided by financing activities during the
current period related to investments by minority members in LLCs ($145,000),
partially offset by reductions in debt ($100,000).
Financing Facilities. At March 27, 2005, the Company had $43,000 owing under
equipment leasing financing transactions, a loan from a member of Chicago - The
Grill on the Alley, LLC of $1.0 million, equipment loans of $0.1 million, loans
from stockholders/officers of $0.2 million, and loans/advances from a landlord,
the SBA and others of $0.1 million. Construction of the Santa Monica Daily
Grill was paid for through a $2.2 million tenant improvement allowance of which
$1,115,000 was received during the first quarter of 2005. Construction of the
Downtown Daily Grill is being funded through a $600,000 tenant improvement
allowance, minority member contribution of $1,250,000 and the Company's capital
contribution of $251,000. As of March 27, 2005 $445,000 of the tenant
improvement allowance on the Downtown Daily Grill has been received. These
tenant incentive allowances have been recorded in other long-term liabilities
and is being amortized against rent expense over the lease terms.
In June 2004, we finalized an agreement with respect to the establishment of a
new bank credit facility. Under the terms of the new bank credit facility, we
have been provided with financing in the form of a revolving line of credit in
the amount of $500,000, an irrevocable standby letter of credit in the amount of
$700,000, increased to $860,000 in January 2005 and equipment financing in the
amount of $500,000. As of March 27, 2005 we have utilized $45,000 of the
equipment financing. The facility has a one-year term, is secured by assets and
is subject to certain standard borrowing covenants. We are currently in
discussions with the bank to renew the facility.
Operating Leases and Contractual Obligations. At March 27, 2005, we were
obligated under eighteen leases covering the premises in which our Daily Grill
and Grill Restaurants are located as well as leases on our executive offices.
Such restaurant leases and the executive office lease contain minimum rent
provisions which provide for the payment of minimum aggregate rental payments of
approximately $25.1 million over the life of those leases, with minimum annual
rental payments of $3.3 million in 2005, $6.1 million between 2006 and 2007,
$4.8 million between 2008 and 2009, and $10.9 million thereafter. There were no
material changes in our obligations under operating leases or other contracts
during the quarter ended March 27, 2005 as compared to those described in the
Company's Form 10-K for the year ended December 26, 2004.
Commitments Relating to Managed Restaurants and LLCs. Under certain of our
operating and management agreements we have an obligation to potentially make
additional cash advances and/or contributions and may not realize any
substantial returns for some time. The agreements and arrangements under which
we may be required to make cash advances or contributions, guarantee obligations
or defer receipt of cash are described in the Company's Form 10-K for the year
ended December 26, 2004. There were no material developments with respect to
those agreements and arrangements during the quarter ended March 27, 2005.
22
Detailed information regarding the initial capital contributions to the LLCs and
the CityWalk Partnership, Preferred Returns for each, management fees payable to
the Company and principal distribution provisions are included in the Company's
Form 10-K for the year ended December 26, 2004. The following tables set forth
a summary for each of the LLCs and the CityWalk Partnership of (1) the
distributions of capital to the Members and/or the Company during the quarter
ended March 27, 2005, (2) the unreturned balance of the capital contributions of
the Members and/or the Company at March 27, 2005, and the accrued but unpaid
preferred returns due to the Members and/or the Company at March 27, 2005:
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital
Contributions at March 27, 2005: Members $ -
============
Company $ -
============
Accrued but unpaid Preferred
Returns at March 27, 2005: Members $ -
============
Company $ -
============
23
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 27, 2005: Members (a) $ 63,000
============
Company $ -
============
Unreturned Initial Capital
Contributions at March 27, 2005: Members $ 1,034,000
============
Company $ -
============
Accrued but unpaid Preferred
Returns at March 27, 2005: Members $ -
============
Company $ -
============
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital
Contributions at March 27, 2005: Members $ 1,200,000
============
Company $ 250,000
============
Accrued but unpaid Preferred
Returns at March 27, 2005: Members (b) $ -
============
Company (b) $ -
============
24
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 27, 2005: Members $ -
============
Company $ -
============
Unreturned Initial Capital
Contributions at March 27, 2005: Members $ 1,000,000
============
Company $ 350,000
============
Accrued but unpaid Preferred
Returns at March 27, 2005: Members (b) $ -
============
Company (b) $ -
============
UNIVERSAL CITYWALK DAILY GRILL
Distributions of capital during year
ended December 26, 2004: Members $ -
============
Company $ -
============
Unreturned Initial and Additional
Capital Contributions at December
26, 2004: Members $ 1,301,106
============
Company $ 201,106
============
Accrued but unpaid Preferred
Returns at December 26, 2004: Members (b) $ -
============
Company $ -
============
a) Distribution of capital and note repayments as of March 27, 2005 includes
$42,000 of capital and note repayments and $21,000 of interest and
preferred return.
b) Due to the poor performance of the restaurant the preferred return is not
being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation of the
subsidiary entity. If preferred returns were accrued for The Grill on
Hollywood the Member would have an accrued preferred return of $597,000 and
the Company would have an accrued preferred return of $124,000. If
preferred returns were accrued for the South Bay Daily Grill the Member
would have an accrued preferred return of $249,000 and the Company would
have a preferred return of $113,000. If preferred returns were accrued for
the CityWalk Partnership the Member would have an accrued preferred return
of $451,000.
25
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company's
critical accounting policies is set forth in the Company's Form 10-K for the
year ended December 26, 2004. As of, and for the quarter ended, March 27, 2005,
there have been no material changes or updates to the Company's critical
accounting policies.
RECENTLY ISSUED ACCOUNTING REQUIREMENTS
In April 2004, the EITF reached final consensus on EITF 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128," which
requires companies that have participating securities to calculate earnings per
share using the two-class method. This method requires the allocation of
undistributed earnings to the common shares and participating securities based
on the proportion of undistributed earnings that each would have been entitled
to had all the periods earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company adopted EITF 03-06 for the quarter ended June 27, 2004,
however there has been no impact on the Company's financial statements as the
preferred shares are not participating securities.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
As permitted by Statement 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method may have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share above.
We expect to adopt Statement 123(R) in the first quarter of 2006.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of new restaurants during 2005 and the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 26, 2004, the following developments may impact future operating
results and financial condition.
On June 29, 2004, the Company formed 612 Flower Daily Grill, LLC, a limited
liability company to open and operate a Daily Grill in downtown Los Angeles.
The investor member of the limited liability company will invest $1,250,000 and
own a 41.59% interest in the LLC and the Company will invest $251,000 and own a
58.41% interest in the LLC. A subsidiary of the Company will manage the
downtown Daily Grill for which it will receive a management fee of 5% of sales.
The restaurant is scheduled in open in the second quarter of 2005. The newly
formed LLC signed a 15-year lease. The newly formed LLC will be consolidated
under FIN 46.
26
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 our credit line facility. There were no
borrowings outstanding under the Credit Line Facility at March 27, 2005.
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.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). This evaluation has been
performed in light of the restatements described in the following paragraph.
In connection with the evaluation of disclosure controls and procedures in
preparing our Annual Report on Form 10-K, as of December 26, 2004, our
management considered all disclosure controls and procedures and turned specific
attention to our lease accounting practices in light of the pronouncement of
February 7, 2005 by the Office of the Chief Accountant of the SEC in a letter to
the AICPA. Prior to the issuance of this guidance from the SEC, we had followed
what we believe to be common industry practices in the restaurant and retail
industries in implementing our lease accounting practices. The specific lease
accounting practices involved were established early in our history. Prior to
the February 7, 2005 pronouncement by the SEC, neither management nor the Audit
Committee of the Board of Directors had ever received any information or comment
that would cause it to question its accounting for leases.
27
In conjunction with our review of leases we also looked at the lives utilized
for depreciating our leasehold improvements. We found that in some cases we
were not depreciating the assets over the shorter of their estimated useful
lives or the initial term of the leases, but were using longer or shorter lives.
It was determined that this should also be corrected to be the shorter of the
remaining lease term or the estimated useful life.
In view of the February 7, 2005 guidance by the SEC, and despite management's
good faith efforts in determining the appropriate accounting policies, as a
result of our review, we concluded that our previously established lease
accounting and depreciation policies were not correctly applied.
Accordingly, we determined to restate certain of our previously issued financial
statements to reflect the correction in our lease and depreciation accounting.
During the restatement process, we also eliminated amounts previously recorded
as revenue and restaurant operating expenses for complimentary meals and
promotional activities as the activities do not result in a culmination of an
earnings process. We restated all information from 2000 to 2003 and the first
three quarters for fiscal year 2004 to increase transparency for stockholders.
From the SEC's February 7, 2005 letter to the AICPA regarding lease accounting
matters to the date of this report, we have worked diligently to remediate the
material weakness in our internal control that resulted from the lease
accounting restatement, correctly amortizing leasehold improvements over the
correct periods and accounting for complimentary meals and promotional
activities and have implemented additional review procedures over the selection
and monitoring of appropriate assumptions and factors affecting our accounting
in these areas. We believe these enhancements to our system of internal control
and our disclosure controls and procedures will be adequate to provide
reasonable assurance that the control objectives will be met.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Section 302 Certification of CEO
31.2 Section 302 Certification of CFO
32.1 Certification of CEO Pursuant to 18.U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to 18.U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: May 27, 2005
By: /s/ Robert Spivak
-------------------------------------
Robert Spivak
President and Chief Executive Officer
By: /s/ Philip Gay
-------------------------------------
Philip Gay
Principal Accounting Officer
29