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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2000
[ ] 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (310) 820-5559
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.00004 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
4,203,888 shares of common stock of the Registrant were outstanding as
of February 15, 2001. As of such date, the aggregate market value of the voting
and non-voting common equity held by non-affiliates, based on the closing price
on the NASDAQ Small-Cap Market, was approximately $6,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be
filed within 120 days of the Registrant's fiscal year ended December 31, 2000
are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 13
ITEM 3. LEGAL PROCEEDINGS.......................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................ 14
ITEM 6. SELECTED FINANCIAL DATA.................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK.......................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 26
ITEM 11. EXECUTIVE COMPENSATION..................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.................................... 26
PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 24 of this Form 10-K.
ITEM 1. BUSINESS
General
Grill Concepts, Inc. and its subsidiaries (the "Company") develop and
operate casual dining restaurants under the name "Daily Grill" and fine dining
restaurants under the name "The Grill on the Alley." In addition, the Company
owns and operates, or has management or licensing agreements with respect to,
other restaurant properties.
The Company was incorporated under the laws of the State of Delaware in
November of 1985 to acquire and operate franchised Pizzeria Uno restaurants.
Since its acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, the Company has focused principally on the expansion of the
"Daily Grill" and "The Grill on the Alley" restaurant formats of GCI.
At December 31, 2000, the Company owned and operated 15 restaurants and
managed or licensed 5 additional restaurants, consisting of 10 Daily Grill
restaurants, 3 The Grill on the Alley restaurants and 2 Pizzeria Uno Restaurants
which are owned and operated by the Company, 2 Daily Grill restaurants and a
City Bar & Grill restaurant which are managed by the Company and 2 Daily Grill
restaurants which are licensed by the Company. With the exception of two The
Grill on the Alley restaurants and one Daily Grill restaurant, which restaurants
are operated by partnerships, all of the Daily Grill and The Grill on the Alley
restaurants which were owned and operated at December 31, 2000 were solely owned
and operated on a non-franchise basis by the Company. The two Pizzeria Uno
Restaurants are operated pursuant to franchise agreements.
During 2000, the Company (1) opened The Grill on the Alley in Chicago,
Illinois, (2) opened a licensed Daily Grill in Skokie, Illinois, (3) closed its
Pizzeria Uno franchise in Media, Pennsylvania, and (4) entered into an agreement
to sell its Pizzeria Uno franchise in South Plainfield, New Jersey.
During 2000, the Company continued to pursue a strategic growth plan
whereby the Company plans to open, and/or convert, and operate, and/or manage,
Daily Grill and The Grill on the Alley restaurants in hotel properties in
strategic markets throughout the United States. Management believes that the
opening of restaurants in hotel properties in strategic markets will help
further establish brand name recognition for the opening of free standing
restaurants in those markets. The opening of the Grill on the Alley in Chicago
marked the Company's initial entry into the Chicago area.
The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 2000 and 1999 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):
1
1999 2000
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year.................. 9 10
Restaurant openings................ 1 0
---- ----
End of year........................ 10 10
Managed Restaurants:
Beginning of year.................. 1 3
Restaurant openings................ 3 1
Restaurants closed or sold......... (1) 0
---- ----
End of year........................ 3 4
Total Daily Grill restaurants:
Beginning of year.................. 10 13
Restaurant openings................ 4 1
Restaurants closed or sold......... (1) 0
---- ----
End of year........................ 13 14
==== ====
Grill restaurants:
Company Restaurants:
Beginning of year.................. 2 2
Restaurant openings................ 0 1
---- ----
End of year........................ 2 3
Total Grill restaurants:
Beginning of year.................. 2 2
Restaurant openings................ 0 1
---- ----
End of year........................ 2 3
==== ====
Other restaurants1:
Company Restaurants:
Beginning of year.................. 3 3
Restaurants closed or sold......... 0 (1)
---- ----
End of year........................ 3 2
Managed or Licensed Restaurants:
Beginning of year.................. 2 1
Restaurants closed or sold......... (1) 0
----- ----
End of year........................ 1 1
Total Other restaurants:
Beginning of year.................. 5 4
Restaurants closed or sold......... (1) (1)
---- ----
End of year........................ 4 3
==== ====
Total restaurants:
Beginning of year.................. 17 19
Restaurant openings................ 4 2
Restaurants closed or sold......... (2) (1)
---- ----
End of year........................ 19 20
==== ====
1 Includes three Pizzeria Uno Restaurants in 1999, and two Pizzeria Uno
Restaurants in 2000, operated by the Company pursuant to franchise
agreements; and restaurants in two hotel properties for which the Company
assumed management One of the managed hotel restaurants was converted to a
Daily Grill format in January of 1999 and is reflected as both a Managed
Daily Grill restaurant opening and a Managed Other restaurant closed or
sold during 1999.
2
1999 2000
---- ----
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants.................... $ 55,545 $ 58,920
Managed Restaurants.................... n.a. n.a.
Grill restaurants:
Company Restaurants.................... $ 71,447 $ 89,476
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... $ 32,093 $ 32,029
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants.................... 1.1% 8.1%
Managed Restaurants.................... n.a. n.a.
Grill restaurants
Company Restaurants.................... 3.7% 25.2%
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... (2.3)% (0.2%)
Total system sales:
Daily Grill.............................. $ 25,994,890 $ 28,104,683
Grill.................................... 7,430,460 12,168,746
Pizza Restaurants........................ 5,006,536 4,323,920
Management and license fees.............. 544,090 1,078,272
--------------- --------------
Total consolidated revenues.............. $ 38,975,976 $ 45,675,621
============ ============
Total system sales....................... $ 50,834,918 $ 62,323,172
============ ============
Restaurant Concepts
- - Daily Grill Restaurants
Background. At December 31, 2000, the Company, through its subsidiary, GCI,
owned and operated, managed or licensed ten Daily Grill restaurants in Southern
California, three Daily Grill restaurants in the Washington, D.C./Virginia
market and one Daily Grill restaurant in Skokie, Illinois. Daily Grill
restaurants are patterned after "The Grill on the Alley" in Beverly Hills, a
fine dining American-style grill restaurant which was acquired by the Company
during 1996. See "-- The Grill on the Alley." The Grill on the Alley was founded
by Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for a
number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants.
Restaurant Sites. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, managed or licensed and as
either hotel based or based in shopping malls and other commercial properties.
At December 31, 2000, fourteen Daily Grill restaurants were in operation, nine
of which were 100% owned by the Company and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, two of which were managed by the Company and located in
hotels and two of which were licensed restaurants.
Daily Grill locations opened, or are scheduled to open, in the following
months and years, are owned, managed or licensed as indicated and, where
indicated, are located in the referenced hotels:
3
Ownership
Interest,
Licensed or
Location Opened Managed
- -------- ------ -----------
Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Encino, California April 1992 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Los Angeles International Airport January 1997 Licensed
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California (Hilton Hotel) January 1999 Managed
Washington, D.C. (Georgetown Inn) April 1999 Managed
Universal CityWalk, California May 1999 50%
Skokie, Illinois (DoubleTree) September 2000 Licensed
San Francisco, California (Handlery Union Square Hotel) Fall 2001 Managed
Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of the Company and,
accordingly, significant effort is exerted to assure that each site selected is
appropriate. For non-hotel based restaurants, the site selection process focuses
on local demographics and household income levels, as well as specific site
characteristics such as visibility, accessibility, parking availability and
traffic volume. Each site must have sufficient traffic such that management
believes the site can support at least twelve strong meal periods a week (i.e.,
five lunches and seven dinners). Preferred Daily Grill sites, which characterize
the existing 100% owned restaurants, are high-end, mid-size retail shopping
malls in large residential areas with significant daytime office populations and
some entertainment facilities. Historically, Daily Grill restaurants have been
anchor tenants at high profile malls and, therefore, have received significant
tenant improvement allowances.
Hotel based Daily Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership,
joint venture or license arrangement or operated pursuant to a management
agreement. As with non-hotel based restaurants, site selection is viewed as
critical and, accordingly, significant effort is exerted to assure that each
site selected is appropriate. The site selection process is the responsibility
of HRP which identifies suitable locations and negotiates leases, licenses or
management agreements for those properties. See "-- Hotel Property Agreement."
Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 100 and 250 persons. Our costs of existing
non-hotel based restaurants, including leasehold improvements, furniture,
fixtures and equipment and pre-opening expenses, have averaged $325 per foot per
restaurant, less tenant improvement allowances.
Existing hotel based Daily Grill restaurants range in size from 5,000 to
8,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 140 and 250 persons. Management anticipates
that additional hotel based Daily Grill restaurants will require minimal capital
investment on the Company's part. However, each hotel restaurant arrangement
will be negotiated separately and the capital investment by the Company may vary
widely. Opening costs, for the Company, of existing hotel restaurants, including
leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $150,000 to $600,000 per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be reminiscent
of the selection available at American-style grill restaurants of the 1930's and
1940's, in contrast to the "nouvelle cuisine" and diet meal fads of the 1980's.
Daily Grill offers such "signature" items as Cobb salad, Caesar salad, meatloaf
with mashed potatoes, chicken pot pie, chicken burgers, hamburgers, rice pudding
and fresh fruit cobbler. The emphasis at the Daily Grill is on freshly prepared
American food served in generous portions.
4
Entrees range in price, subject to regional differences in menu pricing,
from $9.50 for an "original" beef dip sandwich to $21.95 for a char-broiled 16
oz. T-bone steak with all the trimmings. The average lunch check is $14.00 per
person and the average dinner check is $19.00 per person, including beverage.
Daily Grill restaurants also offer a children's menu with reduced portions of
selected items at reduced prices. All of the existing Daily Grill restaurants
offer a full range of beverages, including beer, wine and full bar service.
During the year ended December 31, 2000, food and non-alcoholic beverage sales
constituted approximately 86% of the total restaurant revenues for the Daily
Grill restaurants, with alcoholic beverages accounting for the remaining 14%.
Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the Daily
Grill are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.
Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week. Each Daily Grill location is designed to
provide the sense and feel of comfort. In the tradition of an old-time
American-style grill, the setting is very open with a mix of booths and tables.
Several of the restaurants have counters for singles to feel comfortable. The
restaurant emphasizes the quality and freshness of Daily Grill food dishes in
addition to the cleanliness of operations. The dining area is well-lit and is
characterized by a "high energy level".
The feeling of comfort and tradition is enhanced by the restaurant policy
of not requiring, nor accepting, reservations except for groups of six or more.
As a result, patrons are served on a first-come-first-served basis and never
have to wait for a table while a vacant table is being held for patrons with
reservations.
The attention to detail and quality of the decor is carried through to the
professional service. All Daily Grill employees are trained to treat each person
who visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with the
traditions of the past, each Daily Grill employee is taught that at the Daily
Grill "the guest is always right." The Daily Grill's policy is to accommodate
all guest requests, ranging from substitutions of menu items to take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 60% of the guests at the Daily Grills which
have been open for over a year represent repeat business, and many guests have
become "regulars" in the tradition of the neighborhood restaurant.
The Grill on the Alley
Background. At December 31, 2000, the Company, through its subsidiary, GCI,
owned and operated three The Grill on the Alley restaurants ("Grill"), one in
Beverly Hills, California, one in San Jose, California, and one in Chicago,
Illinois.
5
The original Grill is an upscale Beverly Hills restaurant which opened in
1984 and served as the model for the Daily Grill restaurants. The Grill is set
in the traditional style of the old-time grills of New York and San Francisco,
with black-and-white marbled floors, polished wooden booths and deep green
upholstery. In 1995, the Grill was inducted into Nation's Restaurant News' Fine
Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere.
In April of 1996, the Company acquired the original Grill from a
partnership, the managing partner of which was controlled by the Company's
principal shareholders and directors.
Restaurant Sites. At December 31, 2000, the Company operated three Grill
restaurants, one of which is a non-hotel based facility and two of which are
hotel-based facilities.
Grill locations opened, or are scheduled to open, in the following months
and years, are owned or managed as indicated and, where indicated, in the
referenced hotels:
Ownership
Interest or
Location Opened Managed
-------- ------ ------------
Beverly Hills, California January 1984 100.00%
San Jose, California (Fairmont Hotel) May 1998 50.05%
Chicago, Illinois (Westin Hotel) June 2000 60.00%
The Company's Grill restaurants are located in leased facilities. As with
the Company's Daily Grill restaurants, site selection is viewed as critical to
the success of the Company and, accordingly, significant effort is exerted to
assure that each site selected is appropriate. For non-hotel based Grill
restaurants, the site selection process focuses on local demographics and
household income levels, as well as specific site characteristics such as
visibility, accessibility, parking availability and traffic volume. Because of
the upscale nature of Grill restaurants, convenience for business patrons is
considered a key site selection criteria.
Hotel based Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership or
joint venture arrangement or operated pursuant to a management agreement. As
with free standing restaurants, site selection is viewed as critical to the
success of the Company and, accordingly, significant effort is exerted to assure
that each site selected is appropriate.
The existing non-hotel based Grill restaurant is approximately 4,300 square
feet -- of which approximately 1,500 square feet is devoted to kitchen and
service areas -- and seats 120 persons. Because of the unique nature of Grill
restaurants, the size, seating capacity and opening costs of future sites cannot
be reasonably estimated.
The San Jose based Grill restaurant is approximately 8,000 square feet --
of which approximately 38% is devoted to kitchen and service areas -- and seats
280 persons. The Chicago based Grill restaurant is approximately 8,500 square
feet -- of which approximately 35% is devoted to kitchen and service areas --
and seats more than 300 guests. Management anticipates that additional hotel
based Grill restaurants will require minimal capital investment on the Company's
part. However, each hotel restaurant arrangement will be negotiated separately
and the capital investment by the Company may vary widely. Opening costs of the
existing hotel based restaurants, including leasehold improvements, furniture,
fixtures and equipment and pre-opening expenses, have ranged from $2.1 million
to $3.4 million.
Menu and Food Preparation. Each Grill restaurant offers a similar extensive
menu featuring over 100 items. The menu was designed to be reminiscent of the
selection available at fine American-style grill restaurants of the 1930's and
1940's, featuring steaks and seafood and freshly prepared salads and vegetables
served in generous portions.
6
Entrees range in price from $11.95 for a hamburger to $34.50 for a Prime
Porterhouse Steak. The average lunch check is $22.00 per person and the average
dinner check is $46.00 per person, including beverage. All of the existing Grill
restaurants offer a full range of beverages, including beer, wine and full bar
service. During the year ended December 31, 2000, food and non-alcoholic
beverage sales constituted approximately 72% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
28%.
Proprietary recipes have been developed for substantially all of the items
offered on the Grill menu. The same recipes are used at each location and all
chefs undergo extensive training in order to assure consistency and quality in
the preparation of food. Virtually all of the menu items offered at the Grill
are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
Each Grill has up to 8 cooks on duty during regular lunch and dinner hours
to provide prompt, specialized service. Restaurant staff members utilize a
"point-of-sale" computer system to monitor the movement of food items to assure
prompt and proper service of guests and for fiscal control purposes.
Atmosphere and Service. Each Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed to
provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level".
Reservations are accepted but are not required.
The attention to detail and quality of the decor is carried through to the
professional service. All Grill employees are trained to treat each person who
visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with the
traditions of the past, each Grill employee is taught that "the guest is always
right." The Grill's policy is to accommodate all guest requests, ranging from
substitutions of menu items to take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Grill employees from the kitchen staff to the serving staff
undergo extensive training making each employee knowledgeable not only in the
Company's procedures and policies but in every aspect of Grill operations. The
Company's policy of promoting from within and providing access to senior
management for all employees has produced a work force which works in a
cooperative team approach.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 75% of the guests at the original Grill
represent repeat business, and many guests have become "regulars" in the
tradition of the neighborhood restaurant.
- - Pizzeria Uno Restaurants
Restaurant Sites. At December 31, 2000, the Company, through its wholly-
owned subsidiaries, operated "Pizzeria Uno Restaurant & Bar" locations in South
Plainfield and Cherry Hill, New Jersey (the "Pizza Restaurants"). The Company's
Pizza Restaurants are operated in accordance with certain guidelines established
by, and with managerial assistance from and training provided by, the
Franchisor. See "-- The Franchise Agreements" below.
The Pizza Restaurants are located in suburban areas in leased premises. The
Pizza Restaurants range in size from approximately 5,300 square feet to
approximately 7,900 square feet, including a bar and lounge area, and have
seating capacities ranging from 180 to 200 customers.
7
Menu and Food Preparation. The Pizza Restaurants offer a diverse menu in
accordance with guidelines established by the Franchisor, featuring gourmet,
Chicago-style deep-dish pizzas, filled with ingredients such as fresh meats,
spices, vegetables and cheese and baked to order based on proprietary recipes of
the Franchisor. The Pizza Restaurants also offer a variety of sandwiches,
hamburgers, appetizers, salads, desserts and beverages, including a full liquor
selection. All of the menu items offered by the Pizza Restaurants are also
available for delivery or carry-out. Delivery service is provided by third
parties pursuant to contractual arrangements. Entree selections currently range
in price from approximately $4.95 to $8.95, with an average cost per person per
meal, including beverage, of approximately $6.25 for lunch and $9.25 for dinner.
Atmosphere and Service. The Pizza Restaurants are characterized by a
casual, friendly and entertaining atmosphere, full and efficient service, and
high-quality menu items at moderate prices. Each of the Pizza Restaurants
employs between three and four full time managers and assistant managers and
between 45 and 85 part-time and full-time employees. The Pizza Restaurants are
generally open from 11:00 a.m. to midnight, seven days per week, except on
Friday and Saturday when the Pizza Restaurants remain open until 1:00 a.m.
The Franchise Agreements. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreements, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurants' designated
locations. The Franchise Agreements each have a term of 20 years with three
successive ten-year renewal periods at the option of the Company, provided that
the agreements have not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts and advertising fee (approximately 1% of gross
revenues).
Potential Sale of Pizza Restaurant. During 1998, the Company determined
that the continued ownership and operation of the Pizza Restaurants did not fit
with the Company's strategic growth plan. In July, 2000, the Company closed its
Pizzeria Uno restaurant in Media, Pennsylvania due to declining operations. In
October 2000, the Company entered into an agreement to sell its Pizzeria Uno
restaurant in South Plainfield, New Jersey for $700,000. The Company is also
seeking a suitable buyer for its Pizzeria Uno restaurant located in Cherry Hill,
New Jersey.
Other Restaurant Activities
In addition to owning and operating Daily Grill, The Grill and the Pizza
Restaurants, the Company, at December 31, 2000, also provided management
services for Daily Grill restaurants at the Burbank Hilton and the Georgetown
Inn and for the City Bar & Grill in the San Jose Hilton and had granted licenses
to operate a Daily Grill at LAX and a Daily Grill at the DoubleTree Inn in
Skokie, Illinois.
- - Restaurant Management Services
In conjunction with the Company's entry into the hotel restaurant market,
in May 1998, the Company began providing management services at the City Bar &
Grill at the San Jose Hilton. The Company is entitled to a management fee equal
to 4% of the gross receipts of the City Bar & Grill. Additionally, the Company
is entitled to a percentage of the annual profits of the City Bar & Grill in
excess of certain historical profits.
8
In May 1998, the Company, pursuant to its agreement with Hotel Restaurant
Properties, Inc., began providing management services for a restaurant in the
Burbank Hilton Hotel. The restaurant was converted from its former format to a
Daily Grill in January 1999. Pursuant to its management agreement with the
hotel, the Company invested $500,000 for conversion of the restaurant to a Daily
Grill and is responsible for management and supervision of the restaurant. The
Company is entitled to a management fee equal to 8.5% of the gross receipts of
the restaurant. Additionally, the Company is entitled to a 30% percentage of the
annual profits of the restaurant in excess of a base amount.
In March 1999, the Company, pursuant to the Hotel Property Agreement, (see
below) began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to its management agreement with the hotel, the Company
was not required to invest in the restaurant but is responsible for management
and supervision of the restaurant. The Company is entitled to a management fee
equal to 8% of the gross receipts of the restaurant. Additionally, the Company
is entitled to a percentage of the annual profits of the restaurant in excess of
a base amount.
- - Restaurant Licensing
LAX Daily Grill. In March of 1995, the Company entered into an operating
agreement to own and operate restaurants within Los Angeles International
Airport ("LAX"). Profits were shared 51% by the Company and 49% by CA One
Services after the payment of a management fee equal to 4% of gross revenues to
each of the Company and CA One Services and after the repayment of CA One
Services' advances, with interest.
In January of 1997, a Daily Grill restaurant was opened in the
International Terminal of LAX ("LAX Daily Grill"). The LAX Daily Grill is an
8,300 square foot full-service restaurant seating approximately 300 persons.
Effective April 1, 1998, the Company sold and assigned its interest in the
venture and the LAX Daily Grill to CA One Services, Inc.
Simultaneous with the sale of its interest in the LAX Daily Grill, the
Company entered into a License Agreement pursuant to which CA One will continue
to have the right to utilize the "Daily Grill" name, logos, recipes and other
rights associated with the operation of the Daily Grill restaurant at Thomas
Bradley International Airport. Pursuant to the terms of the License Agreement,
the Company is entitled to receive royalties in an amount equal to 2.5% of the
first $5 million of annual revenues from the restaurant and 4% of annual
revenues in excess of $5 million.
Skokie Daily Grill. In September 2000, a licensed Daily Grill restaurant
was opened in the DoubleTree Inn in Skokie, Illinois. Under the terms of the
license, the hotel operator paid all costs to build and open the restaurant and
the Company is entitled to a license fee equal to the greater of $65,000 or 2%
of sales per year.
Hotel Property Agreement
In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. HRP is responsible for identifying suitable hotel locations in
which a Grill or Daily Grill can be operated ("Managed Outlets") and negotiating
and entering into leases or management agreements for those properties. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company will advance certain pre-opening costs and
certain required advances ("Manager Loans") and will manage and supervise the
day to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $1,667 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company and 25% to HRP. The Agreement also
provides that in case of a change in control of the Company both HRP and the
Company will have certain rights to cause the Company to acquire HRP commencing
in May of 2004.
9
Business Expansion
The Company's expansion plans focus on the addition of Daily Grill
restaurants with selected expansion of the Grill restaurant concept also
planned.
Management continually reviews possible expansion into new markets and
within existing markets. Such review will entail careful analysis of potential
locations to assure that the demographic make-up and general setting of new
restaurants is consistent with the patterns which have proven successful at the
existing Daily Grills and Grills. While the general appearance and operations of
future Daily Grills and Grill restaurants are expected to conform generally to
those of existing facilities, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.
The Company's future expansion efforts are expected to concentrate on (1)
expansion into new markets through the establishment of hotel based restaurants
pursuant to the Hotel Property Agreement, and (2) expansion within existing
markets through the opening of non-hotel based restaurants. With the assistance
of HRP, the Company expects to establish name recognition and market presence
through the opening of Daily Grill and Grill restaurants in fine hotel
properties in strategic markets throughout the United States. Upon establishing
name recognition and a market presence in a market, the Company intends to
construct and operate clusters of free standing restaurants within those
markets. Management intends to limit the construction and operation of Grill
restaurants to one restaurant per market while constructing multiple Daily Grill
restaurants within each market. The exact number of Daily Grill restaurants to
be constructed within any market will vary depending upon population,
demographics and other factors.
At December 31, 2000, the Company operated non-hotel based Daily Grill and
Grill restaurants in Southern California, principally the greater-Los Angeles
market, and metropolitan Washington, D.C. Management is presently evaluating the
opening of additional non-hotel based Daily Grill and Grill restaurants in
existing markets and in other major metropolitan areas. Existing markets will be
evaluated for expansion in order to establish market presence and economies of
scale. As of March, 2001, no definitive sites had been identified for future
construction of free standing restaurants. Management anticipates that the cost
to open additional free standing Daily Grill and Grill restaurants will average
$325 per square foot per restaurant, less tenant improvement allowances, with
each restaurant expected to be approximately 6,000 to 7,000 square feet in size.
Actual costs may vary significantly depending upon the tenant improvements,
market conditions, rental rates, labor costs and other economic factors
prevailing in each market in which the Company pursues expansion.
At December 31, 2000, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., and Skokie, Illinois, and hotel based Grill restaurants were operated in
San Jose, California and Chicago, Illinois. In February 2001, the Company
entered into a management agreement with Handlery Hotel, Inc. pursuant to which
the Company has agreed to manage a Daily Grill to be located adjacent to the
Handlery Union Square Hotel in San Francisco. The restaurant is scheduled to
open in the Fall of 2001. The Company and HRP are presently evaluating the
opening of additional hotel based Daily Grill restaurants in existing markets
and in other major metropolitan areas. Each hotel restaurant arrangement will be
negotiated separately and the size of the restaurants, ownership and operating
arrangements and capital investment by the Company may vary widely.
Restaurant Management
The Company strives to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
adherence to standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has experienced a relatively low
turnover at every level at its Daily Grill and Grill restaurants. See "-- Daily
Grill Restaurants" above.
Daily Grill and Grill. Each Daily Grill and Grill restaurant, including
both free standing and hotel based restaurants, is managed by one general
manager and up to four managers or assistant managers. Each restaurant also has
one head chef and one or two sous chefs, depending on volume. On average,
general managers have approximately seven years experience in the restaurant
industry and three years with the Company. The general manager has primary
responsibility for the operation of the restaurant and reports directly to an
Area Director who in turn reports to the Company's President. In addition to
ensuring that food is prepared properly, the head chef is responsible for
product quality, food costs and kitchen labor costs. Each restaurant has
approximately 85 employees. Restaurant operations are standardized, and a
comprehensive management manual exists to ensure operational quality and
consistency.
10
The Company maintains financial and accounting controls for each Daily
Grill and Grill restaurant through the use of a "point-of-sale" computer system
integrated with centralized accounting and management information systems. In
the year 2000, the point of sale systems in the original six Daily Grills were
updated to new systems similar to those in newer restaurants. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue and
cash control.
All managers participate in a comprehensive seven week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports, guest
comment cards and third party quality control reviews. Two or three times every
month, an independent service is paid to go to each location and prepare a
report on every aspect of the meal, the service and the ambiance.
Servers at each restaurant participate in approximately ten days of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.
Pizza Restaurants. The staff of the Company's Pizza Restaurants consists of
between three and four managers and between 40 and 85 hourly employees, most of
whom are part-time employees, per location.
All managers of the Pizza Restaurants participate in an onsite training
program and are provided with the Franchisor's Operating Manual. Additionally,
selected management personnel participate in periodic meetings conducted by the
Franchisor focusing on marketing, new products and other aspects of business
management.
The Company has an Area Director who oversees and supervises the operations
of each of the Company's Pizza Restaurants, providing ongoing guidance and
assistance to managers as necessary. Additionally, field-service supervisors of
the Franchisor periodically visit and inspect the operations of the Pizza
Restaurants to assure compliance with the quality, service and other standards
imposed by the Franchisor.
Purchasing
Daily Grill and Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill and Grill restaurants. In
order to assure quality and consistency at each of the Daily Grill and Grill
restaurants, ingredients approved for the recipes are ordered on a unit basis by
each restaurant's head chef from a supplier designated by the Company's Vice
President-Executive Chef. Because of the emphasis on cooking from scratch,
virtually all food items are purchased "fresh" rather than frozen or pre-cooked,
with the exception being bread, which is ordered from a central supplier which
prepares the bread according to a proprietary recipe and delivers daily to
assure freshness. In order to reduce food preparation time and labor costs while
maintaining consistency, the Company is working with outside suppliers to
produce a limited number of selected proprietary items such as salad dressings
and seasoning combinations.
11
The Company utilizes its point-of-sale computer system to monitor inventory
levels and sales, then orders food ingredients daily based on such levels. The
Company employs contract purchasing in order to lock in food prices and reduce
short term exposure to price increases. The Company's Vice President - Executive
Chef establishes general purchasing policies and is responsible for controlling
the price and quality of all ingredients. The Vice President - Executive Chef,
in conjunction with the Company's team of chefs, constantly monitors the
quality, freshness and cost of all food ingredients. All essential food and
beverage products are available, or upon short notice can be made available,
from alternative qualified suppliers.
Advertising and Marketing
Daily Grill and Grill. The Company has historically relied primarily on
reputation, local reviews and word of mouth to promote its Daily Grill and Grill
restaurants. Daily Grill and Grill restaurants have been featured in articles
and reviews in numerous local as well as national publications. The Company
supplements its reputation with a program of marketing and public relations
activities designed to keep the Daily Grill and Grill name before the public.
Such activities include media advertising, participating in local charity events
and providing a location and refreshments for meetings of charity organizations.
During 2000, expenditures for advertising and promotion were approximately 1.8%
of gross revenues.
Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."
The Company budgets an average of 3% of Pizza Restaurant sales annually for
advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers.
Competition
The Daily Grill restaurants compete within the rapidly growing mid-price,
full-service casual dining segment. Daily Grill competitors include national and
regional chains, such as Cheesecake Factory and Houston's, as well as local
owner-operated restaurants. Grill restaurants compete within the fine dining
segment. Grill competitors include a limited number of national fine dining
chains as well as selected local owner-operated fine dining establishments. The
primary competitors to the Company's Pizza Restaurants are casual theme
restaurant chains including Friday's and the Olive Garden. Competition for the
Company's hotel based restaurants is primarily limited to restaurants within the
immediate proximity of the hotel.
The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. The
Company believes that its ability to compete effectively will continue to depend
in large measure on its ability to offer a diverse selection of high quality,
fresh food products with an attractive price/value relationship served in a
friendly atmosphere.
Management believes that its affiliation with, and operation under the name
of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enable the Company to compete effectively with other local and national-chain
restaurants.
Employees
The Company and its subsidiaries employ approximately 1,400 people, 26 of
whom are corporate personnel and 100 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 65% are full-time employees, with the
remainder being part-time employees.
12
With the exception of the Chicago Grill on The Alley, none of the Company's
employees are represented by labor unions or are subject to collective
bargaining or other similar agreements. Management believes that its employee
relations are good at the present time.
Trademarks and Service Marks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "Satisfaction Served Daily,"
"Think Daily," "Daily Grind" and other marks with the United States Patent and
Trademark Office as service marks for restaurant service, and has secured
California state registration of such marks. The Company's policy is to pursue
registration of its marks and to oppose strenuously any infringement.
Pursuant to the Franchise Agreements, the Company's Pizza Restaurants
operate under the "Pizzeria Uno" trademark and service marks. The Franchisor has
undertaken to keep in place and renew, as necessary, its trademark registrations
and to vigorously oppose any infringements of its marks.
Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurants are located. Difficulties or failures in
obtaining or renewing the required licenses or approvals could result in
temporary or permanent closure of the Company's restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leaves of absence and mandated health benefits, or increased
tax reporting requirements for employees who receive gratuities, could be
detrimental to the economic viability of the Company's restaurants. Management
is not aware of any environmental regulations that have had a material effect on
the Company to date.
ITEM 2. PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant and
certain properties which may be operated pursuant to management arrangements or
partnership or joint venture arrangements, all of the Company's restaurants are
located in space leased from parties unaffiliated with the Company. The leases
have initial terms ranging from 10 to 25 years, with varying renewal options on
all but one of such leases. Each of the leases provides for a base rent plus
payment of real estate taxes, insurance and other expenses, plus additional
percentage rents based on revenues of the restaurant. See "Description of
Business."
13
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by a director of the Company,
Robert L. Wechsler. The Grill restaurant in San Jose is located in space leased
from a hotel management company which may be deemed to be controlled by Lew
Wolff who may also be deemed to be an affiliate of the Company as a result of
his holdings of common stock and securities convertible into or exercisable to
acquire common stock of the Company.
The Company's executive offices are located in 3,300 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party pursuant to a lease expiring in January 2002.
Management believes that the Company's existing restaurant and executive
office space is adequate to support current operations. The Company intends to
lease, from time to time, such additional office space and restaurant sites as
management deems necessary to support its future growth plans.
ITEM 3. LEGAL PROCEEDINGS
Restaurants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of which the Company expects to be
covered by its general liability insurance. However, punitive damages awards are
not covered by general liability insurance. Punitive damages are routinely
claimed in litigation actions against the Company. No material causes of action
are presently pending against the Company. However, there can be no assurance
that punitive damages will not be given with respect to any actions which may
arise in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The following table sets forth the high and low bid price per share for
the Company's common stock for each quarterly period during the last two fiscal
years, adjusted to reflect a 1-for-4 reverse stock split effective August 9,
2000:
High Low
------ ------
1999 - First Quarter 4.375 3.5
Second Quarter 3.875 2.75
Third Quarter 3.125 1.656
Fourth Quarter 2 1.219
2000 - First Quarter 1.812 1.281
Second Quarter 1.968 1.000
Third Quarter 2.125 1.234
Fourth Quarter 3.750 1.375
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 20, 2001, the closing bid price of the Common Stock was $2.063.
As of March 20, 2001, there were approximately 412 holders of record of the
Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein.
Fiscal Year Ended December
---------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands except per share data)
Statement of Operations Data:
Sales................................ $ 22,744 $ 28,901 $ 34,464 $ 38,432 $ 44,597
Management and license fees.......... - - 444 544 1,078
------ ------ ------ ------ -------
Total revenues....................... 22,744 28,901 34,908 38,976 45,676
------ ------ ------ ------ -------
Gross profit......................... 16,534 20,981 25,234 28,090 32,674
Operating expenses:
Restaurant operating expenses...... 13,970 17,446 21,321 23,426 27,201
General and administration......... 2,172 2,648 2,755 3,296 3,303
Depreciation and amortization...... 827 948 1,137 1,196 1,334
Amortization of preopening costs... 40 337 175 54 330
Unusual charges.................... 2,052 - 964 - 73
------ ------ ------ ------ -------
Total................................ 19,061 21,380 26,352 27,972 32,241
------ ------ ------ ------ -------
Income (loss) from operations........ (2,528) (399) (1,118) 118 433
Interest income (expense), net....... (86) (166) (231) (376) (478)
Nonrecurring gain (costs)............ (231) 93 - - -
------ ------ ------ ------ -------
Income (loss) before taxes, minority interest,
equity in loss of joint venture and
cumulative effective
of change in accounting principle.. (2,845) (472) (1,349) (258) (45)
Provision for income taxes........... (8) (5) (10) (6) (14)
Equity in loss of joint venture...... - - - (74) (9)
Minority interests................... - - 122 (68) 103
Cumulative effect of change in
accounting principle............... - - (70) - -
------- ------ ------ ------ -------
Net income (loss).................... $ (2,853) $ (477) $ (1,307) $ (406) $ 34
======= ====== ======= ====== =======
Preferred dividends accrued or paid.. - (69) (85) (50) (50)
Accounting deemed dividends.......... - (211) (83) - -
------- ------- ------- ------ -------
Net income (loss) applicable to
common stock........................ $ (2,853) $ (757) $ (1,475) $ (456) $ (16)
======= ======= ======= ====== =======
Net income (loss) per share (1):
Basic............................... $ (0.83) $ (0.13) $ (0.33) $ (0.10) $ 0.01
Preferred stock:
Dividends........................ - (0.02) (0.02) (0.01) (0.01)
Accounting deemed dividends...... - (0.05) (0.02) (0.00) (0.00)
------- ------- ------- ------ -------
Basic net income (loss) applicable
to common stock.................... $ (0.83) $ (0.20) $ (0.37) $ (0.11) $ 0.00
======= ======= ======= ====== =======
Weighted average shares outstanding.. 3,426,472 3,773,560 3,972,256 4,003,738 4,104,360
========= ========== ========== ========== ==========
14
Balance Sheet Data:
Working capital (deficit)............ $ (1,199) $ (1,223) $ (2,300) $ (3,685) $ (2,757)
Total assets......................... 8,082 9,011 11,387 11,288 12,534
Long-term debt, less
current portion.................... 1,031 699 2,928 2,033 2,408
Stockholders' equity................. 4,202 5,183 3,867 3,461 3,495
(1) All per share amounts and weighted average shares outstanding have been
adjusted to reflect a 1-for-4 reverse stock split effective August 9, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 24 of this Form 10-K.
General
During the fiscal year ended December 31, 2000, the Company owned and
operated a total of 16 restaurants and managed or licensed 5 additional
restaurants, consisting of 10 Daily Grill restaurants, 3 Pizzeria Uno
restaurants (one was closed in July 2000) and 3 The Grill on the Alley
restaurants which are owned and operated by the Company, 2 Daily Grill
restaurants and a City Bar & Grill restaurant which are managed by the Company
and 2 Daily Grill restaurants which are licensed by the Company. During the
fiscal year ended December 26, 1999, the Company owned and operated a total of
15 restaurants and managed or licensed 4 additional restaurants, consisting of
10 Daily Grill restaurants, 3 Pizzeria Uno restaurants and 2 The Grill on the
Alley restaurants which are owned and operated by the Company, 2 Daily Grill
restaurants and a City Bar & Grill restaurant which are managed by the Company
and one Daily Grill restaurant which was licensed by the Company. During fiscal
1998, the Company operated a total of 14 restaurants, consisting of 9 Daily
Grill restaurants, 3 Pizzeria Uno restaurants, one Grill and Rhino Chasers. See
"Description of Business."
Fiscal 2000 operating results include a full year of operations and
management fees from the Georgetown Inn Daily Grill restaurant (compared to 39
weeks of operations in 1999) and the Universal CityWalk Daily Grill (compared to
25 weeks of operations in 1999) 29 weeks of operations of the Chicago Grill
restaurant, and 12 weeks of operations at the Daily Grill in Skokie, Illinois.
The Pizzeria Uno restaurant in Media, Pennsylvania was closed in July 2000 and
revenues from that restaurant terminated at that date.
Fiscal 1999 operating results include a full year of operations from the
Tyson's Corner Daily Grill and the San Jose Fairmont Grill and a full year of
management fees from the Burbank Hilton Daily Grill, each of which opened in
1998, 39 weeks of management fees from the Georgetown Inn Daily Grill, 25 weeks
of management fees from the Universal CityWalk Daily Grill and no management
fees from the Salt Lake City Hilton Daily Grill. The Salt Lake City Daily Grill
was closed in November 1999 and management fees on that restaurant terminated at
that date.
Fiscal 1998 operating results include eleven weeks of operations at the
Company's Tysons Corner Daily Grill and thirty-four weeks of operations at the
San Jose Fairmont Grill and 32 weeks of management fees from the restaurant
which became the Burbank Hilton Daily Grill. The Company sold its interest in
the LAX Daily Grill and Rhino Chasers in April of 1998.
The Company accounts for its interest in the Universal CityWalk Daily Grill
and, prior to their sale, accounted for its interest in the LAX Daily Grill
using the equity method. All other owned restaurants are consolidated with
minority interest being reflected in the San Jose Fairmont Grill and The Chicago
Grill on the Alley.
Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 75% of combined 2000 sales
were food and 25% were beverage. Sales revenues from restaurant operations are
primarily influenced by the number of restaurants in operation at any time, the
timing of the opening of such restaurants and the sales volumes of each
restaurant.
15
The Company's expenses are comprised primarily of cost of food and
beverages and restaurant operating expenses, including payroll, rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. Restaurant operating expenses consist primarily of wages
paid to part-time and full-time employees, rent, utilities, insurance and taxes.
In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreements, the Company pays a continuing license fee
with respect to each of its Pizza Restaurants, an advertising fee and is
required to expend certain minimum amounts on local advertising and promotion.
See "Description of Business - The Pizza Restaurants -- The Franchise
Agreements."
In connection with acquisition of the Grill during 1996, the Company
capitalized $246,000 of goodwill which is being amortized over a thirty year
period. As this item involves the payment of certain amounts in advance and the
expensing of such amounts in subsequent years, the Company's operating results
reflect amortization expense which does not affect the Company's operating cash
flows.
Consistent with practices in the restaurant industry, the Company
historically deferred its restaurant preopening costs and amortized those costs
over a twelve month period following the opening of the respective restaurant.
In April 1998, The American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities." The SOP required entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. The
SOP is effective for the fiscal years beginning after December 15, 1998, with
earlier adoption encouraged. The Company adopted the SOP during 1998 resulting
in a one-time charge against earnings during fiscal 1998 of $70,000. Excluding
the one-time cumulative effect, the adoption of the new accounting standard
impacted the Company's reported results for fiscal 1998 by $513,000, or $0.13
per basic share.
In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers and clerical personnel, rent,
legal and accounting costs, travel, insurance and various office expenses.
16
Results of Operations
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1998, 1999 and 2000:
Fiscal Year Ended December
--------------------------
1998 1999 2000
---- ---- ----
Sales revenues 98.7% 98.6% 97.6%
Management and licensing fees 1.3 1.4 2.4
-------- --------- ---------
Total revenues 100.0 100.0 100.0
Cost of sales 27.7 27.9 28.5
-------- --------- ---------
Gross profit 72.3 72.1 71.5
-------- --------- ---------
Restaurant operating expense 61.1 60.1 59.6
General and administrative expense 7.9 8.5 7.2
Depreciation and amortization 3.8 3.1 2.9
Unusual charges 2.7 0.1 0.2
-------- --------- ---------
Total operating expenses 75.5 71.8 70.6
-------- --------- ---------
Operating income (loss) (3.2) 0.3 0.9
Interest expense, net (0.6) (1.0) (1.0)
--------- --------- ----------
Loss before income tax (3.8) (0.7) (0.1)
Provision for taxes (0.0) 0.0 (0.0)
Minority interest 0.3 (0.2) 0.2
Equity in loss of joint venture 0.0 (0.2) (0.0)
Cumulative effect of change in
accounting principle (0.2) 0.0 0.0
--------- ---------- ----------
Net income (loss) (3.7)% (1.0)% 0.1%
========== ========== ==========
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues. The Company's revenues for 2000 increased 17.2% to $45.7 million
from $39 million in 1999. Sales revenues increased 16% to $44.6 million in 2000
from $38.4 million in 1999. Management and license fee revenues increased to
$1,078,000 in 2000 from $544,000 in 1999. System-wide sales, including sales of
non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.3 million in 2000, an increase of 22.6% from $50.8
million in 1999.
Sales for Daily Grill restaurants increased by 8.1% from $26 million in
1999 to $28.1 million in 2000. The increase in sales revenues for the Daily
Grill restaurants from 1999 to 2000 was primarily attributable to an increase in
same store sales of 8.1% for restaurants open for 12 months in both 1999 and
2000. Weighted average weekly sales at the Daily Grill restaurants increased
6.1% from $55,545 in 1999 to $58,920 in 2000 and the additional week in 2000
contributed, on average, $530,000, or 2% of sales. Comparable restaurant sales
and weighted average weekly sales at the Daily Grill restaurants in 2000 were
positively affected by increased customer counts in all restaurants and a price
increase in October 2000.
Sales for Grill restaurants increased by 63.8% from $7.4 million in 1999 to
$12.2 million in 2000. The increase in sales revenues for the Grill restaurants
from 1999 to 2000 was primarily attributable to (1) the opening of the Chicago
Grill in June 2000, and (2) an increase in same store sales of 16.1% at the
Grill restaurants which were open for 12 months in both 1999 and 2000. Weighted
average weekly sales at the Grill restaurants increased 25.2% from $71,450 in
1999 to $89,476 in 2000. Comparable restaurant sales and weighted average weekly
sales at the Grill restaurants in 2000 were positively affected by the maturing
of the San Jose Grill, now in its third year of operation, and increased
customer counts at The Grill in Beverly Hills.
17
Sales for the Pizza Restaurants decreased by 13.6% from $5.0 million in
1999 to $4.3 million in 2000. The decrease in sales revenues for the Pizza
Restaurants from 1999 to 2000 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, Pennsylvania and (2) a 0.2% decline
in same store sales. Weighted average weekly sales at the Pizza Restaurants
decreased 0.2% from $32,100 in 1999 to $32,000 in 2000. Management has
determined that continued ownership and operation of the Pizza Restaurants does
not fit with the Company's strategic growth plans. In October 2000, the Company
entered into an agreement to sell its Pizza Restaurant in South Plainfield, New
Jersey for $700,000. The Company is also seeking a suitable buyer for its Pizza
Restaurant in Cherry Hill, New Jersey.
Price increases were last implemented during the fourth quarter of 2000 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
Management and license fee revenues during 2000 were attributable to (1)
hotel restaurant management services which accounted for $750,000 of management
fees, and (2) licensing fees from the LAX Daily Grill and Skokie, Illinois Daily
Grill which totaled $148,000 and (3) $122,000 in fees from Universal CityWalk.
The increase in management fees during 2000 was attributable to (1) management
of the Georgetown Inn Daily Grill for all of 2000 as compared to 39 weeks during
1999, and (2) management of the Universal CityWalk Daily Grill for all of 2000
as compared to 25 weeks in 1999.
The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.2 million during 2000 as compared to $1.1 million during 1999.
Cost of Sales and Gross Profit. While sales revenues increased by 16.0 %
($6.2 million) in 2000 as compared to 1999, cost of sales increased by 19.4%
($2.1 million) and increased as a percentage of sales from 27.9% in 1999 to
28.5% in 2000. The increase in cost of sales as a percentage of sales revenues
was attributable to the additional Grill restaurant and the 16.1% same store
increase for the Grills, which typically have a higher cost of sales than Daily
Grills.
Gross profit increased 16.3% from $28.1 million (72.1% of sales) in 1999 to
$32.7 million (71.5% of sales) in 2000.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, preopening costs, and unusual charges, rose 15.3%
to $32.2 million in 2000 (representing 70.6% of revenues) from $28.0 million in
1999 (representing 71.8% of sales).
Restaurant operating expenses increased 16.1% to $27.2 million in 2000 from
$23.4 million in 1999. As a percentage of sales, restaurant operating expenses
represented 59.6% in 2000 as compared to 60.1% in 1999. The increase in
restaurant operating expenses followed the 16% sales increase for the Company
and resulted from the additional costs of opening the Chicago Grill, offset by
the spreading of fixed costs over the significant same store sales increases
experienced in the Daily Grills and the Grill restaurant same stores.
General and administrative expenses were flat at $3.3 million in 2000 and
1999. General and administrative expenses represented 7.2% of sales in 2000 as
compared to 8.5% of sales in 1999. While these expenses in total were nearly
equal, there were increases of approximately $120,000 in legal expense relating
to establishment of new credit facilities, efforts to sell the Pizza restaurants
and certain litigation, offset by decreases in other expenses such as,
restaurant management hiring and training.
18
Depreciation and amortization expense was $1.3 million during 2000 as
compared to $1.2 million during 1999. The increase in depreciation and
amortization expense reflects the opening of the Chicago Grill in June 2000
offset by a reduction in this expense in the older Daily Grill restaurants.
Preopening costs totaled $330,000 in 2000 as compared with $54,000 in 1999.
These pre-opening costs were attributable to the opening in 2000 of the Chicago
Grill.
Unusual charges totaling $73,000 in 2000 related to the costs of closing
the Media Pizza Restaurant. The Company reported no unusual charges in 1999.
Interest Expense. Interest expense, net, totaled $478,000 during 2000 as
compared to $376,000 in 1999. The increase in interest expense was primarily
attributable to the added debt for the Chicago Grill plus a slight increase in
interest rates on bank debt.
Minority Interest and Equity in Loss of Joint Venture. The Company reported
a minority interest in the loss of its majority owned subsidiaries of $103,000
during 2000, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $114,000 and a minority interest in the loss of Chicago -
The Grill on the Alley LLC of $217,000. For the year ending December 26, 1999
the Company recorded a minority interest in the earnings of San Jose Grill on
the Alley, LLC of $68,000.
The Company recorded equity in loss of joint venture of $9,000 in 2000 and
$74,000 in 1999 which is primarily attributable to the preopening costs incurred
in 1999 related to the Universal CityWalk Daily Grill.
The Company reported net income of $34,000 in 2000 as compared to a net
loss of $406,000 for 1999.
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenues. The Company's revenues for 1999 increased 11.7% to $39.0 million
from $34.9 million in 1998. Sales revenues increased 11.3% to $ 38.4 million in
1999 from $34.5 million in 1998. Management and license fee revenues increased
to $ 544,000 in 1999 from $444,000 in 1998.
Sales for Daily Grill restaurants increased by 11.1% from $23.4 million in
1998 to $26.0 million in 1999. The increase in sales revenues for the Daily
Grill restaurants from 1998 to 1999 was primarily attributable to (1) the
operation of the Tysons Corner Daily for the full year in 1999 as compared to
eleven weeks during 1998 ($0.6 million), and (2) an increase in same store sales
of 1.1% for restaurants open for 12 months in both 1998 and 1999. Weighted
average weekly sales at the Daily Grill restaurants increased 1.1% from $54,900
in 1998 to $55,545 in 1999. Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 1999 were positively affected by
a significant increase in sales at the Palm Desert restaurant.
Sales for Grill restaurants increased by 25.4% from $5.9 million in 1998 to
$7.4 million in 1999. The increase in sales revenues for the Grill restaurants
from 1998 to 1999 was primarily attributable to (1) the operation of the San
Jose Fairmont Grill for the full year in 1999 as compared to thirty-four weeks
during 1998 ($2.4 million), and (2) an increase in same store sales of 4.7% at
the one Grill restaurant which was open for 12 months in both 1998 and 1999.
Weighted average weekly sales at the Grill restaurants increased 3.7% from
$68,900 in 1998 to $71,450 in 1999. Comparable restaurant sales and weighted
average weekly sales at the Grill restaurants in 1999 were positively affected
by increased customer counts.
Sales for the Pizza Restaurants decreased by 2.0% from $5.1 million in 1998
to $5.0 million in 1999. The decrease in sales revenues for the Pizza
Restaurants from 1998 to 1999 was attributable to a decrease in same store
sales. Weighted average weekly sales at the Pizza Restaurants decreased 2.1%
from $32,800 in 1998 to $32,100 in 1999. Comparable restaurant sales and
weighted average weekly sales at the Pizza Restaurants in 1999 were negatively
affected by (1) several restaurant days lost because restaurants were closed due
to severe weather and (2) a large decrease at the Media, Pennsylvania
restaurant.
19
Price increases were last implemented during the second quarter of 1998 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
Management and license fee revenues during 1999 were attributable to (1)
the commencement of hotel restaurant management services during the second
quarter of 1998 which accounted for $432,000 of management fees in 1999 and
$186,000 of management fees in 1998, and (2) licensing fees from the LAX Daily
Grill which totaled $112,000 in 1999 and gain from the sale of the Company's
interest in the LAX Daily Grill and licensing fees from the LAX Daily Grill
which totaled $258,000 in 1998. The increase in management fees during 1999 was
attributable to (1) management of the Burbank Daily Grill for all of 1999 as
compared to 33 weeks during 1998, (2) management of the Georgetown Inn Daily
Grill for 39 weeks during 1999, (3) management of the Salt Lake City Hilton
Daily Grill for 37 weeks during 1999 (this restaurant was closed and management
fees terminated in November 1999), (4) management fees from operation of the
Universal CityWalk Daily Grill for 25 weeks during 1999, and (5) management of
the City Grill restaurant for all of 1999 as compared to 33 weeks during 1998.
The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues from the Universal CityWalk Daily
Grill were $1,140,000 during 1999.
Cost of Sales and Gross Profit. While sales revenues increased by 11.5%
($3.9 million) in 1999 as compared to 1998, cost of sales increased by 12.5%
($1.2 million) and increased as a percentage of sales from 27.7% in 1998 to
27.9% in 1999. The increase in cost of sales as a percentage of sales revenues
was attributable to the additional Grill restaurant, which typically have a
higher cost of sales than Daily Grills.
Gross profit increased 11.5% from $25.2 million (72.3% of sales) in 1998 to
$28.1 million (72.1% of sales) in 1999.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense and
depreciation and amortization, rose 6.1% to $28.0 million in 1999 (representing
71.8% of revenues) from $26.4 million in 1998 (representing 75.5% of sales).
Restaurant operating expenses increased 9.9% to $23.4 million in 1999 from
$21.3 million in 1998. As a percentage of sales, restaurant operating expenses
represented 60.1% in 1999 as compared to 61.1% in 1998. The increase in
restaurant operating expenses was primarily attributable to (1) an increase in
labor cost and (2) occupancy cost associated with new restaurants during 1998
and 1999. The decrease in restaurant operating expenses as a percentage of sales
was primarily attributable to lower percentage in the Grill restaurants.
Restaurant labor wage rates decreased during 1999, with total restaurant labor
costs representing 32.3% of sales revenues during 1999 as compared to 34.3% of
sales revenues during 1998. The decrease in restaurant labor costs as a
percentage of sales revenues was primarily attributable to lower labor costs in
the Grill restaurants due to higher per customer sales. Occupancy costs,
consisting principally of rent expense, increased by 7.1% from $2.8 million in
1998 to $3.0 million in 1999, or 7.8% of sales revenues in 1999 as compared to
8% of sales revenues in 1998. The decrease in occupancy costs as a percentage of
sales revenues was primarily attributable to a very favorable rental cost at the
San Jose Grill.
General and administrative expenses increased 17.9% to $3.3 million in 1999
from $2.8 million in 1998. General and administrative expenses represented 8.5%
of sales in 1999 as compared to 7.9% of sales in 1998. The increase in total
general and administrative expenses was primarily attributable to the addition
of corporate office personnel and related costs to support expansion. The
increase in this category reflects the higher cost for additional restaurants,
some of which are not included in consolidated sales.
20
Depreciation and amortization expense, including amortization of
pre-opening expense, was $1.2 million during 1999 as compared to $1.3 million
during 1998. The decrease in depreciation and amortization expense reflects the
operation of three additional restaurants during part of 1998 and all of 1999
offset by a reduction in this expense in the older Daily Grill restaurants.
Also, depreciation and amortization expense during 1998 included the
amortization of pre-opening costs in the amount of $176,000 associated with the
opening of the San Jose Grill during May of 1998 and the Tysons Corner Daily
Grill during October of 1998.
Unusual Charges, Other Income and Expenses, Minority Interest, Equity in
Loss of Joint Venture, Effect of Change in Accounting Principle and Net Income.
The Company reported unusual charges totaling $964,000 during 1998 relating to
the Company's early adoption of SOP 98-5 ($513,000) and the write-off of fixed
assets ($451,000) of two restaurants due to negative projected cash flows from
those restaurants. The Company incurred no similar charges during 1999.
As noted, in addition to the unusual charge of $513,000 during 1998
relating to the incremental impact of early adoption of SOP 98-5, the Company
reported a $70,000 charge reflecting the cumulative effect of a change in
accounting principle as a result of the early adoption of SOP 98-5.
Net interest expense increased by approximately $145,000 reflecting higher
average borrowing during the year attributable to the opening of the San Jose
Fairmont Grill and the Tysons Corner Daily Grill, offset by interest earned on
funds provided to be used in connection with the scheduled opening of the
Chicago Westin Grill during 2000.
The Company reported a minority interest in the earnings of its majority
owned subsidiaries (San Jose Grill on the Alley, LLC and Chicago - The Grill on
the Alley LLC) of $68,000 during 1999. For the year ending December 27, 1998 the
Company recorded a minority interest in the loss of its subsidiary of $121,000
attributable to the minority interest in the San Jose Grill which commenced
operations in May of 1998.
The Company recorded equity in loss of joint venture of $74,000 which is
primarily attributable to the preopening costs incurred related to the Universal
CityWalk Daily Grill.
The Company reported a net loss of $406,000 during 1999 as compared to a
net loss of $1,307,000 for 1998. In accordance with the position of the
Securities and Exchange Commission relating to accounting for Preferred Stock
which is convertible into common stock at a discount from the market price of
the common stock, the Company reported a "deemed dividend" of approximately
$83,000 during 1998. The "deemed dividend", which relates to the Company's
issuance of convertible preferred stock during 1997, is a non-cash,
non-recurring accounting entry for determining income (loss) applicable to
common stock. After giving effect to preferred stock dividends ($85,000 during
1998) and the "deemed dividend", the net loss attributable to common stock was
$456,000 for fiscal 1999 and $1,475,000 for fiscal 1998.
Liquidity and Capital Resources
At December 31, 2000, the Company had a working capital deficit of $2.7
million and a cash balance of $0.6 million as compared to a working capital
deficit of $3.7 million and a cash balance of $0.4 million at December 26, 1999.
The variance in the Company's working capital and cash was primarily
attributable to the pay down in the Company's line of credit of $0.8 million and
the reduction in other current debt of $0.1 million, resulting from a
refinancing of debt and cash flow from operations.
The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new 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 and preferred stock, loans and
tenant allowances from certain of its landlords, and, beginning in 1999, through
joint venture arrangements. At December 31, 2000, the Company had existing bank
borrowing of $1.2 million, a loan from a member of Chicago - The Grill on the
Alley, LLC of $0.5 million, loans from private investors of $0.4 million, an SBA
loan of $0.1 million, loans from stockholders/officers of $0.2 million,
equipment loans of $1.4 million, and loans/advances from a landlord of $0.1
million.
21
On August 1, 2000, the Company received a $400,000 loan from private
individuals. The loan bears interest at 9% and is payable in monthly
installments over four years. In connection with the loan, the Company issued
40,000 warrants.
At December 31, 2000, the Company had a bank credit facility of $1.5
million consisting of a $0.3 million revolving line of credit and a $1.2 million
term loan payable. Interest is payable at the bank's prime rate, which was 9.5%
at December 31, 2000. In connection with the Credit Facility the Company is
required to comply with certain debt service coverage and liquidity
requirements. Two of the Company's principal stockholders have guaranteed the
Credit Facility. In exchange for the guarantee, the Company issued warrants to
purchase 150,000 shares at an exercise price of $1.406 per share exercisable for
a period of four years and agreed to pay each of the stockholders interest of 2%
per annum on the average annual balance on the note payable to the bank for
guaranteeing the note. At December 31, 2000, the Company had utilized $100,000
of its available line of credit. The line of credit matures in August 2001. The
term loan is payable in 48 installments over 4 years.
During 2000, the Company and its subsidiaries were obligated under 16
leases covering the premises in which the Company's Daily Grill, Grill and Pizza
Restaurants are located as well as leases on its executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $2.6 million in 2000, with varying escalation and percentage rent
clauses in each of the restaurant leases. Minimum rental payments during 2001 on
existing leases as of December 31, 2000, total $2.3 million.
The Company currently expects to open one restaurant in 2001, in San
Francisco, and is currently negotiating for two additional locations, which
would open in 2001 or 2002. Cost of opening the Handlery Hotel Daily Grill in
San Francisco is estimated at $2.8 million, of which the Company expects to pay
approximately $250,000, with the balance being paid by the hotel. 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 which will cause the cost to the Company of opening such
restaurants to be less than the Company's cost to build and open non-hotel based
restaurants.
Capital expenditures were $3.8 million in 1998, $1.1 million in 1999 and
$2.3 million in 2000. Capital expenditures in fiscal 2001 are expected to be
between $1.0 million and $1.5 million, primarily for the development of new
restaurants, capital replacements and refurbishing for existing restaurants. The
amount of actual capital expenditures will be dependent upon, among other
things, the proportion of free standing versus hotel based properties as hotel
based restaurants are expected to generally require lower capital investment on
the Company's part. In addition, if the Company opens more, or less, restaurants
than it currently anticipates, its capital requirements will increase, or
decrease, accordingly.
In order to finance restaurant openings during 1997 and 1998, the Company
conducted an offering of common stock, convertible preferred stock and warrants
during 1997 and entered into a joint operating arrangement and loan in 1998.
The 1997 offering provided net proceeds to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred Stock,
500 shares of Series II 10% Convertible Preferred Stock, 187,500 five year $8.00
Warrants and 187,500 five year $12.00 Warrants. The aggregate sales price of
those securities was $1,500,000.
The Series I Convertible Preferred Stock was converted into 200,000 shares
of common stock in July 2000.
The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $4.00
per share, or (ii) 75% of the average closing price of the Company's common
stock for the five trading days immediately prior to the date of conversion;
provided, however, that the conversion price shall in no event exceed $10.00 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or redemption in
cash or, at the Company's option, in common stock at the then applicable
conversion price. The Series II Convertible Preferred Stock is subject to
redemption, in whole or in part, at the option of the Company on or after the
second anniversary of issuance at $1,000 per share.
22
The $8.00 Warrants are exercisable to purchase common stock at a price of
$8.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance.
The $12.00 Warrants are exercisable to purchase common stock at a price of
$12.00 per share commencing three years from the date of issuance and ending
five years from the date of issuance.
In February of 1999, the Company entered into a limited liability
company/member loan arrangement to provide financing for the planned opening of
a Grill restaurant at the Chicago Westin Hotel which opened June of 2000.
Pursuant to the financing arrangement for the Chicago Westin Hotel Grill,
investor members of the limited liability company (the "Chicago LLC") invested
$1,000 in the Chicago LLC and loaned an additional $1.699 million to the Chicago
LLC. The Company manages the Chicago LLC for which it receives a management fee
of 5% of sales and owns a 60% interest in the Chicago LLC. The Company
guaranteed repayment of the loan to the Chicago LLC and issued warrants to
acquire 203,645 shares of common stock at $1.75 per share. The total cost to
construct the Chicago Grill was $2.5 million. The Chicago Grill opened in June
2000.
The Company may enter into investment/loan arrangements in the future on
terms similar to the Chicago Westin Grill arrangements to provide for the
funding of selected restaurants.
In September 2000, the Company opened a hotel-based licensed Daily Grill
restaurant at the Double Tree in Skokie, Illinois. All costs to build and open
the restaurant were paid by the hotel operator.
Management believes that the Company has adequate resources on hand and
operating cash flow to sustain operations for at least the following 12 months.
In order to fund the opening of additional restaurants, the Company will
require, and intends to raise, additional capital, 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. See "Description of Business -- Business Expansion" and "Management's
Discussion and Analysis -- Certain Factors Affecting Future Operating Results."
Certain Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: adverse weather conditions and
other conditions affecting agricultural output which may cause shortages of key
food ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at the Company's
restaurants; the dependence on key personnel and ability to attract and retain
qualified management and restaurant personnel to support existing operations and
future growth; regulatory developments, particularly relating to labor matters
(i.e., minimum wage, health insurance and other benefit requirements), health
and safety conditions, service of alcoholic beverages and taxation, which could
increase the cost of restaurant operations; establishment of market position and
consumer acceptance in new markets in light of intense competition in the
restaurant industry and the geographic separation of senior management from such
markets; potential delays in securing sites for new restaurants and delays in
opening restaurants which may entail additional costs and lower revenues than
would otherwise exist in the absence of such delays; and the availability of
capital to fund future restaurant openings; rising energy costs and the
occurrence of rolling blackouts in California which may result in higher
occupancy costs and periodic restaurant closures which could adversely impact
revenues and earnings; and potential increases in meat prices, and corresponding
decreases in operating margins, as a result of quarantine and destruction of
livestock in Europe due to disease. In addition to the foregoing, the following
specific factors may affect the Company's future operating results.
The anticipated opening of additional Daily Grill and Grill locations is
expected to result in the incurrence of various pre-opening expenses and high
initial operating costs which may adversely impact earnings during the first
year of operations of such restaurants. However, management anticipates that
each of such operations can be operated profitably within the first year of
operations and that the opening of each of the restaurants presently
contemplated will improve revenues and profitability.
23
The Company closed its Media, Pennsylvania Pizza Restaurant in 2000 and, in
October 2000, entered into an agreement to sell its South Plainfield, New Jersey
Pizza Restaurant for $700,000. Sale of the South Plainfield Restaurant is
subject to certain contingencies.
Future Accounting Requirements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2001 as amended by SFAS No. 137
in June 1999. The Company does not believe that the new standard will have a
material impact on the Company's financial statements.
Impact of Inflation
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past two years.
A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws and various laws that allow for credits to
that wage. The Company's cost of operations have been affected by several
increases in the Federal and State minimum wage in recent years, including a
state minimum wage increase in California in January 2001. In addition, further
increases in the minimum wage are also being discussed by the federal and
various state governments. Although the Company has been able to and will
continue to attempt to pass along increases in costs through food and beverage
price increases, there can be no assurance that all such increases can be
reflected in its prices or that increased prices will be absorbed by customers
without diminishing, to some degree, customer spending at its restaurants.
ITEM 7A. 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 $1.5 million revolving credit and term
loan facility. Borrowings outstanding under the credit facility totaled $1.2
million at December 31, 2000. Borrowings under the credit facility bear interest
at the lender's prime rate .A hypothetical 1% interest rate change would not
have a material impact on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent accountants report thereon of PricewaterhouseCoopers, LLP, appears
herein. See Index to Financial Statements on F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such infor