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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 30, 2001
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3319172
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(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 ]
5,537,071 shares of common stock of the Registrant were outstanding as
of March 20, 2002. 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 $4,600,000.
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 30, 2001
are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS............................................... 1
ITEM 2. PROPERTIES............................................. 15
ITEM 3. LEGAL PROCEEDINGS...................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................ 16
ITEM 6. SELECTED FINANCIAL DATA................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK...................................... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 29
ITEM 11. EXECUTIVE COMPENSATION................................. 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................ 30
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 28 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 30, 2001, the Company owned and operated 15 restaurants and
managed or licensed 5 additional restaurants, consisting of 10 Daily Grill
restaurants, 4 The Grill on the Alley restaurants and 1 Pizzeria Uno restaurant
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 three 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 30, 2001 were solely owned
and operated on a non-franchise basis by the Company. The Pizzeria Uno
Restaurant was operated pursuant to franchise agreement.
During 2001, the Company (1) sold its Pizzeria Uno franchise in South
Plainfield, New Jersey and (2) opened The Grill on Hollywood in Hollywood,
California.
During 2001, 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. The Company entered into a
strategic alliance with Starwood Hotels and Resorts Worldwide, Inc. to jointly
develop the Company's restaurant properties in Starwood hotels. 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 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 2001 and 2000 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):
1
2000 2001
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year.................. 10 10
Restaurant openings................ - -
---- ----
End of year........................ 10 10
Managed Restaurants:
Beginning of year.................. 3 4
Restaurant openings................ 1 -
Restaurants closed or sold......... - -
----- ---
End of year........................ 4 4
Total Daily Grill restaurants:
Beginning of year.................. 13 14
Restaurant openings................ 1 -
Restaurants closed or sold......... - -
----- ----
End of year........................ 14 14
=== ===
Grill restaurants:
Company Restaurants:
Beginning of year.................. 2 3
Restaurant openings................ 1 1
--- ---
End of year........................ 3 4
Total Grill restaurants:
Beginning of year.................. 2 3
Restaurant openings................ 1 1
--- ---
End of year........................ 3 4
=== ===
Other restaurants1:
Company Restaurants:
Beginning of year.................. 3 2
Restaurants closed or sold......... (1) (1)
----- ---
End of year........................ 2 1
Managed or Licensed Restaurants:
Beginning of year.................. 1 1
Restaurants closed or sold......... - -
------ ----
End of year........................ 1 1
Total Other restaurants:
Beginning of year.................. 4 3
Restaurants closed or sold......... (1) (1)
---- ----
End of year........................ 3 2
==== ===
Total restaurants:
Beginning of year.................. 19 20
Restaurant openings................ 2 1
Restaurants closed or sold......... (1) (1)
---- ----
End of year........................ 20 20
==== ===
1 Includes two Pizzeria Uno Restaurants in 2000, and one Pizzeria Uno
Restaurant in 2001, operated by the Company pursuant to franchise
agreements.
2
2000 2001
---- ----
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants.................... $ 58,920 $ 60,041
Managed Restaurants.................... n.a. n.a.
Grill restaurants:
Company Restaurants.................... $ 89,476 $ 88,965
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... $ 32,029 $ 34,340
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants.................... 8.1% -%
Managed Restaurants.................... n.a. n.a.
Grill restaurants
Company Restaurants.................... 25.2% (4.6)%
Managed Restaurants.................... n.a. n.a.
Other restaurants:
Company Restaurants.................... (0.2)% (4.6%)
Total system sales:
Daily Grill.............................. $ 28,104,683 $ 28,099,091
Grill.................................... 12,168,746 13,713,816
Pizza Restaurants........................ 4,323,920 2,715,691
Management and license fees.............. 1,078,272 872,562
------------ ------------
Total consolidated revenues.............. $ 45,675,621 $ 45,401,160
============ ============
Managed restaurants ................... 11,150,362 10,488,301
Licensed restaurants................... 6,575,461 7,392,052
Less: management and license fees...... (1,078,272) (872,562)
------------ ------------
Total system sales....................... $ 62,323,172 $ 62,408,951
============ ============
Restaurant Concepts
- - Daily Grill Restaurants
Background. At December 30, 2001, 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 30, 2001, 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.
3
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:
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 Hotel) September 2000 Licensed
San Francisco, California (Handlery Union Square Hotel) February 2002 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.
4
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.
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 $16.00 per
person and the average dinner check is $24.00 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 30, 2001, 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".
Reservations are accepted but not required.
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 at the Daily Grills which have been open for over a
year repeat business is significantly greater than the industry average, with
many guests becoming "regulars" in the tradition of the neighborhood restaurant.
5
The Grill on the Alley
Background. At December 30, 2001, the Company, through its subsidiary, GCI,
owned and operated four The Grill on the Alley restaurants ("Grill"), one in
Beverly Hills, California, one in San Jose, California, one in Chicago, Illinois
and the newest in Hollywood, California, named The Grill on Hollywood.
The original Grill is a fine dining 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 30, 2001, the Company operated four Grill
restaurants, two of which are non-hotel based facilities 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%
Hollywood, California November 2001 51.00%
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 Beverly Hills 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. The Hollywood based Grill restaurant is
approximately 5,600 square feet - of which approximately 2,000 square feet is
devoted to kitchen and service areas - and seats 200 persons.
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.
Because of the unique nature of Grill restaurants, the size, seating
capacity and opening costs of future sites cannot be reasonably estimated.
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.
6
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.
Entrees range in price from $11.95 for a hamburger to $34.50 for a Prime
Porterhouse Steak. The average lunch check is $26.00 per person and the average
dinner check is $60.00 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 30, 2001, 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 at the original Grill repeat business is significantly
greater than the industry average, with many guests becoming "regulars" in the
tradition of the neighborhood restaurant.
- - Pizzeria Uno Restaurant
Restaurant Site. At December 30, 2001, the Company, through its
wholly-owned subsidiary, operated a "Pizzeria Uno Restaurant & Bar" location in
Cherry Hill, New Jersey (the "Pizza Restaurant"). The Pizza Restaurant is
operated in accordance with certain guidelines established by, and with
managerial assistance from and training provided by, the Franchisor. See "-- The
Franchise Agreements" below.
7
The Pizza Restaurant is located in a suburban area in leased premises. The
Pizza Restaurant is approximately 7,900 square feet, including a bar and lounge
area, and has a seating capacity of 200 customers.
Menu and Food Preparation. The Pizza Restaurant offers 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 Restaurant also offers a variety of sandwiches,
hamburgers, appetizers, salads, desserts and beverages, including a full liquor
selection. All of the menu items offered by the Pizza Restaurant 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 Restaurant is characterized by a casual,
friendly and entertaining atmosphere, full and efficient service, and
high-quality menu items at moderate prices. The Pizza Restaurant employs four
full time managers and assistant managers and approximately 50 part-time and
full-time employees. The Pizza Restaurant is open from 11:00 a.m. to midnight,
seven days per week, except on Friday and Saturday when the Pizza Restaurant
remains open until 1:00 a.m.
The Franchise Agreement. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to a franchise agreement (the "Franchise Agreement") between the
Company or its subsidiary and the Uno Restaurant Group, a national operator and
franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreement, 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 Restaurant's location.
The Franchise Agreement has a term of 20 years with three successive ten-year
renewal periods at the option of the Company, provided that the agreement has
not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreement entitles 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 Agreement and the Manual are minimum insurance requirements,
non-competition 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 franchise. 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).
Sale and 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 July 2001, the Company sold 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
Restaurant, the Company, at December 30, 2001, 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 Hotel in Skokie,
Illinois.
8
- - 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. The Agreement was amended in November 2001
to defer one-half of the management fee for six months at which time repayment
would begin.
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 30% percent 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. Since January 1997, CA One Services has operated a Daily
Grill restaurant (the "LAX Daily Grill") in the International Terminal of the
Los Angeles International Airport. The LAX Daily Grill was originally operated
as a joint venture between the Company and CA One Services, and since April 1998
has been operated by CA One Services under a license agreement.
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.
Following the events of September 11, 2001, service at the LAX Daily Grill has
been scaled back.
Skokie Daily Grill. In September 2000, pursuant to the Hotel Property
Agreement (see below), a licensed Daily Grill restaurant was opened in the
DoubleTree Hotel 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.
In July 2001, in conjunction with an investment in the Company by Starwood
Hotels, the Hotel Property Agreement was amended to limit, for so long as the
Company is subject to the exclusivity provisions of a Property Development
Agreement with Starwood, the amounts payable to HRP to $400,000 annually plus
12.5% of the amounts otherwise payable to HRP with respect to the Burbank,
Georgetown and San Jose Hilton restaurants.
9
The Agreement with HRP also provides that, beginning in May 2004, the
Company shall have the right to acquire HRP and HRP shall have the right to
cause the Company to acquire HRP. The purchase price of HRP shall be computed by
(1) multiplying the operating income of HRP over the preceding twelve months,
excluding operating income attributable to certain defined restaurants, by ten,
(2) subtracting from the product the principal balance of loans made in
connection with the development of restaurants pursuant to the HRP Agreement,
and (3) multiplying that amount by 25%. The purchase price shall be payable in
common stock of the Company based on the average closing price of the common
stock over the ten trading days immediately preceding closing.
Pursuant to the July 2001 amendment to the Hotel Property Agreement, the
maximum purchase price of HRP will not exceed $4,500,000.
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 30, 2001, 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, 2002, 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 30, 2001, 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 opened in February
of 2002. 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.
10
Starwood Development Agreement
On July 27, 2001, in conjunction with the purchase by Starwood Hotels
and Resorts of 666,667 shares of the Company's common stock and 666,667 $2.00
warrants for $1,000,000, the Company and Starwood entered into a Development
Agreement under which the Company and Starwood agreed to jointly develop the
Company's restaurant properties in Starwood hotels.
Under the Starwood Development Agreement, either the Company or
Starwood may propose to develop a Daily Grill, Grill or City Bar and Grill
restaurant in a Starwood hotel property. If the parties agree in principal to
the development of a restaurant, the parties will attempt to negotiate either a
management agreement or a license agreement with respect to the operation of the
restaurant.
So long as Starwood continues to meet certain development thresholds
set forth in the Development Agreement, the Company is prohibited from
developing, managing, operating or licensing the Company's restaurants in any
hotel owned, managed or franchised by a person or entity, other than Starwood,
with more than 50 locations operated under a single brand. Existing hotel based
restaurants are excluded from the exclusive right of Starwood. The development
thresholds required to be satisfied to maintain Starwood's exclusive development
rights require, generally, (1) the signing of an average of one management
agreement or license agreement with respect to Daily Grill restaurants annually
over the life of the Development Agreement, (2) the signing of one management
agreement or license agreement in any two year period with respect to Grill
restaurants, and (3) the signing of an aggregate average of three management
agreements or license agreements with respect to all of the Company's
restaurants annually over the life of the Development Agreement. Satisfaction of
the thresholds set forth in the Development Agreement are determined on each
anniversary of the Development Agreement. With respect to satisfaction of the
specific thresholds applying to Daily Grill restaurants and Grill restaurants,
the failure to satisfy the development thresholds with respect to those
individual brands will terminate the exclusivity provisions relative to such
brand but will not effect the exclusivity rights as to the other brand or in
general.
Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common stock
equal to four percent of the outstanding shares upon the attainment of certain
development milestones. Such warrants are issuable upon execution of management
agreements and/or license agreements relating to the development and operation,
and the commencement of operation, of an aggregate of five, ten, fifteen and
twenty of the Company's branded restaurants. If the market price of the
Company's common stock on the date the warrants are to be issued is greater than
the market price on the date of the Development Agreement, the warrants will be
exercisable at a price equal to the greater of (1) 75% of the market price as of
the date such warrant becomes issuable, or (2) the market price on the date of
the Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price equal
to the market price as of the date such warrants become issuable. The warrants
will be exercisable for a period of five years.
In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement exceeds
35% of the total Daily Grill, Grill and City Grill-branded restaurants, the
Company will be obligated to issue to Starwood a warrant to purchase a number of
shares of the Company's common stock equal to 0.75% of the outstanding shares on
that date exercisable for a period of five years at a price equal to the market
price at that date. On each anniversary of that date at which the restaurants
operated under the Development Agreement continues to exceed the 35% threshold,
for so long as the Development Agreement remains effective, the Company shall
issue to Starwood additional warrants to purchase 0.75% of the outstanding
shares on that date at an exercise price equal to the market price on that date.
Following the events of September 11, 2001, Starwood has substantially
curtailed new development activities and no management agreements or license
agreements have, as yet, been entered into under the Development Agreement.
11
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 Director of Operations. 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.
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. Financial management and accounting policies and procedures are
developed and maintained by the Company's Corporate Controller, Director of
Information Systems, and Chief Financial Officer.
All managers participate in a comprehensive six 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.
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 Restaurant. The staff of the Company's Pizza Restaurant consists of
four managers and 48 hourly employees, most of whom are part-time employees.
All managers of the Pizza Restaurant 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 operation
of the Company's Pizza Restaurant, 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 Restaurant to assure
compliance with the quality, service and other standards imposed by the
Franchisor.
12
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-Operations and Development. 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, soups and seasoning combinations.
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 Director of Purchasing
establishes general purchasing policies and is responsible for controlling the
price and quality of all ingredients. The Vice President - Operations and
Development 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 2001, expenditures for advertising and promotion were approximately 1.1%
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 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.
13
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 1,328 people, 42 of
whom are corporate personnel and 102 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 40% are full-time employees, with the
remainder being part-time employees.
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 Restaurant
operates 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.
14
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."
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by a former 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 a director of the Company, 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 30, 2001.
15
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,
1999:
High Low
------ ------
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
2001 - First Quarter 3.344 1.938
Second Quarter 3.500 1.940
Third Quarter 2.900 1.500
Fourth Quarter 1.900 1.100
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 20, 2002, the closing bid price of the Common Stock was $1.32.
As of March 20, 2002, there were approximately 419 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.
16
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
----------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands except per share data)
Statement of Operations Data:
Sales................................ $ 28,901 $ 34,464 $ 38,432 $ 44,598 $ 44,529
Management and license fees.......... - 444 544 1,078 872
------------- ----------- --------- ---------- ----------
Total revenues....................... 28,901 34,908 38,976 45,676 45,401
------------- ----------- --------- ---------- ----------
Gross profit......................... 20,981 25,234 28,090 32,674 32,985
Operating expenses:
Restaurant operating expenses...... 17,446 21,321 23,426 27,201 27,063
General and administration......... 2,648 2,755 3,296 3,303 3,540
Depreciation and amortization...... 949 1,137 1,196 1,334 1,457
Amortization of preopening costs... 337 175 54 330 199
Unusual charges.................... - 964 - 73 -
------------- ------------ -------- ---------- ----------
Total................................. 21,380 26,352 27,972 32,241 32,259
------------- ------------ -------- ---------- ----------
Income (loss) from operations......... (399) (1,118) 118 433 726
Interest expense, net................. (166) (231) (376) (478) (394)
Nonrecurring costs.................... 93 - - - -
------------- ------------ -------- ---------- ----------
Income (loss) before taxes,
minority interest, equity in loss
of joint venture and cumulative
effective of change in accounting
principle............................. (472) (1,349) (258) (45) 332
Provision for income taxes........... (5) (10) (6) (14) (65)
Equity in loss of joint venture...... - - (74) (9) (9)
Minority interests................... - 122 (68) 102 211
Cumulative effect of change in
accounting principle............... - (70) - - -
------------ ------------ -------- ---------- ----------
Net income (loss)................. (477) (1,307) (406) 34 469
------------ ------------ -------- ---------- ----------
Preferred dividends accrued or paid.. (69) (85) (50) (50) (50)
Accounting deemed dividends........... (211) (83) - - -
------------ ------------- -------- ---------- ----------
Net income (loss) applicable to
common stock........................ $ (757) $ (1,475) $ (456) $ (16) $ 419
============ ============= ======== ========== ==========
Net income (loss) per share applicable
to common stock (1):
Basic............................. $ (0.20) $ (0.37) $ (0.11) $ 0.00 $ 0.09
============ ============= ======== ========== ==========
Diluted........................... $ (0.20) $ (0.37) $ (0.11) $ 0.00 $ 0.09
============ ============= ======== ========== ==========
Weighted average shares outstanding
Basic.......................... 3,773,560 3,972,256 4,003,738 4,104,360 4,776,741
============ ============= ========== ========= =========
Diluted........................ 3,773,560 3,972,256 4,003,738 4,104,360 4,866,449
============ ============= ========== ========= =========
17
Balance Sheet Data:
Working deficit...................... $ (1,223) $ (2,300) $ (3,685) $ (2,719) $ (693)
Total assets......................... 9,011 11,387 11,288 12,534 14,344
Long-term debt, less
current portion.................... 699 2,928 2,033 2,866 1,534
Stockholders' equity.............. 5,183 3,867 3,461 3,495 6,045
(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 28 of this Form 10-K.
General
During the fiscal year ended December 30, 2001, the Company owned and
operated 16 restaurants and managed or licensed 5 additional restaurants,
consisting of 10 Daily Grill restaurants, 2 Pizzeria Uno restaurants (one was
sold in July 2001), 3 The Grill on the Alley restaurants and 1 The Grill on
Hollywood (opened in November 2001) which are owned and operated by the Company,
2 Daily Grill restaurants and a City Bar and 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 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. See "Description of Business."
Fiscal 2001 operating results include a full year of operations from the
Chicago Grill restaurant (compared to 29 weeks in 2000), 7 weeks of operations
of The Grill on Hollywood and a full year of operations for the Skokie
restaurant (compared to 12 weeks in 2000). The Pizzeria Uno restaurant in South
Plainfield, New Jersey was sold in July 2001 and revenues from that restaurant
terminated at that date.
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.
The Company accounts for its interest in the Universal CityWalk Daily Grill
using the equity method. All other owned restaurants are consolidated with
minority interest being reflected in the San Jose Fairmont Grill, The Chicago
Grill on the Alley and The Grill on Hollywood.
18
Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 81% of combined 2001 sales
were food and 19% 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.
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 Agreement, the Company pays a continuing license fee
with respect to its Pizza Restaurant, an advertising fee and is required to
expend certain minimum amounts on local advertising and promotion. See
"Description of Business - The Pizza Restaurant -- The Franchise Agreement."
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.
Results of Operations
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1999, 2000 and 2001:
Fiscal Year Ended December
--------------------------
1999 2000 2001
---- ---- ----
Sales revenues 98.6% 97.6% 98.1%
Management and licensing fees 1.4 2.4 1.9
------- -------- -------
Total revenues 100.0 100.0 100.0
Cost of sales 27.9 28.5 27.3
------- -------- -------
Gross profit 72.1 71.5 72.7
------- -------- -------
Restaurant operating expense 60.1 59.6 59.6
General and administrative expense 8.5 7.2 7.8
Depreciation and amortization 3.1 2.9 3.2
Preopening costs 0.1 0.7 0.5
Unusual charges 0.0 0.2 0.0
------- -------- -------
Total operating expenses 71.8 70.6 71.1
------- -------- -------
Operating income 0.3 0.9 1.6
Interest expense, net (1.0) (1.0) (0.9)
------- -------- -------
Income (loss) before income tax (0.7) (0.1) 0.7
Provision for taxes 0.0 0.0 (0.2)
Minority interest (0.1) 0.2 0.5
Equity in loss of joint venture (0.2) 0.0 0.0
------- -------- -------
Net income (loss) (1.0)% 0.1% 1.0%
======= ======== =======
19
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues. The Company's revenues for 2001 decreased 0.6% to $45.4 million
from $45.7 million in 2000. Sales revenues decreased 0.2% to $44.5 million in
2001 from $44.6 million in 2000. Management and license fee revenues decreased
to $872,000 in 2001 from $1,078,000 in 2000. System-wide sales, including sales
of non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.4 million in 2001 compared to $62.3 million in 2000.
The decline in consolidated revenues for the year is partially due to one
less week of sales in 2001 compared to 2000. Additionally it is believed to be
attributable to specific factors which may have effected individual restaurants,
to unfavorable economic and operating conditions which prevailed during the
fourth quarter of 2001, including weak economic conditions, the impact of the
September 11 terrorist attacks, corporate spending cutbacks and reduced business
travel. These factors contributed to a decline in consolidated revenues during
the fourth quarter of 15.1%, from $13.6 million in 2000 to $11.5 million in
2001. The adverse operating conditions which prevailed during the fourth quarter
of 2001 are continuing into the first quarter of 2002.
Sales for Daily Grill restaurants were flat at $28.1 million in 2000 and
2001. Although weighted average weekly sales at the Daily Grill restaurants
increased 1.9% from $58,920 in 2000 to $60,041 in 2001, the additional week in
2000 contributed, on average, $530,000, or 2% of sales. An increase in the
average ticket of almost $2.00 was offset by a 0.9% decrease in the number of
guests.
Sales for Grill restaurants increased by 12.7% from $12.2 million in 2000
to $13.7 million in 2001. The increase in sales revenues for the Grill
restaurants from 2000 to 2001 was primarily attributable to (1) the opening of
the Grill on Hollywood in November 2001 which contributed $0.7 million and (2)
having the full year of Chicago compared to only 29 weeks in 2000 which
contributed $1.2 million. Weighted average weekly sales at the Grill restaurants
decreased 0.6% from $89,476 in 2000 to $88,965 in 2001. An increase in the
average ticket of $7.73, primarily attributable to San Jose Grill, combined with
the addition of Hollywood offset the decrease in guests at both San Jose and
Beverly Hills.
Sales for the Pizza Restaurants decreased by 37.2% from $4.3 million in
2000 to $2.7 million in 2001. The decrease in sales revenues for the Pizza
Restaurants from 2000 to 2001 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, PA ($0.6 million), (2) the sale of
the Pizzeria Uno in South Plainfield, NJ ($0.9 million) and (3) a 4.6% decline
in same store sales at the remaining location. Weighted average weekly sales at
the Pizza Restaurants increased 7.2% from $32,000 in 2000 to $34,300 in 2001.
Management has determined that continued ownership and operation of the Pizza
Restaurants does not fit with the Company's strategic growth plans. In July
2001, the Company finalized the sale of 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 with minor increases as a result of menu engineering in the
second quarter of 2001. 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 were attributable to (1) hotel
restaurant management services which accounted for management fees of $577,000
in 2001 and $750,000 in 2000, (2) licensing fees from the LAX Daily Grill and
Skokie, Illinois Daily Grill which totaled $194,000 in 2001 and $148,000 in
2000, and (3) fees from Universal CityWalk which totaled $101,000 in 2001 and
$122,000 in 2000. The decrease in management fees during 2001 was attributable
to decreased sales at the Burbank Hilton and San Jose City Bar & Grill offset by
increases at the Georgetown Inn.
20
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 $2.0 million during 2001 as compared to $2.2 million during 2000.
Cost of Sales and Gross Profit. While sales revenues decreased by 0.2 % in
2001 as compared to 2000, cost of sales decreased by 4.5% ($0.6 million) and
decreased as a percentage of sales from 28.5% in 2000 to 27.3% in 2001. The
decrease in cost of sales as a percentage of sales revenues was primarily
attributable to menu refinements and related sales mix as well as cost
reductions resulting from improved purchasing.
Gross profit increased 1.0% from $32.7 million (71.5% of sales) in 2000 to
$33.0 million (72.7% of sales) in 2001.
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 0.1%
to $32.3 million in 2001 (representing 71.1% of revenues) from $32.2 million in
2000 (representing 70.6% of sales).
Restaurant operating expenses decreased 0.5% to $27.1 million in 2001 from
$27.2 million in 2000. As a percentage of sales, restaurant operating expenses
represented 59.6 % in both 2001 and 2000. The decrease in restaurant operating
expenses resulted primarily from the sale of the Pizzeria Uno restaurant in
South Plainfield, New Jersey for net proceeds of $225,000 which were credited
against restaurant operating expenses.
General and administrative expenses increased 7.2% to $3.5 million in 2001
from $3.3 million in 2000. General and administrative expenses represented 7.8%
of sales in 2001 as compared to 7.2% of sales in 2000. The increase in total
general and administrative was primarily the result of increased headcount at
the corporate office and related benefits ($0.3 million).
Depreciation and amortization expense was $1.5 million during 2001 as
compared to $1.3 million during 2000. The increase in depreciation and
amortization expense reflects the opening of the Hollywood Grill in November
2001 ($0.1 million) and a full year of expense for the Chicago Grill ($0.1
million).
Preopening costs totaled $199,000 in 2001 as compared with $330,000 in
2000. These pre-opening costs were attributable to the opening in 2001 of The
Grill on Hollywood and 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 2001.
Interest Expense. Interest expense, net, totaled $394,000 during 2001 as
compared to $478,000 in 2000. The decrease in interest expense was primarily
attributable to the reduction in total debt and decrease 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 $211,000
during 2001, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $77,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $144,000 and a minority interest in the loss of The
Grill on Hollywood, LLC of $144,000. For the year ending December 31, 2000 the
Company recorded a minority interest in the earnings of San Jose Grill on the
Alley, LLC of $115,000 and a minority interest in the loss of Chicago - The
Grill on the Alley, LLC of $217,000.
The Company recorded equity in loss of joint venture of $9,000 in 2001 and
2000 relating to the Company's 50% interest in Universal CityWalk Daily Grill.
The Company reported net income of $469,000 in 2001 as compared to $34,000
for 2000.
21
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.
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.
22
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.
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 $102,000
during 2000, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $115,000 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.
Liquidity and Capital Resources
At December 30, 2001, the Company had a working capital deficit of $0.7
million and a cash balance of $2.3 million as compared to a working capital
deficit of $2.7 million and a cash balance of $0.6 million at December 31, 2000.
The variance in the Company's working capital and cash was primarily
attributable to the issuance of new equity in 2001, proceeds from the sale of
the Pizzeria Uno in South Plainfield, New Jersey and cash flow from operations
that were used to pay off the Company's bank borrowing of $1.2 million and other
debt of $0.5 million.
23
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 stock, loans and tenant
allowances from certain of its landlords, and, beginning in 1999, through joint
venture arrangements. At December 30, 2001, the Company had a bank credit
facility with nothing owing, a loan from a member of Chicago - The Grill on the
Alley, LLC of $0.5 million, an SBA loan of $0.1 million, loans from
stockholders/officers/directors of $0.5 million, equipment loans of $1.1
million, and loans/advances from a landlord of $0.1 million.
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. In June 2001 the lender became a member of the Company's Board
of Directors and the loan was reclassified as related party debt. The balance
owed on the loan at December 30, 2001 was $274,000.
On December 13, 2001 the Company amended its bank credit facility
converting the term loan to a $0.8 million reducing line of credit and extending
the existing $0.3 million line of credit for another year. At December 30, 2001
there were no borrowings against either line of credit. 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. 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. The extended line of credit matures in August 2004 and
the reducing line of credit matures in October 2004.
During 2001, 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 $2.9 million in 2001, with varying escalation and percentage rent
clauses in each of the restaurant leases. Minimum rental payments during 2001 on
existing leases as of December 30, 2001, total $2.6 million.
The Company opened one restaurant in February 2002, in San Francisco, and
is currently negotiating for two additional locations, which would open in 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 $1.1 million in 1999, $2.4 million in 2000 and
$1.4 million in 2001. Capital expenditures in fiscal 2002 are expected to be
between $1.0 million and $1.8 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.
24
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. Accrued dividends in arrears
total $226,000 at December 30, 2001 and $176,000 at December 31, 2000.
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. $1,190,000 of the loan was converted to equity. 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
$7.00 per share. The total cost to construct the Chicago Grill was $2.5 million.
The Chicago Grill opened in June 2000. At December 30, 2001, the balance of the
loan to Chicago LLC guaranteed by the Company was $455,000.
The Operating Agreement for San Jose Grill LLC, stipulates that
distributions of distributable cash shall be made first, 10% to the manager and
90% to the members in the ratio of their percentage interests until the members
have received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the members in the ratio of
their percentage interests until the additional capital contributions have been
repaid. Thereafter, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and the balance to the members in the ratio
of their percentage interests. In January 2001 a distribution of distributable
cash in the amount of $90,000 was made to the minority member that reduced the
member's interest. The minority member's unrecovered capital contribution at
December 30, 2001 was $260,000.
The Operating Agreement and the Senior Promissory Note for Chicago - The
Grill on the Alley, LLC stipulates that the non-manager member of Chicago - The
Grill on the Alley, LLC is entitled to a cumulative preferred return of eight
percent annually of their converted capital contribution. Preferred return
payments of $97,000 were paid to the non-manager member during 2001. These
payments are treated as a reduction of equity. Payments returning $94,000 of
converted capital contribution were made in 2001.
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.
In July 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which the Company sold 666,667 shares of
restricted common stock and 666,6667 stock warrants at $2.00 to Starwood for
$1,000,000. Concurrently, the Company sold an additional 666,666 shares of
restricted common stock and 666,666 stock purchase warrants for $2.25 to other
strategic investors for $1,000,000. Proceeds reflected in the financial
statements are net of transaction costs.
25
In conjunction with the investment by Starwood, the Company and Starwood
entered into a Development Agreement under which the Company and Starwood agreed
to jointly develop the Company's restaurant properties in Starwood hotels.
Under the Starwood Development Agreement, either the Company or
Starwood may propose to develop a Daily Grill, Grill or City Bar and Grill
restaurant in a Starwood hotel property. If the parties agree in principal to
the development of a restaurant, the parties will attempt to negotiate either a
management agreement or a license agreement with respect to the operation of the
restaurant.
So long as Starwood continues to meet certain development thresholds
set forth in the Development Agreement, the Company is prohibited from
developing, managing, operating or licensing the Company's restaurants in any
hotel owned, managed or franchised by a person or entity, other than Starwood,
with more than 50 locations operated under a single brand. Existing hotel based
restaurants are excluded from the exclusive right of Starwood. The development
thresholds required to be satisfied to maintain Starwood's exclusive development
rights require, generally, (1) the signing of an average of one management
agreement or license agreement with respect to Daily Grill restaurants annually
over the life of the Development Agreement, (2) the signing of one management
agreement or license agreement in any two year period with respect to Grill
restaurants, and (3) the signing of an aggregate average of three management
agreements or lic