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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 28, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing price on the NASDAQ
Small-Cap Market, as of the close of business June 30, 2003 was approximately $
7,424,000.
Number of shares outstanding of the registrant's common stock, $.00004 par
value, as of March 12, 2004: 5,537,071 shares.
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 28, 2003 are
incorporated by reference into Part III.
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 35
ITEM 9A. CONTROLS AND PROCEDURES 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 36
ITEM 11. EXECUTIVE COMPENSATION 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 36
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 36
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 33 of this Form 10-K.
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires, as
used herein, "GCI," the "Company", "we", "our", or "us", means Grill Concepts,
Inc., a Delaware corporation and its subsidiaries.
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, we own and
operate, or have 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 our acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, we have focused principally on the expansion of the "Daily
Grill" and "The Grill on the Alley" restaurant formats of GCI.
At December 28, 2003, we owned and operated fourteen restaurants and
managed or licensed eight additional restaurants. Of the total ten Daily Grill
restaurants and four The Grill on the Alley restaurants are owned and operated,
five Daily Grill restaurants are managed and two Daily Grill restaurants and a
City Bar & Grill restaurant are licensed by us. With the exception of three The
Grill on the Alley restaurants, which are operated by partnerships, all of the
Daily Grill and The Grill on the Alley restaurants which were owned and operated
at December 28, 2003 were solely owned and operated on a non-franchise basis by
us.
In 2001 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.
During 2002, we opened two managed restaurants, consisting of (1) a Daily
Grill restaurant, not subject to the Starwood alliance, opened in February 2002
in the Handlery Union Square Hotel in San Francisco, California, and (2) a Daily
Grill restaurant opened in July 2002 in the Westin Galleria Hotel in Houston,
Texas pursuant to our alliance with Starwood. During 2002, we (1) sold our last
Pizzeria Uno franchise in Cherry Hill, New Jersey and (2) closed the Daily Grill
in Encino, California.
During 2003, 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, and
free-standing restaurants, in strategic markets throughout the United States.
During 2003, we opened one owned and one managed restaurant, being (1) a
50.1% owned Daily Grill opened in January 2003 in El Segundo (South Bay),
California, and (2) a managed Daily Grill opened in September 2003 in the
Portland Westin Hotel in Portland, Oregon operated pursuant to our alliance with
Starwood.
In January 2004, a 100% owned Daily Grill, not covered by the Starwood
alliance, was opened in the Hyatt Bethesda Hotel in Bethesda, Maryland.
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 2003 and 2002 by restaurant concept for both owned restaurants ("Company
Restaurants") and managed and/or licensed restaurants ("Managed Restaurants"):
-3-
2002 2003
----- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year 10 9
Restaurant opening - 1
Restaurant closings (1) -
----- ----
End of year 9 10
Managed or Licensed Restaurants:
Beginning of year 4 6
Restaurant openings 2 1
----- ----
End of year 6 7
Total Daily Grill restaurants:
Beginning of year 14 15
Restaurant openings 2 2
Restaurants closed or sold (1) -
----- ----
End of year 15 17
===== ====
Grill restaurants:
Company Restaurants:
Beginning of year 4 4
Restaurant openings - -
----- ----
End of year 4 4
Total Grill restaurants:
Beginning of year 4 4
Restaurant openings - -
----- ----
End of year 4 4
===== ====
Other restaurants1:
Company Restaurants:
Beginning of year 1 -
Restaurants closed or sold (1) -
----- ----
End of year - -
Managed or Licensed Restaurants:
Beginning of year 1 1
----- ----
End of year 1 1
Total Other restaurants:
Beginning of year 2 1
Restaurants closed or sold (1) -
----- ----
End of year 1 1
===== ====
Total restaurants:
Beginning of year 20 20
Restaurant openings 2 2
Restaurants closed or sold (2) -
----- ----
End of year 20 22
===== ====
1 Includes one Pizzeria Uno Restaurant in 2002 operated pursuant to a
franchise agreement.
-4-
2002 2003
------------ ------------
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants $ 57,133 $ 62,365
Managed Restaurants. n.a. n.a.
Grill restaurants:
Company Restaurants $ 73,057 $ 78,728
Managed Restaurants. n.a. n.a.
Other restaurants:
Company Restaurants $ 29,239 -
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants (4.2)% 5.3%
Managed Restaurants n.a. n.a.
Grill restaurants
Company Restaurants (2.3)% 7.8%
Managed Restaurants n.a. n.a.
Other restaurants:
Company Restaurants - -
Total system sales:
Daily Grill $25,593,000 $29,051,000
Grill 15,196,000 16,376,000
Pizza Restaurants 497,000 -
Management and license fees 1,006,000 1,147,000
------------ ------------
Total consolidated revenues 42,292,000 46,574,000
Managed restaurants 13,975,000 15,711,000
Licensed restaurants 6,963,000 8,762,000
Less: management and license fees (1,006,000) (1,147,000)
------------ ------------
Total system sales $62,224,000 $69,900,000
============ ============
RESTAURANT CONCEPTS
- - DAILY GRILL RESTAURANTS
Background. At December 28, 2003, we, through our subsidiaries, GCI and
Grill Concepts Management, Inc., owned and operated, managed or licensed ten
Daily Grill restaurants in Southern California, three Daily Grill restaurants in
the Washington, D.C./Virginia market, one Daily Grill restaurant in Skokie,
Illinois, one Daily Grill restaurant in San Francisco, California, one Daily
Grill restaurant in Houston, Texas and one Daily Grill in Portland, Oregon.
Daily Grill restaurants are patterned after "The Grill on the Alley" in Beverly
Hills, a fine dining American-style grill restaurant which we acquired 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.
-5-
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 28, 2003, seventeen Daily Grill restaurants were in operation, eight
of which were 100% owned by us and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, one of which was 50.1% owned by us and located in an
office park, five of which were managed by us and located in hotels and two of
which were licensed restaurants.
Daily Grill locations opened, in the following months and years, are owned,
managed or licensed as indicated and, where indicated, are located in the
referenced hotels:
Ownership
Opened or Interest,
Scheduled Licensed or
Location Opening Managed
- ------------------------------------------------------- --------------- -------------
Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 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
Houston, Texas (Westin Galleria) July 2002 Managed
El Segundo (South Bay), California January 2003 50.1%
Portland, Oregon (Portland Westin) September 2003 Managed
Bethesda, Maryland (Hyatt Hotel) January 2004 100%
Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of our restaurants 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 viewed as desirable tenants drawing traffic to the high
profile malls where we locate 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 us, operated pursuant to a partnership, a joint
venture, a license arrangement, or 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 for hotel based restaurants is the responsibility of
Hotel Restaurant Properties, Inc. ("HRP") which identifies suitable locations
and negotiates leases, license or management agreements for those properties.
See "-- Hotel Property Agreement."
-6-
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 for 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 our part. However, each hotel restaurant arrangement will be
negotiated separately and our capital investment may vary widely. Our portion of
opening costs of existing hotel restaurants, including leasehold improvements,
furniture, fixtures and equipment and pre-opening expenses, have ranged from
$64,000 to $513,000 per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at American-style grill restaurants of
the 1930's and 1940's. 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, from $8.95 for a
hamburger to $23.95 for a char-broiled New York steak with all the trimmings.
The average lunch check is $17.00 per person and the average dinner check is
$25.00 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 28,
2003, food and non-alcoholic beverage sales constituted approximately 85% of the
total restaurant revenues for the Daily Grill restaurants, with alcoholic
beverages accounting for the remaining 15%.
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. Our
management believes that our 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 and for Sunday brunch. 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. A number of the Daily Grill restaurants have private dining rooms
for banquets or additional seating. Each 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.
Attention to detail and quality of 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 our 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 our procedures
and policies but in every aspect of Daily Grill operations. Our 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 57% per year for
hourly employees, considerably below the industry average which management
believes to be approximately 125%.
We believe 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.
-7-
THE GRILL ON THE ALLEY
Background. At December 28, 2003, we, through our 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 one
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, we acquired the original Grill from a partnership, the
managing partner of which was controlled by our then principal shareholders and
directors.
Restaurant Sites. At December 28, 2003, we operated four Grill
restaurants, two of which are non-hotel based facilities and two of which are
hotel-based facilities.
Grill locations opened 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%
Our Grill restaurants are located in leased facilities. As with the Daily
Grill restaurants, site selection is viewed as critical to success 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 criterion.
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 us, operated pursuant to a partnership, a joint
venture arrangement, or a management agreement. As with free standing
restaurants, site selection is viewed as critical to success 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 35% 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 36% 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 our part. However, each hotel restaurant
arrangement will be negotiated separately and our capital investment may vary
widely. Total project 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 $3.1 million.
-8-
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 $13.25 for a cheeseburger to $36.75 for a prime
porterhouse steak. The average lunch check is $28.00 per person and the
average dinner check is $55.00 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 28, 2003, food and
non-alcoholic beverage sales constituted approximately 71% of the total
restaurant revenues for Grill restaurants, with alcoholic beverages accounting
for the remaining 29%.
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. Our management
believes that our 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.
Attention to detail and quality of 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 our 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 our procedures and
policies but in every aspect of Grill operations. Our 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.
We believe 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.
SALE OF PIZZERIA UNO RESTAURANTS
In April 2002, with the sale of our Cherry Hill, New Jersey Pizzeria Uno
Restaurant for $325,000, we completed our planned divestiture of our interests
in Pizzeria Uno Restaurants. Previously, we operated as many as three
franchised Pizzeria Uno Restaurants. During 1998, we determined that the
continued ownership and operation of the Pizza Restaurants did not fit with our
strategic growth plan. Based on that determination, in July 2000, we closed our
Pizzeria Uno restaurant in Media, Pennsylvania and, in July 2001, we sold our
Pizzeria Uno restaurant in South Plainfield, New Jersey for $700,000.
-9-
OTHER RESTAURANT ACTIVITIES
In addition to owning and operating Daily Grills and The Grills, we, at
December 28, 2003, also provided management services for Daily Grill restaurants
at the Burbank Hilton, the Georgetown Inn, the Handlery Hotel, the Westin
Galleria and the Portland Westin and had granted licenses to operate a Daily
Grill at LAX, a Daily Grill at the DoubleTree Hotel in Skokie, Illinois and for
the City Bar & Grill in the San Jose Hilton.
- - RESTAURANT MANAGEMENT SERVICES
Restaurant management services include overseeing the design, development,
construction, equipping, furnishing and operation of the restaurant. Once the
restaurant is open to the public, the manager is responsible for rendering and
performing all services in connection with the operation of the restaurant.
Those services include employing, training and supervision personnel, purchasing
and maintaining adequate inventory, etc.
In May 1998, pursuant to our agreement with HRP, we began providing
management services for a restaurant in the Burbank Hilton Hotel. The
restaurant was converted from its former concept to a Daily Grill in January
1999. Pursuant to our management agreement with the hotel, we invested $500,000
for conversion of the restaurant to a Daily Grill and are responsible for
management and supervision of the restaurant. We are entitled to a management
fee equal to 8.5% of the gross receipts of the restaurant. Additionally, we are
entitled to 30% of the annual profits of the restaurant in excess of a base
amount increased annually by the CPI.
In March 1999, pursuant to the Hotel Property Agreement (see below), we
began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to our management agreement with the hotel, we were
not required to invest in the restaurant but we are responsible for management
and supervision of the restaurant. We are entitled to a management fee equal to
8% of the gross receipts of the restaurant. Additionally, we are entitled to 30%
of the annual profits of the restaurant.
In February 2002, pursuant to the Hotel Property Agreement, we began
providing management services for a Daily Grill restaurant at the Handlery Hotel
in San Francisco. Pursuant to our management agreement with the hotel, we
advanced the restaurant $331,000 to be paid out of future operating profits. We
are entitled to a management fee equal to 6% of gross receipts of the
restaurant. Additionally, we are entitled to 25% of the net income of the
restaurant.
In July 2002, pursuant to the Hotel Property Agreement, we began providing
management services for a Daily Grill restaurant at the Westin Galleria in
Houston, Texas. Pursuant to our management agreement with the hotel, we
advanced the restaurant $64,000 which was repaid out of net income available for
distribution in May 2003. We are entitled to a management fee equal to 5% of
gross receipts of the restaurant. Additionally, we are entitled to 35% of the
annual profits of the restaurant after working capital requirements are
satisfied.
In September 2003, pursuant to the Hotel Property Agreement, we began
providing management services for a Daily Grill restaurant at the Portland
Westin in Portland, Oregon. We were not required to invest in the restaurant.
We are entitled to a management fee of 5% of gross receipts of the restaurant
and 35% of annual profit after working capital requirements are satisfied.
- - RESTAURANT LICENSING
Under restaurant licensing agreements, we earn a licensing fee in exchange
for use of our brand, as well as, the proprietary menu.
LAX Daily Grill. Since January 1997, CA One Services, Inc. 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 us and CA One Services, Inc., and since
April 1998 has been operated by CA One Services under a license agreement.
Pursuant to the terms of the License Agreement, we are 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.
-10-
Skokie Daily Grill. In September 2000, pursuant to the Hotel Property
Agreement, 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 we are entitled to a license
fee equal to the greater of $65,000 or 2% of sales per year.
San Jose City Bar and Grill. In conjunction with our entry into the hotel
restaurant market, in May 1998, we began providing management services at the
City Bar & Grill at the San Jose Hilton. In September 2002 the agreement
relating to our management of the City Bar and Grill was converted to a license
agreement under which we are entitled to receive license fees equal to the
greater of $2,500 per month or 1.5% on sales.
HOTEL PROPERTY AGREEMENT
In order to facilitate our efforts to open restaurants on a large scale
basis in hotel properties, in August of 1998, we entered into the Hotel Property
Agreement with Hotel Restaurant Properties, Inc. ("HRP") pursuant to which HRP
has agreed to assist us in locating suitable hotel locations for the opening of
our restaurants. HRP is considered a related party as one of its owners is a
family member of a director and preferred stock holder. 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. We will, in turn, enter into
management agreements with HRP or the hotel owners, as appropriate. We may
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. We will be entitled to receive from HRP a base overhead fee equal to
$1,667 per month per Managed Outlet. Net income derived from management or
licensing of restaurants covered by the Hotel Property Agreement, after
repayments required on Manager Loans from each Managed Outlet, will be allocated
75% to us 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 we are
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.
The Agreement with HRP also provides that, beginning in May 2004, we 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 our
common stock 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
Our 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 reviews 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, we intend to monitor the results of any
modifications to our existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.
Our 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,
we expect 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, we intend 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.
-11-
At December 28, 2003, we 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 2004, negotiations are under way for several sites,
however no definitive site 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 we pursue expansion.
At December 28, 2003, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., Skokie, Illinois, San Francisco, California, Houston, Texas, and Portland,
Oregon and hotel based Grill restaurants were operated in San Jose, California
and Chicago, Illinois. We, 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 on our part may vary widely. We opened a hotel-based
company owned Daily Grill restaurant in Bethesda, Maryland in January 2004.
STARWOOD DEVELOPMENT AGREEMENT
On July 27, 2001, in conjunction with the purchase by Starwood Hotels and
Resorts of 666,667 shares of our common stock and 666,667 $2.00 warrants for
$1,000,000, we and Starwood entered into a Development Agreement under which we
and Starwood agreed to jointly develop our restaurant properties in Starwood
hotels.
Under the Starwood Development Agreement, either we, 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, we are prohibited from developing, managing,
operating or licensing our 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 our 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 affect the
exclusivity rights as to the other brand or in general.
Under the Development Agreement, we are obligated to issue to Starwood
warrants to acquire a number of shares of our 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
our branded restaurants. If the market price of our 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 our 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.
-12-
In addition to the warrants described above, if and when the aggregate
number of restaurants operated under the Development Agreement exceeds 35% of
the total Daily Grill, Grill and City Grill-branded restaurants, we will be
obligated to issue to Starwood a warrant to purchase a number of shares of our
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 on which the restaurants operated under the
Development Agreement continues to exceed the 35% threshold, for so long as the
Development Agreement remains effective, we 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 substantially
curtailed new development activities and only two management agreements have, as
yet, been entered into under the Development Agreement. Certain portions of the
exclusivity agreement have terminated due to the lack of performance on
Starwood's part.
RESTAURANT MANAGEMENT
We strive to maintain quality and consistency in our 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. We believe that our concept and high sales volume
enable it to attract quality, experienced restaurant management and hourly
personnel. We have experienced a relatively low turnover at every level at its
Daily Grill and Grill restaurants. See "-- Daily Grill Restaurants" above.
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 us. The general manager has primary responsibility for the operation of the
restaurant and reports directly to an Area Director who in turn reports to our
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 77 employees. Restaurant operations
are standardized, and a comprehensive management manual exists to ensure
operational quality and consistency.
We maintain 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 our 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,
we have developed training courses for assistant managers and chefs. We
typically have a number of employees involved in management training, so as to
provide qualified management personnel for new restaurants. Our 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 our philosophy, strategy and
standards of quality are being adhered to in all aspects of restaurant
operations.
-13-
PURCHASING
We have developed proprietary recipes for substantially all the items
served at our 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 our 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, we work with outside suppliers to produce a limited number of
selected proprietary items such as salad dressings, soups and seasoning
combinations.
We utilize our point-of-sale computer system to monitor inventory levels
and sales, then order food ingredients daily based on such levels. We employ
contract purchasing in order to lock in food prices and reduce short-term
exposure to price increases. Our Vice President-Operations and Development
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 our 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
Our marketing philosophy is to provide our guests with an exceptional and
enjoyable dining experience that creates loyalty and frequent visits. Our
marketing and promotional efforts have been fueled historically by our quality
reputation, word of mouth, and positive local reviews. The Grill on the Alley
and The Daily Grill have been featured in articles and reviews in numerous local
as well as national publications. We supplement our 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, direct
mail promotions, a birthday club, as well as holiday and special interest
events. We also support and participate in local charity campaigns. These
activities are managed by a full time Vice President of Marketing. Guest
feedback is solicited regularly through a comment card program. During 2003,
expenditures for advertising and promotion were approximately 1.6% of gross
revenues.
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.
Competition for our hotel-based restaurants is primarily limited to restaurants
within the immediate proximity of the hotels.
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. We
believe we compete favorably with respect to these factors. We believe that our
ability to compete effectively will continue to depend in large measure on our
ability to offer a diverse selection of high quality, fresh food products with
an attractive price/value relationship served in a friendly atmosphere.
EMPLOYEES
We, and our subsidiaries, employ approximately 1,569 people, 32 of whom are
corporate personnel and 122 of whom are restaurant managers, assistant managers
and chefs. The remaining employees are restaurant personnel. Of our employees,
approximately 40% are full-time employees, with the remainder being part-time
employees.
-14-
Management believes that its employee relations are good at the present
time. An anonymous employee survey is taken each year and the results are
disseminated to keep management aware of the level of employee satisfaction.
With the exception of the Chicago Grill on the Alley, none of our employees
are represented by labor unions or are subject to collective bargaining or other
similar agreements. The current union contract expires in August 2005.
Management believes that its employee relations are good at the present time.
TRADEMARKS AND SERVICE MARKS
We regard our trademarks and service marks as having significant value and
as being important to our marketing efforts. We have registered our "Daily
Grill" mark and logo and our "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 have secured California state
registration of such marks. Our policy is to pursue registration of our marks
and to oppose strenuously any infringement.
GOVERNMENT REGULATION
We are subject to various federal, state and local laws affecting our
business. Each of our 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 our restaurants.
Alcoholic beverage control regulations require each of our 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 our restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control, and handling, storage and dispensing of alcoholic beverages.
We 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. We presently
carry liquor liability coverage as part of our existing comprehensive general
liability insurance.
Various federal and state labor laws govern our relationship with our
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 our restaurants. Management is not
aware of any environmental regulations that have had a material effect on us to
date.
ITEM 2. PROPERTIES
With the exception of certain properties that may be operated pursuant to
management arrangements or partnership or joint venture arrangements, all of our
restaurants are located in space leased from unaffiliated third parties. The
leases have initial terms ranging from 10 to 25 years, with varying renewal
options on all but one of such leases. Most of the leases provide 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
"Business."
The Grill restaurant in San Jose is located in space leased from a hotel
management company that may be deemed to be controlled by one of our directors,
Lewis Wolff.
Our 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 May 2005.
-15-
Management believes that our existing restaurant and executive office space
is adequate to support current operations. We intend to lease, from time to
time, such additional office space and restaurant sites as management deems
necessary to support our future growth plans.
ITEM 3. LEGAL PROCEEDINGS
Restaurants such as those we operate are subject to litigation in the
ordinary course of business, most of the related costs we expect to be covered
by our general liability insurance. However, punitive damages awards are not
covered by general liability insurance. Punitive damages are routinely claimed
in litigation actions against us. No material causes of action are presently
pending against us. However, there can be no assurance that punitive damages
will not be given with respect to any actions that may arise in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders through the
solicitation of proxies, or otherwise, during the fourth quarter of our fiscal
year ended December 28, 2003.
EXECUTIVE OFFICERS
Our executive officers as of March 9, 2004, and their ages and current positions
as of that date are as follows:
NAME AGE POSITION
- --------------- --- --------------------------------------------------
Robert Spivak 60 President and Chief Executive Officer
Michael Weinstock 61 Chairman of the Board and Executive Vice President
John Sola 51 Vice President - Operations and Development
Daryl Ansel 42 Chief Financial Officer
ROBERT SPIVAK has served as our President, Chief Executive Officer and a
director since 1995. Mr. Spivak was a co-founder of our predecessor, Grill
Concepts, Inc. (a California corporation)("GCI") and served as President, Chief
Executive Officer and a director of GCI from the company's inception in 1988
until 1995. Prior to forming GCI, Mr. Spivak co-founded, and operated, The
Grill on the Alley restaurant in Beverly Hills in 1984. Mr. Spivak is a founder
and past president of the Beverly Hills Restaurant Association. Mr. Spivak also
chairs the executive advisory board of the Collins School of Hotel and
Restaurant Management at California State Polytechnic University at Pomona, is
Director Emeritus of the California Restaurant Association and is a member of
the Board of Directors of DiRoNA - Distinguished Restaurants of North America.
MICHAEL WEINSTOCK has served as our Executive Vice President and a director
since 1995 and as Chairman of the Board since 2000. From 1995 to 2000, Mr.
Weinstock served as Vice-Chairman of the Board. Mr. Weinstock was a co-founder
of GCI and served as Chairman of the Board, Vice President and a director of GCI
from 1988 until 1995. Prior to forming GCI, Mr. Weinstock co-founded The Grill
on the Alley restaurant in Beverly Hills in 1984. Mr. Weinstock previously
served as President, Chief Executive Officer and a director of Morse Security
Group, Inc., a security systems manufacturer.
JOHN SOLA has served as our Vice President - Operations and Development since
September 2001. Previously, Mr. Sola served as Executive Chef for GCI from 1988
until 1995 when he assumed the position of Vice President - Executive Chef of
the Company. Mr. Sola oversees all kitchen operations, including personnel,
food preparation and food costs, as well as monitoring and maintaining the
overall performance of the kitchens and establishing procedures and policies in
connection with the opening of new Daily Grill restaurants. Mr. Sola, along
with Mr. Spivak, created the Daily Grill menu. Prior to joining GCI, Mr. Sola
served as opening chef at The Grill on the Alley from inception in 1984 to 1988.
Previously, Mr. Sola served in various positions, including Executive Chef, at a
wide range of restaurants.
DARYL ANSEL has served as our Chief Financial Officer since January 2001. Prior
to joining the Company, Mr. Ansel served as food and beverage finance manager at
Universal Studios from June 1999 to January 2001. Previously, Mr. Ansel owned
and operated catering and restaurant businesses from 1990 to 1997, and served,
from 1983 to 1990, in various senior finance positions with the University of
California, Berkeley.
-16-
There are no family relationships among the executive officers and
directors. Except as otherwise provided in employment agreements, each of the
executive officers serves at the discretion of the Board.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our 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 our common
stock for each quarterly period during the last two fiscal years:
High Low
----- -----
2002 - First Quarter 1.850 1.220
Second Quarter 2.000 1.500
Third Quarter 1.900 1.400
Fourth Quarter 1.850 0.970
2003 - First Quarter 1.620 0.830
Second Quarter 2.850 1.050
Third Quarter 2.950 2.010
Fourth Quarter 2.900 1.940
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 8, 2004, the closing bid price of our Common Stock was $3.43.
As of March 8, 2004, there were approximately 412 holders of record of our
Common Stock.
We have never declared or paid any cash dividend on our Common Stock and do
not expect to declare or pay any such dividend in the foreseeable future.
-17-
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from our consolidated financial statements. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements included elsewhere herein.
Fiscal Year Ended December
----------------------------------------------
1999 2000 2001 2002 2003
----- ----- ----- ---- ----
(In thousands except per share data)
Statement of Operations Data:
Sales $38,432 $44,598 $44,529 $ 41,286 $45,427
Management and license fees 544 1,078 872 1,006 1,147
--------- --------- --------- --------- --------
Total revenues 38,976 45,676 45,401 42,292 46,574
--------- --------- --------- --------- --------
Gross profit 28,090 32,674 32,985 30,858 33,831
Operating expenses:
Restaurant operating expenses 23,426 27,201 27,288 25,678 28,095
General and administration 3,296 3,303 3,540 3,568 3,673
Depreciation and amortization 1,196 1,334 1,457 1,492 1,461
Pre-opening costs 54 330 199 69 182
Gain on sale of assets - - (225) (71) (12)
Unusual charges - 73 - - -
--------- --------- --------- --------- --------
Total 27,972 32,241 32,259 30,736 33,399
--------- --------- --------- --------- --------
Income from operations 118 433 726 122 432
Interest expense, net (376) (478) (394) (214) (194)
--------- --------- --------- --------- --------
Income (loss) before taxes, minority
interest, equity in loss of joint
venture (258) (45) 332 (92) 238
Provision for income taxes (6) (14) (65) (37) (89)
Equity in loss of joint venture (74) (9) (9) (23) (19)
Minority interests (68) 102 211 285 316
--------- --------- --------- --------- --------
Net income (loss) (406) 34 469 133 446
--------- --------- --------- --------- --------
Preferred dividends accrued (50) (50) (50) (50) (50)
--------- --------- --------- --------- --------
Net income (loss) applicable to
common stock $ (456) $(16) $ 419 $ 83 $ 396
========= ========= ========= ========= ========
Net income (loss) per share applicable
to common stock (1):
Basic $ (0.11) $0.00 $ 0.09 $ 0.02 $ 0.07
========= ========= ========= ========= ========
Diluted $ (0.11) $0.00 $ 0.09 $ 0.02 $ 0.07
========= ========= ========= ========= ========
Weighted average shares outstanding
Basic 4,003,738 4,104,360 4,776,741 5,537,071 5,537,071
========= ========= ========= ========= ========
Diluted 4,003,738 4,104,360 4,866,449 5,551,751 5,640,842
========= ========= ========= ========= ========
-18-
Fiscal Year Ended December
----------------------------------------------
1999 2000 2001 2002 2003
----- ----- ----- ---- ----
(In thousands except per share data)
Balance Sheet Data:
Working deficit $(3,685) $(2,719) $ (693) $ (996) $ (247)
Total assets 11,288 12,534 14,344 13,665 13,887
Long-term debt, less
current portion 2,033 2,866 1,534 976 606
Stockholders' equity 3,461 3,495 6,045 6,178 6,624
(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 33 of this Form 10-K.
GENERAL
Grill Concepts develops, owns and operates casual dining restaurants under
the name "Daily Grill" and fine dining restaurants under the name "The Grill on
the Alley." Additionally, we manage or license other restaurant properties.
During the fiscal year ended December 28, 2003, we owned and operated, for
the full fiscal year, thirteen restaurants (nine Daily Grill and four Grill
restaurants), including one Daily Grill and three Grill restaurants owned in
partnership with third parties. During fiscal 2003, we also operated one Daily
Grill that opened in January and is owned in partnership.
Also during fiscal 2003, we managed or licensed, for the full fiscal year,
seven restaurants (six Daily Grill and one City Bar and Grill restaurant).
During fiscal 2003, we commenced management of one Daily Grill that opened in
September.
During the fiscal year ended December 29, 2002, we owned and operated, for
the full fiscal year, thirteen restaurants (nine Daily Grill and four Grill
restaurants), including one Daily Grill and three Grill restaurants owned in
partnership. During fiscal 2003, we operated for a portion of the year two
restaurants (one Daily Grill and one Pizzeria Uno) that were closed or sold
during the year.
Also during fiscal 2002, we managed or licensed, for the full fiscal year,
five restaurants (four Daily Grill and one City Bar and Grill restaurant).
During fiscal 2002, we commenced management of two Daily Grill restaurants that
opened in February and July, respectively. See "Business."
We account for our 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, The Grill on Hollywood and the South Bay Daily Grill.
Sales revenues are derived from sales of food, beer, wine, liquor and
non-alcoholic beverages. Approximately 73% of combined 2003 sales were food and
27% 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.
Expenses are comprised primarily of cost of food and beverages and
restaurant operating expenses, including payroll, rent and occupancy costs. Our
largest expenses 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 our restaurants. Restaurant operating
expenses consist primarily of wages paid to part-time and full-time employees,
rent, utilities, insurance and taxes.
-19-
In addition to our cost of food and beverages and normal restaurant
operating expenses through April 2002 when we sold our last Pizzeria Uno
Restaurant, we paid a continuing license fee with respect to our Pizza
Restaurant, an advertising fee and was required to expend certain minimum
amounts on local advertising and promotion. See "Business - Sale of Pizzeria Uno
Restaurants."
In addition to restaurant operating expenses, we pay certain general and
administrative expenses that relate primarily to operation of our corporate
offices. Corporate office general and administrative expenses consist primarily
of salaries of officers, management personnel and clerical personnel, rent,
legal and accounting costs, travel, insurance and office expenses.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of total
revenues from our Statements of Operations during 2001, 2002 and 2003:
Fiscal Year Ended December
--------------------------
2001 2002 2003
------ ------ ------
Sales revenues 98.1% 97.6% 97.5%
Management and licensing fees 1.9 2.4 2.5
------ ------ ------
Total revenues 100.0 100.0 100.0
Cost of sales 27.3 27.0 27.4
------ ------ ------
Gross profit 72.7 73.0 72.6
------ ------ ------
Restaurant operating expense 60.1 60.7 60.3
General and administrative expense 7.8 8.5 7.9
Depreciation and amortization 3.2 3.5 3.1
Pre-opening costs 0.5 0.2 0.4
Gain on sale of assets (0.5) (0.2) (0.0)
------ ------ ------
Total operating expenses 71.1 72.7 71.7
------ ------ ------
Operating income 1.6 0.3 0.9
Interest expense, net ( 0.9) (0.5) (0.4)
------ ------ ------
Income (loss) before income tax 0.7 (0.2) 0.5
Provision for taxes (0.2) (0.1) (0.2)
Minority interest 0.5 0.7 0.7
Equity in loss of joint venture 0.0 (0.1) 0.0
------ ------ ------
Net income 1.0% 0.3% 1.0%
====== ====== ======
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Revenues. Revenues for 2003 increased 10.1% to $46.6 million from $42.3
million in 2002. Sales revenues increased 10.0% to $45.4 million in 2003 from
$41.3 million in 2002. Management and license fee revenues increased to $1.1
million in 2003 from $1.0 million in 2002. System-wide sales, including sales
of non-consolidated restaurants operated under license, management or
partnership agreement, totaled $69.9 million in 2003, an increase of 12.4% from
$62.2 million in 2002. System-wide sales, computed by adding to total revenues
the revenues of unconsolidated restaurants and subtracting license and
management fees reported from those restaurants, is considered by management to
be a key indicator of brand strength. See reconciliation of system-wide sales
to revenues in "Business - General."
-20-
Sales for Daily Grill restaurants increased by 13.5% from $25.6 million in
2002 to $29.1 million in 2003. The increase in sales revenues for the Daily
Grill restaurants from 2002 to 2003 was primarily attributable to a increase in
same store sales of 5.3% ($1.3 million) for restaurants open for 12 months in
both 2003 and 2002 and opening of the South Bay Daily Grill ($2.7 million),
offset by the closure of the Encino Daily Grill ($0.6 million) and the Cherry
Hill Pizzeria Uno ($0.5 million). Weighted average weekly sales at the Daily
Grill restaurants increased 9.2% from $57,133 in 2002 to $62,365 in 2003.
Comparable restaurant sales and weighted average weekly sales at the Daily Grill
restaurants in 2003 were favorably affected approximately equally by increased
guest counts and improved average checks.
Sales for Grill restaurants increased by 7.8% from $15.2 million in 2002 to
$16.4 million in 2003. The increase in sales revenues for the Grill restaurants
from 2002 to 2003 was attributable to the improved check averages and increased
guest counts. Weighted average weekly sales at the Grill restaurants increased
7.8% from $73,057 in 2002 to $78,728 in 2003.
Price increases were last implemented during the first quarter of 2003 for
certain menu items. Selected price increases may be implemented from time to
time in the future, consistent with the casual dining industry and how the
economy fares. 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 guest count at existing restaurants and selected price increases.
When entering new markets where we have not yet established a market presence,
sales levels are expected to be lower than in existing markets where we have a
concentration of restaurants and high customer awareness. Although our
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 could result.
Management and license fee revenues during 2003 were attributable to (1)
hotel restaurant management services which accounted for $834,000 of management
fees, and (2) licensing fees from the LAX Daily Grill, Skokie, Illinois Daily
Grill and the San Jose City Bar and Grill which totaled $203,000 and (3)
$110,000 in management fees from Universal CityWalk. The increase in management
fees during 2003 was attributable to (1) management of the San Francisco Daily
Grill open a full year compared to 44 weeks in 2002, (2) management of the
Houston Daily Grill for the full year compared to 25 weeks in 2002 and (3)
management of the Portland Daily Grill for 15 weeks in 2003.
We account for our 50% interest in the Universal CityWalk Daily Grill using
the equity method. As a result, our sales do not include sales from Universal
CityWalk. Total revenues for the Universal CityWalk Daily Grill were $2.2
million during 2003 as compared to $2.1 million during 2002.
Cost of Sales and Gross Profit. While sales revenues increased by 10.0%
($4.1 million) in 2003 as compared to 2002, cost of sales increased by 11.4%
($1.3 million) and increased as a percentage of sales from 27.0% in 2002 to
27.4% in 2003. The increase in cost of sales as a percentage of sales revenues
was attributable to higher beef costs during the second half of the year.
Gross profit increased 9.6% from $30.9 million (73.0% of revenues) in 2002
to $33.8 million (72.6% of revenues) in 2003.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, and pre-opening costs, increased 8.7% to $33.4
million in 2003 (representing 71.7% of revenues) from $30.7 million in 2002
(representing 72.7% of revenues).
Restaurant operating expenses increased 9.4% to $28.1 million in 2003 from
$25.7 million in 2002. As a percentage of revenues, restaurant operating
expenses represented 60.3% in 2003 compared to 60.7% in 2002. The dollar
increase in restaurant operating expenses followed the sales increase and was
negatively impacted by increases in marketing, workers' compensation and general
insurance. The decrease in operating expenses as a percentage of revenues
resulted from improved labor management.
-21-
General and administrative expenses rose slightly to $3.7 million in 2003
compared to $3.6 million in 2002. General and administrative expenses
represented 7.9% of revenues in 2003 as compared to 8.5% of revenues in 2002.
While these expenses in total were nearly equal, there were increases in payroll
and related benefits, professional services and rent, partially offset by
decreases in recruitment costs and office expenses. Depreciation and
amortization expense was $1.5 million during 2003 and 2002.
Pre-opening costs totaled $182,000 in 2003 as compared with $69,000 in
2002. These pre-opening costs were attributable to the opening in January 2003
of the South Bay Daily Grill and the opening of the Bethesda Daily Grill in
January 2004.
Interest Expense. Interest expense, net, totaled $194,000 during 2003 as
compared to $214,000 in 2002. The decrease in interest expense was primarily
attributable to the maturing of the loans.
Minority Interest and Equity in Loss of Joint Venture. We reported a
minority interest in the loss of its majority owned subsidiaries of $316,000
during 2003, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $132,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $44,000, a minority interest in the loss of The Grill
on Hollywood, LLC of $140,000 and a minority interest in the loss of The Daily
Grill at Continental Park, LLC of $264,000. For the year ended December 29,
2002 we recorded a minority interest in the earnings of San Jose Grill on the
Alley, LLC of $102,000, a minority interest in the loss of Chicago - The Grill
on the Alley, LLC of $67,000, a minority interest in the loss of The Grill on
Hollywood, LLC of $269,000 and a minority interest in the loss of The Daily
Grill at Continental Park of $51,000.
We recorded equity in loss of joint venture of $19,000 in 2003 and $23,000
in 2002 relating to the Company's 50% interest in the Universal CityWalk Daily
Grill.
We reported net income of $446,000 in 2003 as compared to a net income of
$133,000 for 2002.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
Revenues. Revenues for 2002 decreased 6.8% to $42.3 million from $45.4
million in 2001. Sales revenues decreased 7.3% to $41.3 million in 2002 from
$44.5 million in 2001. Management and license fee revenues increased to
$1,006,000 in 2002 from $872,000 in 2001. System-wide sales, including sales of
non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.2 million in 2002, a decrease of 0.3% from $62.4
million in 2001.
Sales for Daily Grill restaurants decreased by 8.9% from $28.1 million in
2001 to $25.6 million in 2002. The decrease in sales revenues for the Daily
Grill restaurants from 2001 to 2002 was primarily attributable to a decrease in
same store sales of 4.2% ($1.1 million) for restaurants open for 12 months in
both 2002 and 2001 and the closure of the Encino Daily Grill ($1.4 million).
Weighted average weekly sales at the Daily Grill restaurants decreased 4.8% from
$60,041 in 2001 to $57,133 in 2002. Comparable restaurant sales and weighted
average weekly sales at the Daily Grill restaurants in 2002 were negatively
affected by decreased customer counts in all restaurants.
Sales for Grill restaurants increased by 10.8% from $13.7 million in 2001
to $15.2 million in 2002. The increase in sales revenues for the Grill
restaurants from 2001 to 2002 was primarily attributable to the opening of the
Hollywood Grill in November 2001. Weighted average weekly sales at the Grill
restaurants decreased 17.9% from $88,965 in 2001 to $73,057 in 2002. Comparable
restaurant sales and weighted average weekly sales at the Grill restaurants in
2002 were negatively affected by decreased guest counts and a much lower check
average at the Grill on Hollywood compared to other Grill restaurants.
Sales for the Pizza Restaurants decreased by 81.7% from $2.7 million in
2001 to $0.5 million in 2002. The decrease in sales revenues for the Pizza
Restaurants from 2001 to 2002 was attributable to the closing of the Pizzeria
Uno franchise restaurant in Cherry Hill in April 2002 and the closing of the
South Plainfield restaurant in July 2001. Weighted average weekly sales at the
Pizza Restaurants decreased 14.9% from $34,340 in 2001 to $29,239 in 2002.
Management and license fee revenues during 2002 were attributable to (1)
hotel restaurant management services which accounted for $726,000 of management
fees, and (2) licensing fees from the LAX Daily Grill and Skokie, Illinois Daily
Grill which totaled $175,000 and (3) $105,000 in management fees from Universal
CityWalk. The increase in management fees during 2002 was attributable to (1)
management of the San Francisco Daily Grill for 44 weeks in 2002, and (2)
management of the Houston Daily Grill for 25 weeks in 2002 offset by decreases
at the Georgetown Inn and Burbank Hilton.
-22-
We account for our 50% interest in the Universal CityWalk Daily Grill using
the equity method. As a result, our sales do not include sales from Universal
CityWalk. Total revenues for the Universal CityWalk Daily Grill were
$2.1million during 2002 as compared to $2.0 million during 2001.
Cost of Sales and Gross Profit. While sales revenues decreased by 7.3%
($3.2 million) in 2002 as compared to 2001, cost of sales decreased by 7.9%
($1.0 million) and decreased as a percentage of sales from 27.3% in 2001 to
27.0% in 2002. The decrease in cost of sales as a percentage of sales revenues
was attributable to improved purchasing and menu refinements.
Gross profit decreased 6.4% from $33.0 million (72.7% of sales) in 2001 to
$30.9 million (73.0% of sales) in 2002.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, pre-opening costs, and unusual charges, decreased
4.7% to $30.7 million in 2002 (representing 72.7% of revenues) from $32.3
million in 2001 (representing 71.1% of sales).
Restaurant operating expenses decreased 5.9% to $25.7 million in 2002 from
$27.3 million in 2001. As a percentage of sales, restaurant operating expenses
represented 60.7% in 2002 as compared to 60.1% in 2001. The dollar decrease in
restaurant operating expenses followed the sales decrease for the Company offset
by increases in minimum wages in California. The increase in operating expenses
as a percentage of sales resulted from increased insurance costs and labor due
to California minimum wage increases.
General and administrative expenses rose slightly to $3.6 million in 2002
compared to $3.5 million in 2001. General and administrative expenses
represented 8.5% of sales in 2002 as compared to 7.8% of sales in 2001. While
these expenses in total were nearly equal, there were increases of approximately
$224,000 in wages and related benefits, offset by decreases of approximately
$176,000 in professional services.
Depreciation and amortization expense was $1.5 million during 2002 and
2001. Increased depreciation related to the operation of The Grill on Hollywood
for a full year was offset by the discontinuance of depreciation for the Encino
Daily Grill and the Pizzeria Uno at Cherry Hill.
Pre-opening costs totaled $69,000 in 2002 as compared with $199,000 in
2001. These pre-opening costs were attributable to the opening in January 2003
of the South Bay Daily Grill and the opening of The Grill on Hollywood in
November 2001.
Interest Expense. Interest expense, net, totaled $214,000 during 2002 as
compared to $394,000 in 2001. The decrease in interest expense was primarily
attributable to not having any bank debt in 2002.
Minority Interest and Equity in Loss of Joint Venture. We reported a
minority interest in the loss of our majority owned subsidiaries of $285,000
during 2002, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $102,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $67,000, a minority interest in the loss of The Grill
on Hollywood, LLC of $269,000 and a minority interest in the loss of The Daily
Grill at Continental Park, LLC of $51,000. For the year ending December 30,
2001 we recorded 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.
We recorded equity in loss of joint venture of $23,000 in 2002 and $9,000
in 2001 relating to our 50% interest in the Universal CityWalk Daily Grill.
We reported net income of $133,000 in 2002 as compared to a net income of
$469,000 for 2001.
-23-
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION AND SHORT-TERM LIQUIDITY. At December 28, 2003, we had a
working capital deficit of $0.2 million and a cash balance of $1.5 million as
compared to a working capital deficit of $1.0 million and a cash balance of $1.3
million at December 29, 2002. In 2003 we generated cash from operations ($1.2
million), received tenant improvement allowances ($1.1 million), purchased fixed
assets ($1.7 million) and repaid debt ($0.6 million). During 2002 we used cash
to purchase fixed assets for the South Bay Daily Grill ($0.7 million), remodel
the Newport Beach Daily Grill ($0.4 million), repay debt ($0.5 million) and make
advances to managed restaurants ($0.4 million) that opened in San Francisco and
Houston. We have generated modest net income in each of the last four fiscal
years and have generated positive operating cash flows in each of the last six
years.
Our 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, we have funded our day-to-day
operations through operating cash flows that have ranged from $1.0 million to
$1.4 million over the past three fiscal years. Growth has been funded through a
combination of bank borrowing, loans from stockholders/officers, the sale of
debentures and stock, loans and tenant allowances from certain of our landlords,
and, beginning in 1999, through joint venture arrangements.
FINANCING FACILITIES. At December 28, 2003, we had a bank credit facility
with nothing owing, a loan from a member of Chicago - The Grill on the Alley,
LLC of $0.4 million, loans from stockholders/ officers/directors of $0.2
million, equipment loans of $0.4 million, and loans/advances from a landlord of
$0.1 million. Although no amounts have been borrowed under the credit facility
since 2001, availability under the line has been reducing in accordance with its
terms. Borrowings available under the credit facility are $0.5 million at
December 28, 2003 and will ratably reduce until October 2004 when it expires.
On August 1, 2000, we 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, we issued 40,000 warrants. In June 2001
the lender became a member of our Board of Directors and the loan was
reclassified as related party debt. The balance owed on the loan at December
28, 2003 was $67,000.
On December 13, 2001 we amended our bank credit facility converting the
term loan to a $0.8 million reducing line of credit under which the amount
available to draw is reduced each month by $25,000 so that it mimics the
previous term loan as to the maximum outstanding balance. The maximum borrowing
available under the reducing line of credit was $200,000 at December 28, 2003
and will expire in October 2004. We have an additional line of credit that
provides borrowing up to $0.3 million. At December 28, 2003 and December 29,
2002 there were no borrowings under either line of credit. Interest is payable
at the bank's prime rate. In connection with the Credit Facility, we are
required to comply with certain debt service coverage and liquidity
requirements. Two of our principal stockholders have guaranteed the Credit
Facility. In exchange for the guarantee, we 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 reducing line of credit matures in October 2004.
In March 2004, we entered into a preliminary agreement with respect to the
establishment of a new bank credit facility to replace our facility that expires
in October 2004. Under the terms of the new bank credit facility, we
will be provided with financing in the form of a revolving line of credit in the
amount of $500,000, an irrevocable standby letter of credit in the amount of
$700,000 and equipment financing in the amount of $500,000. The facility will
have a one-year term, be secured by assets and is subject to certain standard
borrowing covenants. The credit facility is subject to execution of definitive
loan documents that, as of March 24, 2004, have been drafted by the bank but
have not been signed.
OPERATING LEASES. During 2003, we, and our subsidiaries, were obligated
under sixteen leases covering the premises in which our Daily Grill and Grill
Restaurants are located as well as leases on our executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $3.0 million in 2003 and paid percentage rent obligations above
and beyond minimum rent of $0.5 million. Our minimum rent obligations for 2004
are $2.8 million.
-24-
CONTRACTUAL OBLIGATIONS. Our only material contractual obligations
requiring determinable future payments on our part are various notes payable and
our leases relating to our executive offices and restaurants, each of which is
described above.
The following table details our contractual obligations as of December 28,
2003:
Payments due by period
----------------------------------------------------------------
Total 2004 2005 - 2006 2007 - 2008 Thereafter
Long-term debt $ 1,129,000 $ 523,000 $ 300,000 $ 142,000 $ 164,000
Capital lease obligations - - - - -
Operating lease commitments 18,510,000 2,845,000 4,848,000 3,877,000 6,940,000
Other contractual purchase
Obligations - - - - -
Other long-term liabilities - - - - -
----------- ------------ ------------ ----------- ----------
Total $19,639,000 $ 3,368,000 $ 5,148,000 $ 4,019,000 $7,104,000
----------- ------------ ------------ ----------- ----------
COMMITMENTS RELATING TO MANAGED RESTAURANTS AND LLCS. We began management
in February 2002, of the San Francisco Daily Grill in the Handlery Hotel in
Union Square. Cost of opening the Handlery Hotel Daily Grill in San Francisco
was $2.8 million, of which we advanced approximately $331,000, with the balance
being paid by the hotel owners. The advance made by us will be repaid through
future profits.
We began management of a hotel-based Daily Grill in the Westin Galleria in
Houston, Texas on July 10, 2002. Under the terms of the Management Agreement,
we advanced $64,000 to the restaurant for initial working capital which has
since been repaid in full.
We began management in September 2003, of the Portland Daily Grill in the
Portland Westin Hotel in Portland, Oregon. Under the terms of the Management
Agreement, we had no cash obligations for initial advances or construction
costs.
Under certain of our operating and management agreements we have an
obligation to potentially make additional cash advances and/or contributions and
may not realize any substantial returns for some time. The agreements and
arrangements under which we may be required to make cash advances or
contributions, guarantee obligations or defer receipt of cash are:
CITYWALK. The CityWalk management agreement requires that each member to
loan, interest free, to the joint venture 50 percent of any operating deficit
forecast for the next quarter, such loans to be repaid out of the first cash
available from operations.
SAN FRANCISCO DAILY GRILL. The management agreement for the San Francisco
Daily Grill stipulates that if in any month there is insufficient working
capital to pay operating expenses, excluding payments to us or the owner, we
will provide one-half of the required working capital. Such advances are to be
repaid prior to deferred payments to us or the owner.
PORTLAND DAILY GRILL. The management agreement for the Portland Daily
Grill stipulates that the Owner shall provide working capital of no less than
$50,000 or more than $150,000. If during any month there is insufficient
working capital to pay for operating expenses the Owner agrees to advance the
required working capital until the balance of the Owner Working Capital Advance
equals $150,000. Thereafter if additional working capital is necessary we as
the manager will be required to loan it. Any advances we make will earn
interest at a rate of 12% per annum and will be repaid as second priority behind
owner's working capital advance but before owner's return of capital. At
December 28, 2003 the Owner had advanced $50,000.
CHICAGO - THE GRILL ON THE ALLEY. The Operating Agreement and the Senior
Promissory Note for Chicago - The Grill on the Alley, LLC stipulates that the
non-manager member shall receive a preferred return of eight percent on its
capital contribution and a payment on its converted capital prior to any
distribution of cash.
-25-
THE GRILL ON HOLLYWOOD. The Operating Agreement for The Grill on
Hollywood, LLC stipulates that 90% of distributable cash shall go to the
non-managing member until its preferred return, unrecovered contribution and any
additional contribution have been returned.
SAN JOSE GRILL. The Operating Agreement for San Jose Grill, LLC stipulates
that distributable cash shall be paid first 10% to the manager and 90% to the
members in proportion to their ownership percentage until initial capital is
recovered, then as a preferred return on the capital contributions to both
members in proportion to their ownership percentage, then to the managing member
and non-managing member in proportion to their ownership percentage until the
additional capital contribution is recovered, and finally 16 2/3% to the manager
and the balance to the members in proportion to their ownership percentages.
Our San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood and
South Bay Daily Grill restaurants are each owned by limited liability companies
(the "LLCs") in which we serve as manager and own a controlling interest. Each
of the LLCs has minority interest owners. In connection with the financing of
each of the LLCs, the minority members may have certain rights to priority
distributions of capital until they have received a return of their initial
investments ("Return of Member Capital") as well as rights to receive defined
preferred returns on their invested capital ("Preferred Return").
The following tables set forth a summary for each of the LLCs of (1) the
initial capital contributions of the Company and the minority LLC members (the
"Members"), (2) the distributions of capital to the Members and/or us during the
year ended December 28, 2003, (3) the unreturned balance of the capital
contributions of the Members and/or us at December 28, 2003, (4) the Preferred
Return rate to Members and/or us, (5) the accrued but unpaid preferred returns
due to the Members and/or us at December 28, 2003, (6) the management incentive
fees, if any, payable to us, and (7) a summary of the principal distribution
provisions:
SAN JOSE GRILL LLC
Initial Capital Contribution: Members (a) $1,149,650
===========
Company $ 350,350
============
Distributions of capital, preferred return
and profit during the year ended December
28, 2003: Members $ 275,000
===========
Company $ 275,000
============
Unreturned Initial Capital Contributions at
December 28, 2003: Members $ 0
============
Company $ 0
============
Preferred Return rate: Members 10%
Company 10%
Accrued but unpaid Preferred Returns at
December 28, 2003: Members $ 0
Company $ 0
============
Management Fee: Company 5%
============
-26-
Principal Distribution Provisions:
Order of Distributions ALLOCATION
1 Until Return of Initial Capital 10% to Company (Manager)
50.05% of 90% to Company
49.95% of 90% to Members
2 Until Return of Preferred Return 50.05% to Company
49.95% to Members
3 Until Return of Additional Contributions 50.05% to Company
49.95% to Members
Thereafter:
4 Balance of distributable cash 16.67% to Company (Manager)
50.05% of 83.33% to Company
49.95% of 83.33% to Members
CHICAGO - GRILL ON THE ALLEY
Initial Capital Contribution: Members (b) $ 1,700,000
Company $ 0
============
Distributions of capital and
note repayments during the year
ended December 28, 2003:
Members (b) $ 220,000
============
Unreturned Initial Capital
Contributions at December 28, 2003:
Members $ 944,000
============
Preferred Return rate: Members 8%
Accrued but unpaid Preferred
Returns at December 28, 2003:
Members $ 0
Management Fee: Company 5%
============
Principal Distribution Provisions:
Order of Distributions Allocation
1 Until Return of Members Capital 100% to Members
2 Until Return of Preferred Return 100% to Members
Thereafter:
3 Balance of distributable cash 60% to Company
40% to Members
-27-
THE GRILL ON HOLLYWOOD LLC
Initial Capital Contribution: Members $1,200,000
Company $ 250,000
============
Distributions of capital during
nine months ended December 28, 2003:
Members $ 0
============
Company $ 0
============
Unreturned Initial Capital
Contributions at December 28, 2003:
Members $1,200,000
============
Company $ 250,000
============
Preferred Return rate: Members 12%
Company 12%
Accrued but unpaid Preferred
Returns at December 28, 2003:
Members $ 0
Company $ 65,000
============
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
1 Until Return of Members Capital
and Preferred Return 10% to Company (Manager)
90% to Members
2 Until Return of Company's Capital
and Preferred Return 90% to Company (Manager)
10% to Members
Thereafter:
3 Balance of distributable cash 51% to Company
49% to Members
-28-
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Initial Capital Contribution: Members $ 1,000,000
Company $ 350,000
============
Distributions of capital during
nine months ended December 28, 2003:
Members $ 0
============
Company $ 0
============
Unreturned Initial Capital
Contributions at December 28, 2003:
Members $ 1,000,000
============
Company $ 350,000
============
Preferred Return rate: Members 10%
Company (c) 10%
Accrued but unpaid Preferred Returns
at December 28, 2003:
Members $ 100,000
Company $ 35,000
============
Management Fee: Company 5%
Principal Distribution Provisions:
Order of Distributions Allocation
1 Until payment in full of
all deferred management fees 100% to Company (Manager)
2 Until Return of Any Additional
Contributions and Preferred
Returns thereon Ratably to Company and Members
3 Until $300,000 is paid 33.3% to Company
66.7% to Members
4 Until Return of Members accrued
and unpaid preferred returns 10% to Company
90% to Members
5 Until Members Capital Contribution
Returned 10% to Company
90% to Members
6 Until Return of Company's Preferred
Return 90% to Company
10% to Members
7 Until Return of Company's Capital
Contribution 90% to Company
10% to Members
Thereafter
8 Balance of distributable cash 50.1% to Company
49.9% to Members
(a) The initial capital contributions of the Members of San Jose Grill LLC
consisted of a capital contribution of $349,650 and a loan of $800,000.
(b) The initial capital contributions of the Members of Chicago - Grill on the
Alley LLC consisted of a capital contribution of $1,000 and a loan of
$1,699,000. $1,189,000 of the loan was converted to capital in 1999.
Distribution of capital as of December 28, 2003 includes $176,000 of
capital and preferred return and $44,000 of payment on the loan.
(c) Our preferred return with respect to the South Bay Daily Grill is based on
unrecovered capital contribution and accrued but unpaid management fees.
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OFF-BALANCE SHEET ARRANGEMENTS. At December 28, 2003, we had no
off-balance sheet arrangements of the nature described in Item 303(a)(4) of
Regulation S-K.
CAPITAL EXPENDITURES. 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 us of opening such restaurants to be less than our cost to
build and open non-hotel based restaurants.
Capital expenditures were $1.4 million in 2001, $1.3 million in 2002 and
$1.7 million in 2003. Capital expenditures in fiscal 2004 are expected to be
between $0.2 million and $2.2 million, primarily for the development of new
restaurants, capital replacements and refurbishing 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
our part. In addition, if we open more, or