Back to GetFilings.com
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 26, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------------- ---------------
Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (310) 820-5559
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
---------------------- -----------------------------------------------
None None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.00004 par value
-------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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, 2004 was approximately
$7,240,000.
Number of shares outstanding of the registrant's common stock, $.00004 par
value, as of April 11, 2005: 5,650,146 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I Page
----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 16
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, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES 16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 40
ITEM 9A. CONTROLS AND PROCEDURES 40
ITEM 9B. OTHER INFORMATION 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 42
ITEM 11. EXECUTIVE COMPENSATION 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 49
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 38 of this Form 10-K.
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires, as
used herein, 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. 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 26, 2004, we owned and operated fifteen restaurants and managed
or licensed eight additional restaurants. Eleven Daily Grill restaurants and
four The Grill on the Alley restaurants are owned and operated, six Daily Grill
restaurants are managed and we license two Daily Grill restaurants. With the
exception of three The Grill on the Alley restaurants, and two Daily Grill
restaurants that are operated by partnerships, all of the Daily Grill and The
Grill on the Alley restaurants, which were owned and operated at December 26,
2004, were solely owned and operated by us.
In 2001 we entered into a strategic alliance with Starwood Hotels and
Resorts Worldwide, Inc. to jointly develop 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 additional restaurants in those markets.
During 2004, we 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 non-hotel based
restaurants, in strategic markets throughout the United States.
During 2004 we opened two restaurants consisting of (1) a 100% owned Daily
Grill, not covered by the Starwood alliance, opened in January 2004 in the Hyatt
Bethesda Hotel in Bethesda, Maryland and (2) a managed Daily Grill restaurant,
not subject to the Starwood alliance, opened in November 2004 in the Hilton
Hotel in Long Beach, California.
In March 2005, we opened a 100% owned Daily Grill in an office park in
Santa Monica, California.
3
The following table sets forth unaudited restaurant count information for
all restaurants.
2004 2003
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year 10 9
Restaurant opening 1 1
Restaurant closings - -
---- ----
End of year 11 10
Managed or Licensed Restaurants:
Beginning of year 7 6
Restaurant openings 1 1
---- ----
End of year 8 7
Total Daily Grill restaurants:
Beginning of year 17 15
Restaurant openings 2 2
Restaurants closed or sold - -
---- ----
End of year 19 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 restaurants:
Company Restaurants:
Beginning of year - -
Restaurants closed or sold - -
---- ----
End of year - -
Managed or Licensed Restaurants:
Beginning of year 1 1
Restaurant closings (1) -
---- ----
End of year - 1
Total Other restaurants:
Beginning of year 1 1
Restaurants closed or sold (1) -
---- ----
End of year - 1
==== ====
Total restaurants:
Beginning of year 22 20
Restaurant openings 2 2
Restaurants closed or sold (1) -
---- ----
End of year 23 22
==== ====
4
The following table sets forth unaudited per restaurant sales information,
comparable restaurant sales information for restaurants open twelve months in
both periods, and total sales information during 2004 and 2003 by restaurant
concept for owned restaurants ("Company Restaurants"):
2004 2003
---------- ----------
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants $ 57,757 $ 58,052
Grill restaurants:
Company Restaurants $ 77,545 $ 75,971
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants 4.6% 4.9%
Grill restaurants
Company Restaurants 2.1% 8.1%
Total sales:
Daily Grill $33,809,000 $30,056,000
Grill 16,129,000 15,802,000
---------- ----------
Total consolidated sales $49,938,000 $45,858,000
========== ==========
We also earn management and license fee revenue based on a percentage of gross
sales at restaurants under management and under licensing arrangements. Our
management and license fee revenue typically is earned at a rate of five to
eight percent of reported gross sales at these restaurants. The gross sales of
managed and licensed restaurants are not included in our statements of
operations. However, we consider the disclosure of these gross sales to be a key
indicator of brand strength and important to understanding how changes in gross
sales at the managed and licensed restaurants impact our revenue.
Sales at non-Company owned Grill Concepts-branded restaurants, categorized as,
managed and licensed restaurants were as follows:
2004 2003
------------- -------------
Gross Sales
Managed Daily Grills $16,382,000 $13,256,000
Licensed Daily Grills 8,003,000 8,773,000
------------- -------------
$24,385,000 $22,029,000
============= =============
Management and license fees $1,282,000 $ 1,037,000
============ ==============
Percent of gross sales 5.3% 4.7%
RESTAURANT CONCEPTS
- - DAILY GRILL RESTAURANTS
Background. At December 26, 2004, we, through our subsidiaries, GCI and
Grill Concepts Management, Inc., owned and operated, managed or licensed eleven
Daily Grill restaurants in Southern California, four 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. 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 26, 2004, nineteen 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 is 100% owned by us and located in a hotel,
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, six of which were
managed by us and located in hotels and two of which were licensed restaurants.
Daily Grill locations which are opened, or are scheduled to open in the
following months and years, are owned, managed or licensed as indicated and,
where indicated, are located in the referenced hotels:
Ownership
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%
Long Beach, California (Hilton Hotel) November 2004 Managed
Santa Monica, California March 2005 100%
Downtown Los Angeles, California 2nd Quarter 2005 58.4%
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, 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" and " Certain Relationships and Related
Transactions".
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 252 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
$26.00 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 26,
2004, 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. Most Daily Grill restaurants are 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 reasonable 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 over 66% per year for all
employees, considerably below the industry average which management believes to
be approximately 125%.
7
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.
THE GRILL ON THE ALLEY
Background. At December 26, 2004, 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 26, 2004, 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
Location Opened or 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 freestanding (non hotel
based) 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 $29.00 per person and the average
dinner check is $59.00 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 26, 2004, 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 reasonable 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.
OTHER RESTAURANT ACTIVITIES
In addition to owning and operating Daily Grills and The Grills, we, at
December 26, 2004, also provided management services for Daily Grill restaurants
at the Burbank Hilton, the Georgetown Inn, the Handlery Hotel, the Westin
Galleria, the Portland Westin and the Long Beach Hilton and had granted licenses
to operate a Daily Grill at LAX and a Daily Grill at the DoubleTree Hotel in
Skokie, Illinois. Under the terms of our management agreements, we are
responsible for all aspects of the restaurant's operation for which we earn a
fee, however, we have no ownership in the restaurant. We are liable for all
debts and obligations that we incur on behalf of the managed outlets including
payroll and related costs of the restaurant staff who are our employees. All
such costs are included as expenses in our statements of operations and we also
record revenue for those costs that are reimbursed by the restaurants.
9
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. In May 11, 1999 the HRP
agreement was amended under the same terms and conditions except that it is now
100% owned by the family member. 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. From the gross management fee, we
are entitled to receive a base overhead fee equal to $1,667 per month per
Managed Outlet. The remaining fee income, less any expenses and after
repayments required on Manager Loans from each Managed Outlet, are 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 operating agreement between HRP and GCI contains a clause whereby, HRP
has the right to cause GCI to purchase HRP (the put option) at any time there is
a change in control or after May 2004 subject to certain conditions and at the
same time, GCI has the right to purchase HRP (the call option) after May 2004
subject to certain conditions. The purchase is governed by the following terms:
The Agreed Purchase Price ("APP") (principally paid in stock) under the put
or call option will be 25% multiplied by 10 (Multiple) times the Operating
Income of HRP (Gross Receipts for the prior twelve months less Operating
Expenses which are averaged over a five year period), with certain allowed
exclusions from Operating Income minus the principal balance of any outstanding
loans (with certain allowed exclusions) to HRP. Under the Put Option the
Multiple may change if 87.5% multiplied by the Closing Price of the Company's
Common Stock divided by EBITDA per share is less than 10. If the Company sells
assets or stock to certain third parties introduced to GCI by HRP which causes a
Change in Control, then purchase price will be the greater of: (A) $3,000,000 or
(B) the APP not to exceed $4,500,000.
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 supervising personnel, purchasing
and maintaining adequate inventory, etc.
In May 1998, pursuant to the Hotel Property Agreement with HRP (see below),
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, with HRP, are entitled to
a management fee equal to 8.5% of the gross receipts of the restaurant.
Additionally, we, with HRP, 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, 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, with HRP, are entitled to a management fee equal to 8% of
the gross receipts of the restaurant. Additionally, we, with HRP, are entitled
to 30% of the annual profits of the restaurant.
10
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
contributed $331,000 to the restaurant which was expensed through reimbursed
costs in 2002 and 2003. We, with HRP, are entitled to a management fee equal to
6% of gross receipts of the restaurant. Additionally, we, with HRP, 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, with HRP, are entitled to a management fee equal
to 5% of gross receipts of the restaurant. Additionally, we, with HRP, 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, with HRP, 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. Due to the slow start at this restaurant we have not received any
of the management fees earned and therefore have reserved for them 100%.
In November 2004, pursuant to the Hotel Property Agreement, we began
providing management services for a Daily Grill restaurant at the Long Beach
Hilton in Long Beach, California. We were not required to invest in the
restaurant. We, with HRP, are entitled to a management fee of 6% of gross
receipts of the restaurant guaranteed by the owner to be no less than $150,000
per year subject to certain cancellation rights after two years. We, with HRP,
are also entitled to an incentive fee of 35% of the annual profits of the
restaurant.
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
license fees 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.
San Jose City Bar and Grill. In conjunction with our entry into the hotel
restaurant market and pursuant to the Hotel Property Agreement, 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, with HRP,
were entitled to receive license fees equal to the greater of $2,500 per month
or 1.5% on sales. In 2004 the agreement was terminated.
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, with HRP, are entitled to a
license fee equal to the greater of $65,000 increased by 4% per year or 2% of
sales per year.
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.
11
Our future expansion efforts are expected to concentrate on (1) expansion
into new markets through a combination of Company owned restaurants and 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 restaurants within those
markets. Management intends to limit the construction and operation of Grill
restaurants to one restaurant per market while constructing multiple Daily Grill
restaurants within each market. The exact number of Daily Grill restaurants to
be constructed within any market will vary depending upon population,
demographics and other factors.
At December 26, 2004, we operated non-hotel based Daily Grill and Grill
restaurants in Southern California, principally the greater-Los Angeles market,
and metropolitan Washington, D.C. In March 2005, we opened a non-hotel based
Daily Grill in Santa Monica, California and we plan to open a non-hotel based
Daily Grill in downtown Los Angles, California in the second quarter of 2005.
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 2005,
negotiations are under way for several sites, however no definitive site had
been identified for future construction of restaurants. Management anticipates
that the cost to open additional 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 26, 2004, 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 and a
hotel-based managed restaurant in Long Beach, California in November 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.
12
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.
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 us 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
Vice President 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. 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, receives 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.
13
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.
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-Purchasing. 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-Purchasing establishes general
purchasing policies and is responsible for controlling the price and quality of
all ingredients. The Senior Vice President - Culinary 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 Director of Marketing. A toll free
phone-in guest survey is utilized to gather guest feelings on their dining
experience. During 2004, expenditures for advertising and promotion were
approximately 0.9% of total 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.
14
EMPLOYEES
We, and our subsidiaries, employ approximately 1,408 people, 35 of whom are
corporate personnel and 124 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.
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 corporate and restaurant 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."
15
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 5,000 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 2007.
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. There can be no assurance that punitive
damages will not be given with respect to any actions that may arise in the
future.
In June 2004, one of our former hourly restaurant employees filed a class
action lawsuit against us in the Superior Court of California of Orange County.
We requested and were granted a motion to move the suit from Orange County to
Los Angeles County. The lawsuit was then filed in the Superior Court of
California of Los Angeles County in December 2004. The plaintiff has alleged
violations of California labor laws with respect to providing meal and rest
breaks. The lawsuit sought unspecified amounts of penalties and other monetary
payments on behalf of the plaintiffs and other purported class members. We
believe that all of our employees were provided with the opportunity to take all
required meal and rest breaks. The Company filed a motion to dismiss several of
the claims, which is scheduled to be argued in court in May 2005. Concurrently,
discovery is continuing in these matters and we intend to vigorously defend our
position in all of these matters although the outcome cannot be ascertained at
this time.
In November 2004, a sexual harassment case was filed against the Company in
Superior Court of California of Los Angeles. We filed a motion to dismiss and
the case was dismissed with the plaintiff having the right to re-file. The
plaintiff re-filed the case. We filed a second motion to dismiss in March 2005
as we believe the suit is unfounded.
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 26, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
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
----- -----
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
2004 - First Quarter 3.650 2.460
Second Quarter 3.440 1.800
Third Quarter 2.960 1.550
Fourth Quarter 2.530 1.450
16
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At April 11, 2005, the closing bid price of our Common Stock was $2.75.
As of April 11, 2005, there were approximately 1,200 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 financial results
for fiscal years 2003, 2002, 2001 and 2000 have been restated. See footnote 1 to
the consolidated financial statements for the impact of the restatement on the
2003 and 2002 results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the impact of the
restatement on 2001 and 2000. 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
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- -------- --------- --------- ---------
Restated Restated Restated Restated
(In thousands except per share data)
Statement of Operations Data:
Sales $ 49,938 $ 45,858 $ 41,826 $ 45,022 $ 45,454
Reimbursed managed outlet operating expenses 12,439 9,728 7,270 3,594 3,510
Management and license fees 1,282 1,037 901 771 957
--------- -------- --------- --------- ---------
Total revenues 63,659 56,623 49,997 49,387 49,921
Operating expenses:
Cost of sales 14,465 13,274 11,927 12,915 13,605
Restaurant operating expenses 30,552 28,050 25,649 27,100 27,272
Managed outlet operating expenses 12,439 9,772 7,557 3,594 3,510
General and administration 4,472 3,696 3,426 3,381 3,142
Depreciation and amortization 2,005 1,816 1,868 1,838 1,655
Pre-opening costs 167 182 69 199 330
Gain on sale of assets (2) (11) (71) (225) -
Unusual charges - - - - 73
--------- -------- --------- --------- ---------
Total 64,098 56,779 50,425 48,802 49,587
Income (loss) from operations (439) (156) (428) 585 334
Interest expense, net (272) (331) (364) (564) (580)
--------- -------- --------- --------- ---------
Income (loss) before taxes and minority
interest (711) (487) (792) 21 (246)
Provision for income taxes (65) (89) (37) (65) (14)
Minority interest 814 704 422 110 (59)
--------- -------- --------- --------- ---------
Net income (loss) 38 128 (407) 66 (319)
--------- -------- --------- --------- ---------
Preferred dividends accrued (50) (50) (50) (50) (50)
--------- -------- --------- --------- ---------
Net income (loss) applicable to
common stock $ (12) $ 78 $ (457) $ 16 $ (369)
========= ========= ========= ========= =========
Net income (loss) per share applicable
to common stock:
Basic $ 0.00 $ 0.01 $ (0.08) $ 0.00 $ (0.09)
========= ========= ========= ========= =========
Diluted $ 0.00 $ 0.01 $ ( 0.08) $ 0.00 $ (0.09)
========= ========= ========= ========= =========
Weighted average shares outstanding
Basic 5,608,541 5,537,071 5,537,071 4,776,741 4,104,360
========= ========= ========= ========= =========
Diluted 5,608,541 5,640,842 5,537,071 4,776,741 4,104,360
========= ========= ========= ========= =========
18
Fiscal Year Ended December
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- -------- --------- --------- ---------
Restated Restated Restated Restated
(In thousands except per share data)
Balance Sheet Data:
Working capital surplus (deficit) $ 209 $ 378 $ (1,045) $ (628) $(2,702)
Total assets 19,749 17,047 16,579 17,321 16,069
Long-term debt, less
current portion 977 1,254 1,743 2,371 3,842
Stockholders' equity 3,830 3,744 3,616 4,023 1,866
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 38 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.
Our revenues are derived from sales at company-owned restaurants,
management and license fees from restaurants managed or licensed by us and
reimbursements of operating expenses of managed outlets.
During the fiscal year ended December 26, 2004, we owned and operated, for
the full fiscal year, thirteen restaurants (ten Daily Grill and four Grill
restaurants), including two Daily Grill and three Grill restaurants owned in
partnership with third parties. During fiscal 2004, we also operated one fully
owned Daily Grill that opened in January.
Also during fiscal 2004, we managed or licensed, for the full fiscal year,
six Daily Grill restaurants. During fiscal 2004, we commenced management of one
Daily Grill that opened in November and terminated our license relating to the
San Jose City Bar and Grill.
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. During 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.
Sales revenues are derived from sales of food, beer, wine, liquor and
non-alcoholic beverages. Approximately 73% of combined 2004 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.
Management and license fee revenues are derived from individually
negotiated arrangements by which we manage restaurants on behalf of third
parties or license to third parties the right to operate Daily Grill
restaurants. Management and license fees are primarily influenced by the number
of management and license arrangements in place, the negotiated management or
license fee and the revenues of the managed or licensed restaurants. Management
and license fees typically range from five to eight percent of gross sales of
the subject restaurants.
Revenues derived from reimbursement of operating expenses of managed
outlets relate to contractual undertakings relating to managed restaurants
wherein we assume responsibility for some or all operating expenses of managed
restaurants and the restaurant owner undertakes to reimburse all of those
expenses. Pursuant to the guidance of EITF 01-14 and EITF 99-19, we are
considered to be the primary obligor with respect to the reimbursed expenses
and, as such, report the reimbursed expenses as revenues with the expenses being
reported as "Reimbursed Costs" under operating expenses.
19
Expenses are comprised primarily of cost of food and beverages, restaurant
operating expenses, including payroll, rent and occupancy costs and reimbursed
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. Reimbursed costs are costs incurred on
behalf of managed restaurants that are reimbursable by the managed restaurant.
We typically analyze these costs as a percentage of restaurant sales, not total
revenues.
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.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company began a review of its lease accounting policies following
announcements in February 2005 that the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants regarding lease accounting issues. As a result of
our review, the Company has revised its accounting for leases in 2004 and
restated its historical financial statements as of December 28, 2003 and for
each of the two years in the period then ended, as well as the historical
financial data as of and for the fiscal years 2001 and 2000 and the 2003 and
2004 quarterly financial data, to correct for these errors in its lease
accounting. The Company has also corrected the accounting for complimentary
meals and promotional activities as part of this restatement process.
Historically, the Company recognized straight-line rents and amortized
lessor lease incentives using the initial non-cancelable term of the lease
commencing on the date rent payments began. Under generally accepted accounting
principles, the Company should have recognized rent expense (net of the related
lessor lease incentive amortization) on a straight-line basis over the term of
the lease as defined in SFAS No. 13 which begins on the later of when the
Company had access to the site or the lease is executed. The impact of correctly
calculating rent expense and lessor lease incentive amortization was to increase
restaurant operating expenses and decrease general and administrative expenses
by $117,000 and $1,000, respectively, for fiscal year 2003, to decrease
restaurant operating expenses and general and administrative expenses by $61,000
and $4,000, respectively, for fiscal year 2002, to decrease restaurant operating
expenses and general and administrative expenses by $135,000 and $18,000,
respectively, for fiscal year 2001, and to increase restaurant operating
expenses and decrease general and administrative expenses by $32,000 and
$80,000, respectively, for fiscal year 2000. The Company also increased other
current assets by $1,116,000 and $228,000 in fiscal years 2003 and 2002,
respectively, to recognize a receivable for tenant improvement allowances to be
received, increased fixed assets by $272,000 in fiscal year 2002 to recognize
additional construction in progress and increased long-term liabilities by
$2,862,000, $2,129,000, $1,694,000 and $1,849,000 for deferred rent and lease
incentives, to properly reflect the correct lease accounting in each of the
fiscal years 2003, 2002, 2001 and 2000, respectively.
In closing the 2004 books and records, the Company also reviewed the
estimated useful lives that it was using to amortize its leasehold improvements.
In the case of six restaurants, it was found that the incorrect lives had been
used. The Company has revised the amortization period to reflect the shorter of
their estimated useful lives or the initial lease term. The impact of the change
is to increase depreciation and amortization expense by $70,000, $69,000,
$76,000 and $15,000 in fiscal years 2003, 2002, 2001, 2000, respectively.
A portion of the above adjustments was recorded on the books of the LLC's
in which we have a majority ownership or we consolidate under FIN 46R. As
discussed in the footnotes to the consolidated financial statements the Company
allocates results to the minority interests based on the underlying economics of
the investment. The impact of the above adjustments increased/(decreased) the
amount of loss allocated to the minority interests by $256,000, $6,000 and
($16,000) in fiscal years 2003, 2002 and 2001, respectively, and increased the
amount of income allocated to the minority interests by $22,000 in fiscal year
2000.
20
During fourth quarter of 2004, the Company eliminated amounts that had
previously been recorded as restaurant sales revenue arising from complimentary
meals and promotional activities. The Company's previous method of recording
these activities as restaurant sales revenue at the full retail price of each
item with a corresponding increase in operating expense is not in accordance
with generally accepted accounting principles. Historically the amounts
associated with complimentary meals and promotional activities have been
recorded as restaurant revenues, with an offsetting amount in restaurant
operations and corporate general and administrative expenses. As revised, the
Company has eliminated the complimentary portion of meals and promotional
activities from revenues and operating expenses. As a result of these
adjustments, revenue and expenses were decreased by $1.7 million, $1.5 million,
$1.5 million and $1.4 million in fiscal years 2003, 2002, 2001 and 2000,
respectively. These adjustments have no impact on previously reported net
income.
The individual per share impact of each adjustment noted above was not
considered material. The overall impact on earnings per share is shown below in
the tables that follow.
The above revisions impacted the balance sheets, statements of operations
and statements of cash flows for each of the fiscal years 2000 to 2003. The
impact of all the above is as follows:
The following table reflects the effects of the restatement on the
Consolidated Balance Sheet:
DECEMBER 28, 2003
As previously reported Restated
Prepaid expenses and other
current assets $ 612,000 $ 1,728,000
Total current assets 3,931,000 5,047,000
Furniture, equipment and
improvements, net 11,061,000 10,988,000
Total Assets 16,005,000 17,047,000
Other Long Term Liabilities 2,734,000 5,596,000
Total Liabilities 8,657,000 11,519,000
Minority Interest 2,058,000 1,784,000
Accumulated Deficit (8,311,000) (9,857,000)
Total Stockholders Equity 5,290,000 3,744,000
Total Liabilities & Equity 16,005,000 17,047,000
DECEMBER 29, 2002
As previously reported Restated
Prepaid expenses and other
current assets $ 532,000 $ 760,000
Total current assets 3,285,000 3,513,000
Furniture, equipment and
improvements, net 11,088,000 11,356,000
Total Assets 16,083,000 16,579,000
Other Long Term Liabilities 1,739,000 3,868,000
Total Liabilities 8,040,000 10,169,000
Minority Interest 2,811,000 2,794,000
Accumulated Deficit (8,369,000) (9,985,000)
Total Stockholders Equity 5,232,000 3,616,000
Total Liabilities & Equity 16,083,000 16,579,000
DECEMBER 30, 2001
As previously reported Restated
Furniture, equipment and
improvements, net $ 11,687,000 $ 11,752,000
Total Assets 17,256,000 17,321,000
Other Long Term Liabilities 1,864,000 3,558,000
Total Liabilities 9,259,000 10,953,000
Minority Interest 2,356,000 2,345,000
Accumulated Deficit (7,960,000) (9,578,000)
Total Stockholders Equity 5,641,000 4,023,000
Total Liabilities & Equity 17,256,000 17,321,000
21
DECEMBER 28, 2000
As previously reported Restated
Furniture, equipment and
improvements, net $ 12,230,000 $ 12,372,000
Total Assets 15,927,000 16,069,000
Other Long Term Liabilities 1,960,000 3,809,000
Total Liabilities 10,940,000 12,789,000
Minority Interest 1,441,000 1,414,000
Accumulated Deficit (7,964,000) (9,644,000)
Total Stockholders Equity 3,546,000 1,866,000
Total Liabilities & Equity 15,927,000 16,069,000
The following table reflects the effects of the restatement on the Consolidated
Statement of Operations:
December 28, 2003 December 29, 2002
As previously Restated As previously Restated
reported reported
------------------------------- -------------------------------
Sales $ 47,578,000 $ 45,858,000 $ 43,336,000 $ 41,826,000
Total Revenues 58,343,000 56,623,000 51,507,000 49,997,000
Restaurant operating expenses 29,535,000 28,050,000 27,082,000 25,649,000
General & administrative 3,815,000 3,696,000 3,568,000 3,426,000
Depreciation & amortization 1,746,000 1,816,000 1,799,000 1,868,000
Total operating expenses 58,313,000(1) 56,779,000 51,931,000(1) 50,425,000
Income (loss) from operations 30,000 (156,000) (424,000) (428,000)
Loss before taxes & minority
interest (301,000) (487,000) (788,000) (792,000)
Loss before minority interest (390,000) (576,000) (825,000) (829,000)
Minority interest 448,000 704,000 416,000 422,000
Net income (loss) 58,000 128,000 (409,000) (407,000)
Net income (loss) applicable
to common stock 8,000 78,000 (459,000) (457,000)
Net income (loss) per share
applicable to common stock:
Basic Net Income (loss) $ 0.00 $ 0.01 $ (0.08) $ (0.08)
Diluted Net Income (loss) $ 0.00 $ 0.01 $ (0.08) $ (0.08)
22
December 30, 2001 December 31, 2000
As previously Restated As previously Restated
reported reported
------------------------------- -------------------------------
Sales $ 46,541,000 $ 45,022,000 $ 46,809,000 $ 45,454,000
Total Revenues 50,906,000 49,387,000 51,276,000 49,921,000
Restaurant operating expenses 28,624,000 27,100,000 28,460,000 27,272,000
General & administrative 3,530,000 3,381,000 3,357,000 3,142,000
Depreciation & amortization 1,762,000 1,838,000 1,640,000 1,655,000
Total operating expenses 50,399,000(1) 48,802,000 50,975,000(1) 49,587,000
Income from operations 507,000 585,000 301,000 334,000
Income (loss) before taxes
& minority interest (57,000) 21,000 (279,000) (246,000)
Loss before minority interest (122,000) (44,000) (293,000) (260,000)
Minority interest 126,000 110,000 (37,000) (59,000)
Net income (loss) 4,000 66,000 (330,000) (319,000)
Net income (loss) applicable
to common stock (46,000) 16,000 (380,000) (369,000)
Net income (loss) per share
applicable to common stock:
Basic Net Income $ (0.01) $ 0.00 $ (0.09) $ (0.09)
Diluted Net Income $ (0.01) $ 0.00 $ (0.09) $ (0.09)
(1) Includes cost of sales amounts that were not included in the "Total
operating expenses" subtotal in prior financial statements.
23
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of total
revenues from our Statements of Operations during 2004, 2003 and 2002. As noted
above, we typically analyze our operating expenses as a percentage of sales
revenues, not total revenues.
Fiscal Year Ended December
--------------------------
2004 2003 2002
---- ---- ----
Restated Restated
Sales revenues 78.5% 81.0% 83.7%
Cost reimbursements 19.5 17.2 14.5
Management and licensing fees 2.0 1.8 1.8
------ ------ ------
Total revenues 100.0 100.0 100.0
Cost of sales 22.7 23.4 23.9
Restaurant operating expense 48.0 49.5 51.3
Reimbursed costs 19.5 17.4 15.1
General and administrative expense 7.0 6.5 6.9
Depreciation and amortization 3.2 3.2 3.7
Pre-opening costs 0.3 0.3 0.1
Gain on sale of assets (0.0) (0.0) (0.1)
------ ------ ------
Total operating expenses 100.7 100.3 100.9
------ ------ ------
Operating income (loss) (0.7) (0.3) (0.9)
Interest expense, net (0.4) (0.6) (0.7)
------ ------ ------
Loss before income tax (1.1) (0.9) (1.6)
Provision for taxes (0.1) (0.2) (0.1)
Minority interest 1.3 1.3 0.8
------ ------ ------
Net income (loss) 0.1% 0.2% (0.9)%
======= ====== =======
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
Revenues. Revenues for 2004 increased 12.4% to $63.7 million from $56.6
million in 2003. Sales revenues increased 8.9% to $49.9 million in 2004 from
$45.9 million in 2003. Reimbursed managed outlet operating expenses increased
27.9% to $12.4 million from $9.7 million in 2003. Management and license fee
revenues increased to $1.3 million in 2004 from $1.0 million in 2003. The
restaurant sales information excludes revenue related to reimbursed operating
expenses and management and license fees.
Sales for Daily Grill restaurants increased by 12.5% from $30.1 million in
2003 to $33.8 million in 2004. The increase in sales revenues for the Daily
Grill restaurants from 2003 to 2004 was primarily attributable to an increase in
same store sales of 4.6% ($1.3 million) for restaurants open for 12 months in
both 2004 and 2003 and opening of the Bethesda Daily Grill ($2.9 million) and a
decrease at our South Bay Daily Grill ($400,000). Weighted average weekly sales
at the Daily Grill restaurants decreased 1.1% from $58,052 in 2003 to $57,757 in
2004.
Sales for Grill restaurants increased by 2.1% from $15.8 million in 2003 to
$16.1 million in 2004. The increase in sales revenues for the Grill restaurants
from 2003 to 2004 was attributable to the improved check averages partially
offset by decreased guest counts. Weighted average weekly sales at the Grill
restaurants increased 2.1% from $75,971 in 2003 to $77,545 in 2004.
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.
24
Cost reimbursements increased in 2004 primarily due to the full year
operation of Portland Daily Grill, the opening of Long Beach Daily Grill and
improved sales at other managed restaurants.
Management and license fee revenues during 2004 were attributable to (1)
hotel restaurant management services which accounted for $1,073,000 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 $209,000.
The increase in management fees during 2004 was attributable to (1) management
of the Portland Daily Grill open a full year compared to 15 weeks in 2003, (2) a
26.6% increase in sales at the San Francisco Daily Grill and (3) sales increase
of over 6% at the Georgetown Daily Grill, Burbank Daily Grill and Houston Daily
Grill. We have reserved 100% of the Portland management due to slower than
expected sales. We terminated the licensed operation of the San Jose City Bar
and Grill in 2004.
Operating Expenses and Operating Results. Total operating expenses,
including cost of sales, restaurant operating expenses, reimbursed costs,
general and administrative expense, depreciation and amortization, and
pre-opening costs, increased 12.9% to $64.1 million in 2004 from $56.8 million
in 2003.
Cost of Sales. Cost of sales consists exclusively of the cost of food and
beverages sold. Cost of sales increased by 9.0% ($1.2 million) and increased
slightly as a percentage of sales to 29.0% in 2004 compared to 28.9% in 2003.
The increase in cost of sales reflects the opening of new restaurants and higher
revenues, generally. The slight increase in cost of sales as a percentage of
sales reflects fluctuation in food costs.
Restaurant Operating Expenses. Restaurant operating expenses consist of
wages and benefits of restaurant personnel and all other operating expenses. The
operating expenses include, but are not limited to, supplies, advertising,
occupancy, maintenance and utilities. Restaurant operating expenses increased
8.9% to $30.6 million in 2004 from $28.1 million in 2003. As a percentage of
sales, restaurant operating expenses represented 61.2% in both 2004 and 2003.
The opening during 2004 of the Bethesda Daily Grill accounted for $1.9 million
of the increase. For comparable restaurants the expenses as a percentage of
sales improved slightly to 60.3% from 60.5% in 2003.
Reimbursed Costs. Reimbursed costs increased 27.3% from $9.8 million in
2003 to $12.4 million in 2004. These expenses represent the operating costs for
which we are the primary obligor of the restaurants we do not consolidate. The
increase is primarily due to the full year operations of the Portland Daily
Grill, the opening of the Long Beach Daily Grill and improved sales at other
restaurants.
General and Administrative. General and administrative expenses rose to
$4.5 million in 2004 compared to $3.7 million in 2003. General and
administrative expenses represented 7.0% of total revenues in 2004 as compared
to 6.5% of total revenues in 2003. The increase was the result of higher payroll
and related benefits related to building staff for our growth ($367,000),
increased professional services ($248,000), increased travel due to new
locations ($76,000), and reserve for uncollected management fees ($109,000).
Depreciation and Amortization. Depreciation and amortization expense was
$2.0 million during 2004 and $1.8 million in 2003. The increase was due
primarily to the addition of the Bethesda Daily Grill.
Pre-opening costs. Pre-opening costs totaled $167,000 in 2004 as compared
with $182,000 in 2003. 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 $272,000 during 2004 as
compared to $331,000 in 2003. The decrease in interest expense was primarily
attributable to reduced debt levels as a result of the maturing of loans.
Provision for income taxes. The income tax provision for 2004 and 2003 are
due mainly to state taxes as the company has a federal net operating loss to
carry forward. The tax rates in 2004 and 2003 were comprised of the federal and
state statutory rates, less any permanent items and tax credits based on the
annual estimated effective tax rates for the respective years.
25
Minority Interest. We reported a minority interest in the loss of our
majority owned subsidiaries of $814,000 during 2004, consisting of a minority
interest in the earnings of San Jose Grill on the Alley, LLC of $154,000, a
minority interest in the loss of The Grill on Hollywood, LLC of $357,000, a
minority interest in the loss of The Daily Grill at Continental Park, LLC of
$483,000, a minority interest in the loss of the 612 Flower Daily Grill LLC of
$3,000 and a partnership loss in the Universal CityWalk Daily Grill of $125,000.
During 2003 we reported a minority interest in the loss of our majority owned
subsidiaries of $704,000, consisting of a minority interest in the earnings of
San Jose Grill on the Alley, LLC of $141,000, a minority interest in the loss of
The Grill on Hollywood, LLC of $366,000 and a minority interest allocation from
The Daily Grill at Continental Park of $334,000 and partnership loss in the
Universal CityWalk Daily Grill of $145,000. The Company allocates profits and
losses to the minority interest in its partially owned subsidiaries based on the
underlying economics of the investment. These may or may not reflect the
Company's ownership percentage and can be inconsistent with the allocation
provisions specified in the joint venture agreements. Where there is a disparity
among the ownership percentages, the terms of the agreements and the underlying
economics, the Company utilizes a hypothetical liquidation model to allocate
profits and losses. Under this model, all of the venture's assets and
liabilities as reflected in the balance sheet are assumed to be realized at
their GAAP carrying values. The hypothetical liquidating proceeds are calculated
at the end of each period and applied to the capital accounts as would occur
under a true liquidation scenario. The change in this balance from period to
period represents the investors' share of the income or loss.
Net Income. We reported a net income of $38,000 in 2004 as compared to a
net income of $128,000 in 2003.
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Revenues. Revenues for 2003 increased 13.3% to $56.6 million from $50.0
million in 2002. Sales revenues increased 9.6% to $45.9 million in 2003 from
$41.8 million in 2002. Reimbursed managed outlet operating expenses increased
33.8% to $9.7 million from $7.3 million in 2002. Management and license fee
revenues increased to $1.0 million in 2003 from $0.9 million in 2002. The
restaurant sales information excludes revenue related to reimbursed operating
expenses and management and license fees.
Sales for Daily Grill restaurants increased by 10.7% from $27.2 million in
2002 to $30.1 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 ($2.6 million),
offset by the closure of the Encino Daily Grill ($0.5 million) and the Cherry
Hill Pizzeria Uno ($0.5 million). Weighted average weekly sales at the Daily
Grill restaurants increased 8.1% from $53,701 in 2002 to $58,052 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 8.1% from $14.6 million in 2002 to
$15.8 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
from $70,252 in 2002 to $75,971 in 2003.
Reimbursed costs which represent employee and other operating expenses of
managed restaurants for which we are reimbursed by the restaurants increased in
2003 primarily due to the opening of Portland Daily Grill and the full year of
operations for San Francisco Daily Grill and Houston Daily Grill, which were
open for a partial year in 2002.
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. 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.
26
Operating Expenses and Operating Results. Total operating expenses,
including cost of sales, restaurant operating expenses, managed outlet operating
expenses, general and administrative expense, depreciation and amortization, and
pre-opening costs, increased 12.6% to $56.8 million in 2003 from $50.4 million
in 2002.
Cost of Sales. Cost of sales consists exclusively of the cost of food and
beverages sold. While sales revenues increased by 9.6% ($4.0 million) in 2003
as compared to 2002, cost of sales increased by 11.3% ($1.3 million) and
increased as a percentage of sales from 28.5% in 2002 to 28.9% in 2003. The
increase in cost of sales as a percentage of restaurant sales was attributable
to higher beef costs during the second half of the year.
Restaurant Operating Expenses. Restaurant operating expenses consist of
wages and benefits of restaurant personnel and all other operating expenses.
The operating expenses include, but are not limited to, supplies, advertising,
occupancy, maintenance and utilities. Restaurant operating expenses increased
9.4% to $28.1 million in 2003 from $25.7 million in 2002. As a percentage of
restaurant sales, restaurant operating expenses represented 61.3% in 2003
compared to 61.3% in 2002. The dollar increase in restaurant operating expenses
followed the sales increase and was negatively impacted by increases in
marketing, stock option compensation expense, workers' compensation and general
insurance. The decrease in operating expenses as a percentage of sales resulted
from improved labor management.
Reimbursed Costs. Reimbursed costs expenses increased 29.3% from $7.6
million in 2002 to $9.8 million in 2003. These expenses represent the operating
costs for which we are the primary obligor of the restaurants we do not
consolidate. The increase is primarily due to the opening of the Portland Daily
Grill and the full year of operations for San Francisco Daily Grill and Houston
Daily Grill, which were open for a partial year in 2002.
General and Administrative. General and administrative expenses rose
slightly to $3.7 million in 2003 compared to $3.4 million in 2002. General and
administrative expenses represented 6.5% of total revenues in 2003 as compared
to 6.9% of total revenues in 2002. While these expenses in total were nearly
equal, there were increases in payroll and related benefits, stock option
compensation expense, professional services and rent, partially offset by
decreases in recruitment costs and office expenses.
Depreciation and Amortization. Depreciation and amortization expense was
$1.8 million during 2003 and $1.9 million during 2002.
Pre-opening Costs. 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 $331,000 during 2003 as
compared to $364,000 in 2002. The decrease in interest expense was primarily
attributable to the maturing of the loans.
Provision for income taxes. The income tax provision for 2003 and 2002
are due mainly to state taxes as the company has a federal net operating loss to
carry forward. The tax rates in 2003 and 2002 were comprised of the federal and
state statutory rates, less any permanent items and tax credits based on the
annual estimated effective tax rates for the respective years.
Minority Interest. We reported a minority interest in the loss of our
majority owned subsidiaries of $704,000 during 2003, consisting of a minority
interest in the earnings of San Jose Grill on the Alley, LLC of $141,000, a
minority interest in the loss of The Grill on Hollywood, LLC of $366,000, a
minority interest in the loss of The Daily Grill at Continental Park, LLC of
$334,000 and a partnership loss in the Universal CityWalk Daily Grill of
$145,000. We reported a minority interest in the loss of our majority owned
subsidiaries of $422,000 for the year ended December 29, 2002 comprised of a
minority interest in the earnings of San Jose Grill on the Alley, LLC of
$111,000, a minority interest in the loss of The Grill on Hollywood, LLC of
$307,000 and a minority interest allocation from The Daily Grill at Continental
Park of $3,000 and a partnership loss in the Universal CityWalk Daily Grill of
$229,000.
Net Income/(Loss). We reported net income of $128,000 in 2003 as compared
to a net loss of $407,000 for 2002.
27
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION AND SHORT-TERM LIQUIDITY. At December 26, 2004, we had a
working capital surplus of $209,000 and a cash balance of $1.4 million as
compared to a working capital surplus of $378,000 and a cash balance of $1.5
million at December 28, 2003. In 2004 we generated cash from operations of
$4.1 million which included tenant improvement allowances of $2.1 million,
purchased fixed assets of $2.9 million increased restricted cash of $0.8
million and repaid debt of $0.5 million. During 2003 we generated cash from
operations of $1.8 million used cash to purchase fixed assets of $1.4 million
and repay debt of $0.7 million.
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. Funds necessary to operate restaurants under
management agreements are usually funded by cash generated by the restaurants.
Sales from these outlets are deposited into an agency account belonging to the
owner and we pay the outlet operating expenses, including our fee, from this
agency account. Historically, we have funded our day-to-day operations through
operating cash flows that have ranged from a $803,000 to $4.1 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 26, 2004, the Company had $45,000 owing
under equipment leasing financing transactions, an obligation to a member of
Chicago - The Grill on the Alley, LLC of $1.0 million for a guaranteed return of
its invested capital, loans from stockholders/ officers/directors of $0.2
million, equipment loans of $0.2 million, and loans/advances from a landlord of
$0.1 million.
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 loan had been paid in full at December
26, 2004.
In June 2004, we finalized an agreement with respect to the establishment
of a new bank credit facility to replace our facility that expired in October
2004. Under the terms of the new bank credit facility, we have been provided
with financing in the form of a revolving line of credit in the amount of
$500,000, an irrevocable standby letter of credit in the amount of $700,000,
increased to $860,000 in January 2005, and equipment financing in the amount of
$500,000. The facility has a one-year term, is secured by assets and is subject
to certain standard borrowing covenants. We have not utilized any funds from the
current or prior lines of credit dating back to 2001 except for $45,000 of
equipment leasing in 2004; therefore, there should be no negative impact if the
current facility is not extended. Interest is at the bank's variable reference
rate. Although we were in default of a covenant at year-end, the bank has
granted us a waiver.
We held preliminary talks with the bank to renew its existing credit lines
for another year. Given the expected capital expenditures of approximately
$600,000 (net of $3.5 million in both landlord reimbursements and joint venture
contributions) for the new restaurants planned for 2005 and refurbishments on
existing restaurants, management believes we will be able to meet our expected
obligations from our existing cash flow from operations if it is unable to
secure bank financing.
OPERATING LEASES. During 2004, we, and our subsidiaries, were obligated
under eighteen leases covering the premises in which our Daily Grill and Grill
Restaurants are located as well as leases on our executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $3.7 million in 2004 and percentage rent obligations, above and
beyond minimum rent, of $0.7 million. Our minimum rent obligations for 2005 are
$3.3 million.
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.
28
The following table details our contractual obligations as of December
26, 2004:
Payments due by period
-----------------------------------------------------------------------------
Total 2005 2006 - 2007 2008 - 2009 Thereafter
Long-term debt $ 1,467,000 $ 490,000 $ 386,000 $ 465,000 $ 126,000
Capital lease obligations -