SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the transition period from ______________ to ______________.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 820-5559
--------------
(Registrant's telephone number, including area code)
_____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of May 5, 2004, 5,588,019 shares of Common Stock of the issuer were
outstanding.
1
GRILL CONCEPTS, INC.
--------------------
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - March 28, 2004 (restated)
and December 28, 2003 (restated) . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations - For the three
months ended March 28, 2004 (restated) and March 30, 2003 (restated) 5
Consolidated Condensed Statements of Cash Flows - For the three
months ended March 28, 2004 (restated) and March 30, 2003 (restated) 6
Notes to Consolidated Condensed Financial Statements . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . 42
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 42
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 43
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 44
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
EXPLANATORY NOTE
----------------
This amended Form 10-Q/A for the quarter ended March 28, 2004 is being filed to
restate our financial statements to properly account for certain of the
Company's joint ventures, record costs and revenues associated with reimbursed
costs under management agreements, make other miscellaneous corrections and
reflect the retroactive adoption of FIN 46 (see Note 1 to the financial
statements) and to reflect resulting corrections to the Management Discussion
and Analysis in Part I, Item 2. Part I, Item 4. Controls and Procedures has
also been amended to reflect the foregoing. Except as noted, this Amendment
speaks as of the original filing date and has not been updated to reflect events
occurring subsequent to the original filing date.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 28, December 28,
2004 2003
(restated) (restated)
------------ --------------
Current assets:
Cash and cash equivalents $ 1,415,000 $ 1,496,000
Inventories 586,000 585,000
Receivables, net of reserve ($13,000 in 2004 and 2003) 488,000 658,000
Reimbursable costs receivable 542,000 580,000
Prepaid expenses and other current assets 895,000 612,000
------------ --------------
Total current assets 3,926,000 3,931,000
Furniture, equipment and improvements, net 11,857,000 11,061,000
Goodwill, net 205,000 205,000
Liquor licenses 350,000 350,000
Restricted cash 72,000 72,000
Note receivable 112,000 111,000
Other assets 247,000 275,000
------------ --------------
Total assets $ 16,769,000 $ 16,005,000
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
March 28, December 28,
2004 2003
(restated) (restated)
------------ --------------
Current liabilities:
Accounts payable $ 1,347,000 $ 1,046,000
Accrued expenses 2,313,000 2,400,000
Reimbursable costs payable 542,000 580,000
Current portion of long term debt 360,000 298,000
Current portion notes payable - related parties 321,000 345,000
------------ --------------
Total current liabilities 4,883,000 4,669,000
Long-term debt 104,000 285,000
Notes payable - related parties 935,000 969,000
Other long-term liabilities 3,536,000 2,734,000
------------ --------------
Total liabilities 9,458,000 8,657,000
Minority interest 1,898,000 2,058,000
Stockholders' equity:
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, none
issued and outstanding in 2004 and 2003 - -
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, 500 shares issued
and outstanding in 2004 and 2003 - -
Common stock, $.00004 par value; 12,000,000 shares
authorized in 2004 and 2003, 5,588,019 issued and
outstanding in 2004 and 5,537,071 issued and
outstanding 2003 - -
Additional paid-in capital 13,627,000 13,601,000
Accumulated deficit (8,214,000) (8,311,000)
------------ --------------
Total stockholders' equity 5,413,000 5,290,000
------------ --------------
Total liabilities, minority interest and stockholders' equity $16,769,000 $ 16,005,000
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
--------------------------
March 28, March 30,
2004 2003
------------ ------------
(restated) (restated)
Revenues:
Sales $13,510,000 $12,134,000
Cost reimbursements 3,190,000 2,067,000
Management and license fees 296,000 231,000
------------ ------------
Total revenues 16,996,000 14,432,000
Cost of sales (exclusive of depreciation,
presented separately below) 3,772,000 3,283,000
------------ ------------
Gross profit 13,224,000 11,149,000
------------ ------------
Operating expenses:
Restaurant operating expenses 8,125,000 7,308,000
Reimbursed costs 3,190,000 2,067,000
General and administrative 1,227,000 910,000
Depreciation and amortization 449,000 502,000
Pre-opening costs 147,000 187,000
Gain on sale of assets - (11,000)
------------ ------------
Total operating expenses 13,138,000 10,963,000
------------ ------------
Income from operations 86,000 186,000
Interest expense, net (66,000) (83,000)
------------ ------------
Income before provision for income taxes
and minority interest 20,000 103,000
Provision for income taxes (23,000) (55,000)
Minority interest in net loss of subsidiaries 100,000 196,000
------------ ------------
Net income 97,000 244,000
Preferred dividends accrued (13,000) (13,000)
------------ ------------
Net income applicable to common stock $ 84,000 $ 231,000
============ ============
Net income per share applicable to common stock:
Basic net income $ 0.02 $ 0.04
============ ============
Diluted net income $ 0.01 $ 0.04
============ ============
Weighted average share outstanding:
Basic 5,545,864 5,537,071
============ ============
Diluted 6,192,910 5,537,071
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
-------------------------
March 28, March 30,
2004 2003
------------ -----------
Cash flows from operating activities: (restated) (restated)
Net income $ 97,000 $ 244,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 449,000 502,000
Stock based compensation expense 187,000 5,000
Gain on sale of assets - (11,000)
Minority interest in loss of subsidiaries (100,000) (196,000)
Changes in operating assets and liabilities:
Inventories (1,000) (25,000)
Receivables 170,000 (234,000)
Reimbursable costs receivable 38,000 (9,000)
Prepaid expenses and other current assets (287,000) (292,000)
Other assets 28,000 1,000
Accounts payable 301,000 49,000
Accrued expenses (276,000) (353,000)
Reimbursable costs payable (38,000) 9,000
Other long-term liabilities (83,000) (44,000)
------------ -----------
Net cash provided by (used in) operating activities 485,000 (354,000)
------------ -----------
Cash flows from investing activities:
Purchase of furniture, equipment and improvements (1,241,000) (184,000)
Restricted cash for Daily Grill at Continental Park, LLC - 466,000
Proceeds from sale of assets - 26,000
------------ -----------
Net cash provided by (used in) investing activities (1,241,000) 308,000
------------ -----------
Cash flows from financing activities:
Tenant improvement allowances 885,000 -
Proceeds from minority interests 35,000 -
Payments on related party debt (58,000) (61,000)
Payments on long term debt (119,000) (98,000)
Return of capital and profits to minority shareholder (68,000) (72,000)
------------ -----------
Net cash provided by (used in) financing activities 675,000 (231,000)
------------ -----------
Net decrease in cash and cash equivalents (81,000) (277,000)
Cash and cash equivalents, beginning of period 1,496,000 1,275,000
------------ -----------
Cash and cash equivalents, end of period $ 1,415,000 $ 998,000
============ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 51,000 $ 59,000
Income taxes $ 36,000 $ 16,000
The accompanying notes are an integral part of these consolidated financial
statements.
6
GRILL CONCEPTS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have
not been audited by independent auditors. The December 28, 2003 balance
sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should be
read in conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 28, 2003, as amended on
October 15, 2004. In the opinion of management, these interim financial
statements reflect all adjustments of a normal recurring nature necessary
for a fair statement of the results for the interim periods presented. The
current period results of operations are not necessarily indicative of
results, which ultimately will be reported for the full year ending
December 26, 2004.
RESTATEMENT FOR CORRECTION OF ERRORS AND RETROACTIVE ADOPTION OF FIN 46
The accompanying consolidated financial statements as of December 28, 2003
and for the three-month period ended March 30, 2003 were restated on May
14, 2004 from those originally issued to reflect certain adjustments
related to stock compensation and other miscellaneous adjustments, and the
consolidated financial statements as of March 28, 2004 and December 28,
2003 and for the three-month periods ended March 28, 2004 and March 30,
2003 (as previously restated) were subsequently restated on October 15,
2004 to further reflect additional adjustments to revise the accounting for
certain of the Company's ventures, record costs and revenues associated
with reimbursed costs under management agreements and make other
miscellaneous corrections. Additionally, the Company revised its financial
statements as of and for the three months ended March 28, 2004 to correct
for the initial adoption of FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51," (FIN 46)
which was first effective for this quarter.
In connection with the restatement resulting from these errors, the Company
has elected to apply the retroactive adoption provisions of FIN 46 in these
restated financial statements and adjust previously reported amounts as of
December 28, 2003 and for the three months ended March 30, 2003 to give
effect to the adoption of FIN 46 as if it had been applied for all periods
presented. (Note - Except where there is no change to diluted earnings per
share, the impact of each adjustment on diluted earnings per share has been
identified below.)
RETROACTIVE ADOPTION OF FIN 46
------------------------------
Effective December 29, 2003 (the first day of fiscal year 2004), the
Company adopted the provisions of FIN 46. The Company has elected to
retroactively adopt the provisions of FIN 46. The impact of the retroactive
adoption is to consolidate The San Jose Grill LLC, Chicago - the Grill on
the Alley, LLC, the Daily Grill at Continental Park, LLC and the Universal
CityWalk Daily Grill prior to fiscal year 2004. There is no impact on net
income (loss) in any period as a result of the retroactive adoption. Errors
in the prior accounting for these entities are discussed in the following
sections. The restatement adjustment gives effect to the consolidation of
these entities. See further discussion of the adoption of FIN 46 under the
accounting policy note below.
CORRECTIONS OF ERRORS
---------------------
7
Stock Compensation and Miscellaneous Adjustments
In May 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," this cashless exercise feature requires the
Company to account for its option plan using a variable accounting
treatment. Under variable accounting, compensation expense must be
remeasured each balance sheet date based on the difference between the
current market price of the Company's stock and the option's exercise
price. An accrual for compensation expense is determined based on the
proportionate vested amount of each option as prescribed by Financial
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans." Each period, adjustments to the
accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant. The impact of this adjustment was to increase operating expenses and
net loss by $5,000 in first quarter of 2003. Results for the first quarter
of fiscal 2004 were originally reported correctly and did not require
restatement.
In addition to this change, the Company also recorded additional general
and administrative expense of $28,000 ($0.01 per share) in the fourth
quarter of fiscal year 2003 to correctly state its liability for payroll
and other costs. This adjustment increased accumulated deficit as of
December 28, 2003. Lastly, the Company increased additional paid-in capital
and accumulated deficit by $55,000 as of each fiscal yearend in the period
from 1998 through 2003 to properly reflect the fair value of fully vested
stock options issued in connection with severance agreements arranged in
fiscal year 1998 which had not been previously expensed.
Joint Venture Accounting and Miscellaneous Adjustments
Deconsolidation of The San Jose Grill LLC, Chicago - the Grill on the
Alley, LLC and the Daily Grill at Continental Park, LLC Pursuant to SOP
78-9
In August 2004, the Company reevaluated its consolidation policies with
respect to its investments in four restaurants held by limited liability
companies (LLCs). Previously, all four of the LLCs were consolidated due to
the Company's majority ownership in these entities. However, the terms of
three agreements gave the minority interests certain voting rights which,
when evaluated under the relevant terms of Statement of Position No. 78-9,
"Accounting for Investments in Real Estate Ventures," precluded
consolidation. Therefore, the Company restated previously reported results
to show the investments in the San Jose Grill LLC, Chicago - The Grill on
the Alley, LLC and the Daily Grill at Continental Park, LLC under the
equity method, rather than as consolidated subsidiaries. The fourth LLC,
The Grill on Hollywood, LLC, remained consolidated. There was no impact on
net income as a result of this change. See further discussion below
regarding other errors in the accounting for the Company's joint ventures
and the consolidation of all the Company's partially-owned entities upon
the adoption of FIN 46.
Correction of Adoption of FIN 46
FIN 46 was first effective for the Company for the quarter ended March 28,
2004. At that time, the Company was consolidating all of its LLCs
(incorrectly, in some cases, as indicated above), namely the San Jose Grill
LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood, LLC and
the Daily Grill at Continental Park, LLC, and was accounting for its
investment in the Universal CityWalk Daily Grill partnership under the
equity method. Upon the initial adoption of FIN 46, the Company made no
changes to its accounting for the LLCs and partnership, as it believed them
to already be appropriately consolidated.
8
As part of the restatement process undertaken in September 2004, the
Company reevaluated its adoption of FIN 46 which became even more relevant
given the deconsolidation of many of the LLC's pursuant to SOP 78-9. The
Company assessed all entities which are not wholly owned to determine if
these entities would be considered variable interest entities and whether
the Company would be considered the primary beneficiary. The Company
determined that all of the following entities would be considered variable
interest entities: The San Jose Grill LLC, Chicago - The Grill on the Alley
LLC, The Grill on Hollywood LLC, The Daily Grill at Continental Park LLC,
and the Universal CityWalk Daily Grill partnership. The Company also
determined that it is the primary beneficiary for all these entities which
has resulted in consolidation of these entities. The Company has elected to
retroactively adopt the provisions of FIN 46 and present these variable
interest entities as consolidated subsidiaries for the prior periods
presented in these financial statements.
Chicago - The Grill on the Alley, LLC Loss Allocation and Interest Charge
In August 2004, the Company reevaluated the accounting for its venture
relating to the Chicago Grill on the Alley restaurant. The venture was
established in 1999 and is administered under an operating agreement
whereby the Company owns a 60% stated interest and the minority investor,
the Michigan Avenue Group (MAG), owns the remaining interests. The venture
was originally funded by an eight percent, $1.7 million loan from MAG which
was used to build the restaurant and fund initial operations. GCI made no
financial contribution and was not credited with any capital for the
trademarks and restaurant expertise it contributed to the venture. MAG had
the right to convert all or part of the loan into capital of the venture
and in 2000, upon completion of the initial built-out, it converted
approximately $1.2 million of the loan into capital. There was no change in
the voting, ownership or profit sharing interests as a result of this
conversion. The terms of the equity interest into which the loan was
converted were such that MAG was entitled to an eight percent return on its
capital balance (defined as the "Preferred Return") which was identical to
the interest rate on the original note. Additionally, the venture was
obligated to repay converted capital amounts under an identical
payment/amortization schedule as the original note. GCI guaranteed the
venture's repayment of both the loan and MAG converted capital amounts.
Historically, the Company had consolidated the entity due to its belief
that it had a controlling voting interest (see separate comment above
regarding deconsolidation of this entity) and recognized a minority
interest at an amount equal to MAG's capital contribution reduced by 40 %
of the venture's losses and any return of capital amounts and allocated
losses. The restaurant has operated at a loss since inception and losses
were allocated based on the stated 40% interest noted above.
In reviewing this accounting, it was determined that the venture's
obligation to return MAG's capital should have been recognized as a
liability of the joint venture rather than treated as equity. As the joint
venture is a consolidated entity, pursuant to FIN 46 the Company's accounts
should also recognize this liability rather than reflect it as minority
interest. Furthermore, interest expense should have been recorded in the
statement of operations related to the Preferred Return as opposed to
treating the amounts as dividends. Lastly, the Company determined that
losses should not have been allocated to the minority interest member given
that MAG had no equity at risk. The impact of these adjustments was to
decrease the minority interest in loss of subsidiary by $41,000 ($0.01 per
share) and $11,000 in the first quarters of fiscal year 2003 and 2004,
respectively, and increase interest expense by $19,000 and $17,000 in the
first quarters of fiscal year 2003 and 2004, respectively.
Chicago Grill on the Alley Warrants
In the process of evaluating prior accounting for this joint venture, it
was noted that warrants to purchase approximately 203,000 shares of GCI
stock were given to MAG in connection with the issuance of the original
note. In accordance with APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," the Company determined that the fair
value of such warrants
9
should have been recognized as a debt discount and recorded as a reduction
to the loan balance, with accretion of the discount recognized as
additional interest expense using the effective interest method. The effect
of this adjustment was to increase additional paid-in capital by $322,000
as of each fiscal year-end in the period from 1999 to 2003 and as of March
28, 2004. Amortization of this amount has increased interest expense by
$12,000 and $9,000 in each of the first quarters of fiscal year 2003 and
2004, respectively.
Other Joint Venture Loss Allocations
The Company also reviewed its accounting for its other joint ventures,
specifically, those that had been generating losses. Based on the terms of
these agreements, losses are typically allocated in proportion to the
recorded amount of each member's capital account balances. The recorded
capital balances differ from the actual ownership percentages and the
method to distribute cash flows in the event of a liquidation of the
venture. As noted above, while the Company usually has a majority ownership
percentage, the minority partner usually contributes the majority of the
capital. The venture agreements specify that the minority member is
entitled to cash distributions before the Company so that its investment is
returned prior to the Company's.
The Company determined that its previous loss allocations to the minority
partners were incorrect because they do not reflect the underlying
economics of the investments. The Company determined that a hypothetical
liquidation at book value model should be utilized to allocate losses for
each reporting period based on the prescribed order of cash distributions
upon liquidation. The change in the amounts allocated to the individual
members based on this process, as adjusted for actual contributions and
distributions, determines the allocation of profits or losses each period.
The impact of this adjustment was to reduce the minority interest in loss
of subsidiaries by $23,000 and increase the minority interest in loss of
subsidiaries by $23,000 in the first quarters of fiscal year 2003 and 2004,
respectively.
Reimbursed Costs
The Company operates a number of restaurants under management agreements
whereby it is responsible for the operation of each restaurant. For its
services, the Company typically receives a management fee based on a
percentage of revenue, an incentive fee which is usually a profit sharing
arrangement (collectively, "Fees") and a reimbursement of the Company's
direct costs of operating the restaurant. Management agreements are in
place for restaurants in which the Company has a non-controlling ownership
percentage as well as a number of restaurants in which the Company has no
ownership. For non-consolidated restaurants, the Company previously only
reflected its Fees as revenue in the consolidated accounts. In August 2004,
the Company reviewed these arrangements considering the primary obligor
criteria as described in EITF 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." Under the
terms of the management agreements, the Company is hired as an independent
contractor and is responsible for settlement of all liabilities of the
restaurant. Additionally, all employees are employees of the Company, not
the individual restaurant. Although payroll and other operating expenses
are paid out of an agency bank account belonging to the restaurant, based
on the weight of the indicators identified in EITF 01-14 and EITF 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," the
Company determined it should recognize the reimbursement of restaurant
expenses of the unconsolidated outlets as revenues in its financial
statements and the related expenses.
These adjustments have been reflected in the accompanying statement of
operations through the addition of two new line items, cost reimbursements
and reimbursed costs. The impact of these adjustments was to increase
revenues by $2,067,000 and $3,190,000 in the first quarter of fiscal years
2003 and 2004, respectively and to increase operating expenses by a similar
amount for both periods.
10
In evaluating certain transactions related to the San Francisco managed
outlet, the Company also determined that advances made to the restaurant in
prior periods should have been expensed in the period incurred instead of
capitalized and deferred.
Accounting for Lease Incentives
In 2003, the Company began recording reimbursements received for tenant
improvement allowances as a liability. Consistent with the guidance set
forth in SFAS No. 13, "Accounting for Leases," and FASB Technical Bulletin
No. 88-1, "Issues Related to the Accounting for Leases," these lease
incentives are amortized over the life of the lease as a credit to rent
expense. Prior to 2003, however, the Company had recorded such
reimbursements as a reduction to the value of the fixed asset. As part of
this restatement process, the Company has corrected its prior accounting
practice and recorded the unamortized value of previously unrecorded lease
incentives as an increase to fixed assets and increase to other long-term
liabilities. This adjustment totaled $835,000 and $800,000 as of December
28, 2003 and March 28, 2004, respectively. There was no impact on net
income or earnings per share as a result of this adjustment, however,
depreciation expense was increased and restaurant operating expenses were
decreased by $35,000 for the quarters ended March 30, 2003 and March 28,
2004. Upon retroactive adoption of FIN 46, the adjustment increased fixed
assets and other long-term liabilities by $1,238,000 and $1,194,000 as of
December 28, 2003 and March 28, 2004, respectively, and increased
depreciation expense and decreased restaurant operating expenses by $44,000
for the first quarters of fiscal year 2003 and 2004.
Other Equity Award Adjustments
The Company recorded additional interest expense of $5,000 in both first
quarters of fiscal year 2003 and 2004 to correct the amortization of the
fair value of warrants issued to two principal shareholders in connection
with their guarantee of the Company's credit facility. Such amortization
should have been recognized over the three-year term of the guarantee but
was incorrectly being amortized over the term of the warrants. Additional
paid-in capital was increased by $27,000 as of each fiscal yearend from
2000 to 2003 to adjust the fair value of these warrants. The Company also
increased additional paid-in capital and accumulated deficit by $45,000 as
of each fiscal yearend in the period from 2000 through 2003 and as of March
28, 2004 to recognize the fair value of warrants to purchase 50,000 shares
of the Company's stock, pursuant to EITF 96-18, "Accounting for Equity
Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Such warrants were issued to
a professional advisor for services rendered in fiscal year 2000 and had
not been previously recognized.
SUMMARY
-------
The above revisions impacted the balance sheets as of March 28, 2004 and
December 28, 2003 and the statements of operations and cash flows for the
three-month periods ended March 28, 2004 and March 30, 2003. The revisions
have had no impact to our income tax provisions. The impact of this
restatement, which has been reflected throughout the consolidated financial
statements and accompanying notes, is as follows (amounts in thousands):
11
March 28, 2004
----------------------------------
As restated for
As previously correction of
reported (1) errors
Cash & equivalents $ 1,405 $ 1,415
Inventories 569 586
Receivables, net 561 488
Reimbursable costs receivable 542
Prepaid & Other 876 895
----------------------------------
Current assets 3,411 3,926
----------------------------------
Furniture, equipment and improvements, net 9,878 11,857
Goodwill, net 205 205
Liquor Licenses 330 350
Restricted Cash 72 72
Advances to managed outlets 302 -
Note Receivable 112 112
Other Assets 420 247
----------------------------------
Total assets $ 14,730 $ 16,769
==================================
Current Liabilities
Bank line of credit $ - $ -
Accounts payable 1,289 1,347
Accrued expenses 2,239 2,313
Reimbursable costs payable 542
Current portion of debt 326 360
Note payable related parties 242 321
----------------------------------
Current liabilities 4,096 4,883
----------------------------------
Long term debt 104 104
Note payable related parties 310 935
Other long-term liabilities 2,342 3,536
----------------------------------
Total liabilities 6,852 9,458
----------------------------------
Minority interest 1,337 1,898
Convertible stock
Common stock
Paid in capital 13,233 13,627
Accumulated deficit (6,692) (8,214)
----------------------------------
Total equity 6,541 5,413
----------------------------------
Total liabilities, minority interest and
stockholders' equity $ 14,730 $ 16,769
==================================
12
December 28, 2003
---------------------------------------------------------
As restated for
correction of
errors and
As restated for retroactive
As previously correction of adoption of
reported (1) errors FIN 46
Current assets:
Cash and cash equivalents $ 1,473 $ 972 $ 1,496
Inventories 570 355 585
Receivables 741 747 658
Reimbursable costs receivable - 1,503 580
Prepaid and other current assets 608 535 612
---------------------------------------------------------
Total current assets 3,392 4,112 3,931
Furniture, equipment and improvements 9,020 5,690 11,061
Goodwill 205 205 205
Liquor licenses 330 264 350
Restricted cash 72 - 72
Advances to managed outlets 331 - -
Note receivable 111 111 111
Other assets 426 1,320 275
---------------------------------------------------------
Total assets $ 13,887 $ 11,702 $ 16,005
=========================================================
Current liabilities:
Accounts payable $ 998 $ 676 $ 1,046
Accrued expenses 2,315 1,134 2,400
Reimbursable costs payable - 1,503 580
Current portion of debt 254 82 298
Note payable related party 269 346 345
---------------------------------------------------------
Total current liabilities 3,836 3,741 4,669
---------------------------------------------------------
Long term debt 283 106 285
Note payable related party 323 230 969
Other long term liabilities 1,496 1,632 2,734
---------------------------------------------------------
Total liabilities 5,938 5,709 8,657
---------------------------------------------------------
Minority interest 1,521 703 2,058
Stockholders' equity
Preferred stock - - -
Common stock - -
Additional paid-in capital 13,207 13,601 13,601
Accumulated deficit (6,779) (8,311) (8,311)
---------------------------------------------------------
Total liabilities, minority
interest and stockholders'
equity 6,428 5,290 5,290
---------------------------------------------------------
$ 13,887 $ 11,702 $ 16,005
=========================================================
13
Three months ended Three months ended
March 28, 2004 March 30, 2003
------------------------------ ----------------------------------------------------------
As restated for
As restated for correction of errors
As previously As previously correction of and retroactive
reported (1) As restated reported (1) errors adoption of FIN 46
Revenues
Sales $ 12,958 $ 13,510 $ 11,667 $ 8,691 $ 12,134
Cost reimbursements - 3,190 - 6,806 2,067
Management Fees 296 296 255 333 231
------------------------------ ----------------------------------------------------------
Total Revenues 13,254 16,996 11,922 15,830 14,432
Cost of sales 3,630 3,772 3,174 2,316 3,283
------------------------------ ----------------------------------------------------------
Gross Profit 9,624 13,224 8,748 13,514 11,149
------------------------------ ----------------------------------------------------------
Operating expenses
Restaurant and operating expenses 7,776 8,125 6,997 5,117 7,308
Reimbursed costs - 3,190 - 6,806 2,067
General and administrative 1,227 1,227 910 910 910
Depreciation and amortization 386 449 432 312 502
Pre-opening costs 147 147 187 - 187
Gain on sale of assets - - (12) (11) (11)
------------------------------ ----------------------------------------------------------
Total operating expenses 9,536 13,138 8,514 13,134 10,963
------------------------------ ----------------------------------------------------------
Income (loss) from operations 88 86 234 380 186
Interest expense, net (34) (66) (48) (33) (83)
------------------------------ ----------------------------------------------------------
Income (loss) before provision from
income taxes, minority interest and
equity in loss of joint venture 54 20 186 347 103
Provision for income taxes (23) (23) (55) (53) (55)
------------------------------ ----------------------------------------------------------
Income (loss) before minority
interest and equity in loss of joint
venture 31 (3) 131 294 48
Minority interest in loss (earnings)
of subsidiaries 60 100 216 90 196
Equity in loss of joint venture (4) - (5) (140) -
------------------------------ ----------------------------------------------------------
Net income (loss) 87 97 342 244 244
Preferred dividends accrued (13) (13) (13) (13) (13)
------------------------------ ----------------------------------------------------------
Net income available for common
shareholders $ 74 $ 84 $ 329 $ 231 $ 231
============================== ==========================================================
Net income per share applicable to
common stock :
Basic Net Income 0.01 0.02 0.06 0.04 0.04
Diluted Net Income 0.01 0.01 0.06 0.04 0.04
Average-weighted shares
outstanding
Basic 5,546 5,546 5,537 5,537 5,537
Diluted 6,193 6,193 5,537 5,537 5,537
14
March 28, 2004
---------------------------------------
As previously As restated for
reported (1) correction of errors
Cash flows from operating activities
Net Income $ 87 $ 97
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 386 449
Stock based compensation 187 187
Minority interest in net income (60) (100)
Equity in loss of JV 4 -
Changes in operating assets and liabilities:
Inventories 1 (1)
Receivables 180 170
Reimbursable costs receivable - 38
Prepaid expenses and other current assets (272) (287)
Other assets 22 28
Accounts payable 291 301
Accrued expenses (265) (276)
Reimbursable costs payable - (38)
Other long-term liabilities (1) (83)
---------------------------------------
Net cash provided by operating activities 560 485
---------------------------------------
Cash flows from investing activities:
Purchase of furnitutre, equipment and improvements (1,240) (1,241)
Additional investment in CityWalk (20) -
Advance repaid by managed outlet 29 -
---------------------------------------
Net cash used in investing activities (1,231) (1,241)
---------------------------------------
Cash flows from financing activities:
Tenant improvement allowances 847 885
Proceeds from minority interests 15 35
Payments on related party debt (40) (58)
Payments on long term debt (107) (119)
Return of capital and profits to minority shareholder (68) (68)
Preferred return to Chicago (44) -
---------------------------------------
Net cash provided by financing activities 603 675
---------------------------------------
Net decrease in cash and cash equivalents (68) (81)
Cash and cash equivalents, beginning of period 1,473 1,496
---------------------------------------
Cash and cash equivalents, end of period $ 1,405 $ 1,415
=======================================
15
March 30, 2003
--------------------------------------------------------------------
As restated for
correction of errors and
As previously As restated for retroactive adoption of
reported (1) correction of errors FIN 46
Cash flows from operating activities
Net Income $ 342 $ 244 $ 244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 432 312 502
Stock based compensation 5 5 5
Gain on sale of assets (12) (12) (11)
Minority interest in net income (216) (90) (196)
Equity in loss of JV 5 140 -
Changes in operating assets and liabilities:
Inventories (22) (6) (25)
Receivables (285) (176) (234)
Reimbursable cost receivables 181 (9)
Prepaid expenses and other currents assets (269) (232) (292)
Other assets (4) (9) 1
Accounts payable (9) (34) 49
Accrued expenses (316) (239) (353)
Reimbursable cost payable - (181) 9
Other liabilities (23) (44)
--------------------------------------------------------------------
Net cash used in operating activities (349) (120) (354)
--------------------------------------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment and improvements (184) (41) (184)
Restricted cash for DGCP, LLC 466 - 466
Proceeds from sale of assets 26 26 26
--------------------------------------------------------------------
Net cash provided by investing activities 308 (15) 308
--------------------------------------------------------------------
Cash flows from financing activities:
Payments on related party debt (36) 22 (61)
Payments on long term debt (98) (63) (98)
Return of capital and profits to minority shareholder (72) - (72)
Preferred return to Chicago (44) - -
--------------------------------------------------------------------
Net cash used in financing activities (250) (41) (231)
--------------------------------------------------------------------
Net increase(decrease) in cash $ (291) $ (176) $ (277)
Cash and cash equivalents, beginning of period $ 1,275 $ 581 $ 1,275
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 984 $ 405 $ 998
====================================================================
(1) The Company previously restated its consolidated financial statements
as of December 28, 2003 and the three months ending March 30, 2003 to
reflect the accounting for employee stock options using variable accounting
treatment and to make other miscellaneous corrections. The effect of this
restatement was to increase operating expenses and decrease net income by
$5,000 in for the quarter ended March 30, 2003. There was no change to
reported net income per share. These "As previously reported" amounts
already reflect these adjustments and represent the amounts presented in
the
16
Company's Quarterly Report on Form 10-Q filed on May 27, 2004.In addition,
certain prior year amounts have been reclassified to conform to current
year presentation.
2. RESTRICTED CASH
Restricted cash consists of amounts held in escrow for the Daily Grill at
Continental Park in El Segundo, California which was opened in January 2003
and all but $72,000 was released by March 28, 2004.
3. WORKER'S COMPENSATION LOSS RESERVE
In the first quarter of 2004, the Company obtained a large deductible
worker's compensation policy for 2004 that includes a deductible per
occurrence of $250,000 subject to an aggregate loss of $1.7 million. The
Company has established a loss reserve to cover the potential deductible
amounts. The loss reserve is determined by estimating the ultimate cost to
the Company utilizing information on current accidents, prior year
experience and the carrier's loss development and loss trend factors.
4. LONG-TERM TENANT IMPROVEMENT ALLOWANCE
Construction of the Bethesda Daily Grill was paid for through a $1.8
million tenant improvement allowance of which $885,000 was received during
the first quarter of 2004. This tenant improvement allowance has been
recorded in long-term leasehold improvement allowance and is being
amortized against rent expense over the 15 year lease term.
5. OPERATING LEASES AND CONTRACTUAL OBLIGATIONS
During the quarter ended March 28, 2004, we entered into a lease relating
to a restaurant scheduled to open in Santa Monica, CA, in the first quarter
of 2005. Accordingly, at March 28, 2004, we were obligated under seventeen
leases covering the premises in which our Daily Grill and Grill Restaurants
are located as well as leases on our executive offices. Such restaurant
leases and the executive office lease contain minimum rent provisions which
provide for the payment of minimum aggregate rental payments of
approximately $22.5 million over the life of those leases, with minimum
annual rental payments of $3.1 million in 2004, $5.3 million between 2005
and 2006, $4.3 million between 2007 and 2008, and $9.8 million thereafter.
With the exception of entering into the referenced lease, there were no
material changes in our obligations under operating leases or other
contracts during the quarter ended March 28, 2004 as compared to those
described in the Company's Form 10-K for the year ended December 28, 2003,
as amended.
6. RECENTLY ISSUSED ACCOUNTING REQUIREMENTS
Effective December 29, 2003 (the first day of fiscal year 2004), the
Company adopted the provisions of FIN 46. In light of the changes resulting
from the current restatement process, the Company has elected to
retroactively adopt the provisions of FIN 46 so that the financial
presentation in this Amended Quarterly Report on Form 10-Q/A is more
consistent with the presentation of the Company's ongoing financial
position and results of operations.
Under FIN 46, an entity is considered to be a variable interest entity
("VIE") when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it
to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is
determined that the investor is the primary beneficiary and will absorb a
majority of the VIE's expected losses or residual returns if they occur.
17
Management has assessed all entities which are not wholly owned by the
Company to determine if these entities would be considered VIEs and whether
the Company would be considered the primary beneficiary. It was determined
that all of the following entities would be considered VIEs: Chicago - The
Grill on the Alley, San Jose Grill, South Bay Daily Grill, Hollywood Grill
and Universal Daily Grill. Of these entities, the Company has been
determined to be the primary beneficiary for Chicago - The Grill on the
Alley, San Jose Grill, South Bay Daily Grill and Universal Daily Grill.
Chicago - The Grill on the Alley LLC, an Illinois limited liability company
("Chicago Grill"), was formed in February 1999 and commenced operations on
June 12, 2000. The Chicago Grill was formed for the purpose of owning and
operating "The Grill on the Alley" restaurant located in the Westin Hotel
in Chicago, Illinois. All of the business of the Company is conducted under
the name "The Grill on the Alley," patterned after The Grill on the Alley
in Beverly Hills, California.
The members of the Chicago Grill are the Company, which holds a member's
percentage interest of 60%, and The Michigan Avenue Group, a general
partnership which holds the remaining member's percentage interest of 40%.
The Chicago Grill is managed exclusively by the Company who has full,
complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the Chicago Grill. In return,
the Chicago Grill pays the Company a management fee of 5% of gross
restaurant revenues. Total assets and revenues of the Chicago Grill as of
and for the three months ended March 28, 2004 were approximately $2.6
million and $1.0 million, respectively.
San Jose Grill LLC, a California limited liability company ("San Jose
Grill"), was formed in July 1997 and commenced operations on May 13, 1998.
San Jose Grill was formed for the purpose of owning and operating "The
Grill on the Alley" restaurant located in the Fairmont Hotel in San Jose,
California. All of the business of the Company is conducted under the name
"The Grill on the Alley," also patterned after The Grill on the Alley in
Beverly Hills, California, owned by the Company.
The members of the San Jose Grill are the Company, which holds a member's
percentage interest of 50.05%, and Light Tower Restaurant Associates LLC, a
California limited liability company, which holds the remaining member's
percentage interest of 49.95% and is an affiliate of the San Jose Fairmont
Hotel. The San Jose Grill is managed exclusively by the Company who has
full, complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the San Jose Grill. In
return, the San Jose Grill pays the Company a management fee of 5% of gross
restaurant sales. Total assets and revenues of the San Jose Grill as of and
for the three months ended March 28, 2004 were approximately $1.6 million
and $1.2 million, respectively.
Daily Grill at Continental Park, LLC, a California limited liability
company (the "Daily Grill at Continental Park"), was formed on May 28, 2002
and commenced operations on January 16, 2003. The South Bay Daily Grill was
formed for the purpose of owning and operating the Daily Grill at
Continental Park restaurant located in the Plaza in El Segundo, California.
All of the business of the entity is conducted under the name Daily Grill
at Continental Park, LLC and is patterned after Daily Grill restaurants,
owned by the Company.
The members of Daily Grill at Continental Park are Grill Concepts
Management Inc., which holds an ownership's percentage interest of 50.1%,
and Continental Plaza Restaurant Corporation ("CPR"), a California
corporation which holds the remaining ownership percentage interest of
49.9%. The operations are managed exclusively by the Company who has full,
complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the entity. In return, the
Daily Grill at Continental Park pays the Company a management fee of 5% of
the adjusted gross restaurant's revenues. Total assets and restaurant sales
of the Daily Grill at Continental Park as of and for the three months ended
March 28, 2004 were approximately $1.3 million and $0.8 million,
respectively.
18
The Grill on Hollywood LLC, a California limited liability company (the
"Grill on Hollywood"), was formed on July 26, 2001 and commenced operations
on November 9, 2001. The entity was formed for the purpose of owning and
operating "The Grill on Hollywood" restaurant located in the Hollywood and
Highland entertainment and shopping complex in Hollywood, California. All
of the business of the entity is conducted under the name "The Grill on
Hollywood," patterned after The Grill on the Alley in Beverly Hills,
California, owned by the Company.
The members of the Grill on Hollywood are the Company which holds a
member's percentage interest of 51%, and TH Grill, Inc., a Delaware
corporation, which holds the remaining member's percentage interest of 49%
and is an affiliate of the TrizecHahn Hollywood, LLC. The entity is managed
exclusively by the Company. In return, the Grill on Hollywood pays the
Company a management fee of 5% of gross restaurant revenues. Total assets
and restaurant sales of the Grill on Hollywood as of and for the three
months ended March 28, 2004 were approximately $1 million and $0.7 million,
respectively.
Universal Grill Joint Venture, a California general partnership (the
"Universal Grill"), was formed in December 1998 and commenced operations on
June 28, 1999. Universal Grill was formed for the purpose of owning and
operating "Daily Grill Short Order" restaurant located in the retail and
entertainment district of Universal CityWalk Hollywood in Universal City,
California. All of the business of the entity is conducted under the name
"Daily Grill Short Order," patterned after Daily Grill in Brentwood,
California, owned by the Company.
The partners of the Universal Grill are Universal Grill Concepts, Inc., a
wholly owned subsidiary of the Company, which holds a partner's percentage
interest of 50%, and Universal Studios Development Venture Six, a
California corporation which holds the remaining partnership percentage
interest of 50%. The Universal Grill is managed exclusively by the Company
who has full, complete and exclusive authority, power, and discretion to
manage and control the business, property and affairs of the entity. In
return, the Universal Grill pays the Company a management fee of 5.5% of
the adjusted gross restaurant's revenues. Total assets and restaurant sales
of the Universal Grill as of and for the three months ended March 28, 2004
were approximately $1.0 million and $0.5 million, respectively.
In April 2004, the EITF reached final consensus on EITF 03-06,
"Participating Securities and the Two-Class Method under FASB Statement No.
128," which requires companies that have participating securities to
calculate earnings per share using the two-class method. This method
requires the allocation of undistributed earnings to the common shares and
participating securities based on the proportion of undistributed earnings
that each would have been entitled to had all the period s earnings been
distributed. EITF 03-06 is effective for fiscal periods beginning after
June 30, 2004 and earnings per share reported in prior periods presented
must be retroactively adjusted in order to comply with EITF 03-06. The
Company believes there will be no impact on the Company's financial
statements as the preferred shares are not participating securities.
7. DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on
Hollywood and South Bay (Continental Park) Daily Grill restaurants are each
owned by limited liability companies (the "LLCs") in which the Company
serves as manager and owns a controlling interest. Each of the LLCs has
minority interest owners, some of whom have participating rights in the
joint venture such as the ability to approve operating and capital budgets
and the borrowing of money. In connection with the financing of each of the
LLCs, the minority members may have certain rights to priority
distributions of capital until they have received a return of their initial
investments ("Return of Member Capital") as well as rights to receive
defined preferred returns on their invested capital ("Preferred Return").
The following tables set forth a summary for each of the LLCs of (1) the
distributions of capital to the Members and/or the Company during the
quarter ended March 28, 2004, (2) the unreturned balance
19
of the capital contributions of the Members and/or the Company at March 28,
2004, and (3) the accrued but unpaid preferred returns due to the Members
and/or the Company at March 28, 2004:
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the three
months ended March 28, 2004: Members $68,000
=======
Company $68,000
=======
Unreturned Initial Capital
Contributions at March 28, 2004: Members $ 0
=======
Company $ 0
=======
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
=======
Company $ 0
=======
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 28, 2004: Members (a) $ 63,000
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,072,000
==========
Company $ 0
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
==========
Company $ 0
20
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,200,000
==========
Company $ 250,000
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
==========
Company $ 73,000
==========
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,000,000
==========
Company $ 350,000
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 128,000
==========
Company $ 45,000
==========
(a) Distribution of capital as of March 28, 2004 includes $29,000 of
payments of capital and loan and $34,000 of payments on interest and
preferred return.
8. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," which amends SFAS No. 123. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results of operations. As the Company has
not elected to change to the fair value based method of accounting for
stock based employee compensation, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial position or results of
operations. All disclosure requirements of SFAS No. 148 have been adopted
and are reflected in these financial statements.
21
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay
to acquire the stock. Because grants under the plan require variable
accounting treatment, due to the cashless exercise feature of those
options, compensation expense is remeasured at each balance sheet date
based on the difference between the current market price of the Company's
stock and the option exercise price. An accrual for compensation expense is
determined based on the proportionate vested amount of each option as
prescribed by Financial Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans." Each
period, adjustments to the accrual are recognized in the income statement.
The Company accounts for stock and options to non-employees at fair value
in accordance with the provisions of SFAS No. 123 and the Emerging Issues
Task Force Consensus on Issue No. 96-18.
On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12,
1998 the 1998 Stock Option Plan (the "1998 Plan") was adopted. These Plans
provide for options to be issued to the Company's employees and others. The
exercise price of the shares under option shall be equal to or exceed 100%
of the fair market value of the shares at the date of grant. The options
generally vest over a five-year period.
The terms of the option grants allow the employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash, subject
to the terms of the plan including the rights of the Compensation Committee
to amend grants in any manner that the committee in its sole discretion
deems to not adversely impact the option holders.
The Company has adopted the disclosure-only provisions of SFAS No. 148 and
SFAS No. 123, and will continue to use the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." Pro forma compensation expense for the Company's stock
option plans determined based on the fair value at the grant date for
awards is as follows:
2004 2003
----------- -----------
(restated) (restated)
Net income, as reported $ 97,000 $ 244,000
Add: stock compensation expense
recorded 187,000 5,000
Deduct: stock compensation expense
under fair value method (30,000) (38,000)
Net income, pro forma $ 254,000 $ 211,000
Net income per share applicable to common
stock, as reported:
Basic $ 0.02 $ 0.04
Diluted $ 0.01 $ 0.04
Net income per share applicable to common
stock, pro forma:
Basic $ 0.04 $ 0.04
Diluted $ 0.04 $ 0.04
22
9. PER SHARE DATA
Pursuant to SFAS No. 128, "Earnings Per Share," basic net income per share
is computed by dividing the net income attributable to common shareholders
by the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income
attributable to common shareholders by the weighted-average number of
common and common equivalent shares outstanding during the period. Common
share equivalents included in the diluted computation represent shares
issuable upon assumed exercise of stock options, warrants and convertible
preferred stocks using the treasury stock method.
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the quarters ended March 28, 2004 and March 30, 2003 follow:
2004 2003
----------- -----------
Earnings Shares Earnings Shares
----------------------------------------------
(restated) (restated)
Net income $ 97,000 $ 244,000
Less: preferred stock dividend (13,000) (13,000)
----------- -----------
Earnings available for common
stockholders 84,000 5,545,864 231,000 5,537,071
Dilutive securities:
Stock options - 142,215 - -
Warrants - 504,831 - -
----------- --------- ----------- ---------
Dilutive earnings available to
common stockholders $ 84,000 6,192,910 $ 231,000 5,537,071
==============================================
Stock options for 230,750 and 664,525 shares for 2004 and 2003,
respectively, were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. Warrants for 203,645 and 1,922,786
shares for 2004 and 2003, respectively, were excluded from the calculation
of diluted earnings per share because they were anti-dilutive. 500 shares
of preferred stock were excluded from the calculation of diluted earnings
per share because they were anti-dilutive for both 2004 and 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto included elsewhere in
this Form 10-Q. Except for the historical information contained herein, the
discussion in this Form 10-Q contains certain forward looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements
made in this Form 10-Q should be read as being applicable to all related
forward looking statements wherever they appear in this Form 10-Q. The
Company's actual results could differ materially from those discussed here.
For a discussion of certain factors that could cause actual results to be
materially different, refer to the Company's Annual Report on Form 10-K for
the year ended December 28, 2003, as amended on October 15, 2004
RESTATEMENT FOR CORRECTION OF ERRORS AND RETROACTIVE ADOPTION OF FIN 46
The accompanying consolidated financial statements as of December 28, 2003
and for the three-month period ended March 30, 2003 were restated on May
14, 2004 from those originally issued to reflect certain adjustments
related to stock compensation and other miscellaneous adjustments, and the
consolidated financial statements as of March 28, 2004 and December 28,
2003 and for the three-month periods ended March 28, 2004 and March 30,
2003 (as previously restated) were subsequently restated on October 15,
23
2004 to further reflect additional adjustments to revise the accounting for
certain of the Company's ventures, record costs and revenues associated
with reimbursed costs under management agreements and make other
miscellaneous corrections. Additionally, the Company revised its financial
statements as of and for the three months ended March 28, 2004 to correct
for the initial adoption of FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51," (FIN 46)
which was first effective for this quarter.
In connection with the restatement resulting from these errors, the Company
has elected to apply the retroactive adoption provisions of FIN 46 in these
restated financial statements and adjust previously reported amounts as of
December 28, 2003 and for the three months ended March 30, 2003 to give
effect to the adoption of FIN 46 as if it had been applied for all periods
presented. (Note - Except where there is no change to diluted earnings per
share, the impact of each adjustment on diluted earnings per share has been
identified below.)
RETROACTIVE ADOPTION OF FIN 46
------------------------------
Effective December 29, 2003 (the first day of fiscal year 2004), the
Company adopted the provisions of FIN 46. The Company has elected to
retroactively adopt the provisions of FIN 46. The impact of the retroactive
adoption is to consolidate The San Jose Grill LLC, Chicago - the Grill on
the Alley, LLC, the Daily Grill at Continental Park, LLC and the Universal
CityWalk Daily Grill prior to fiscal year 2004. There is no impact on net
income (loss) in any period as a result of the retroactive adoption. Errors
in the prior accounting for these entities are discussed in the following
sections. The restatement adjustment gives effect to the consolidation of
these entities. See further discussion of the adoption of FIN 46 under the
accounting policy note below.
CORRECTIONS OF ERRORS
---------------------
Stock Compensation and Miscellaneous Adjustments
In May 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," this cashless exercise feature requires the
Company to account for its option plan using a variable accounting
treatment. Under variable accounting, compensation expense must be
remeasured each balance sheet date based on the difference between the
current market price of the Company's stock and the option's exercise
price. An accrual for compensation expense is determined based on the
proportionate vested amount of each option as prescribed by Financial
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans." Each period, adjustments to the
accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant. The impact of this adjustment was to increase operating expenses and
net loss by $5,000 in first quarter of 2003. Results for the first quarter
of fiscal 2004 were originally reported correctly and did not require
restatement.
In addition to this change, the Company also recorded additional general
and administrative expense of $28,000 ($0.01 per share) in the fourth
quarter of fiscal year 2003 to correctly state its liability for payroll
and other costs. This adjustment increased accumulated deficit as of
December 28, 2003. Lastly, the Company increased additional paid-in capital
and accumulated deficit by $55,000 as of each fiscal yearend in the period
from 1998 through 2003 to properly reflect the fair value of fully vested
stock options issued in connection with severance agreements arranged in
fiscal year 1998 which had not been previously expensed.
24
Joint Venture Accounting and Miscellaneous Adjustments
Deconsolidation of The San Jose Grill LLC, Chicago - the Grill on the
Alley, LLC and the Daily Grill at Continental Park, LLC Pursuant to SOP
78-9
In August 2004, the Company reevaluated its consolidation policies with
respect to its investments in four restaurants held by limited liability
companies (LLCs). Previously, all four of the LLCs were consolidated due to
the Company's majority ownership in these entities. However, the terms of
three agreements gave the minority interests certain voting rights which,
when evaluated under the relevant terms of Statement of Position No. 78-9,
"Accounting for Investments in Real Estate Ventures," precluded
consolidation. Therefore, the Company restated previously reported results
to show the investments in the San Jose Grill LLC, Chicago - The Grill on
the Alley, LLC and the Daily Grill at Continental Park, LLC under the
equity method, rather than as consolidated subsidiaries. The fourth LLC,
The Grill on Hollywood, LLC, remained consolidated. There was no impact on
net income as a result of this change. See further discussion below
regarding other errors in the accounting for the Company's joint ventures
and the consolidation of all the Company's partially-owned entities upon
the adoption of FIN 46.
Correction of Adoption of FIN 46
FIN 46 was first effective for the Company for the quarter ended March 28,
2004. At that time, the Company was consolidating all of its LLCs
(incorrectly, in some cases, as indicated above), namely the San Jose Grill
LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood, LLC and
the Daily Grill at Continental Park, LLC, and was accounting for its
investment in the Universal CityWalk Daily Grill partnership under the
equity method. Upon the initial adoption of FIN 46, the Company made no
changes to its accounting for the LLCs and partnership, as it believed them
to already be appropriately consolidated.
As part of the restatement process undertaken in September 2004, the
Company reevaluated its adoption of FIN 46 which became even more relevant
given the deconsolidation of many of the LLC's pursuant to SOP 78-9. The
Company assessed all entities which are not wholly owned to determine if
these entities would be considered variable interest entities and whether
the Company would be considered the primary beneficiary. The Company
determined that all of the following entities would be considered variable
interest entities: The San Jose Grill LLC, Chicago - The Grill on the Alley
LLC, The Grill on Hollywood LLC, The Daily Grill at Continental Park LLC,
and the Universal CityWalk Daily Grill partnership. The Company also
determined that it is the primary beneficiary for all these entities which
has resulted in consolidation of these entities. The Company has elected to
retroactively adopt the provisions of FIN 46 and present these variable
interest entities as consolidated subsidiaries for the prior periods
presented in these financial statements.
Chicago - The Grill on the Alley, LLC Loss Allocation and Interest Charge
In August 2004, the Company reevaluated the accounting for its venture
relating to the Chicago Grill on the Alley restaurant. The venture was
established in 1999 and is administered under an operating agreement
whereby the Company owns a 60% stated interest and the minority investor,
the Michigan Avenue Group (MAG), owns the remaining interests. The venture
was originally funded by an eight percent, $1.7 million loan from MAG which
was used to build the restaurant and fund initial operations. GCI made no
financial contribution and was not credited with any capital for the
trademarks and restaurant expertise it contributed to the venture. MAG had
the right to convert all or part of the loan into capital of the venture
and in 2000, upon completion of the initial built-out, it converted
approximately $1.2 million of the loan into capital. There was no change in
the voting, ownership or profit sharing interests as a result of this
conversion. The terms of the equity interest into which the loan was
converted were such that MAG was entitled to an eight percent return on its
capital balance (defined as the "Preferred Return") which was identical to
25
the interest rate on the original note. Additionally, the venture was
obligated to repay converted capital amounts under an identical
payment/amortization schedule as the original note. GCI guaranteed the
venture's repayment of both the loan and MAG converted capital amounts.
Historically, the Company had consolidated the entity due to its belief
that it had a controlling voting interest (see separate comment above
regarding deconsolidation of this entity) and recognized a minority
interest at an amount equal to MAG's capital contribution reduced by 40 %
of the venture's losses and any return of capital amounts and allocated
losses. The restaurant has operated at a loss since inception and losses
were allocated based on the stated 40% interest noted above.
In reviewing this accounting, it was determined that the venture's
obligation to return MAG's capital should have been recognized as a
liability of the joint venture rather than treated as equity. As the joint
venture is a consolidated entity, pursuant to FIN 46 the Company's accounts
should also recognize this liability rather than reflect it as minority
interest. Furthermore, interest expense should have been recorded in the
statement of operations related to the Preferred Return as opposed to
treating the amounts as dividends. Lastly, the Company determined that
losses should not have been allocated to the minority interest member given
that MAG had no equity at risk. The impact of these adjustments was to
decrease the minority interest in loss of subsidiary by $41,000 ($0.01 per
share) and $11,000 in the first quarters of fiscal year 2003 and 2004,
respectively, and increase interest expense by $19,000 and $17,000 in the
first quarters of fiscal year 2003 and 2004, respectively.
Chicago Grill on the Alley Warrants
In the process of evaluating prior accounting for this joint venture, it
was noted that warrants to purchase approximately 203,000 shares of GCI
stock were given to MAG in connection with the issuance of the original
note. In accordance with APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," the Company determined that the fair
value of such warrants should have been recognized as a debt discount and
recorded as a reduction to the loan balance, with accretion of the discount
recognized as additional interest expense using the effective interest
method. The effect of this adjustment was to increase additional paid-in
capital by $322,000 as of each fiscal year-end in the period from 1999 to
2003 and as of March 28, 2004. Amortization of this amount has increased
interest expense by $12,000 and $9,000 in each of the first quarters of
fiscal year 2003 and 2004, respectively.
Other Joint Venture Loss Allocations
The Company also reviewed its accounting for its other joint ventures,
specifically, those that had been generating losses. Based on the terms of
these agreements, losses are typically allocated in proportion to the
recorded amount of each member's capital account balances. The recorded
capital balances differ from the actual ownership percentages and the
method to distribute cash flows in the event of a liquidation of the
venture. As noted above, while the Company usually has a majority ownership
percentage, the minority partner usually contributes the majority of the
capital. The venture agreements specify that the minority member is
entitled to cash distributions before the Company so that its investment is
returned prior to the Company's.
The Company determined that its previous loss allocations to the minority
partners were incorrect because they do not reflect the underlying
economics of the investments. The Company determined that a hypothetical
liquidation at book value model should be utilized to allocate losses for
each reporting period based on the prescribed order of cash distributions
upon liquidation. The change in the amounts allocated to the individual
members based on this process, as adjusted for actual contributions and
distributions, determines the allocation of profits or losses each period.
The impact of this adjustment was to reduce the minority interest in loss
of subsidiaries by $23,000 and increase the minority interest in loss of
subsidiaries by $23,000 in the first quarters of fiscal year 2003 and 2004,
respectively.
26
Reimbursed Costs
The Company operates a number of restaurants under management agreements
whereby it is responsible for the operation of each restaurant. For its
services, the Company typically receives a management fee based on a
percentage of revenue, an incentive fee which is usually a profit sharing
arrangement (collectively, "Fees") and a reimbursement of the Company's
direct costs of operating the restaurant. Management agreements are in
place for restaurants in which the Company has a non-controlling ownership
percentage as well as a number of restaurants in which the Company has no
ownership. For non-consolidated restaurants, the Company previously only
reflected its Fees as revenue in the consolidated accounts. In August 2004,
the Company reviewed these arrangements considering the primary obligor
criteria as described in EITF 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." Under the
terms of the management agreements, the Company is hired as an independent
contractor and is responsible for settlement of all liabilities of the
restaurant. Additionally, all employees are employees of the Company, not
the individual restaurant. Although payroll and other operating expenses
are paid out of an agency bank account belonging to the restaurant, based
on the weight of the indicators identified in EITF 01-14 and EITF 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," the
Company determined it should recognize the reimbursement of restaurant
expenses of the unconsolidated outlets as revenues in its financial
statements and the related expenses.
These adjustments have been reflected in the accompanying statement of
operations through the addition of two new line items, cost reimbursements
and reimbursed costs. The impact of these adjustments was to increase
revenues by $2,067,000 and $3,190,000 in the first quarter of fiscal years
2003 and 2004, respectively and to increase operating expenses by a similar
amount for both periods.
10
In evaluating certain transactions related to the San Francisco managed
outlet, the Company also determined that advances made to the restaurant in
prior periods should have been expensed in the period incurred instead of
capitalized and deferred.
Accounting for Lease Incentives
In 2003, the Company began recording reimbursements received for tenant
improvement allowances as a liability. Consistent with the guidance set
forth in SFAS No. 13, "Accounting for Leases," and FASB Technical Bulletin
No. 88-1, "Issues Related to the Accounting for Leases," these lease
incentives are amortized over the life of the lease as a credit to rent
expense. Prior to 2003, however, the Company had recorded such
reimbursements as a reduction to the value of the fixed asset. As part of
this restatement process, the Company has corrected its prior accounting
practice and recorded the unamortized value of previously unrecorded lease
incentives as an increase to fixed assets and increase to other long-term
liabilities. This adjustment totaled $835,000 and $800,000 as of December
28, 2003 and March 28, 2004, respectively. There was no impact on net
income or earnings per share as a result of this adjustment, however,
depreciation expense was increased and restaurant operating expenses were
decreased by $35,000 for the quarters ended March 30, 2003 and March 28,
2004. Upon retroactive adoption of FIN 46, the adjustment increased fixed
assets and other long-term liabilities by $1,238,000 and $1,194,000 as of
December 28, 2003 and March 28, 2004, respectively, and increased
depreciation expense and decreased restaurant operating expenses by $44,000
for the first quarters of fiscal year 2003 and 2004.
Other Equity Award Adjustments
The Company recorded additional interest expense of $5,000 in both first
quarters of fiscal year 2003 and 2004 to correct the amortization of the
fair value of warrants issued to two principal shareholders in connection
with their guarantee of the Company's credit facility. Such amortization
should have been recognized over the three-year term of the guarantee but
was incorrectly being amortized over the term of the warrants. Additional
paid-in capital was increased by $27,000 as of each fiscal yearend from
2000 to 2003 to adjust the fair value of these warrants. The Company also
increased additional paid-in capital and accumulated deficit by $45,000 as
of each fiscal yearend in the period from 2000 through 2003 and as of March
28, 2004 to recognize the fair value of warrants to purchase 50,000 shares
of the Company's stock, pursuant to EITF 96-18, "Accounting for Equity
Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Such warrants were issued to
a professional advisor for services rendered in fiscal year 2000 and had
not been previously recognized.
SUMMARY
-------
The above revisions impacted the balance sheets as of March 28, 2004 and
December 28, 2003 and the statements of operations and cash flows for the
three-month periods ended March 28, 2004 and March 30, 2003. The revisions
have had no impact to our income tax provisions. The impact of this
restatement, which has been reflected throughout the consolidated financial
statements and accompanying notes, is as follows (amounts in thousands):
27
28
March 28, 2004
----------------------------------
As restated for
As previously correction of
reported errors
Cash & equivalents $ 1,405 $ 1,415
Inventories 569 586
Receivables, net 561 488
Reimbursable costs receivable 542
Prepaid & other current assets 876 895
----------------------------------
Current assets 3,411 3,926
----------------------------------
Furniture, equipment and improvements 9,878 11,857
Goodwill, net 205 205
Liquor licenses 330 350
Restricted cash 72 72
Advances to managed outlets 302 -
Note receivable 112 112
Other assets 420 247
----------------------------------
Total assets $ 14,730 $ 16,769
==================================
Current Liabilities
Bank line of credit $ - $ -
Accounts Payable 1,289 1,347
Accrued Expenses 2,239 2,313
Reimburseable costs payable 542
Current portion of debt 326 360
Note payable related parties 242 321
----------------------------------
Current liabilities 4,096 4,883
----------------------------------
Long-term debt 104 104
Note payable related parties 310 935
Other long-term liabilities 2,342 3,536
----------------------------------
Total liabilities 6,852 9,458
----------------------------------
Minority interest 1,337 1,898
Convertible stock
Common stock
Paid in capital 13,233 13,627
Accumulated deficit (6,692) (8,214)
----------------------------------
Total equity 6,541 5,413
----------------------------------
Total liabilities & equity $ 14,730 $ 16,769
==================================
29
December 28, 2003
-----------------------------------------------------
As restated for
correction of
errors and
As previously As restated for retroactive
reported correction of adoption of
(1) errors FIN 46
Current assets:
Cash and cash equivalents $ 1,473 $ 972 $ 1,496
Inventories 570 355 585
Receivables 741 747 658
Reimbursable costs receivable - 1,503 580
Prepaid and other current assets 608 535 612
-----------------------------------------------------
Total current assets 3,392 4,112 3,931
Furniture, equipment and improvements 9,020 5,690 11,061
Goodwill 205 205 205
Liquor licenses 330 264 350
Restricted cash 72 - 72
Advances to managed outlets 331 - -
Note receivable 111 111 111
Other assets 426 1,320 275
-----------------------------------------------------
Total assets $ 13,887 $ 11,702 $ 16,005
=====================================================
Current liabilities:
Accounts payable $ 998 $ 676 $ 1,046
Accrued expenses 2,315 1,134 2,400
Reimbursable costs payable - 1,503 580
Current portion of debt 254 82 298
Note payable related party 269 346 345
-----------------------------------------------------
Total current liabilities 3,836 3,741 4,669
-----------------------------------------------------
Long term debt 283 106 285
Note payable related party 323 230 969
Other long term liabilities 1,496 1,632 2,734
-----------------------------------------------------
Total liabilities 5,938 5,709 8,657
-----------------------------------------------------
Minority interest 1,521 703 2,058
Stockholders' equity
Preferred stock - - -
Common stock - -
Additional paid-in capital 13,207 13,601 13,601
Accumulated deficit (6,779) (8,311) (8,311)
-----------------------------------------------------
Total stockholders' equity 6,428 5,290 5,290
-----------------------------------------------------
Total liabilities, minority
interest and stockholders'
equity $ 13,887 $ 11,702 $ 16,005
=====================================================
30
Three months ended Three months ended
March 28, 2004 March 30, 2003
--------------------------------- ---------------------------------------------------------
As restated for
As restated As restated correction of errors
As previously for correction As previously for correction and retroactive
reported (1) of errors reported (1) of errors adoption of FIN 46
Revenues
Sales $ 12,958 $ 13,510 $ 11,667 $ 8,691 $ 12,134
Cost reimbursements - 3,190 - 6,806 2,067
Management Fees 296 296 255 333 231
--------------------------------- ---------------------------------------------------------
Total Revenues 13,254 16,996 11,922 15,830 14,432
Cost of sales 3,630 3,772 3,174 2,316 3,283
--------------------------------- ---------------------------------------------------------
Gross Profit 9,624 13,224 8,748 13,514 11,149
--------------------------------- ---------------------------------------------------------
Operating exenses
Restaurant and operating expenses 7,776 8,125 6,997 5,117 7,308
Reimbursed costs - 3,190 6,806 2,067
General and administartive 1,227 1,227 910 910 910
Depreciation and amortization 386 449 432 312 502
Pre-opening costs 147 147 187 - 187
Gain on sale of assets - - (12) (11) (11)
--------------------------------- ---------------------------------------------------------
Total operating expenses 9,536 13,138 8,514 13,134 10,963
--------------------------------- ---------------------------------------------------------
Income (loss) from operations 88 86 234 380 186
Interest expense, net (34) (66) (48) (33) (83)
--------------------------------- ---------------------------------------------------------
Income (loss) before provision from
income taxes, minority interest and
equity in loss of joint venture 54 20 186 347 103
Provision for income taxes (23) (23) (55) (53) (55)
--------------------------------- ---------------------------------------------------------
Income (loss) before minorty
interest and equity in loss of
joint venture 31 (3) 131 294 48
Minority interest in loss
(earnings) of subsidiaries 60 100 216 90 196
Equity in loss of joint venture (4) - (5) (140) -
--------------------------------- ---------------------------------------------------------
Net income (loss) 87 97 342 244 244
Preferred dividends accrued (13) (13) (13) (13) (13)
--------------------------------- ---------------------------------------------------------
Net income available for common
shareholders $ 74 $ 84 $ 329 $ 231 $ 231
================================= =========================================================
Net income per share applicable to
common stock :
Basic Net Income 0.01 0.02 0.06 0.04 0.04
Diluted Net Income 0.01 0.01 0.06 0.04 0.04
Average-weighted shares
outstanding
Basic 5,546 5,546 5,537 5,537 5,537
Diluted 6,193 6,193 5,537 5,537 5,537
31
March 28, 2004
---------------------------------------
As previously As restated for
reported (1) correction of errors
Cash flows from operating activities
Net income $ 87 $ 97
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 386 449
Minority interest in net income (60) (100)
Equity in loss of JV 4 -
Stock based compensation 187 187
Changes in operating assets and liabilities
Inventories 1 (1)
Receivables 180 170
Reimbursable costs receivable - 38
Prepaid expenses and other currents assets (272) (287)
Other assets 22 28
Accounts payable 291 301
Accrued expenses (265) (276)
Reimbursable costs payable - (38)
Other long term liabilities (1) (83)
---------------------------------------
Net cash provided by operating activities 560 485
---------------------------------------
Cash flows from investing activities:
Purchases of PP&E (1,240) (1,241)
Additional investment in CityWalk (20) -
Proceeds from sale of assets 29 -
---------------------------------------
Net cash used in investing activities (1,231) (1,241)
---------------------------------------
Cash flows from financing activities:
Tenant improvement allowances 847 885
Payments on related party debt (40) (58)
Payments on notes payable (107) (119)
Proceeds from minority interest investment 15 35
Preferred return to Chicago (44) -
Return of capital to minority interests (68) (68)
---------------------------------------
Net cash provided by financing activities 603 675
---------------------------------------
Net increase(decrease) in cash (68) (81)
Cash and cash equivalents, beginning of period 1,473 1,496
---------------------------------------
Cash and cash equivalents, end of period $ 1,405 $ 1,415
=======================================
32
March 30, 2003
---------------------------------------------------------------
As restated for
correction of errors
As previously As restated for and retroactive
reported (1) correction of errors adoption of FIN 46
Cash flows from operating activities
Net income $ 342 $ 244 $ 244
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 432 312 502
Minority interest in net income (216) (90) (196)
Equity in loss of JV 5 140 -
Gain on sale of assets (12) (12) (11)
Stock based compensation 5 5 5
Changes in operating assets and liabilities
Inventories (22) (6) (25)
Receivables (285) (176) (234)
Reimbursable costs receivable 181 (9)
Prepaid expenses and other current assets (269) (232) (292)
Other assets (4) (9) 1
Accounts payable (9) (34) 49
Accrued expenses (316) (239) (353)
Reimbursable costs payable - (181) 9
Other liabilities - (23) (44)
---------------------------------------------------------------
Net cash used in operating activities (349) (120) (354)
---------------------------------------------------------------
Cash flows from investing activities:
Purchases of furniture, equipment and improvements (184) (41) (184)
Proceeds from sale of assets 26 26 26
Restricted cash for DGCP, LLC 466 - 466
---------------------------------------------------------------
Net cash provided by investing activities 308 (15) 308
---------------------------------------------------------------
Cash flows from financing activities:
Payments on related party debt (36) 22 (61)
Payments on notes payable (98) (63) (98)
Preferred return to Chicago (44) - -
Return of capital to minority interests (72) - (72)
---------------------------------------------------------------
Net cash used in financing activities (250) (41) (231)
---------------------------------------------------------------
Net decrease in cash (291) (176) (277)
Cash and cash equivalents, beginning of period 1,275 581 1,275
---------------------------------------------------------------
Cash and cash equivalents, end of period $ 984 $ 405 $ 998
===============================================================
33
(1) The Company previously restated its consolidated financial statements
as of December 28, 2003 and the three months ending March 30, 2003 to
reflect the accounting for employee stock options using variable accounting
treatment and to make other miscellaneous corrections. The effect of this
restatement was to increase operating expenses and decrease net income by
$5,000 in for the quarter ended March 30, 2003. There was no change to
reported net income per share. These "As previously reported" amounts
already reflect these adjustments and represent the amounts presented in
the Company's Quarterly Report on Form 10-Q filed on May 27, 2004.
In addition, certain prior year amounts have been reclassified to conform
to current year presentation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total sales revenues, except where otherwise noted. We typically
analyze our operating expenses as a percentage of sales revenues, not total
revenues.
Three Months Ended
-----------------------
March 28, March 30,
2004 2003
----------- ----------
(restated) (restated)
----------- ----------
% %
Revenues:
Sales revenues 79.5 84.1
Cost reimbursements 18.8 14.3
Management and license fees 1.7 1.6
----------- ----------
Total revenues 100.0 100.0
Cost of sales (exclusive of depreciation,
presented separately below) 22.2 22.7
----------- ----------
Gross profit 77.8 77.3
----------- ----------
Restaurant operating expenses 47.8 50.6
Reimbursed costs 18.8 14.3
Gain on sale of assets - (0.1)
General and administrative 7.2 6.3
Depreciation and amortization 2.7 3.5
Pre-opening costs 0.9 1.4
----------- ----------
Total operating expenses 77.4 76.0
----------- ----------
Operating income 0.4 1.3
Interest expense, net (0.3) (0.6)
----------- ----------
Income before taxes, equity in loss of joint
venture and minority interest 0.1 0.7
Provision for income taxes (0.1) (0.4)
Minority interest 0.6 1.4
Equity in loss of joint venture 0.0 0.0
----------- ----------
Net income 0.6 1.7
=========== ==========
34
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
First Quarter Total open at
Openings End of Quarter
---------------- ----------------
FY 2004 FY 2003 FY 2004 FY 2003
Daily Grill Restaurants:
Company owned 1 1 11 10
Managed and/or licensed - - 7 6
Grill on the Alley restaurants:
Company owned - - 4 4
Other restaurants
Managed and/or licensed - - 1 1
------- ------- ------- -------
Total 1 1 23 21
======= ======= ======= =======
Three Months Ended
----------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
Weighted average weekly sales per company
owned restaurant:
Daily Grill $ 69,700 $ 67,800
Grill on the Alley 80,115 75,500
Change in comparable restaurants (1)
Daily Grill 8.7% 3.4%
Grill on the Alley 6.1% (1.3)%
Total Company revenues:
Daily Grill $ 9,344,000 $ 8,206,000
Grill on the Alley 4,166,000 3,928,000
Reimbursed Costs 3,190,000 2,067,000
Management and license fees 296,000 231,000
---------------- ----------------
Total consolidated revenues 16,996,000 14,432,000
---------------- ----------------
Managed restaurants sales 4,020,000 2,835,000
Licensed restaurants sales 2,142,000 2,295,000
Less Reimbursed Costs (3,190,000) (2,067,000)
Less management and license fees (296,000) (231,000)
---------------- ----------------
Total system sales $ 19,672,000 $ 17,264,000
================ ================
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
35
MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28,
2004 AS COMPARED TO THE THREE MONTHS ENDED MARCH 30, 2003
Revenues. Revenues for the 2004 quarter increased 17.8% to $17.0 million from
$14.4 million in the 2003 period. Sales revenues increased 11.3% to $13.5
million in 2004 from $12.1 million in 2003. Reimbursed costs increased 54.3% to
$3.2 million in 2004 from $2.1 million in 2003. Management and license fee
revenues increased to $296,000 in 2004 from $231,000 in 2003. System-wide
sales, including sales of non-consolidated restaurants operated under license,
management or partnership agreements, totaled $19.7 million in 2004, an increase
of 13.9% from $17.3 million in 2003. System-wide sales, computed by adding to
total revenues the revenues of unconsolidated restaurants and subtracting
license and management fees reported from those restaurants, is a non-GAAP
measure considered by management to be a key indicator of brand strength. See
reconciliation of system-wide sales to revenues above.
Sales for Daily Grill restaurants increased by 13.9% from $8.2 million in the
2003 quarter to $9.3 million in the 2004 period. 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 8.7% ($0.6 million) for restaurants open for
12 months in both 2003 and 2004 and opening of the Bethesda Daily Grill ($0.6
million). Management considers performance of same store or comparable store
sales to be an important measure of growth when evaluating performance. Weighted
average weekly sales at the Daily Grill restaurants increased 2.8% from $67,800
in 2003 to $69,700 in 2004. Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 2004 reflected both increased
guest counts and improved average checks during the period.
Sales for Grill restaurants increased by 6.1% from $3.9 million in the 2003
quarter to $4.2 million in 2004. The increase in sales revenues for the Grill
restaurants from 2003 to 2004 was attributable to the improved check averages
and increased guest counts. Weighted average weekly sales at the Grill
restaurants increased 6.1% from $75,500 in 2003 to $80,115 in 2004.
Reimbursed costs which represent employee and other operating expenses of
managed restaurants for which we are reimbursed by the restaurants increased in
2004 primarily due to the opening of the Portland Daily Grill.
Management and license fee revenues during the 2004 quarter were attributable to
hotel restaurant management services which accounted for $238,000 of management
fees and licensing fees from the LAX Daily Grill, Skokie, Illinois Daily Grill
and the San Jose City Bar and Grill which totaled $58,000. The increase in
management fees during 2004 was attributable to management of the Portland Daily
Grill beginning in September 2003 and improved sales at other managed locations.
Cost of Sales and Gross Profit. While sales revenues increased by 11.3% ($1.4
million) in the 2004 quarter as compared to 2003, cost of sales increased by
14.9% ($489,000) and increased as a percentage of sales from 27.1% in 2003 to
27.9% in 2004. The increase in cost of sales as a percentage of sales revenues
was attributable to higher costs for a variety of food and grocery products,
including dairy, poultry and seafood during the current period. The dollar
increase in cost of sales reflects the opening of the Bethesda Daily Grill,
increased same store sales and the increase in various food and grocery prices.
Gross profit from restaurant sales increased 10.0% from $8.9 million (72.9% of
restaurant sales) in 2003 to $9.7 million (72.1% of restaurant sales ) in 2004.
Operating Expenses and Operating Results. Total operating expenses, including
restaurant operating expenses, reimbursed costs, general and administrative
expense, depreciation and amortization, and pre-
36
opening costs, increased 19.8% to $13.1 million in the 2004 quarter
(representing 77.4% of total revenues) from $11.0 million in 2003 (representing
76.0% of total revenues).
Restaurant operating expenses increased 11.2% to $8.1 million in the 2004
quarter from $7.3 million in 2003. As a percentage of restaurant sales,
restaurant operating expenses represented 60.1% in 2004 compared to 60.2% in
2003. The dollar increase in restaurant operating expenses was primarily
attributable to the sales increase, including the opening of the Bethesda Daily
Grill ($458,000), and increases in various restaurant costs, including wages and
related costs ($107,000), promotion and advertising ($113,000), occupancy costs
($96,000), and compensation expense for stock options ($43,000) among others.
The decrease in operating expenses as a percentage of revenues resulted from
improved operating efficiencies partially offset by compensation expense for
stock options attributable to an increase in the Company's stock price during
the quarter.
Reimbursed costs increased 54.3% from $2.1 million in 2003 to $3.2 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 opening of the Portland Daily Grill.
General and administrative expenses rose 34.8% to $1.2 million in the 2004
quarter compared to $0.9 million in 2003. General and administrative expenses
represented 9.1% of restaurant sales in 2004 as compared to 7.5% of revenues in
2003. The increase in general and administrative expense was attributable to
increases in a broad number of categories, including compensation expense for
stock options ($139,000), wages and related costs ($82,000), travel expenses
($20,000), telephone ($13,000), taxes and license expenses ($10,000) and
professional services ($56,000), including costs associated with implementing
various systems and procedures mandated by the Sarbanes-Oxley Act.
Depreciation and amortization expense decreased 10.6% for the 2004 quarter
representing 3.3% of restaurant sales in 2004 and 4.1% of restaurant sales in
2003 primarily due to higher revenues with relatively fixed depreciation amounts
and the completion of amortization of a non-compete agreement in 2003.
Pre-opening costs totaled $147,000 in the 2004 period as compared with $187,000
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 $66,000 during the 2004
quarter as compared to $83,000 in 2003. The decrease in interest expense was
primarily attributable to the reduction in long-term debt.
Minority Interest. We reported a minority interest in the loss of our majority
owned subsidiaries of $100,000 during the 2004 quarter as compared to $196,000
during the 2003 quarter. The decrease in minority interest in loss was
primarily attributable to improved operating results from the South Bay Daily
Grill which reflected pre-opening costs for the 2003 quarter.
We reported net income of $97,000 in the 2004 quarter as compared to a net
income of $244,000 for 2003.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES.
At March 28, 2004 the Company had negative working capital of $1.0 million and a
cash balance of $1.4 million compared to negative working capital of $0.7
million and a cash balance of $1.5 million at December 28, 2003.
Net cash provided by operations during the quarter ended March 28, 2004 totaled
$485,000 compared to $354,000 used in operations during the quarter ended March
30, 2003. The positive change in working
37
capital resulted from a reduction in receivables and an increase in payables,
offset by a reduction in depreciation and amortization and lower net income.
Net cash used in investing activities during the quarter ended March 28, 2004
totaled $1,241,000 as compared to $308,000 provided by investing activities
during the quarter ended March 30, 2003. Cash used in investing activities
during the current period related primary to purchases of property, plant and
equipment for the Bethesda Daily Grill ($1,155,000).
Net cash provided by financing activities during the quarter ended March 28,
2004 totaled $675,000 as compared to $231,000 used in financing activities
during the quarter ended March 30, 2003. Cash provided by financing activities
during the current period related to tenant improvement allowances ($885,000),
and investments by minority members in LLCs ($35,000), partially off-set by
reductions in debt ($177,000), and distribution of profits to the minority
member of San Jose Grill, LLC ($68,000).
Financing Facilities. At March 28, 2004, the Company had a bank credit facility
with nothing owing, a loan from a member of Chicago - The Grill on the Alley,
LLC of $1.1 million, equipment loans of $0.3 million, loans from
stockholders/officers of $0.2 million, and loans/advances from a landlord, the
SBA and others of $0.1 million. Construction of the Bethesda Daily Grill was
paid for through a $1.8 million tenant improvement allowance of which $885,000
was received during the first quarter of 2004. This tenant improvement
allowance has been recorded in long-term lease incentives and is being amortized
against rent expense over the 15 year lease term.
In March 2004, we entered into a preliminary agreement with respect to the
establishment of a new bank credit facility to replace our facility that expires
in October 2004. Under the terms of the new bank credit facility, we will be
provided with financing in the form of a revolving line of credit in the amount
of $500,000, an irrevocable standby letter of credit in the amount of $700,000
and equipment financing in the amount of $500,000. The facility will have a
one-year term, be secured by assets and is subject to certain standard borrowing
covenants. The definitive loan documents were finalized in June 2004.
Operating Leases and Contractual Obligations. During the quarter ended March 28,
2004, we entered into a lease relating to a restaurant scheduled to open in the
first quarter of 2005. Accordingly, at March 28, 2004, we were obligated under
seventeen leases covering the premises in which our Daily Grill and Grill
Restaurants are located as well as leases on our executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provide for the payment of minimum aggregate rental payments of
approximately $22.5 million over the life of those leases, with minimum annual
rental payments of $3.1 million in 2004, $5.3 million between 2005 and 2006,
$4.3 million between 2007 and 2008, and $9.8 million thereafter. With the
exception of entering into the referenced lease, there were no material changes
in our obligations under operating leases or other contracts during the quarter
ended March 28, 2004 as compared to those described in the Company's Form 10-K
for the year ended December 28, 2003, as amended.
Commitments Relating to Managed Restaurants and LLCs. Under certain of our
operating and management agreements we have an obligation to potentially make
additional cash advances and/or contributions and may not realize any
substantial returns for some time. The agreements and arrangements under which
we may be required to make cash advances or contributions, guarantee obligations
or defer receipt of cash are described in the Company's Form 10-K for the year
ended December 28, 2003, as amended. Developments with respect to those
agreements and arrangements during the quarter ended March 28, 2004 include:
Pursuant to the obligation of the Owner of the Portland Daily Grill to provide
working capital advances of not less than $50,000 and not more than $150,000,
after which the Company is required to make working capital advances, the Owner
had advanced $100,000 as of March 28, 2004.
38
The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood
and South Bay Daily Grill restaurants are each owned by limited liability
companies (the "LLCs") in which the Company serves as manager and owns a
controlling interest. Each of the LLCs has minority interest owners, some of
whom have participating rights in the joint venture such as the ability to
approve operating and capital budgets and the borrowing of money. In connection
with the financing of each of the LLCs, the minority members may have certain
rights to priority distributions of capital until they have received a return of
their initial investments ("Return of Member Capital") as well as rights to
receive defined preferred returns on their invested capital ("Preferred
Return").
Detailed information regarding the initial capital contributions to the LLCs,
Preferred Returns for each LLC, management fees payable to the Company and
principal distribution provisions are included in the Company's Form 10-K for
the year ended December 28, 2003, as amended. The following tables set forth a
summary for each of the LLCs of (1) the distributions of capital to the Members
and/or the Company during the quarter ended March 28, 2004, (2) the unreturned
balance of the capital contributions of the Members and/or the Company at March
28, 2004, and the accrued but unpaid preferred returns due to the Members and/or
the Company at March 28, 2004:
SAN JOSE GRILL LLC
Distributions of capital, preferred
return and profit during the three
months ended March 28, 2004: Members $68,000
=======
Company $68,000
=======
Unreturned Initial Capital
Contributions at March 28, 2004: Members $ 0
=======
Company $ 0
=======
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
=======
Company $ 0
=======
CHICAGO - GRILL ON THE ALLEY
Distributions of capital and note
repayments during the three months
ended March 28, 2004: Members (a) $ 63,000
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,072,000
==========
Company $ 0
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
==========
Company $ 0
----------
39
THE GRILL ON HOLLYWOOD LLC
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,200,000
==========
Company $ 250,000
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 0
==========
Company $ 73,000
==========
SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)
Distributions of capital during three
months ended March 28, 2004: Members $ 0
==========
Company $ 0
==========
Unreturned Initial Capital
Contributions at March 28, 2004: Members $1,000,000
==========
Company $ 350,000
==========
Accrued but unpaid Preferred
Returns at March 28, 2004: Members $ 128,000
==========
Company $ 45,000
==========
a) Distribution of capital as of March 28, 2004 includes $29,000 of payment of
capital and loan and $34,000 of payment of interest and preferred return.
40
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company's
critical accounting policies is set forth in the Company's Form 10-K for the
year ended December 28, 2003, as amended. As of, and for the quarter ended,
March 28, 2004, there have been no material changes or updates to the Company's
critical accounting policies other than the establishment of a workers
compensation loss reserve.
Worker's Compensation Loss Reserves
-----------------------------------
In the first quarter of 2004, the Company obtained a worker's compensation
policy for 2004. The Company has established a loss reserve to cover the
potential deductible amounts. The loss reserve is determined by estimating the
ultimate cost to the Company utilizing information on current accidents, prior
year experience and the carrier's loss development and loss trend factors. The
Company has reduced costs during the first quarter by $27,000 resulting from
savings of $64,000 due to lower premium costs net of the establishment of a loss
reserve of $37,000 related to the deductible.
Based on the Company's review at March 28, 2004, the current loss reserve is
adequate.
RECENTLY ADOPTED ACCOUNTING REQUIREMENTS
Effective December 29, 2003 (the first day of fiscal year 2004), the Company
adopted the provisions of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." In light of the changes
resulting from the current restatement process, the Company has elected to
retroactively adopt the provisions of FIN 46 so that the financial presentation
in this Amended Quarterly Report on Form 10-Q/A is more consistent with the
presentation of the Company's ongoing financial position and results of
operations.
Under FIN 46, an entity is considered to be a variable interest entity ("VIE")
when it has equity investors which lack the characteristics of a controlling
financial interest, or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation of a
VIE by an investor is required when it is determined that the investor is the
primary beneficiary and will absorb a majority of the VIE's expected losses or
residual returns if they occur.
Management has assessed all entities which are not wholly owned by the Company
to determine if these entities would be considered VIEs and whether the Company
would be considered the primary beneficiary. Upon adoption of FIN 46, it was
determined that all of the following entities would be considered VIEs: The San
Jose Grill LLC, Chicago - The Grill on the Alley, LLC, The Grill on Hollywood,
LLC, The Daily Grill at Continental Park LLC and the Universal CityWalk Daily
Grill partnership. The Company has determined it is the primary beneficiary for
all these entities.
In April 2004, the EITF reached final consensus on EITF 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128," which
requires companies that have participating securities to calculate earnings per
share using the two-class method. This method requires the allocation of
undistributed earnings to the common shares and participating securities based
on the proportion of undistributed earnings that each would have been entitled
to had all the period s earnings been distributed. EITF 03-06 is effective for
fiscal periods beginning after June 30, 2004 and earnings per share reported in
prior periods presented must be retroactively adjusted in order to comply with
EITF 03-06. The Company has adopted EITF 03-06 for the quarter ended June 30,
2004. The Company believes there will be no impact on the Company's financial
statements as the preferred shares are not participating securities.
41
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the opening of new restaurants during 2004 and the various
factors described in the Company's Annual Report on Form 10-K for the year ended
December 28, 2003, as amended, the following developments may impact future
operating results and financial condition.
In March 2004, the Company signed a lease to open an owned Daily Grill in an
office park in Santa Monica, California. The landlord will provide a turn-key
location built to our specifications. The restaurant is scheduled to open in
the first quarter of 2005.
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; or that additional hotels will elect to
retain the Company's hotel restaurant management services
Variable accounting, as required, for employee stock options may result in
substantial fluctuations in the Company's compensation expense and accrued
compensation based on movements in stock price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its non-revolving credit facility (the "Credit
Facility"). There were no borrowings outstanding under the Credit Facility at
March 28, 2004. Borrowings under the Credit Facility bear interest at the
lender's reference rate plus 0.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
At the time the original Quarterly Report on Form 10-Q was prepared and filed on
May 27, 2004, an evaluation as of the end of the period covered by this report
had been carried out under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the
42
"Exchange Act"). This evaluation was performed in light of a restatement caused
by an error in accounting for the Company's stock options which had been
accounted for using fixed accounting but which should have been accounted for
using variable accounting. Based on their evaluation, our chief executive
officer and chief financial officer had originally concluded that our disclosure
controls and procedures were effective to ensure that we record, process,
summarize, and report information required to be disclosed by us in our reports
filed under the Securities Exchange Act within the time periods specified by the
Securities and Exchange Commission's rules and forms even though a restatement
had occurred.
Subsequent to filing our original report, and in connection with the review of
our financial statements for the second quarter of 2004, the Company was
informed by its independent accountants that (i) the Company's accounting for
its joint ventures including loss allocations, guarantees of returns,
consolidation decisions and the initial adoption of FIN 46 was incorrect, (ii)
reimbursed costs related to management agreements should be presented on a
grossed-up basis as both revenue and expense, and (iii) the accounting for
certain equity awards needed to be adjusted. These instances were considered to
be material weaknesses in the selection and application of accounting principles
and policies. After re-evaluation of our accounting practices for joint
ventures, reimbursed costs and equity awards, our management determined to
restate our consolidated financial statements as of December 28, 2003 and March
28, 2004 and for the three months ended March 30, 2003 and March 28, 2004.
In conjunction with the decision to restate our financial statements, management
re-evaluated our disclosure controls and procedures over the selection and
application of accounting principles, in particular, accounting for stock
options, joint ventures, reimbursed costs and equity awards, and concluded that
these controls were not effective as of March 28, 2004. During the second and
third quarters of 2004, we took steps to identify, rectify and prevent the
recurrence of the circumstances that resulted in our determination to restate
prior period financial statements, including reviewing the terms of our stock
option grant agreements in relation to the option plan agreement, reviewing the
terms of all our joint venture and related agreements, reviewing the accounting
for reimbursed costs under our management agreements and reviewing the
accounting for all our equity awards. As part of this undertaking, we have
consulted with our independent registered public accounting firm, increased
emphasis on continuing education for our accounting personnel and increased
emphasis on reviewing applicable accounting literature, all relating to the
selection and application of accounting principles pertaining to these areas.
In addition, in July 2004, we hired a new chief financial officer. We believe
these enhancements to our system of internal controls and our disclosure
controls and procedures will be adequate to provide reasonable assurance that
the control objectives will be met.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 2004, the Company issued 43,290 shares of common stock to Michael
Weinstock, the Company's Chairman and Executive Vice President, pursuant to the
exercise of 75,000 warrants held by Mr. Weinstock. The exercise price of the
warrant, $1.4062 per share, was paid by means of a cashless exercise. The
warrants were originally issued to Mr. Weinstock pursuant to an agreement by Mr.
Weinstock to guarantee certain bank indebtedness of the Company.
The issuance of the shares of our common stock described above was pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended and related state private offering exemptions. The purchaser
was an Accredited Investors as defined in the Securities Act who took the shares
for investment purposes without a view to distribution and had access to
information concerning the Company and its business prospects, as required by
the Securities Act.
43
In addition, there was no general solicitation or advertising in connection with
the issuance of the shares. All certificates for our shares contain a
restrictive legend. Finally, our stock transfer agent has been instructed not to
transfer any of such shares, unless such shares are registered for resale or
there is an exemption with respect to their transfer.
No commissions were paid in connection with the issuance described above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement, effective January 1, 2004, with Robert Spivak
10.2 Consulting Agreement with Robert Spivak
31.1* Section 302 Certification of CEO
31.2* Section 302 Certification of CFO
32.1* Certification of CEO Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of CFO Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith; all other exhibits previously filed.
(b) Reports on Form 8-K
None
44
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: October 13, 2004
By: _________________________________
Robert Spivak
President and Chief Executive Officer
By: _________________________________
Philip Gay
Chief Financial Officer
45