SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 29, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
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(Name of small business issuer in its charter)
Delaware 13-3319172
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (310) 820-5559
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
------------------- Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.00001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90)
days. Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $22,743,867.
As of March 10, 1997, 14,351,803 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the common
stock held by non-affiliates, based on the average bid and asked price on the
NASDAQ Small-Cap Market, was approximately $8,702,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be
filed within 120 days of the Registrant's fiscal year ended December 29, 1996
are incorporated by reference into Part III.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.................................. 1
ITEM 2. DESCRIPTION OF PROPERTIES................................ 10
ITEM 3. LEGAL PROCEEDINGS........................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS..................... 12
ITEM 7. FINANCIAL STATEMENTS..................................... 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT......................................... 18
ITEM 10. EXECUTIVE COMPENSATION................................... 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................... 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 19
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K......................... 19
SIGNATURES
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PART I
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 18 of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
General and Development of Business
Grill Concepts, Inc. (the "Company") was incorporated under the laws of the
State of Delaware in November of 1985. The Company was originally incorporated
under the name "Uno Concepts, Inc." In December of 1992, the Company changed its
name to "Magellan Restaurant Systems, Inc." and, in May of 1993, the Company
"went public" pursuant to a merger with MRS Funding, Inc.
In March of 1995, the Company consummated an exchange (the "Exchange")
pursuant to which the Company issued 8,500,000 shares of Common Stock in
exchange for 100% of the outstanding stock of Grill Concepts, Inc., a California
corporation ("GCI"). Following the Exchange, the Company changed its name to
"Grill Concepts, Inc.," management of GCI assumed effective management and
control of the Company and the Company effectively altered its future operating
plans to emphasize the expansion of the "Daily Grill" restaurant format of GCI.
The Company, prior to the Exchange, is sometimes referred to herein as
"Magellan."
The Company presently operates fourteen restaurants, consisting of nine
Daily Grill restaurants, three Pizzeria Uno Restaurants, The Grill on the Alley,
and a Rhino Chasers brew pub/restaurant. With the exception of Rhino Chasers and
one Daily Grill, both of which are operated at Los Angeles International Airport
("LAX") pursuant to a venture with CA One Services, Inc. ("CA One"), and the
three Pizzeria Uno Restaurants which are operated pursuant to franchise
agreements, each of the Company's restaurants is owned and operated on a
non-franchise basis solely by the Company. The Company plans to open one
additional Daily Grill restaurant during 1997 and is in negotiations with a
potential partner with respect to the opening of "The Grill" in San Jose,
California.
Daily Grill Restaurants
Background. The Company, through its subsidiary, GCI, and through The
Airport Grill LLC (the "Airport LLC"), owns and operates eight existing Daily
Grill restaurants in Southern California and one in Washington, D.C.. Daily
Grill restaurants are patterned after "The Grill on the Alley" in Beverly Hills,
a fine dining American-style grill restaurant which was acquired by the Company
during 1996. See "The Grill on the Alley." The Grill on the Alley was founded by
Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for a
number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants. The Daily Grill motto is "Satisfaction Served
Daily."
Restaurant Sites. The Company presently operates nine Daily Grill
restaurants which opened in the following months and years:
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Location Opened
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Brentwood, California September 1988
Los Angeles, California April 1990
Newport Beach, California April 1991
Encino, California April 1992
Studio City, California August 1993
Palm Desert, California January 1994
Irvine, California September 1996
Los Angeles International Airport(1) January 1997
Washington, D.C. March 1997
All Daily Grill restaurants are presently open for lunch and dinner seven
days a week with the LAX Daily Grill also open for breakfast.
Each Daily Grill restaurant is located in leased facilities. Site selection
is viewed as critical to the success of the Company and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.
The site selection process focuses on local demographics and household income
levels, as well as specific site characteristics such as visibility,
accessibility, parking availability and traffic volume. Each site must have
sufficient traffic such that management believes the site can support at least
twelve strong meal periods a week (i.e., five lunches and seven dinners).
Preferred Daily Grill sites, which characterize the existing restaurants (other
than the LAX Daily Grill), are high-end, mid-size retail shopping malls in large
residential areas with significant daytime office populations and some
entertainment facilities. Historically, Daily Grill restaurants have been anchor
tenants at high profile malls and, therefore, have received significant tenant
improvement allowances.
Existing Daily Grill restaurants (other than the LAX Daily Grill) range in
size from 3,750 to 6,000 square feet, of which approximately 2,000 square feet
is devoted to kitchen and service areas, and seat between 100 and 250 persons.
Opening costs of existing restaurants, including leasehold improvements,
furniture, fixtures and equipment and pre-opening expenses, have averaged $1.2
million per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers the same
extensive menu featuring over 100 items (the LAX Daily Grill also offers a
breakfast menu). The menu was designed to be reminiscent of the selection
available at American-style grill restaurants of the 1930's and 1940's, in
contrast to the "nouvelle cuisine" and diet meal fads of the 1980's. Daily Grill
offers such "signature" items as Cobb salad, Caesar salad, chicken hash,
meatloaf with mashed potatoes, chicken pot pie, chicken burgers, hamburgers,
rice pudding and fresh fruit cobbler. The emphasis at the Daily Grill is on
freshly prepared American food served in generous portions.
Entrees range in price from $8.25 for an "original" beef dip sandwich
to $19.95 for a char-broiled 16 oz. T-bone steak with all the trimmings. The
average lunch check is $12 per person and the average dinner check is $15 per
person, including beverage. Each Daily Grill restaurant also offers a children's
menu with reduced portions of selected items at reduced prices. All of the
existing Daily Grill restaurants offer a full range of beverages, including
beer, wine and full bar service.
Proprietary recipes have been developed for substantially all of the
items offered on the Daily Grill menu. The same recipes are used at each
location and all chefs undergo extensive training in order to assure consistency
and quality in the preparation of food. Virtually all of the menu items offered
at the Daily Grill are cooked from scratch utilizing fresh food ingredients. The
Company's management believes that its standards for ingredients and the
preparation of menu items are among the most stringent in the industry.
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1 The Daily Grill restaurant at Los Angeles International Airport is operated
by The Airport Grill LLC, a limited liability company in which the Company
owns a 51% interest. See "The Airport Grill LLC - LAX Daily Grill."
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Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.
Atmosphere and Service. Each Daily Grill location is designed to provide
the sense and feel of comfort. In the tradition of an old-time American-style
grill, the setting is an open kitchen adjacent to tables, booths and/or
counters. The open kitchen setting emphasizes the quality and freshness of Daily
Grill food dishes in addition to the cleanliness of operations. The dining area
is well-lit and is characterized by a "high energy level".
The feeling of comfort and tradition is enhanced by the restaurant
policy of not requiring reservations except for groups of six or more. As a
result, patrons are served on a first-come-first-served basis and never have to
wait for a table while a vacant table is being held for patrons with
reservations.
The attention to detail and quality of the decor is carried through to
the professional service. All Daily Grill employees are trained to treat each
person who visits the restaurant as a "guest" and not merely a customer. Each
server is responsible for assuring that his or her guest is satisfied. In
keeping with the traditions of the past, each Daily Grill employee is taught
that at the Daily Grill "the guest is always right." The Daily Grill's policy is
to accommodate all guest requests, ranging from substitutions of menu items to
take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 70% of the guests at the Daily Grills which
have been open for over a year represent repeat business, and many guests have
become "regulars" in the tradition of the neighborhood restaurant.
The Airport Grill LLC
Operating Agreement. In March of 1995, the Company entered into an
operating agreement (the "Operating Agreement") with CA One Services, Inc., a
major national airport concessionaire and division of Delaware North Companies,
Inc. Pursuant to the Operating Agreement, the Company and CA One Services formed
The Airport Grill LLC (the "Airport LLC") to own and operate restaurants within
Los Angeles International Airport ("LAX"). Under the Operating Agreement, CA One
Services is advancing all required capital to open and operate one or more
restaurants, other than certain minimum capital ($10,200) which the Company
contributed, and the Company will provide certain managerial oversight and
assistance. Profits of the Airport LLC will be shared 51% by the Company and 49%
by CA One Services after the payment of a management fee equal to 4% of gross
revenues to each of the Company and CA One Services and after the repayment of
CA One Services' advances to the Airport LLC, with interest.
Rhino Chasers. In October of 1995, the Airport LLC opened its first
restaurant in LAX, "Rhino Chasers" brew pub restaurant/bar. Rhino Chasers
features hand-crafted beer and a selection of foods developed by the Company
specifically for such restaurant.
Rhino Chasers occupies approximately 1,756 square feet in Terminal One of
LAX and seats up to 60 persons. Rhino Chasers is designed to offer a casual,
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friendly and entertaining atmosphere for travelers to enjoy a casual meal and
drinks at moderate prices. Entree selections currently range in price from
approximately $4.95 to $7.95, with an average cost per person per meal,
including beverage, of approximately $9.00. Based on operating results to date,
approximately 49% of Rhino Chasers' revenues have been attributable to alcohol
sales with the remaining sales being attributable to food and non-alcoholic
beverages.
Rhino Chasers employs two full time managers and approximately 24 part-time
and full-time employees. Rhino Chasers is open from 5:30 a.m. to 11:00 p.m.,
seven days per week.
LAX Daily Grill. In January of 1997, the Airport LLC opened a Daily Grill
restaurant in the International Terminal of LAX ("LAX Daily Grill"). The LAX
Daily Grill is an 8,300 square foot full-service restaurant seating
approximately 300 persons.
The Grill on the Alley
In April of 1996, the Company acquired, for 850,000 shares of common stock,
The Grill on the Alley ("The Grill") from a partnership the managing partner of
which was controlled by the Company's principal shareholders and directors
(Robert Spivak, Michael Weinstock and Richard Shapiro). From 1995 until the
acquisition of The Grill, the Company provided management services for The Grill
for a management fee equal to 5% of the revenues of The Grill.
The Grill is an upscale Beverly Hills restaurant which opened in 1984 and
served as the model for the Daily Grill restaurants. The Grill is set in the
traditional style of the old-time grills of New York and San Francisco, with
black-and-white marbled floors, polished wooden booths and deep green
upholstery. In 1995, The Grill was inducted into Nation's Restaurant News' Fine
Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere. See
"Daily Grill Restaurants."
The Pizza Restaurants
Restaurants. Through its wholly-owned subsidiaries, the Company presently
operates three "Pizzeria Uno Restaurant & Bar" locations. The Company's present
Pizza Restaurants are located in the following cities and were opened in the
months and years indicated:
Location Opened
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South Plainfield, New Jersey January, 1987
Media, Pennsylvania February, 1987
Cherry Hill, New Jersey March, 1990
The Company's Pizza Restaurants are operated in accordance with certain
guidelines established, and managerial assistance and training provided, by the
Franchisor. See "- The Franchise Agreements" below.
The Pizza Restaurants offer a diverse menu in accordance with guidelines
established by the Franchisor, featuring gourmet, Chicago-style deep-dish
pizzas, filled with ingredients such as fresh meats, spices, vegetables and
cheese and baked to order based on proprietary recipes of the Franchisor. The
Pizza Restaurants also offer a variety of sandwiches, hamburgers, appetizers,
salads, desserts and beverages, including a full liquor selection. All of the
menu items offered by the Pizza Restaurants are also available for delivery or
carry-out. Delivery service is provided by third parties pursuant to contractual
arrangements.
The Pizza Restaurants are characterized by a casual, friendly and
entertaining atmosphere, full and efficient service, and high-quality menu items
at moderate prices. Entree selections currently range in price from
approximately $4.95 to $8.95, with an average cost per person per meal,
including beverage, of approximately $6.25 for lunch and $9.25 for dinner.
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The Pizza Restaurants are located in suburban areas in leased premises. The
Pizza Restaurants range in size from approximately 5,300 square feet to
approximately 7,900 square feet, including a bar and lounge area, and have
seating capacities ranging from 180 to 200 customers. Each of the Pizza
Restaurants employs between three and four full time managers and assistant
managers and between 45 and 85 part-time and full-time employees. The Pizza
Restaurants are generally open from 11:00 a.m. to midnight, seven days per week,
except on Friday and Saturday when the Pizza Restaurants remain open until 1:00
a.m.
The Franchise Agreements. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreements, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurants' designated
locations. The Franchise Agreements each have a term of 20 years with three
successive ten-year renewal periods at the option of the Company, provided that
the agreements have not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts, an advertising fee (1% of gross revenues) and the
expenditure of certain minimum amounts on local advertising and promotion (2% of
gross revenues).
Business Expansion
The Company's expansion plans focus on the addition of Daily Grill
restaurants.
During 1996, management reviewed possible expansion into new markets and
will continue to do so in the future. Such review will entail careful analysis
of potential locations to assure that the demographic make-up and general
setting of new restaurants is consistent with the patterns which have proven
successful at the existing Daily Grills. While the general appearance and
operations of future Daily Grills are expected to conform generally to those of
existing facilities, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future Daily Grill restaurants are
expected to feature full bar service.
In March of 1997, the Company opened its first East Coast Daily Grill in
Washington, D.C. at an estimated cost of $1.5 million. In order to establish
market presence and economies of scale, the Company plans to open one additional
Daily Grill restaurant in the greater-Washington, D.C. market during 1997 and
intends to evaluate the opening of additional restaurants in such market over
the next five years. The Company will continue to evaluate sites for future
restaurants and, while management has not selected sites for such additional
restaurants, the Company has targeted Chicago, San Francisco and Las Vegas as
potential markets for future expansion. Management anticipates that the cost to
open additional Daily Grill restaurants will range from $0.8 to $1.4 million per
restaurant, with each restaurant expected to be approximately 5,000 to 7,000
square feet in size. Actual costs may vary significantly depending upon the
market conditions, rental rates, labor costs and other economic factors
prevailing in each market in which the Company pursues expansion. There can be
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no assurance, however, that the Company will be successful in opening additional
Daily Grill restaurants in the cities or at the costs indicated, or, even if
such restaurants can be opened at such costs, that such restaurants can be
operated on a profitable basis.
During 1995, the Company entered into the Operating Agreement with CA One
Services, Inc., pursuant to which the Airport LLC was formed to own and operate
restaurants within Los Angeles International Airport, and the rights to operate
a Daily Grill restaurant at LAX were granted to the Airport LLC by the City of
Los Angeles. Pursuant to such arrangement, CA One Services is advancing all
required capital to open and operate restaurants, other than $10,200 which the
Company has contributed, and the Company will provide certain managerial
oversight and assistance. Profits of the Airport LLC will be shared in
accordance with the Operating Agreement. See "The Airport Grill LLC - Operating
Agreement." Airport LLC presently operates a Rhino Chasers brew pub
restaurant/bar in Terminal One of LAX, which opened in October of 1995, and the
LAX Daily Grill, which opened in January of 1997. At this time, the Company, and
the Airport LLC, have no plans to open additional restaurants at LAX or other
airports. However, the Company, and or the Airport LLC, may evaluate the opening
and operation of additional restaurants where favorable opportunities become
available in airports and other locations.
The Company is presently in negotiations with a potential partner with
respect to the possible opening of "The Grill" in San Jose, patterned after The
Grill on the Alley. While management presently plans to open "The Grill" in San
Jose before the end of 1997 and expects that its partner will contribute a
disproportionate share of the costs of opening such restaurant, negotiations are
still in progress and there is no assurance that the Company will be able to
enter into an acceptable partnership arrangement to fund or operate "The Grill"
or that such restaurant will in fact open during 1997, or ever.
Restaurant Management
The Company strives to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
adherence to standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has experienced a relatively low
turnover at every level at its Daily Grill restaurants. See "- Daily Grill
Restaurants" above.
Daily Grill. Each Daily Grill restaurant is managed by one general manager
and one or two managers or assistant managers. Each restaurant also has one head
chef and one or two sous chefs, depending on volume. On average, general
managers have approximately seven years experience in the restaurant industry
and three years with the Company. The general manager has primary responsibility
for the operation of the restaurant and reports directly to the Company's Vice
President - Western Operations. In addition to ensuring that food is prepared
properly, the head chef is responsible for product quality, food costs and
kitchen labor costs. Each restaurant has approximately 85 employees. Restaurant
operations are standardized, and a comprehensive management manual exists to
ensure operational quality and consistency.
The Company maintains financial and accounting controls for each Daily
Grill restaurant through the use of a "point-of-sale" computer system integrated
with centralized accounting and management information systems. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue and
cash control.
All managers participate in a comprehensive seven week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
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as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports and third
party quality control reviews. Two or three times every month, an independent
service is paid to go to each location and prepare a report on every aspect of
the meal, the service and the ambiance.
Servers at each restaurant participate in approximately three weeks of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.
LAX Restaurants. The LAX Daily Grill is operated under the direction of a
general manager designated and employed by the Company. Management and operation
of the LAX Daily Grill is similar to the other Daily Grill restaurants with a
larger staff to accommodate the larger size of the LAX Daily Grill, including
one general manager, four managers, a chef and two sous chefs.
CA One has primary responsibility for the operations of Rhino Chasers. The
staff of Rhino Chasers consists of two managers and approximately 24 hourly
employees, most of whom are part-time employees.
Pizza Restaurants. The staff of the Company's Pizza Restaurants consists of
between three and four managers and between 40 and 85 hourly employees, most of
whom are part-time employees, per location.
All managers of the Pizza Restaurants participate in an onsite training
program and are provided with the Franchisor's Operating Manual. Additionally,
selected management personnel participate in periodic meetings conducted by the
Franchisor focusing on marketing, new products and other aspects of business
management.
The Company's has a director of operations who oversees and supervises the
operations of each of the Company's Pizza Restaurants, providing ongoing
guidance and assistance to managers as necessary. Additionally, field-service
supervisors of the Franchisor periodically visit and inspect the operations of
the Pizza Restaurants to assure compliance with the quality, service and other
standards imposed by the Franchisor.
Purchasing
Daily Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill restaurants. In order to
assure quality and consistency at each of the Daily Grill restaurants,
ingredients approved for the recipes are ordered on a unit basis by each
restaurant's head chef from a supplier designated by the Company's Food and
Beverage Director. Because of the Daily Grill's emphasis on cooking from
scratch, virtually all food items are purchased "fresh" rather than frozen or
pre-cooked, with the exception being bread, which is ordered from a central
supplier which prepares the bread according to a Daily Grill recipe and delivers
twice daily to assure freshness. In order to reduce food preparation time and
labor costs while maintaining consistency, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings and seasoning combinations.
The Company utilizes its point-of-sale computer system to monitor
inventory levels and sales, then orders food ingredients daily based on such
levels. The Company employs contract purchasing in order to lock in food prices
and reduce short term exposure to price increases. The Company's Vice President
- - Executive Chef establishes general purchasing policies and is responsible for
controlling the price and quality of all ingredients. The Vice President
Executive Chef, in conjunction with the Company's team of chefs, constantly
monitors the quality, freshness and cost of all food ingredients. All essential
food and beverage products are available, or upon short notice can be made
available, from alternative qualified suppliers.
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Pizza Restaurants. The Company has no contracts governing purchases of food
and beverage supplies but negotiates purchases for its Pizza Restaurants
directly with suppliers, often with the assistance of the Franchisor. Such
purchases cover all primary food ingredients and beverage products to ensure
adequate supplies and to obtain competitive prices.
Advertising and Marketing
Daily Grill. The Company has historically relied primarily on reputation,
local reviews and word of mouth to promote its Daily Grill restaurants. Daily
Grill restaurants have been featured in articles and reviews in numerous local
as well as national publications. The Company supplements its reputation with a
program of marketing and public relations activities designed to keep the Daily
Grill name before the public. Such activities include media advertising,
participating in local charity events and providing a location and refreshments
for meetings of charity organizations. During 1996, expenditures for advertising
and promotion were approximately 2.2% of gross revenues.
In 1996, the Company expanded and formalized its marketing efforts with the
hiring of an in-house marketing director and the retention of a national
consumer research firm to coordinate the Company's future advertising and
marketing efforts and to facilitate expansion into new markets. The Company's
marketing director is responsible for advertising, public relations and a wide
range of marketing-related activities. The Company also retained Pulse
Marketing, a nationally known consumer research firm, during 1996 to undertake
research designed to facilitate successful expansion into new markets.
Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."
The Company budgets an average of 3% of Pizza Restaurant sales annually for
advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers.
Competition
The Daily Grill restaurants compete within the rapidly growing mid-price,
full-service casual dining segment. The Daily Grill's competitors include
national and regional chains, as well as local owner-operated restaurants. The
primary competitors to the Company's Pizza Restaurants are casual theme
restaurant chains including Friday's and the Olive Garden. Rhino Chasers'
competition is limited to restaurants and bars within the commuter terminal of
LAX and the LAX Daily Grill's competition is limited to restaurants in the
international terminal of LAX.
The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. However,
many of its competitors have been in existence longer than the Company, have a
more established market presence and have substantially greater financial,
marketing and other resources, which may give them certain competitive
advantages. The Company believes that its ability to compete effectively will
continue to depend in large measure on its ability to offer a diverse selection
of high quality, fresh food products with an attractive price/value relationship
served in a friendly atmosphere.
Management believes that its affiliation with, and operation under the name
of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enables the Company to compete effectively with other local and national-chain
restaurants. Employees
8
<PAGE>
The Company and its subsidiaries employ approximately 700 people, 16 of
whom are corporate personnel and 49 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 350 are full-time employees, with the
remainder being part-time employees.
None of the Company's employees are represented by labor unions or are
subject to collective bargaining or other similar agreements. Management
believes that its employee relations are good at the present time.
Trademarks and Service Marks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "Satisfaction Served Daily"
mark with the United States Patent and Trademark Office as service marks for
restaurant service, and has secured California state registration of such marks.
The Company's policy is to pursue registration of its marks and to oppose
strenuously any infringement.
Pursuant to the Franchise Agreements, the Company's Pizza Restaurants
operate under the "Pizzeria Uno" trademark and service marks. The Franchisor has
undertaken to keep in place and renew, as necessary, its trademark registrations
and to vigorously oppose any infringements of its marks.
Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurants are located. Difficulties or failures in
obtaining or renewing the required licenses or approvals could result in
temporary or permanent closure of the Company's restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leaves of absence and mandated health benefits, or increased
tax reporting requirements for employees who receive gratuities, could be
detrimental to the economic viability of the Company's restaurants. Management
is not aware of any environmental regulations that have had a material effect on
the Company to date.
9
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant, all of
the Company's restaurants are located in space leased from parties unaffiliated
with the Company. The leases have initial terms ranging from 10 to 25 years,
with varying renewal options on all but one of such leases. Each of the leases
provides for a base rent plus payment of real estate taxes, insurance and other
expenses, plus additional percentage rents based on revenues of the restaurant.
See "Description of Business."
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by the Company's chairman, Robert
L. Wechsler.
The Company's executive offices are located in 2,000 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party on a month-to-month basis. The Company is presently in
negotiations to lease an additional 1,000 square feet of office space adjoining
its existing offices.
The Company also maintains east coast offices in a building located in
Cherry Hill, New Jersey. Such offices are rented on a month-to-month basis for
$400 per month from the same affiliated company from which the Company leases,
and are located in the same complex as, the Cherry Hill restaurant.
Management believes that, with the addition of the office space noted
above, the Company's existing restaurant and executive office space is adequate
to support current operations. The Company intends to lease, from time to time,
such additional office space and restaurant sites as management deems necessary
to support its future growth plans.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in various claims and legal
actions arising in the ordinary course of business, including actions filed
pursuant to "dram-shop" laws. None of such claims or legal actions which have
arisen to date is material in the opinion of management.
The Company is not presently a party to any material pending litigation nor
is the management of the Company aware of any threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 29, 1996.
10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The Company's common stock commenced quotation on Nasdaq under the
symbol "MGRS" on December 8, 1993. Prior to such date, the Company's common
stock was quoted in the over-the-counter market on the NASD Bulletin Board.
Prior to the commencement of quotations on Nasdaq, the trading market in the
Company's common stock was sporadic. The following table sets forth the high and
low bid price per share for the Company's common stock for each quarterly period
during the last two fiscal years:
High Low
------- -------
1995 - First Quarter 3-1/32 2
Second Quarter 2 7/8
Third Quarter 1-13/16 1-1/16
Fourth Quarter 1-3/4 1-1/32
1996 - First Quarter 1-1/2 1-3/16
Second Quarter 1-21/32 1-3/16
Third Quarter 3-3/8 1-17/32
Fourth Quarter 3-7/16 1-5/16
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 10, 1997, the bid price of the Common Stock was $1-5/32.
As of March 10, 1997, there were approximately 441 holders of record of the
Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 18 of this Form 10-KSB.
General
The following discussion relates to the historical operating results and
financial condition of the Company since the Exchange, the pro forma combined
operating results and financial condition of the Company giving effect to the
Exchange and the acquisition of The Grill and, where appropriate, to the
historical operating results and financial condition of Magellan and GCI. See
"Description of Business." All references herein, whether of a historical nature
or a prospective nature, unless otherwise noted, are to the Company, and reflect
the combined entity including both Magellan and GCI.
During the fiscal year ended December 29, 1996, the Company owned and
operated a total of twelve restaurants, consisting of seven Daily Grill
restaurants, three Pizza Uno restaurants, The Grill and Rhino Chasers brew
pub/restaurant. During the fiscal year ended December 31, 1995, Magellan owned
and operated three franchised "Pizzeria Uno" restaurants (the "Pizza
Restaurants") and was a 51% partner in a partnership which owned and operated
Tailgators Sports Pub ("Tailgators"). During the same period, GCI owned and
operated six Daily Grill restaurants. In March of 1995, Magellan consummated an
exchange pursuant to which it acquired all of the stock of GCI. See "Description
of Business."
Due to the Exchange explained in the Notes to Consolidated Financial
Statements, the results of operations for the 53 week period ended December 31,
1995 include the operations of GCI for the entire 53 week period while
reflecting the operations of Magellan for only 43 weeks from March 3, 1995 (the
Exchange date) to December 31, 1995. Therefore, 1995 results include operations
for a 43 week period of three Pizzeria Uno restaurants and Tailgators (the
Pizzeria Uno restaurants and Tailgators are collectively referred to as the
"Magellan Units"), in addition to the operation for the entire 53 week period of
six Daily Grill restaurants and for the period from October 15, 1995 to December
31, 1995 of Rhino Chasers.
Revenues of the Company are derived from sales of food, beer, wine, liquor
and non-alcoholic beverages. Approximately 80% of combined 1996 sales were food
and 20% were beverage. Revenues from restaurant operations are primarily
influenced by the number of restaurants in operation at any time, the timing of
the opening of such restaurants and the sales volumes of each restaurant.
The Company's expenses are comprised primarily of cost of food and
beverages, payroll and restaurant operating expenses, including rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. While the Franchisor of the Company's Pizza Restaurants,
Pizzeria Uno Corporation, specifies the menu items which must be offered by the
Company, as well as the recipes and procedures to be utilized in preparing
various menu items, the Company is generally not required to purchase
ingredients from the Franchisor. However, certain key ingredients are
proprietary in nature and may be acquired only from certain distributors which
sell such ingredients under private label for the Franchisor. Restaurant
operating expenses consist primarily of wages paid to part-time and full-time
employees, rent, utilities, insurance and taxes.
In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreements, the Company pays a continuing license fee
with respect to each of its Pizza Restaurants, an advertising fee and is
required to expend certain minimum amounts on local advertising and promotion.
See "Description of Business - The Pizza Restaurants -- The Franchise
Agreements."
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<PAGE>
The Company's balance sheet and results of operations at and for the year
ended December 29, 1996 reflect the capitalization and amortization of costs of
acquiring liquor licenses. The Company at December 29, 1996 had capitalized and
unamortized costs of obtaining its various liquor licenses totaling
approximately $720,000. Such costs consist primarily of amounts paid to purchase
such licenses. The Company is amortizing the capitalized cost of its liquor
licenses over a forty year period. Additionally, the Company capitalizes and
amortizes pre-opening expenses incurred prior to the opening of each of its
restaurants. Such pre-opening expenses are amortized ratably over a twelve month
period commencing when each restaurant opens. The Company had $121,000 of
capitalized and unamortized pre-opening expenses remaining on its balance sheet
at December 29, 1996. In connection with acquisition of The Grill during 1996,
the Company capitalized $171,000 of goodwill which is being amortized over a
thirty year period. As each of the foregoing items involves the payment of
certain amounts in advance and the expensing of such amounts in subsequent
years, the Company's operating results reflect significant amortization expense
which does not affect the Company's operating cash flows. Prior to 1996, the
Company had capitalized and was amortizing goodwill arising in connection with
the Exchange. During 1995, goodwill arising from the Exchange of approximately
$2.0 million was being amortized over thirty years. During the fourth quarter of
1996, the Company wrote-off the remaining unamortized goodwill arising in
connection with the Exchange.
In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers and clerical personnel, rent,
legal and accounting costs, travel, insurance and various office expenses.
Results of Operations -- Fiscal Year 1996 Compared to Fiscal Year 1995
The following table sets forth certain items from the Company's Statements
of Operations during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Amount % Amount %
-------------- ------ ------------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Sales $22,744 100.0% $20,253 100.0 %
Cost of sales 36,210 27.3 5,437 26.8
--------------------------------------------
Gross profit 16,534 72.7 14,816 73.2
--------------------------------------------
Restaurant operating expense 13,970 61.4 12,109 59.8
General and administrative expense 2,172 9.6 1,717 8.5
Depreciation and amortization 867 3.8 792 3.9
Unusual charges 2,052 9.0 - 0.0
--------------------------------------------
Total operating expenses 19,061 83.8 14,618 72.2
--------------------------------------------
Operating income (loss) (2,528) (11.1) 198 1.0
Non-recurring acquisition costs 231 1.0 - 0.0
Interest expense, net 86 0.4 127 0.6
--------------------------------------------
Income (loss) before income tax (2,845) (12.5) 71 0.3
Provision for taxes 8 0.0 8 0.0
--------------------------------------------
Net income (loss) (2,853) (12.5) 63 0.3
</TABLE>
Sales. The Company's revenues for 1996 increased 12.3% to $22.7 million
from $20.2 million in 1995. The increase in revenues was primarily attributable
to (1) the inclusion of the Pizzeria Uno restaurants for all of 1996 as compared
to 43 weeks of operations for 1995 ($1.0 million), (2) the addition of The Grill
during the last three quarters of 1996 ($2.4 million), and (3) operation of one
additional Daily Grill restaurant (Irvine) commencing September 23, 1996 ($0.6
million). The increase in revenues from the addition of restaurants was
partially offset by the closing of Tailgators (0.9 million). The six Daily Grill
locations which were open during all of fiscal 1996 and 1995 reported an
aggregate 3% decrease in same store sales from 1995 to 1996, 2% of which was
attributable to 1995 being a 53 week year as opposed to 52 weeks in the 1996
fiscal year.
13
<PAGE>
On a pro forma basis, assuming the consummation of the Exchange and the
acquisition of The Grill at December 25, 1994, the combined operations of GCI,
Magellan and The Grill produced revenues of $23.6 million in 1996 as compared to
$24.3 million in 1995, a 3% decrease. The decrease in pro forma revenues was
attributable to the closing of Tailgators which was partially offset by the
opening of an additional Daily Grill.
Cost of Sales and Gross Profit. While revenues increased by 12.3% ($2.5
million) in 1996 as compared to 1995, cost of sales increased by 14.2% ($0.7
million) and increased as a percentage of sales from 26.8% to 27.3%. The
increase in cost of sales as a percentage of revenues was attributable to
increased food costs during the third quarter, which have now returned to
previous levels, plus the acquisition of The Grill which has historically
experienced a 31% cost of sales as compared to approximately 27% cost of sales
for Daily Grill. The higher cost of sales at The Grill is offset by lower labor
costs.
As a result, gross profit increased 11.6% from $14.8 million (73.2% of
sales) in 1995 to $16.5 million (72.7% of sales) in 1996.
Operating Expenses and Operating Results. While sales increased 12.3% and
gross profit increased 11.6%, total operating expenses rose 30.5% to $19.1
million in 1996 (representing 83.8% of sales) from $14.6 million in 1995
(representing 72.2% of sales). This increase in operating expense percentages
was primarily attributable to a one-time unusual charge of $2.1 million
reflecting the write-off of goodwill capitalized in connection with the Exchange
and other costs.
Restaurant operating expenses increased 15.4% to $13.9 million in 1996 from
$12.1 million in 1995. As a percentage of sales, restaurant operating expenses
represented 61.4% and 59.8%, respectively, in 1996 and 1995.
General and administrative expenses increased 26.5% to represent 9.6% of
sales in 1996 as compared to 8.5% of sales in 1995. The increase in this
category reflects hiring of additional management and support personnel and
increased executive and office salaries (up $0.2 million), increased insurance
cost attributable to the receipt of a substantially lower workers compensation
insurance dividend during 1996 ($0.1 million), and the elimination of management
fees from The Grill ($0.1 million) which previously were offset against general
and administrative expense.
Other Income and Expenses and Net Income. Net interest expense decreased by
approximately $41,000 due to increased interest income and the conversion of
outstanding Debentures at the time of the Exchange.
The Company also reported a one-time charge during 1996 of $231,000 for the
costs associated with the attempted acquisition of certain assets of Hamburger
Hamlet Restaurants, Inc., which acquisition was abandoned during the third
quarter.
As a result of the above, the Company reported a loss of $2.8 million
during 1996 as compared to net income of $63,000 for 1995. On a pro forma basis,
assuming the consummation of the Exchange and the acquisition of The Grill at
December 25, 1994, the combined operations of GCI, Magellan and The Grill
produced a loss of $2.8 million in 1996 compared with a loss of $0.1 million in
1995.
Liquidity and Capital Resources
At December 29, 1996, the Company had a working capital deficit of $1.2
million and a cash balance of $0.4 million as compared to a working capital
deficit of $0.9 million and a cash balance of $0.6 million at December 31, 1995.
The variance in the Company's working capital and cash was primarily
attributable to the payment of costs associated with the opening of two new
stores during the second half of 1996 and the first quarter of 1997, which costs
were partially offset by the sale of $2.15 million of convertible preferred
stock during 1996.
14
<PAGE>
As a result of the Exchange, in March of 1995, the financial resources,
operations and obligations of Magellan and GCI were combined. Following the
Exchange, the Company assumed GCI's business plan and the primary obligations of
the Company were those of GCI.
Historically, the Company has funded its day-to-day operations through its
operating cash flow, while funding growth through a combination of bank
borrowing, loans from stockholders/officers, the sale of debentures and the
issuance of warrants and loans and tenant allowances from certain of its
landlords. At December 29, 1996, the Company had existing bank borrowing of $1.1
million, an SBA loan of $0.16 million, loans from stockholders/officers of $0.08
million and loans/advances from landlords and others of $0.14 million.
On April 30, 1995, $1.6 million of the Company's bank borrowings was termed
out over a 5-year period payable in 60 equal monthly installments of $26,667
which began on April 30, 1995, with all remaining principal amounts due on March
31, 2000. Interest is payable monthly at a variable rate equal to the lender's
reference rate plus 0.625% (8.875% at December 29, 1996). The Company has an
additional $1,000,000 line of credit which has been extended through May 1998.
All amounts owing under the bank loan and credit line have been guaranteed by
trusts maintained by each of Richard Shapiro and Michael Weinstock and are
secured by first priority liens on the Company's equipment, fixtures, inventory,
receivables, contract rights and general intangibles (whether now owned or
acquired in the future), together with the proceeds thereof.
Under the terms of the credit line, the Company is permitted to use credit
line funds only for repayment of existing term debt, general working capital and
bridge financing for new acquisitions and capital expenditures. Among other
things, the bank loan and the credit line require the Company to maintain
certain financial ratios and insurance coverage. In addition, unless the
lender's consent is obtained, the Company must conduct its operations consistent
with various affirmative and negative covenants of the type often found in bank
lending agreements. Also, any debt to stockholders of the Company must be
subordinated to repayment of the bank loan and credit line.
In April of 1995, the Company received $178,000 of proceeds from a Small
Business Administration loan in connection with earthquake damage sustained
during the first quarter of 1994. The SBA loan is repayable with interest at 4%
in monthly installments of $1,648. $140,000 of such proceeds were used to reduce
existing shareholder debt.
During 1996, the Company and its subsidiaries were obligated under fifteen
leases covering the premises in which the Company's Daily Grill, Pizza
Restaurants, Rhino Chasers and Tailgators are located as well as leases on its
executive offices and an office in Cherry Hill, New Jersey. Such restaurant
leases, other than the Rhino Chasers lease, and the executive office lease
contain minimum rent provisions which provided for the payment of minimum
aggregate annual rental payments of approximately $1.5 million in 1996, with
varying escalation and percentage rent clauses in each of the restaurant leases.
Included in the rental payments during 1996 was $32,000 paid with respect to the
Irvine Daily Grill which opened in September of 1996. The Rhino Chasers lease
contains no minimum rent provisions but obligates Airport LLC to pay rentals in
an amount equal to 16.5% of sales. In March of 1996, the Company entered into a
lease for a new Daily Grill restaurant in Washington, D.C. which began
operations in March of 1997. Additionally, Airport LLC, which operates
restaurants at LAX with CA One, is obligated under a lease covering the LAX
Daily Grill which opened in January of 1997 and provides rental payments in an
amount equal to 16.5% of sales. Minimum rental payments during 1997 on existing
leases total $1.8 million.
As noted above, management of the Company determined to sell or close
Tailgators and, based on that determination, closed Tailgators in January of
1996. The Company is a general partner of the partnership which is the tenant
under the lease on the Tailgators' premises, which lease provides for variable
annual rentals based on the mortgage payments with respect to the property plus
a percentage of the partnership's cash flow with current monthly payments being
approximately $11,000. The Company has made no lease payments with respect to
the Tailgators lease since May of 1996. The Company may be obligated for all or
a portion of the balance of any lease obligations thereunder. In connection with
the contemplated sale or closure, the Company has entered into negotiations with
the landlord of the Tailgators site to secure a written release from liability
under the lease; the Company believes that conditions and circumstances exist
which may mitigate its obligations which would otherwise exist under the lease.
See "Management's Discussion and Analysis -- Certain Factors Affecting Future
Operations."
15
<PAGE>
The Company presently anticipates opening two new restaurants during 1997,
in addition to the LAX Daily Grill which opened in January of 1997 and the
Washington, D.C. Daily Grill which opened in March of 1997. No leases have been
entered into with respect to additional Daily Grill locations. However, the
Company expects to open one additional Daily Grill store in the
greater-Washington, D.C. area and is in negotiations with a potential partner
with respect to opening "The Grill" in San Jose, California. The cost of opening
new Daily Grill restaurants is anticipated to be between $800,000 and $1,400,000
per site depending upon the location and available tenant allowances. Pursuant
to the ongoing negotiations with a potential partner, the Company expects that
its partner would pay a disproportionate share of the costs associated with
opening "The Grill" should such plans materialize.
In order to finance restaurant openings during 1996 and the first quarter
of 1997, the Company conducted two offerings of convertible preferred stock
during 1996. The offerings provided net proceeds to the Company of approximately
$1.97 million.
In June of 1996, the Company completed an offering of $1.5 million of
Series A 10% Convertible Preferred Stock. The preferred shares are convertible
at the option of the holder in 25% increments commencing 60, 90, 120 and 150
days after June 17, 1996. The conversion price of the preferred shares is equal
to the lesser of $2.25 per share or 85% of the average closing bid price of the
common stock for the five trading days preceding notice of conversion, subject
to certain floors and limitations on conversion. The preferred shares are
entitled to receive a 10% cumulative dividend payable semi-annually until the
preferred shares are either redeemed or converted. The Company may, at its
option, redeem the preferred shares at their initial offering price or force
conversion of the preferred shares at the then applicable conversion price
commencing June 17, 1998. The holder of the preferred shares may, at its option,
cause any preferred shares remaining outstanding at June 17, 2000 to be redeemed
at their initial offering price. As of December 29, 1996, 800 shares of Series A
Preferred Stock had been converted resulting in the issuance of 433,288 shares
of common stock and $700,000 in face amount of Series A Preferred Stock remained
outstanding.
In connection with the placement of the Series A preferred shares, the
Company issued warrants to acquire an aggregate of 250,000 shares of the
Company's common stock at a price of $3.00 per share for a period expiring June
17, 2001. The warrants are redeemable at the Company's option commencing June
17, 1999 at a price of $.01 per warrant provided that the closing bid price of
the Company's common stock has equaled or exceeded $4.50 per share for 20
trading days.
In December of 1996, the Company completed an offering of $650,000 of
Series B Convertible Preferred Stock. The preferred shares are convertible at
the option of the holder in one-third increments commencing 60, 75 and 90 days
after December 13, 1996. The conversion price of the preferred shares is equal
to the lesser of $2.50 per share or the average closing bid price of the common
stock for the five trading days preceding notice of conversion multiplied by the
following percentages when converted during the period after the issuance of the
preferred shares indicated: 61 to 90 days - 85%; 91 to 130 days - 83.5%; 131 to
180 days - 82%; and, 181 or more days - 80%. Any conversions for which the
conversion price is less than $1.00 per share shall be subject to the right of
the Company to redeem the preferred shares at $10,600 per share if notice of
conversion is submitted prior to the 90th day following the issuance of the
preferred shares and at $11,000 per share where notice of conversion is
submitted on or after 90 days following issuance. The preferred shares are
entitled to receive an 8% cumulative dividend payable on conversion or
redemption, provided, however, that with respect to any preferred shares
converted prior to 180 days after issuance the dividend shall reduced to 4%.
In connection with the placement of the Series B preferred shares, the
Company issued warrants to acquire an aggregate of 46,222 shares of the
Company's common stock at a price of $3.00 per share for a period expiring
December 13, 1999.
Management believes that the Company has adequate resources on hand to
sustain operations for at least the following 12 months. In order to fund the
opening of additional restaurants, the Company will require, and intends to
16
<PAGE>
raise, additional capital through the issuance of debt or equity securities. The
Company presently has no commitments in that regard. See "Description of
Business -- Business Expansion" and "Management's Discussion and Analysis --
Certain Factors Affecting Future Operating Results."
At December 29, 1996, the Company had outstanding 190,793 warrants
previously issued by Magellan and exercisable at a price of $2.00 per share.
Additionally, in connection with the Exchange and a private placement during
1995, the Company issued 100,000 warrants which are exercisable at $3.00 per
share. The exercise of all warrants outstanding at December 29, 1996, including
the warrants issued in connection with the placement of the Series A and Series
B preferred stock discussed above, would provide an additional $1,570,252 of
capital to the Company. There is no assurance, however, that any of such
warrants will be exercised.
Certain Factors Affecting Future Operating Results
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: adverse weather conditions and
other conditions affecting agricultural output which may cause shortages of key
food ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at the Company's
restaurants; the dependence on key personnel and ability to attract and retain
qualified management and restaurant personnel to support existing operations and
future growth; regulatory developments, particularly relating to labor matters
(i.e., minimum wage, health insurance and other benefit requirements), health
and safety conditions, service of alcoholic beverages and taxation, which could
increase the cost of restaurant operations; establishment of market position and
consumer acceptance in new markets in light of intense competition in the
restaurant industry and the geographic separation of senior management from such
markets; potential delays in securing sites for new restaurants and delays in
opening restaurants which may entail additional costs and lower revenues than
would otherwise exist in the absence of such delays; and the availability of
capital to fund future restaurant openings. In addition to the foregoing, the
following specific factors may affect the Company's future operating results.
During fiscal years 1995 and 1996, the Company amortized certain
capitalized goodwill which arose in connection with the Exchange. As a result of
the continued expansion of the Daily Grill restaurant base and the diminished
significance of the Magellan Units and after an evaluation of the current value
of the assets comprising the Magellan Units, during the fourth quarter of 1996,
the Company determined to write-off all remaining capitalized goodwill related
to the Exchange and the accompanying acquisition of the Magellan Units. As a
result of such write-off, future amortization expense will decrease by $67,000
annually commencing in 1997.
Prior to the consummation of the Exchange, incoming management agreed to
make every effort to sell, or close, Magellan's sports themed restaurant
(originally known as Jo Jo Players and changed to Tailgators following the
Exchange). As a result of such determination, the net assets acquired pursuant
to the Exchange were reduced, and the excess of cost over net assets acquired
was increased by $512,000. After extensive efforts to sell the restaurant,
Tailgators was closed in January of 1996. While the closure of such restaurant
resulted in reduced revenue for the Company and increased amortization of
goodwill during 1995 and 1996, the impact on subsequent net income is expected
to be positive. Because of the adjustment to goodwill taken in 1995, no charge
was recorded upon the ultimate closure of Tailgators. However, the Company is
the general partner of a partnership which continues to be obligated on the
Tailgators lease. No lease payments have been made with respect to the
Tailgators lease since May of 1996 and the Company has been engaged in
discussions with the landlord of the premises for an extended period with
respect to obtaining a release from said lease. The Company believes that
conditions and circumstances exist which may mitigate its obligations which
would otherwise exist under the lease. If the Company is unable to obtain a
release of its obligations under the Tailgators lease, or if the Company is
unable to otherwise mitigate its obligations thereunder, it is possible that the
Company would continue to be liable for lease payments for the balance of the
lease term which runs until 2012 and provides for current monthly lease payments
of approximately $11,000. If the Company were to have continuing liability under
the Tailgators lease, it is likely that the Company would sustain a charge to
earnings to reflect the ongoing lease obligations.
17
<PAGE>
The Company opened its Irvine Daily Grill in September of 1996, the LAX
Daily Grill in January of 1997 and the first Washington, D.C. Daily Grill in
March of 1997. Each of those openings are expected to benefit 1997 revenues and
profitability. Further, while the Company is entitled to 51% of the net income
of the LAX Daily Grill, plus a 4% management fee, the results of the LAX Daily
Grill will not be reported on a consolidated basis. 1997 expansion plans include
the opening of a minimum of one new Daily Grill restaurant and "The Grill" in
San Jose, California. Sites for additional Daily Grills are presently being
evaluated but have not been finalized to date. See "Description of Business
Business Expansion."
The anticipated opening of additional Daily Grill locations is expected to
result in the incurrence of various pre-opening expenses and high initial
operating costs which may adversely impact earnings during the first year of
operations of such restaurants. However, management anticipates that each of
such operations can be operated profitably within the first year of operations
and that the opening of each of the two restaurants presently contemplated will
improve revenues and profitability.
Impact of Inflation
To date, inflation has not been a major factor in the Company's business.
There can be no assurances, however, that this will continue to be the case. To
the extent that it is commercially feasible, menu prices will be adjusted for
increases in food and labor costs when appropriate.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Coopers & Lybrand LLP, appears on pages
F-2 through F-23 of this report. See Index to Financial Statements on F-1 of
this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in accountants as required to be disclosed herein was previously
disclosed in the Company's Form 10-KSB for the year ended December 31, 1995.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
18
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Exchange Agreement dated September 13, 1994 by and between
Magellan Restaurant Systems, Inc. and Grill Concepts, Inc (2)
2.2 Amendment to Exchange Agreement dated December 9, 1994 (2)
2.3 Second Amendment to Exchange Agreement dated January 25, 1995 (2)
2.5 Letter Agreement re: acquisition of The Grill (3)
3.1 Certificate of Incorporation, as amended, of Grill Concepts,
Inc. (9)
3.2 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.3 Amendment to Bylaws of Magellan Restaurant Systems, Inc.
dated December 29, 1994 (2)
3.4 Certificate of Designation fixing terms of Series A Preferred
Stock (4)
3.5 Certificate of Designation fixing terms of Series B Preferred
Stock (5)
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Privately Issued Warrant (1)
4.3 Form of Offshore Warrant (4)
4.4 Warrant Agreement dated December 13, 1996 (5)
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and
Denbob Corp. dated June 29, 1989 for premises in Cherry Hill, New
Jersey (1)
++10.3 Incentive Stock Option Plan (1)
10.4 Neptune Sports Bar Partnership Agreement dated April 15, 1993 (10)
10.5 Cash Flow and Equity Purchase Agreement dated April 15, 1993
relating to Neptune Sports Bar (10)
10.6 Agreement dated April 15, 1993 relating to assignment of rights
under Cash Flow and Equity Purchase Agreement to the Company (10)
++10.7 Employment Agreement with Robert Wechsler (2)
10.8 Finders Fee Agreement dated October 5, 1994 between the Company
and Golenberg & Geller, Inc. and Millennium Capital Corp. (2)
10.9 Merger & Acquisition Fee Agreement dated October 5, 1994 between
the Company and Golenberg & Geller, Inc. and Whale Securities
Co., L.P. (2)
10.10 Form of Escrow Agreement relating to issuance of additional
shares pursuant to terms of exchange with Grill Concepts, Inc. (2)
10.11 Form of Expense Sharing Agreement between Magellan and Grill
Concepts (2)
10.12 Operating Agreement for The Airport Grill LLC between Grill
Concepts and CA One Services, Inc. dated March 15, 1995 (6)
++10.13 Grill Concepts, Inc. 1995 Stock Option Plan (8)
++10.14 Employment Agreement with Robert Spivak (7)
21.1* Subsidiaries of Registrant
23.1* Consent of Coopers & Lybrand
27.1* Financial Data Schedules
- ------------------------
19
<PAGE>
++ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993.
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No.
33-85730) declared effective by the Securities and Exchange Commission on
February 3, 1995.
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated April 1, 1996.
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996.
(5) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated December 13, 1996.
(6) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10- KSB for the year ended December 25,
1994.
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10- KSB for the year ended December 31,
1995.
(8) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.
(9) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the exhibits filed with the Registrant's Current Report
on Form 8-K dated March 3, 1995.
(10) Incorporated by reference to the respective exhibits filed with the
Company's Form 10-QSB for the quarter ended June 27, 1993.
(b) Reports on Form 8-K
During the quarter ended December 29, 1996, the Company filed a report on
Form 8-K dated December 13, 1996 reporting on Item 9 the completion of a
placement of convertible preferred stock pursuant to Regulation S.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak
-----------------------------------
Robert Spivak
President
Dated: March 28, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------- ---------------------------------- ----------------
<S> <C> <C>
/s/ Robert Spivak President, Chief Executive Officer March 28, 1997
- ---------------------- and Director (Principal Executive
Robert Spivak Officer)
/s/ Robert Wechsler Chairman of the Board of Directors March 28, 1997
- ----------------------
Robert Wechsler
/s/ Michael Weinstock Executive Vice President, Vice March 28, 1997
- ---------------------- Chairman and Director
Michael Weinstock
/s/ Richard Shapiro Vice President and Director March 28, 1997
- ----------------------
Richard Shapiro
/s/ Ben Sumner Chief Financial Officer (Principal March 28, 1997
- ---------------------- Accounting and Financial Officer)
Ben Sumner
/s/ Charles Frank Director March 28, 1997
- ----------------------
Charles Frank
/s/ Glenn Golenberg Director March 28, 1997
- ----------------------
Glenn Golenberg
/s/ Peter Balas Director March 28, 1997
- ----------------------
Peter Balas
</TABLE>
21
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
----------
Page
Report Of Independent Accountants............................... F-2
Consolidated Balance Sheets As Of December 29, 1996
And December 31, 1995.......................................... F-3
Consolidated Statements Of Operations For The Years Ended
December 29, 1996 And December 31, 1995........................ F-4
Consolidated Statements Of Stockholders' Equity For The
Years Ended December 29, 1996 And December 31, 1995............ F-5
Consolidated Statements Of Cash Flows For The Years Ended
December 29, 1996 And December 31, 1995........................ F-6
Notes To Consolidated Financial Statements...................... F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors
Grill Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Grill Concepts,
Inc. and Subsidiaries as of December 29, 1996 and December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Grill Concepts,
Inc. and Subsidiaries at December 29, 1996 and December 31, 1995 and their
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 10, 1997
F-2
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $372,317 $631,116
Inventories 239,237 154,898
Prepaid expenses 1,038,036 742,419
--------- ----------
Total current assets 1,649,590 1,528,433
Furniture, equipment and improvements, net 5,225,111 3,737,523
Goodwill, net 245,829 2,003,144
Other assets 961,484 762,712
---------- ----------
Total assets $8,082,014 $8,031,812
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $1,143,484 $1,038,440
Accrued expenses 1,283,805 988,258
Current portion of long-term debt 421,317 450,386
---------- ----------
Total current liabilities 2,848,606 2,477,084
Long-term debt 946,427 1,241,426
Long-term debt-related parties 84,500 84,500
---------- ----------
Total liabilities 3,879,533 3,803,010
---------- ----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A, 10% Convertible Preferred Stock,
$.001 par value, 1,000,000 shares
authorized, 700 issued and outstanding in 1 -
1996, none in 1995
Series B, 8% Convertible Preferred Stock,
$.001 par value, 1,000,000 shares
authorized, 65 issued and outstanding in
1996, none in 1995 1 -
Common Stock, $.00001 par value, 20,000,000
shares authorized, 13,799,230 and
12,999,230 issued and outstanding in
1996 and 1995, respectively 138 130
Additional paid-in capital 9,552,458 6,726,081
Accumulated deficit (5,350,117) (2,497,409)
--------- ---------
Stockholders' equity 4,202,481 4,228,802
--------- ---------
Total liabilities and
stockholders' equity $8,082,014 $8,031,812
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Sales $22,743,867 $20,253,248
Cost of sales 6,210,226 5,437,041
----------- -----------
Gross profit 16,533,641 14,816,207
----------- -----------
Operating expenses:
Restaurant operating expenses 13,969,911 12,109,505
General and administration 2,172,271 1,716,514
Depreciation and amortization 826,761 787,715
Amortization of preopening costs 40,306 4,043
Unusual charges 2,052,141 -
----------- -----------
Total operating expenses 19,061,390 14,617,777
----------- -----------
Income (loss) from operations (2,527,749) 198,430
Interest expense, net (80,573) (105,114)
Interest expense - related parties (5,915) (22,492)
Non-recurring acquisition costs (230,671) -
----------- -----------
Income (loss) before provision
for income taxes (2,844,908) 70,824
Provision for income taxes 7,800 7,600
----------- -----------
Net income (loss) ($2,852,708) $ 63,224
=========== ===========
Net income (loss) per share ($0.21) $0.01
=========== ===========
Weighted average shares outstanding 13,705,886 12,387,081
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Preferred Common Paid-In Accumulated
Stock Stock Stock Capital Deficit Total
--------- --------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 25, 1994 $ - $ - $1,495,347 - ($2,560,633) ($1,065,286)
Adjustment to reflect the reverse
acquisition of Grill Concepts, Inc.
(formerly Magellan Restaurant Systems,
Inc.) by Grill Concepts, Inc. - - (1,495,217) $6,726,081 - 5,230,864
Net income - - - - 63,224 63,224
---- ---- ---------- ---------- ---------- ----------
Balance, December 31, 1995 - - 130 6,726,081 (2,497,409) 4,228,802
Issuance of common stock pursuant
to acquisition of The Grill - - 8 849,992 - 850,000
Issuance of Series A, 10% Convertible
Preferred Stock $2 - - 1,427,039 - 1,427,041
Conversion of Series A, 10% Convertible
Preferred Stock to Common Stock (1) - - 1 - -
Issuance of Series B, 8% Convertible
Preferred Stock - $ 1 - 549,345 - 549,346
Net loss - - - - (2,852,708) (2,852,708)
---- ---- ---------- ---------- ---------- ----------
Balance, December 29, 1996 $ 1 $ 1 $ 138 $9,552,458 ($5,350,117) $4,202,481
==== ==== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,852,708) $ 63,224
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depreciation 826,761 592,635
Amortization of preopening costs 40,306 -
Unusual charges 2,052,141 58,000
Changes in operating assets and
liabilities:
Inventories (43,366) 17,081
Prepaid expenses (239,689) (261,416)
Other assets (143,006) 164,822
Accounts payable 24,528 (146,263)
Accrued expenses 190,115 (296,852)
----------- ----------
Net cash (used in) provided by
operating activities (144,918) 191,231
----------- ----------
Cash flows from investing activities:
Additions to furniture, equipment
and improvements (2,019,431) (300,800)
Net cash acquired through purchase
of business 253,231 940,377
----------- ----------
Net cash (used in) provided by
investing activities (1,766,200) 639,577
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 2,150,000 -
Payments on stock issuance costs (173,613) -
Payments on long-term debt (324,068) (429,634)
Payments on long-term debt - related parties - (140,000)
----------- ----------
Net cash provided by (used in)
financing activities 1,652,319 (390,934)
----------- ----------
Net (decrease) increase in cash (258,799) 439,874
Cash and cash equivalents, beginning of period 631,116 191,242
----------- ----------
Cash and cash equivalents, end of period $ 372,317 $ 631,116
=========== ==========
Business acquisition, net of cash acquired:
Working capital, other than cash $ 26,716 $ 505,591
Furniture, equipment and improvements (321,880) (1,348,853)
Cost in excess of net assets acquired (245,829) (2,061,144)
Other assets (55,776) (519,217)
Long-term debt - 15,000
Fair value of stock exchanged 850,000 4,349,000
----------- ----------
Net cash acquired $ 253,231 $ 940,377
=========== ==========
Supplemental cash flows information:
Cash paid during the year for:
Interest $ 82,600 $ 138,912
Income taxes $ 800 $ 11,800
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Business, Organization And Basis Of Presentation:
General
Grill Concepts, Inc. (the "Company") was incorporated under the laws of the
State of Delaware in November 1985. The Company was originally incorporated
under the name "Uno Concepts, Inc." In December 1992, the Company changed
its name to "Magellan Restaurant Systems, Inc." ("Magellan") and, in
connection with an exchange agreement (the "Exchange") with Grill Concepts,
Inc., a California corporation ("GCI"), changed its name to "Grill
Concepts, Inc." in February 1995. As of December 29, 1996, the Company
operates eleven restaurants, consisting of seven Daily Grill restaurants,
The Grill on the Alley ("The Grill") in Southern California and three
Pizzeria Uno Restaurants located in the eastern part of the United States.
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending the Sunday closest
to December 31. The fiscal year 1996 consisted of 52 weeks ended December
29, 1996 and the fiscal year 1995 consisted of 53 weeks ended December 31,
1995.
2. Summary Of Significant Accounting Policies:
Principles Of Consolidation
The consolidated financial statements include the accounts of Grill
Concepts, Inc. and its wholly owned subsidiaries which include the three
Pizzeria Uno Restaurants and The Grill. All significant intercompany
accounts and transactions for the periods presented have been eliminated in
consolidation.
Cash And Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.
Continued
F-7
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary Of Significant Accounting Policies, Continued:
Concentration Of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The Company
currently maintains substantially all of its day-to-day operating cash
balances with major financial institutions. At times, cash balances may be
in excess of Federal Depository Insurance Corporation ("FDIC") insurance
limits. Cash equivalents principally consist of an investment account with
a major brokerage house.
Inventories
Inventories consist of food, wine and liquor and are stated at the lower of
cost or market, cost generally being determined on a first-in, first-out
basis.
Furniture, Equipment And Improvements
Furniture and equipment acquired from the merger were recorded at their
acquisition cost which resulted in a change from their historical carrying
value in accordance with Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations". Additions to furniture, equipment and
improvements not related to the acquisitions are recorded at cost.
Depreciation And Amortization
Depreciation of furniture and equipment is computed by use of the
straight-line method based on the estimated useful lives of five to seven
years of the respective assets. Leasehold improvements are amortized using
the straight-line method over the life of the improvement or the remaining
life of the lease, whichever is shorter. Interest costs incurred during
construction were capitalized and are being amortized over the related
assets' estimated useful lives. When properties are retired or otherwise
disposed of, the costs and related accumulated depreciation are removed
from the accounts, and the resulting gain or loss is credited or charged to
current year operations. The policy of the Company is to charge amounts
expended for maintenance and repairs to current year expense and to
capitalize expenditures for major replacements and betterments.
Goodwill
Goodwill is amortized on a straight-line basis over thirty years.
Continued
F-8
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary Of Significant Accounting Policies, Continued:
Expendables
Initial amounts spent for china, glassware and flatware in connection with
the opening of a new restaurant are capitalized. Subsequent purchases are
expensed as incurred.
Preopening Costs
Costs related to the opening of new restaurants, payroll and other costs
incurred in the training and introduction period, are deferred and then
amortized over a one-year period commencing with the opening of each
respective restaurant.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS No. 109, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years
to the difference between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Advertising And Promotion Costs
All costs associated with advertising and promoting products are expensed
in the year incurred.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and
for long-lived and certain identifiable assets to be disposed of. The
Company was required to adopt the provisions of SFAS No. 121 for fiscal
1996.
Continued
F-9
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary Of Significant Accounting Policies, Continued:
Recent Accounting Pronouncements, Continued
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value based methodology for
the financial accounting and reporting for stock-based employee
compensation plans. Examples of such plans include stock purchase plans,
stock options, restricted stock, and stock appreciation rights. Prior to
the issuance of SFAS No. 123, stock-based compensation measurements
utilized the intrinsic value based method of accounting as specified by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123,
effective for fiscal 1996, permits entities to continue to utilize the
traditional accounting for stock-based employee compensation plans as
prescribed by APB Opinion No. 25. However, under this option, entities will
be required to disclose the proforma effect of stock-based employee
compensation plans on net income and earnings per share as if SFAS No. 123
had been adopted. The Company intends to continue utilizing the provisions
of APB Opinion No. 25 in accounting for its stock-based employee
compensation plans.
In February 1997, the FASB issued SFAS No. 128, "Earning Per Share," which
establishes standards for computing and presenting earnings per share. SFAS
No. 128 requires the replacement of primary earnings per share with basic
earnings per share. Basic earnings per share excludes dilution, and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period. The
Company will be required to adopt the provision of SFAS No. 128 for fiscal
1997.
Other recently issued standards of the FASB are not expected to affect the
Company as conditions to which those standards apply are absent.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions for the reporting period and as of the financial
statement date. These estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent liabilities, and
the reported amounts of revenue and expenses. Actual results could differ
from those estimates.
Continued
F-10
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary Of Significant Accounting Policies, Continued:
Fair Value Of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosure about Fair
Value of Financial Instrument" ("SFAS No. 107"), requires disclosure of
fair value information about most financial instruments both on and off the
balance sheet, if it is practicable to estimate. SFAS No. 107 excludes
certain financial instruments, such as certain insurance contracts, and all
non-financial instruments from its disclosure requirements. A financial
instrument is defined as contractual obligation that ultimately ends with
the delivery of cash or an ownership interest in an entity. Disclosures
regarding the fair value of financial instruments have been derived using
external market sources, estimates using present value or other valuation
techniques. Cash, accounts payable and accrued liabilities are reflected in
the financial statements at fair value because of the short-term maturity
of these instruments. The fair value of long-term debt closely approximates
its carrying value.
3. Business and Organization:
On March 3, 1995, pursuant to the Exchange agreement previously entered
into by Magellan and GCI, the Company became a wholly owned subsidiary of
Magellan. Immediately following the Exchange, the name of Magellan was
changed to Grill Concepts, Inc., a Delaware corporation.
All of GCI's common stock was exchanged for 8,500,000 shares of Magellan
Common Stock. As a result, following the Exchange, holders of GCI common
stock controlled 63% of the outstanding common stock of the Company, and
for accounting purposes the acquisition has been treated as a
recapitalization of GCI with GCI as the acquirer. The transaction was
therefore accounted for as a purchase under the "reverse acquisition"
method.
On April 1, 1996, the Company acquired 100% of the common stock of The
Grill, an upscale Beverly Hills restaurant which opened in 1984 in exchange
for $850,000 of common stock of the Company. The acquisition was accounted
for under the purchase method of accounting.
Continued
F-11
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
3. Business and Organization, Continued:
As a result of the above, these statements include the accounts of GCI and
The Grill on a consolidated basis for fiscal year 1996. The Consolidated
Statement of Operations for fiscal year 1996 includes the operations of GCI
for the entire 52 week period and the operations of The Grill for the
period between April 1,1996 and December 29, 1996. The Consolidated
Statement of Operations for fiscal year 1995 includes the operations of GCI
for the entire 53 week period and the operations of Magellan for only the
43 week period between March 3, 1995 and December 31, 1995.
The unaudited proforma financial information set forth below is presented
as if the acquisitions had been consummated as of December 25, 1994.
The proforma financial information is not necessarily indicative of what
actual results of operations of the Company would have been if the
acquisitions consummated as of December 25, 1994, nor does it purport to
represent the results of operations for future periods.
1996 1995
---- ----
Sales $23,599,162 $24,248,986
Net loss ($2,767,350) ($140,482)
Net loss per share ($0.20) ($0.01)
Weighted average shares outstanding 13,705,866 12,387,081
4. Closure Of Jo Jo Players:
Prior to the consummation of the Exchange, the Company's management decided
that it would sell, or close, the Magellan sports themed restaurant, Jo Jo
Players. In March 1995, the property and business was listed for sale with
a real estate agent. The effects of such closures has been considered, and
reflected in accounting for the Exchange resulting in a reduction in net
assets acquired pursuant to the Exchange, and a corresponding increase in
goodwill attributable to the Exchange of $521,000.
With respect to the lease for Jo Jo Players, the Company is in negotiations
with the landlord and believes any settlement will not be significant to
financial position or results of operations.
Continued
F-12
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
5. Business Operations:
The Company incurred a net loss of approximately $2,853,000 for the fiscal
year ended December 29, 1996. While many of the costs that contributed to
the loss were created by expansion of the business through additions of new
restaurants, potential acquisitions that did not meet the Company's
financial objectives and the write-offs of impaired long-lived assets that
were acquired as part of the merger, management believes that such costs
will be reduced in the future. Managements plans for a return to
profitability includes increasing sales, through the opening of the
Washington D.C. restaurant and future restaurant openings including
potential joint venture arrangements.
While there can be no assurance that management's plans, if executed will
return the Company to profitability, management believes their plans
provide the Company with a strong base to accomplish their goals.
6. Furniture, Equipment And Improvements:
Furniture, equipment and improvements at December 29, 1996 and December 31,
1995 consisted of:
1996 1995
---- ----
Furniture, fixtures and equipment $3,598,596 $3,008,843
Leasehold improvements 4,196,749 3,100,938
Motor vehicle 14,256 14,256
Expendables 59,631 44,711
Construction in process 720,365 172,218
---------- ----------
Furniture, equipment and improvements 8,589,597 6,340,966
Less, accumulated depreciation (3,364,486) (2,603,443)
---------- ----------
Furniture, equipment and improvements, net $5,225,111 $3,737,523
========== ==========
Continued
F-13
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
7. Long-Term Debt:
Long-term debt at December 29, 1996 and December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to bank under revolving credit
agreement, expiring March 31, 2000, payable
in sixty equal monthly installments starting
April 30, 1995, plus interest. Also
available is $1,000,000 under a revolving
line of credit expiring May 31, 1998.
Interest is payable monthly at the Bank's
Reference Rate (8 1/4% at December 29, 1996)
plus 0.625%. The Company has the option of
fixing the interest rate. The note is
collateralized by an interest in the assets
of the Company. In addition, two of the
Company's principal shareholders have
guaranteed the credit facility.
In connection with of restrictive covenants,
including meeting certain interest cover
requirements and dividend restriction. $1,066,679 $1,360,005
Note payable to Small Business Administration
collateralized by property, payable monthly,
approximately $1,648, including interest
at 4.0% due September 23, 2006. 158,807 171,707
Note payable to lessor, uncollateralized,
payable monthly, approximately $1,435
including interest at 10.0%. 142,258 145,100
---------- ----------
1,367,744 1,691,812
Less, Current portion of long-term debt (421,317) (450,386)
---------- ----------
Total $ 946,427 $1,241,426
========== ==========
</TABLE>
Continued
F-14
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
7. Long-Term Debt, Continued:
Principal maturities of long-term debt are as follows:
Year Ending
December 31
-----------
1997 $421,317
1998 337,646
1999 338,521
2000 126,125
2001 20,423
Thereafter 123,712
--------
Total $1,367,744
During fiscal year 1996, the Company was not in compliance with certain
bank covenants and has received a waiver from the lender with respect to
those instances of noncompliance. The covenants not in compliance were
waived through December 30, 1997.
8. Related Parties:
Long-term debt with related parties at December 29, 1996 and December 31,
1995 consisted of:
1996 1995
------- -------
Uncollateralized subordinated note payable to
shareholders, with interest payable monthly at
a rate of 7.0% per annum. All unpaid principal
and interest were due December 31, 1996. The
Company intends to renegotiate the note payable
through 1998. $84,500 $84,500
======= =======
A stockholder of the Company is the lessor for property leased by one of
the Pizzeria Uno Restaurants. Rent expense related to this operating lease
was $232,686 and $229,420 for the fiscal years 1996 and 1995, respectively.
Continued
F-15
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. Stockholders' Equity:
In June 1996, the Board of Directors authorized and the Company completed
an offering of $1.5 million of Series A, 10% Convertible Preferred Stock to
an offshore investor. The preferred shares are convertible at the option of
the holder in 25% increments commencing 60, 90, 120 and 150 days after June
17, 1996. The conversion price of the preferred shares is equal to the
lesser of $2.25 per share or 85% of the average closing bid price of the
common stock for the five trading days preceding notice of conversion. The
Company may, at its option, redeem the preferred shares at their initial
offering price or force conversion of the preferred shares at the then
applicable conversion price commencing June 17, 1998. The holder of the
preferred shares may, at its option, cause any preferred shares remaining
outstanding at June 17, 2000 to be redeemed at their initial offering
price. Conversion is prohibited during periods where the reported short
interest in common stock exceeds 200% of the average daily trading volume
and the conversion price shall in no event be less than $1.125 per share.
In connection with the offshore placement of the Series A, 10% Convertible
Preferred Stock, the Company issued warrants to acquire an aggregate of
250,000 shares of the Company's common stock at a price of $3.00 per share
for a period expiring June 17, 2001. The warrants are redeemable at the
Company's option commencing June 17, 1999 at a price of $.01 per warrant
providing that the closing bid price of the Company's common stock has
equalled or exceeded $4.50 per share for 20 trading days.
In December 1996, the Board of Directors authorized and the Company
completed an offering of $650,000 of Series B Convertible Preferred Stock.
The preferred shares are convertible at the option of the holder in
one-third increments commencing 60, 75 and 90 days after December 13, 1996.
The conversion price of the preferred shares is equal to the lesser of
$2.50 per share or the average closing bid price of the common stock for
the five trading days preceding notice of conversion multiplied by the
following percentages when converted during the period after the issuance
of the preferred shares indicated: 61 to 90 days - 85%; 91 to 130 days -
83.5%; 131 to 180 days - 82%; and 181 or more days - 80%. The preferred
shares are entitled to receive an 8% cumulative dividend payable on
conversion or redemption, provided, however, that with respect to any
preferred shares converted prior to 180 days after issuance, the dividend
shall be reduced to 4%.
In connection with the placement of the Series B Preferred Stock, the
Company issued warrants to acquire an aggregate of 46,222 shares of the
Company's common stock at a price of $3.00 per share for a period expiring
December 13, 1999.
Continued
F-16
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. Stockholders' Equity, Continued:
Warrants
During fiscal year 1995, the Company abandoned its efforts to extend the
expiration date of its outstanding public warrants. As a result of such
determination, 329,194 warrants exercisable at $1.00 per share expired
effective February 10, 1995.
In addition, 247,047 private warrants exercisable at $1.62 per share and
30,869 private warrants exercisable at $1.13 per share expired.
At December 31, 1995, the Company had outstanding 190,793 warrants
previously issued by Magellan and exercisable at a price of $2.00 per
share. Additionally, in connection with the Exchange and a private
placement during 1995, the Company issued an additional 100,000 warrants
which are exercisable at $3.00 per share.
In June 1996, 250,000 warrants exercisable at $3.00 per share were issued
in connection with the offering of the Series A, 10% Convertible Preferred
Stock which are scheduled to expire June 17, 2001.
In December 1996, 46,222 warrants exercisable at $3.00 per share were
issued in connection with the sale of the Company's Series B, 8%
Convertible Preferred Stock. The warrants are scheduled to expire December
13, 1999.
Options
On June 1, 1995, the Company's board of directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "Plan"). The Plan provides for
options to be issued to the Company's employees. 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.
Continued
F-17
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. Stockholders' Equity, Continued:
Options, Continued
A total of 1,500,000 common shares are reserved for issuance pursuant to
the Plan. During the year, with adoption of the Plan by the Board, upon
recommendation of the Compensation Committee, a total of 523,000 options
were granted under the Plan ranging in price from $1.17 to $1.48. The Plan,
including the options granted during fiscal year 1996, were approved at the
1996 annual stockholders meeting. Transactions during the fiscal years 1996
and 1995 under the Plan were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Options outstanding at start of year $ 573,000 $ 75,000
Options granted 645,100 523,000
Options exercised - -
Options cancelled (108,000) (25,000)
---------- --------
Options outstanding at end of year $1,110,100 $573,000
========== ========
Options exercisable at end of year 481,000 220,666
Options available for grant at end of year 389,900 977,000
</TABLE>
Weighted average option exercise price information for the fiscal years
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Options outstanding at start of year $1.30 $0.91
Options granted 1.47 1.34
Options exercised - -
Options cancelled 1.26 0.91
Options outstanding at end of year 1.37 1.30
</TABLE>
Continued
F-18
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. Stockholders' Equity, Continued:
Options, Continued
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and will continue to use the
intrinsic value-based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized for the stock option plans. Had
compensation expense for the Company's stock option plans been determined
based on the fair value at the grant date for awards in fiscal year 1996
and 1995 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the proforma
amounts indicated below:
1996 1995
----------- ---------
Net income (loss), as reported ($2,852,708) $63,224
Net income (loss), proforma ($3,126,221) ($171,712)
Net income (loss) per share, as reported ($0.21) $0.01
Net income (loss) per share, proforma ($0.23) ($0.01)
The fair value of each option grant issued in fiscal year 1996 and 1995 is
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: (a) no dividend yield on
the Company's stock, (b) expected volatility using the average of three
peer groups of 56.08%, (c) a risk-free interest rate ranging from 5.37% to
6.72%, and (d) expected option lives of five years.
Cancellation of Escrow Shares
Pursuant to the terms of the Exchange agreement between Grill Concepts,
Inc. and Magellan Restaurant Systems, Inc., 614,391 shares of the Company's
common stock originally issued in escrow for disbursement or cancellation
in accordance with such agreement were cancelled effective July 1, 1995.
Continued
F-19
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. Commitments And Contingencies
The Company leases most of its restaurant facilities and corporate offices
under noncancellable operating leases. The restaurant leases generally
include land and building, require various expenses incidental to the use
of the property, and certain leases require contingent rent above the
minimum lease payments based on a percentage of sales. Certain leases also
contain renewal options and escalation clauses.
The aggregate minimum lease payments under noncancellable operating leases
are as follows:
Fiscal Year Ending
------------------
1997 $1,758,815
1998 1,653,642
1999 1,636,788
2000 1,510,756
2001 1,532,484
Thereafter 8,573,638
-----------
Total $16,666,123
===========
Rent expense was $2,217,734 and $2,123,488 for fiscal years 1996 and 1995,
respectively, including $74,530 and $102,031 for 1996 and 1995,
respectively, for contingent rentals which are payable on the basis of a
percentage of sales in excess of stipulated amounts.
11. Income Taxes:
The provisions for income taxes for the fiscal years ended December 29,
1996 and December 31, 1995 are as follows:
1996 1995
------ ------
Current - federal - $5,900
Current - state $7,800 1,700
------ ------
$7,800 $7,600
====== ======
Continued
F-20
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. Income Taxes, Continued:
The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Federal tax rate (34.0%) 34.0%
Goodwill expensed for book 73.7% -
Net operating loss for which no
tax benefit was realized (41.2%) (34.0%)
Alternative minimum tax - 10.7%
Other 1.5% -
----- ----
Effective tax rate 0.0% 10.7%
===== ====
</TABLE>
Deferred tax assets and liabilities consist of the following as of December 29,
1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss $1,327,066 $1,391,883
Fixed assets 88,400 -
Intangible assets 113,010 -
State taxes 206,475 7,933
General business credit 102,000 -
AMT credit 8,058 5,903
Charitable contribution carryover 2,409 -
---------- ----------
Total gross deferred tax assets 1,847,418 1,405,719
Less, Valuation allowance (1,847,418) (1,236,084)
---------- ----------
Net deferred tax assets - 169,635
Deferred tax liabilities:
Fixed assets, intangibles and state taxes - (169,635)
---------- ----------
Net deferred tax assets
and liabilities $ - $ -
========== ==========
</TABLE>
Continued
F-21
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. Income Taxes, Continued:
At December 29, 1996, the Company has available federal and state net
operating loss carryforwards of approximately $3,900,000 and $2,250,000,
respectively, that may be utilized to offset future federal and state
taxable earnings. These net operating losses begin to expire in 2006 and
1997, respectively. Valuation allowances have been established to reduce
deferred tax assets to the amount expected to be realized.
12. Unusual Charges:
During fiscal year 1996, the Company implemented SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. As a result, the Company recorded a charge to earnings of
approximately $1,952,000 for the write-off of the goodwill related to the
merger with Magellan in February 1995. The carrying value of the goodwill
was completely written off due to negative projected future cash flows
pertaining to the Pizzeria Uno Restaurants. The charge was recorded in the
Consolidated Statement of Operations under Unusual Charges for fiscal year
1996.
In addition, the Company has expensed certain restaurant closing costs in
fiscal year 1996 of $100,000.
The non-recurring acquisition costs written off in fiscal year 1996 relate
to the Company's potential acquisition of a chain of restaurants which was
aborted.
13. Quarterly Financial Data (Unaudited):
Summarized unaudited quarterly financial data for fiscal years 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
March 31, June 30, September 29, December 29,
Quarter Ended 1996 1996 1996 1996
------------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenues $5,245,779 $5,691,606 $5,542,120 $6,264,362
Income (loss) from operations 50,482 (61,447) (140,408) (2,376,376)
Net income (loss) 11,785 (94,008) (373,284) (2,397,201)
Net loss per share - ($0.01) ($0.03) ($0.17)
</TABLE>
Continued
F-22
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
13. Quarterly Financial Data (Unaudited), Continued:
<TABLE>
<CAPTION>
April 2, July 2, October 1, December 31,
Quarter Ended 1995 1995 1995 1995
------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Total revenues $4,520,155 $5,385,837 $4,950,978 $5,396,278
Income (loss) from operations 98,546 40,041 27,150 32,693
Net income (loss) 62,383 11,380 4,548 (15,087)
Net income per share $0.01 - - -
</TABLE>
F-23
Exhibit 21.1
List of Subsidiaries
GRILL CONCEPTS, INC.
Name State of Incorporation
- --------------------------------- ----------------------
Grill Concepts, Inc. California
Uno Concepts of Cherry Hill, Inc. New Jersey
Uno Concepts of New Jersey, Inc. New Jersey
Uno Concepts of Rochester, Inc. Connecticut
C.T.S. Investments, Inc. Pennsylvania
Alcoli, Inc. New Jersey
Grill Concepts D.C., Inc. District of Columbia
The Grill on the Alley, Inc. California
Emndee, Inc. California
b:/ms/subsidia.gci
grillconcepts96
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Grill Concepts, Inc. on Form S-8 (File No. 333-04181) of our report dated March
10, 1997 on our audit of the consolidated financial statements of Grill
Concepts, Inc. as of December 29, 1996 and December 31, 1995 and for the years
ended December 29, 1996 and December 31, 1995, which report is included in this
Annual Report on Form 10-KSB.
By: /s/ Coopers & Lybrand, L.L.P.
---------------------------------
Coopers & Lybrand, L.L.P.
Los Angeles, California
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 372,317
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 239,237
<CURRENT-ASSETS> 1,649,590
<PP&E> 8,589,597
<DEPRECIATION> 3,364,486
<TOTAL-ASSETS> 8,082,014
<CURRENT-LIABILITIES> 2,848,606
<BONDS> 1,030,927
0
2
<COMMON> 138
<OTHER-SE> 4,202,341
<TOTAL-LIABILITY-AND-EQUITY> 8,082,014
<SALES> 22,743,867
<TOTAL-REVENUES> 22,743,867
<CGS> 6,210,226
<TOTAL-COSTS> 6,210,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,488
<INCOME-PRETAX> (2,844,908)
<INCOME-TAX> 7,800
<INCOME-CONTINUING> (2,852,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,852,708)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
