SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 0-23226
GRILL CONCEPTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3319172
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of principal executive offices)(Zip code)
(310) 820-5559
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(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 9, 1999, 4,003,888 shares of Common Stock of the issuer were
outstanding.
<PAGE>
GRILL CONCEPTS, INC.
--------------------
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 27, 1999 and December 27, 1998........................................ 1
Consolidated Condensed Statements of Operations -
For the three months and six months ended June
27, 1999 and June 28, 1998................................................. 3
Consolidated Condensed Statements of Cash Flows -
For the six months ended June 27, 1999 and
June 28, 1998.............................................................. 4
Notes to Consolidated Condensed Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Reports on Form 8-K............................... 13
SIGNATURES.............................................................. 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
June 27, December 27,
1999 1998
------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 533,257 $ 438,184
Inventories 462,432 385,131
Receivables 500,427 356,358
Prepaid expenses 894,829 884,602
--------- ---------
Total current assets 2,390,945 2,064,275
--------- ---------
Property and equipment, at cost 13,381,807 12,855,412
Less: accumulated depreciation (5,081,990) (4,513,075)
---------- ----------
Property and equipment, net 8,299,817 8,342,337
Goodwill, net 225,441 229,441
Liquor licenses 641,603 641,603
Other assets 31,213 109,305
---------- -----------
Total assets $11,589,019 $11,386,961
---------- -----------
---------- -----------
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
<TABLE>
June 27, December 27,
1999 1998
------------- -------------
Current liabilities: (unaudited)
<S> <C> <C>
Bank line of credit $ 600,000 $ 590,026
Accounts payable 1,626,433 1,648,465
Accrued expenses 1,421,376 1,045,832
Current portion of long term debt 304,000 455,470
Note payable - related party 824,500 624,500
----------- -----------
Total current liabilities 4,776,309 4,364,293
Long-term debt 1,945,023 2,001,760
Notes payable - related parties 372,556 926,038
---------- -----------
Total liabilities 7,093,888 7,292,091
Minority interest 256,146 227,957
Stockholders' equity:
Series A, 10% Convertible Preferred Stock,
$.001 par value; 1,000,000 shares authorized,
none issued and outstanding in 1999 and 1998 -- --
Series B, 8% Convertible Preferred Stock,
$.001 par value; 1,000,000 shares authorized,
none issued and outstanding in 1999 and 1998 -- --
Series I, Convertible Preferred Stock, $.001 par
value; 1,000,000 shares authorized, 1,000 shares
issued and outstanding in 1999 and 1998 1 1
Series II, 10% Convertible Preferred Stock, $.001 par
value; 1,000,000 shares, authorized, 500 shares
issued and outstanding in 1999 and 1998 1 1
Common stock, $.00004 par value; 7,500,000 shares
authorized, 4,003,883 shares issued and outstanding
in 1999 and 1998 160 160
Additional paid-in capital 11,071,062 11,071,062
Accumulated deficit (6,832,239) (7,204,311)
---------- -----------
Stockholders' equity 4,238,985 3,866,913
---------- -----------
Total liabilities, minority interest
and stockholders' equity $11,589,019 $11,386,961
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- -------------
Revenues:
Sales $9,455,959 $8,378,563 $19,619,154 $16,739,804
Management and license fees 111,464 71,715 236,311 71,715
---------- --------- --------- ---------
Total revenues 9,567,423 8,450,278 19,855,465 16,811,519
Cost of sales 2,614,415 2,322,926 5,430,097 4,525,977
---------- --------- --------- ---------
Gross profit 6,953,008 6,127,352 14,425,368 12,285,542
Costs and expenses:
Restaurant operating expenses 5,639,126 5,167,635 11,641,226 10,213,003
General and administrative 797,473 620,005 1,601,902 1,242,599
Depreciation and amortization 283,045 277,370 570,865 520,640
Preopening costs - 417,232 - 492,730
--------- --------- -------- --------
Total operating expenses 6,719,644 6,482,242 13,813,993 12,468,972
Income (loss) from operations 233,364 (354,890) 611,375 (183,430)
Interest expense, net 111,558 (45,642) (207,114) (84,760)
--------- --------- -------- --------
Income (loss) before provision for
income taxes and minority interest 121,806 (400,532) 404,261 (268,190)
Provision for income taxes (2,000) (1,200) (4,000) (2,400)
Minority interest (10,017) 32,003 (28,189) 32,003
--------- --------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle 109,789 (369,729) 372,072 (238,587)
Cumulative effect of change in
accounting principle - - - 70,281
--------- --------- -------- --------
Net income (loss) $109,789 ($369,729) $372,072 ($308,868)
Preferred stock:
Preferred dividends accrued or paid (12,500) (12,222) (25,000) (34,550)
Accounting deemed dividends - (40,744) - (82,877)
--------- --------- -------- --------
(12,500) (52,966) (25,000) (117,427)
--------- --------- -------- --------
Basic net income (loss) applicable to
common stock $97,289 ($422,695) $347,072 ($426,295)
--------- --------- -------- --------
--------- --------- -------- --------
Net income (loss) per share
Basic net income (loss) $ 0.02 ($ 0.10) $ 0.09 ($ 0.08)
--------- --------- -------- --------
Preferred stock
Dividends ($ 0.00) ($ 0.00) ($ 0.00) ($ 0.01)
Accounting deemed dividends ($ --) ($ 0.01) ($ --) ($ 0.02)
--------- --------- -------- --------
($ 0.00) ($ 0.01) ($ 0.00) ($ 0.03)
--------- --------- -------- --------
Basic net income (loss) applicable to
common stock $ 0.02 ($ 0.11) $ 0.09 ($ 0.11)
--------- --------- -------- --------
--------- --------- -------- --------
Average weighted shares outstanding 4,033,888 3,950,628 4,033,888 3,938,414
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-----------------------
June 27, June 28,
1999 1998
---------- ---------
Cash flows from operating activities:
Net income (loss) $ 372,072 ($308,868)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 570,865 597,740
Minority interest in net income 28,189 --
Cumulative effect of change in accounting principal -- 70,281
Preopening costs -- 415,630
Changes in operating assets and liabilities
Inventories (77,301) (46,640)
Receivables (144,069) 34,790
Prepaid expenses (10,227) (212,501)
Other assets 78,092 (281,037)
Accounts payable (22,035) (24,077)
Accrued liabilities 375,545 123,397
--------- ---------
Net cash provided by operating activities 1,171,131 368,715
--------- ---------
Cash flows from investing activities:
Additions to furniture, equipment and improvements 524,346 1,911,599
--------- ---------
Net cash used in investing activities 524,346 1,911,599
--------- ---------
Cash flows from financing activities:
Proceeds from note payable -- 800,000
Proceeds from investment in L.L.C. -- 299,700
Proceeds from line of credit 9,974 520,000
Payments on long-term debt (561,686) (176,189)
--------- ---------
Net cash provided by (used in) financial activities (551,712) 1,443,511
--------- ---------
Net increase (decrease) in cash and cash equivalents 95,073 (99,373)
Cash and cash equivalents, beginning of period 438,184 272,567
--------- ---------
Cash and cash equivalents, end of period $ 533,257 $173,194
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 157,151 $101,850
Income taxes -- 3,400
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These financial statements have not
been audited by independent accountants. The December 27, 1998 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Form 10-KSB dated
December 27, 1998. In the opinion of management, these interim financial
statements reflect all adjustments of a normal recurring nature necessary for a
fair statement of the results for the interim periods presented. The current
period results of operations are not necessarily indicative of results which
ultimately will be reported for the full year ending December 26, 1999.
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. PREOPENING COSTS
During fiscal 1998, the Company elected early adoption of AICPA Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This new
accounting standard requires most entities to expense all start-up and
preopening costs as they are incurred. Preopening costs for all periods
presented herein reflect costs that were expensed as incurred. In addition, the
Consolidated Statement of Operations for the six months ended June 28, 1998 has
been restated to reflect, as a one-time charge, the cumulative effect of the
change in accounting principle.
3. FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company does not
believe that the new standard will have a material impact on the Company's
financial statements.
4. SUBSEQUENT EVENT
On August 9, 1999, the Company effected a 1-for-4 reverse stock split of the
Company's common stock. All share and per share data have been restated to
reflect the reverse stock split.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this Form
10-Q. Except for the historical information contained herein, the discussion in
this Form 10-Q contains certain forward looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward statements wherever
they appear in this Form 10-Q. The Company's actual results could differ
materially from those discussed here. For a discussion of certain factors that
could cause actual results to be materially different, refer to the Company's
Annual Report on Form 10-KSB for the year ended December 27, 1998.
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of operations expressed as a
percentage of total operating revenues, except where otherwise noted.
Percentages may not add due to rounding.
Three Months Ended Six Months Ended
-------------------- --------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- --------- --------- ---------
Revenues:
Company restaurant sales 98.8 % 99.2 % 98.8 % 99.6 %
Management and license fees 1.2 .8 1.2 .4
----- ----- ----- -----
Total operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 27.3 27.5 27.3 26.9
----- ----- ----- -----
Gross profit 72.7 72.5 72.7 73.1
----- ----- ----- -----
Restaurant operating expense 58.9 61.2 58.6 60.8
General and administrative expense 8.3 7.3 8.1 7.4
Depreciation and amortization 3.0 3.3 2.9 3.1
Preopening costs 0.0 6.4 0.0 2.9
----- ----- ----- -----
Total operating expenses 70.2 76.7 69.6 74.2
----- ----- ----- -----
Operating income (loss) 2.4 (4.2) 3.1 (1.1)
Interest expense, net (1.2) (0.5) (1.0) (0.5)
----- ----- ----- -----
Income (loss) before taxes 1.3 (4.7) 2.0 (1.6)
Provision for taxes 0.0 0.0 0.0 0.0
Minority interest (0.1) 0.4 (0.1) 0.2
Cumulative effect of change in
accounting principle 0.0 0.0 0.0 0.4
----- ----- ----- -----
Net income (loss) 1.1% (4.4)% 1.9% (1.8)%
----- ----- ----- -----
----- ----- ----- -----
6
<PAGE>
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
<TABLE>
<S> <C> <C> <C>
Second Quarter Year-to-date Total open at
Openings Openings End of Quarter
-------------- -------------- --------------
FY 1999 FY 1998 FY 1999 FY 1998 FY 1999 FY 1998
------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Daily Grill restaurants:
Company owned -- -- -- -- 9 8
Managed and/or licensed 1 -- 3 -- 3 --
Grill on the Alley restaurants:
Company owned -- -- -- 1 2 2
Pizza restaurants -- -- -- -- 3 3
Other restaurants
Managed and/or licensed -- -- -- 1 2 3
----- ---- ---- ---- ---- ----
Total -- -- 3 1 19 16
----- ---- ---- ---- ---- ----
----- ---- ---- ---- ---- ----
</TABLE>
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
------------------ ----------------
<S> <C> <C> <C> <C>
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 54,960 $ 55,030 $ 57,004 $ 56,845
Grill on the Alley 66,915 68,467 71,071 70,110
Pizza restaurants 32,644 32,985 32,971 33,364
Change in comparable restaurant
sales (1):
Daily Grill -- % 10.7 % 1.2 % 8.6 %
Grill on the Alley 4.2 % 9.3 % 2.8 % 5.5 %
Pizza restaurants (1.0)% 0.0 % (1.2)% (0.1)%
Total system revenues:
Daily Grill $6,443,071 $5,722,821 $13,351,688 $11,823,745
Grill on the Alley 1,739,782 1,369,339 3,695,705 2,313,645
Pizza restaurants 1,273,106 1,286,403 2,571,761 2,602,414
Management and license fees 111,464 71,715 236,311 71,715
--------- --------- ---------- ---------
Total $9,567,423 $8,450,278 $19,855,465 $16,811,519
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
- -------------------
(1) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
7
<PAGE>
Revenues
Revenues for the second quarter of fiscal 1999 increased to $9.6 million, 13.2 %
over the $8.5 million generated for the same quarter of fiscal 1998. Revenues
for the six months ended June 27, 1999 rose 18.1% to $19.8 million from the
$16.8 million generated for the same period of fiscal 1998. Total revenues
included $9.5 million of sales revenues and $111,000 of management and licensing
fees for the 1999 quarter and $19.6 million of sales revenues and $236,000 of
management and licensing fees for the first six months of 1999. This compares to
$8.4 million of sales revenues and $72,000 of management and licensing fees for
the 1998 quarter and $16.7 million of sales revenues and $72,000 of management
and licensing fees for the first six months of 1998. The increase in sales
revenues for both the quarter ($1.1 million, or 12.9%) and the six months ($2.9
million, or 17.2%) was primarily attributable to the San Jose Grill and the
Tyson's, Virginia, Daily Grill being open for the full quarter and six months in
1999.
Same store sales (for restaurants open at least 18 months) increased 0.2% for
the quarter and 1.0% for the six month period. The increase in management and
licensing fees for both the quarter ($40,000, or 55%) and the six months
($165,000, or 130%) was primarily attributable to the managed restaurants being
open for the full periods in 1999 while they were only included for two months
of the second quarter in 1998.
Cost of Sales
Cost of sales increased by 12.5% for the quarter and 20.0% for the six months
ended June 27, 1999 as compared to the same periods in 1998. As a percentage of
sales revenues, cost of sales was 27.3% for the quarter and 27.3% for the six
months as compared to 27.5% for the second quarter of 1998 and 27.0% for the
year-to-date period in 1998. The increase in cost of sales as a percentage of
sales during the 1999 six month period was primarily attributable to the
inclusion of the San Jose Grill in 1999, which has a higher cost of sales
percentage.
Restaurant Operating Expenses
Restaurant operating expenses increased by 9.1% for the quarter and 14.0% for
the six months as compared to the same periods in 1998. The increase in
restaurant operating expenses was primarily attributable to the new restaurants
opened in the second and fourth quarters of 1998. As a percentage of total
revenues, restaurant operating expenses totaled 58.9% for the 1999 quarter and
58.6% for the six months as compared to 61.2% for the quarter and 60.8% for the
six month period in 1998. The decrease in restaurant operating expenses as a
percentage of total revenues was attributable to improvement in payroll costs at
the Daily Grills and Pizzeria Uno restaurants plus the inclusion of the San Jose
Grill for the full 1999 periods; Grill restaurants typically having a lower
payroll percentage. The increased management fees also favorably affected this
expense percentage.
General and Administrative Expense
General and administrative expense increased 28.6% for the quarter and 28.9% for
the six month period as compared to the same periods in 1998. As a percentage of
total revenues, general and administrative expense totaled 8.3% for the quarter
and 8.1% for the six month period as compared to 7.3% for the quarter and 7.4%
for the six month period in 1998. The increase in total general and
administrative expense during 1999 was primarily attributable to added corporate
personnel, merit increases, related payroll costs and added recruiting costs for
the new managed restaurants.
8
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense increased by 2.0% for the quarter and 9.6%
for the six month period as compared to 1998. The small increase in depreciation
and amortization expense was primarily attributable to the opening of two
restaurants in 1998 offset by the write-off of fixed assets of two restaurants
in the fourth quarter of 1998.
Unusual Charges and Cumulative Effect of Changes in Accounting Principle
During fiscal 1998, the Company elected early adoption of American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." This new accounting standard
requires entities to expense start-up and preopening costs as they are incurred.
Consistent with the practice of most casual dining restaurant companies, the
Company previously deferred such costs and then wrote them off over the
twelve-month period following the opening of each restaurant. As a result of
this early adoption, preopening costs for all periods presented herein reflect
costs that were expensed as incurred. The Company incurred preopening costs of
$417,232 during the 1998 quarter and $492,730 during the 1998 year-to-date
period compared to none in the 1999 quarter and year-to-date period. Although
the Company had three restaurant openings during the 1999 six month period, all
preopening costs were fully funded through landlord contributions, joint
ventures, partnerships or a combination thereof.
Additionally, the Company reported a charge of $70,281 in the first quarter of
1998 and the 1998 year-to-date period attributable to the cumulative effect of a
change in accounting principle as a result of the early adoption of the SOP.
Interest Expense, Net
Interest expense, net, increased by 144% during both the quarter and six month
periods compared to the same periods in 1998. The increase in interest expense
was primarily attributable to increased borrowing during 1998 for the opening of
the San Jose Grill and the Tyson's, Virginia, Daily Grill.
Minority Interest
In connection with the building of a new restaurant, in January 1998, a limited
liability company was formed for the operation of "The Grill" restaurant in San
Jose, California, of which the company owns 50.05%. Construction of the
restaurant has been funded by a capital contribution from the Company of
$350,350 and by a capital contribution of $299,700 and an $800,000 loan from the
minority interest member of the limited liability company. The consolidated
financial statements include the accounts of the limited liability company.
The change in minority interest for both the quarter and six month periods was
primarily attributable to the increase in revenues from the San Jose Grill which
was open for the full 1999 periods.
9
<PAGE>
Preferred Stock Dividends
The Company reported accrued or paid dividends on preferred stock of $12,500
during the quarter and $25,000 for the six month period compared to $12,222
during the quarter and $34,550 during the six month period in 1998.
Additionally, in accordance with the position of the Securities and Exchange
Commission relating to accounting for Preferred Stock which is convertible into
common stock at a discount from the market price of the common stock, the
Company reported a "deemed dividend" of $40,744 during the 1998 quarter and
$82,877 during the 1998 year-to-date period. The Company reported no similar
"deemed dividend" in 1999. The "deemed dividend," which relates to the issuance
of convertible preferred stock during 1997, is a non-cash, non-recurring
accounting entry which, along with the accrued dividends on preferred stock, is
a deduction from net income in calculating income (loss) applicable to common
stock.
Material Changes in Financial Condition, Liquidity and Capital Resources
At June 27, 1999 the Company had negative working capital of $2.4 million and a
cash balance of $0.5 million compared to negative working capital of $2.3
million and a cash balance of $0.4 million at December 27, 1998. The negligible
change in working capital was attributable to the operating profit during the
period offset by a significant reduction in debt.
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, loans and tenant allowances
from certain of its landlords and, beginning in 1998, through joint venture
arrangements. At June 27, 1999, the Company had existing bank borrowing of $1.9
million, a loan from a San Jose Grill L.L.C. member of $0.6 million, an SBA loan
of $0.1 million, loans from stockholders/officers of $0.6 million, equipment
loans of $0.7 million and loans/advances from a landlord of $0.1 million.
As of June 27, 1999, the Company had opened three Daily Grill restaurants in
1999, all of which are hotel-based managed facilities. In addition, the Company
opened a non-hotel based Daily Grill restaurant on July 9, 1999, under a joint
venture agreement. Finally, the Company expects to open a majority owned
hotel-based Grill restaurant in early 2000. Management anticipates that new non-
hotel based restaurants will cost between $1 million and $2 million per
restaurant to build and open depending upon the location and available tenant
allowances. Hotel based restaurants may involve remodeling existing facilities,
substantial capital contributions from the hotel operators and other factors
which will cause the cost to the Company of opening such restaurants to be
substantially less than the Company's cost to build and open non-hotel based
restaurants.
The Company may enter into investment/loan arrangements in the future on terms
similar to the San Jose Fairmont Grill and Chicago Westin Grill arrangements to
provide for the funding of selected restaurants. Management believes that the
Company has adequate resources on hand and operating cash flow 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 raise,
additional capital through additional bank borrowings, the issuance of debt or
equity securities, or the formation of additional investment/loan arrangements,
or a combination thereof. The Company presently has no commitments in that
regard.
10
<PAGE>
Future Accounting Requirements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company does not
believe that the new standard will have a material impact on the Company's
financial statements.
Certain Factors Affecting Future Operating Results
In addition to the opening of new restaurants during 1999, as described above,
and the various factors described in the Company's Annual Report on Form 10-KSB
for the year ended December 27, 1998, the following developments during the
first half of this year may impact future operating results.
The Company's operations during 1999 will reflect the opening during the last
two quarters of a 50% owned restaurant in Universal Studios, California. In
addition, pursuant to the Company's hotel restaurant management agreement, the
Company opened three hotel-based Daily Grill restaurants in the Spring of 1999
which had no material impact on operating results during the first quarter, and
is scheduled to open a majority owned hotel-based Grill restaurant in early
2000.
The Company has dropped its efforts to sell its Pizza Restaurants at the current
time.
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; or that additional hotels will elect to
retain the Company's hotel restaurant management services.
Year 2000 Issue
The Company recognizes the need to ensure that its operations, as well as those
of third parties with whom the Company conducts business, will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems
through a combination of actions including the implementation of a new
financial, payroll, human resources software package that is Year 2000 compliant
and new hardware in both corporate headquarters and restaurants.
The corporate network of the Company's headquarters has been replaced with new
hardware with a Windows NT software package. The Company ordered a new
accounting system software package which is Year 2000 compliant. The new
accounting system was implemented in May of 1999.
Each new restaurant has had new year 2000 compliant software installed with a
new in restaurant point of sale and back office computer system.
11
<PAGE>
The Company is evaluating the software currently being utilized in its 6 older
restaurants. While we have received assurance from the software's supplier that
such software is year 2000 compliant, we are investigating new more efficient
software to replace the older software and expect a decision before the end of
1999.
The Company has incurred approximately $40,000 for the new corporate hardware
and $60,000 for new corporate software.
New restaurant computer systems and software cost approximately $60,000 per
restaurant. This is however a part of the initial capital contribution for new
restaurants.
Regarding the Year 2000 issue, the greatest risk to the Company is that the
systems placed in service by the Company itself and/or its vendors will not be
fully operational by the end of calendar year 1999. This could adversely impact
the day to day operations of the Company. However, it is the Company's belief
that all of its systems will be in full operation in adequate time to ensure the
Company is fully operational in the third quarter of 1999. Beginning in calendar
year 1999, if any current vendors are not Year 2000 compliant, the Company will
identify alternative vendors who are Year 2000 compliant. As of August 1, 1999,
the Company had surveyed more than half of its vendors and received assurances
that they are currently, or are taking the necessary steps to become, Year 2000
compliant. The Company presently expects to have completed its survey of vendors
by the end of the third quarter of 1999, or early in the fourth quarter of 1999
at which time arrangements will be made to secure alternative vendors which are
Year 2000 compliant for current vendors who are not, at that time, Year 2000
compliant Should any part of the implementation by the Company or its vendors
not function as anticipated, the Company believes that it has ample time to
develop contingency plans to ensure Company operations will not be materially
affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its $2,100,000 revolving credit and term loan
facility (the "Credit Facility"). Borrowings outstanding under the Credit
Facility totaled $1,875,000 at June 27, 1999. Borrowings under the Credit
Facility bear interest at the lender's reference rate plus 0.25%. A hypothetical
1% interest rate change would not have a material impact on the Company's
results of operations.
12
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 17, 1999, an annual meeting of shareholders of Grill Concepts, Inc.
was held.
(b) The following directors were elected (by the vote indicated) at such
meeting:
Robert Wechsler 14,388,674 For 205,001 Against 14,091 Abstain
Michael Weinstock 14,593,675 For 0 Against 14,091 Abstain
Richard Shapiro 14,593,675 For 0 Against 14,091 Abstain
Charles Frank 14,357,675 For 200,000 Against 20,091 Abstain
Glenn Golenberg 14,592,325 For 1,350 Against 14,091 Abstain
Peter Balas 14,392,675 For 201,000 Against 14,091 Abstain
Robert Spivak 14,593,675 For 0 Against 14,091 Abstain
c) In addition to the election of directors as noted above, the following
matters were voted upon at such meeting:
(i) Approval of a proposal to authorize the board of directors to carry
out a reverse stock split, if necessary to assure continued listing on
Nasdaq (14,209,466 For, 377,761 Against, 20,539 Abstain)
(ii) Ratification of appointment of PricewaterhouseCoopers LLP as the
Company's independent certifying accountants (14,499,412 For, 17,598
Against, 90,756 Abstain)
Item 5. Other Information
On August 9, 1999, the Company effected a 1-for-4 reverse stock split.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
3 Certificate of Amendment to Certificate of Incorporation
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: August 9, 1999 By: /s/ Robert Spivak
----------------------------------
Robert Spivak, President
and Chief Executive Officer
Dated: August 9, 1999 By: /s/ Lawrence Byer
----------------------------------
Lawrence Byer, Controller and
Principal Accounting Officer
14
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
GRILL CONCEPTS, INC.
---------------------------
GRILL CONCEPTS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware, does hereby certify:
FIRST: That at a meeting of the Board of Directors of the Corporation
resolutions were duly adopted summarizing a proposed amendment to the Restated
Certificate of Incorporation of said Corporation, declaring said amendment to be
advisable and calling a meeting of the Stockholders of said Corporation for
consideration thereof. The resolutions summarizing the proposed amendment are as
follows:
RESOLVED, that (1) a 1-for-4 reverse split of the Corporation's common
stock be carried out to be effective no later than 60 calendar days
following a hearing before Nasdaq at which a reverse split is proposed to
remedy the failure to satisfy Nasdaqs minimum bid price requirement with
the actual record date and payment date to be fixed by the Corporation's
President and Chief Executive Officer, Robert Spivak, (2) Securities
Transfer Corp., the Corporation's transfer agent, be appointed Exchange
Agent to carry out the reverse stock split, and (3) the officers of the
Corporation are hereby authorized and directed to take such actions as they
may deem appropriate to effect the reverse stock split.
SECOND: That, in accordance with the resolution set forth in ONE above,
paragraph FOURTH of the Corporation's Restated Certificate of Incorporation, as
amended, be amended to give effect to a 1-for-4 reverse split of the
Corporation's common stock and to read in full as follows:
"Fourth: The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is eight million five hundred
thousand(8,500,000) shares, consisting of (a) one million (1,000,000)
shares of preferred stock, par value $.001 per share (hereinafter referred
to as "Preferred Stock"); and (b) seven million five hundred
thousand(7,500,000) shares of common stock, par value $.00004 per share
(hereinafter referred to as "Common Stock")."
1
<PAGE>
THIRD: That thereafter, pursuant to resolution of its Board of Directors,
an annual meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FIFTH: This amendment shall become effective on August 9, 1999.
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by its President and attested by its Secretary this day of
, 1999.
- --------------
GRILL CONCEPTS, INC.
By:
-------------------------------
Robert Spivak, President
ATTEST:
By:
--------------------------------
Michael Weinstock,
Secretary
2
<PAGE>
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