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 September 26,1999
OR
[ ] 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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(Exact name of registrant as specified in its charter)
Delaware 13-3319172
- - --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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 November 5, 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 -
September 26, 1999 and December 27, 1998......................... 1
Consolidated Condensed Statements of Operations -
For the three months and nine months ended September
26, 1999 and September 27, 1998.................................. 3
Consolidated Condensed Statements of Cash Flows -
For the nine months ended September 26, 1999 and
September 27, 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......... 13
PART II - OTHER INFORMATION
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
September 26, December 27,
1999 1998
----------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 249,215 $ 438,184
Inventories 476,634 385,131
Receivables 893,545 356,358
Prepaid expenses 876,515 884,602
----------- ------------
Total current assets 2,495,909 2,064,275
----------- ------------
Property and equipment, at cost 13,623,892 12,855,412
Less: accumulated depreciation (5,422,313) (4,513,075)
----------- ------------
Property and equipment, net 8,201,579 8,342,337
Goodwill, net 223,295 229,441
Liquor licenses 645,539 641,603
Other assets 54,970 109,305
----------- ------------
Total assets $ 11,621,292 $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>
September 26, December 27,
1999 1998
----------- ------------
<S> <C> <C>
Current liabilities: (unaudited)
Bank line of credit $ 825,000 $ 590,026
Accounts payable 1,855,868 1,648,465
Accrued expenses 1,440,406 1,045,832
Current portion of long term debt 511,672 455,470
Note payable - related party 594,500 624,500
Total current liabilities 5,227,446 4,364,293
Long-term debt 1,789,226 2,001,760
Notes payable - related parties 352,529 926,038
----------- ------------
Total liabilities 7,369,201 7,292,091
Minority interest 224,574 227,957
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, 4,003,888 shares issued and outstanding
in 1999 and 1998 160 160
Additional paid-in capital 11,071,062 11,071,062
Accumulated deficit (7,043,707) (7,204,311)
----------- ------------
Stockholders' equity 4,027,517 3,866,913
----------- ------------
Total liabilities, minority interest
and stockholders' equity $11,621,292 $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>
Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $8,962,886 $8,354,440 $28,582,040 $25,094,244
Management and license fees 138,811 287,000 375,122 358,715
---------- ---------- ----------- -----------
Total revenues 9,101,697 8,641,440 28,957,162 25,452,959
Cost of sales 2,551,057 2,424,390 7,981,154 6,950,367
---------- ---------- ----------- -----------
Gross profit 6,550,640 6,217,050 20,976,008 18,502,592
---------- ---------- ----------- -----------
Costs and expenses:
Restaurant operating expenses 5,431,627 5,302,029 17,072,853 15,515,032
General and administrative 762,552 654,037 2,364,454 1,896,636
Depreciation and amortization 348,251 272,545 919,116 793,185
Preopening costs - 185,245 - 677,975
---------- ---------- ----------- -----------
Total operating expenses 6,542,430 6,413,856 20,356,423 18,882,828
---------- ---------- ----------- -----------
Income (loss) from operations 8,210 ( 196,806) 619,585 (380,236)
Interest expense, net (169,871) (53,255) (376,985) (138,015)
---------- ---------- ----------- -----------
Income (loss) before provision for
income taxes, equity in loss
of joint venture and minority interest (161,661) (250,061) 242,600 (518,251)
Provision for income taxes (2,000) (1,200) (6,000) (3,600)
Equity in (loss) of joint venture (80,379) - (80,379) -
Minority interest 32,572 49,381 4,383 81,384
---------- ---------- ----------- -----------
Income (loss) before cumulative effect
of change in accounting principle (211,468) (201,880) 160,604 (440,467)
Cumulative effect of change in
accounting principle - - - (70,281)
---------- ---------- ----------- -----------
Net income (loss) $(211,468) $(201,880) $160,604 $(510,748)
---------- ---------- ----------- -----------
Preferred stock:
Preferred dividends accrued or paid (12,500) (-) (37,500) (34,550)
Accounting deemed dividends - - - (82,877)
---------- ---------- ----------- -----------
(12,500) (-) (37,500) (117,427)
---------- ---------- ----------- -----------
Basic net income (loss) applicable to
common stock $(223,968) $(201,880) $123,104 $(628,175)
========== ========== =========== ===========
Net income (loss) per share
Basic net income (loss) $ (0.05) $(0.05) $ 0.04 $ (0.13)
---------- ---------- ----------- -----------
Preferred stock
Dividends $ (0.01) ($-) ($0.01) ($ 0.01)
Accounting deemed dividends $ (-) ($-) $ (-) ($ 0.02)
---------- ---------- ----------- -----------
$ (0.01) ($-) ($0.01) ($ 0.03)
---------- ---------- ----------- -----------
Basic net income (loss) applicable to
common stock ($ 0.06) ($ 0.05) $ 0.03 ($ 0.16)
========== ========== =========== ===========
Average weighted shares outstanding 4,003,888 4,003,888 4,003,888 3,960,239
========== ========== =========== ===========
</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)
<TABLE>
Nine Months Ended
September 26, September 27,
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $160,604 $ (510,748)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 919,116 793,185
Equity in (loss) of joint venture 80,379 -
Minority interest in net (loss) (4,383) ( 81,384)
Cumulative effect of change in accounting principal - 70,281
Changes in operating assets and liabilities
Inventories (91,503) ( 54,113)
Receivables (537,187) ( 79,694)
Prepaid expenses 8,087 (265,253)
Other assets 49,894 (5,403)
Accounts payable 207,403 382,257
Accrued liabilities 394,574 516,372
----------- ------------
Net cash provided by operating activities 1,186,984 765,500
----------- ------------
Cash flows from investing activities:
Investment in joint venture (83,606) -
Additions to furniture, equipment and improvements (768,480) ( 2,244,530)
----------- ------------
Net cash (used) in investing activities (852,086) ( 2,244,530)
----------- ------------
Cash flows from financing activities:
Proceeds from note payable - 800,000
Proceeds from investment in L.L.C. 210,052 349,650
Proceeds from line of credit 234,974 120,000
Increase in bank term loan - 580,000
Payments on bank loans (365,384) -
Payments on related party debt (603,509) (195,176)
----------- ------------
Net cash provided by (used in) financial activities (523,867) 1,654,474
----------- ------------
Net increase (decrease) in cash and cash equivalents (188,969) 175,444
Cash and cash equivalents, beginning of period 438,184 272,567
----------- ------------
Cash and cash equivalents, end of period $ 249,215 $ 448,011
=========== ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 316,293 $ 101,850
Income taxes $ - $ 3,400
</TABLE>
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 nine months ended
September 27, 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 2001, as amended by SFAS No.137 in June 1999. The Company
does not believe that the new standard will have a material impact on the
Company's financial statements.
4. REVERSE STOCK SPLIT
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.
<TABLE>
Three Months Ended Nine Months Ended
September September September September
26, 1999 27, 1998 26, 1999 27, 1998
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales 98.5% 96.7% 98.7% 98.6%
Management and license fees 1.5 3.3 1.3 1.4
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 28.0 28.1 27.6 27.3
Gross profit 72.0 71.9 72.4 72.7
Restaurant operating expense 59.7 61.4 59.7 61.0
General and administrative expense 8.4 7.6 7.4 7.5
Depreciation and amortization 3.8 3.2 3.2 3.1
Preopening costs 0.0 2.1 0.0 2.7
Total operating expenses 71.9 74.2 70.3 74.2
Operating income (loss) 0.1 (2.3) 2.1 (1.5)
Interest expense, net (1.9) (0.6) (1.3) (0.5)
Income (loss) before taxes (2.3) (2.9) 0.6 (2.0)
Provision for taxes 0.0 0.0 0.0 0.0
Equity in loss of joint venture 0.9 0.0 0.3 0.0
Minority interest 0.4 0.6 0.0 0.3
Cumulative effect of change in
accounting principle 0.0 0.0 0.0 (0.3)
Net income (loss) (2.3)% (2.3)% 0.6% (2.0)%
</TABLE>
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>
Third 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 1 - 1 - 10 8
Managed and/or licensed - - 3 - 3 -
Grill on the Alley restaurants: - - - 1 2 2
Company owned
Pizza restaurants - - - - 3 3
Other restaurants
Managed and/or licensed - - - 1 2 2
------- -------- ------- ------- ------ -------
Total 1 - 4 2 20 15
======= ======== ======= ======= ====== =======
</TABLE>
<TABLE>
Three Months Ended Nine Months Ended
September September September September
26, 1999 27, 1998 26, 1999 27, 1998
<S> <C> <C> <C> <C>
Weighted average weekly sales
per company owned restaurant:
Daily Grill $ 52,655 $ 51,768 $ 55,466 $ 55,153
Grill on the Alley $ 63,484 $ 64,531 $ 68,542 $ 67,652
Pizza restaurants $ 32,261 $ 33,150 $ 32,735 $ 33,293
Change in comparable restaurant
sales (1):
Daily Grill (1.0) % 4.7 % 0.5 % 7.4 %
Grill on the Alley (1.6) % 5.8 % 3.2 % 5.6 %
Pizza restaurants (1.7) % 0.7 % (2.7) % 2.2 %
Total system revenues:
Daily Grill $ 6,052,856 $ 5,383,857 $19,404,544 $ 17,207,602
Grill on the Alley 1,651,844 1,677,722 5,347,549 3,991,367
Pizza restaurants 1,258,186 1,292,861 3,829,947 3,895,275
Management and license fees 138,811 287,000 375,122 358,715
Total $ 9,101,697 $ 8,641,440 $ 28,957,162 $ 25,452,959
</TABLE>
(1) When computing comparable restaurant sales, restaurants open for at least
12 months are compared from period to period.
7
<PAGE>
Revenues
Revenues for the third quarter of fiscal 1999 increased to $9.1 million, 5.3%
over the $8.6 million generated for the same quarter of fiscal 1998. Revenues
for the nine months ended September 26, 1999 rose 13.8% to $29.0 million from
the $25.5 million generated for the same period of fiscal 1998. Total revenues
included $9.0 million of sales revenues and $0.1 million of management and
licensing fees for the 1999 quarter and $28.6 million of sales revenues and $0.4
million of management and licensing fees for the first nine months of 1999. This
compares to $8.3 million of sales revenues and $0.3 million of management and
licensing fees for the 1998 quarter and $25.1 million of sales revenues and $0.4
million of management and licensing fees for the first nine months of 1998. The
increase in sales revenues for both the quarter ($0.6 million, or 7.3%) and the
nine months ($3.5 million, or 13.9%) was primarily attributable to the Tyson's
Daily Grill being open for the full quarter and nine months in 1999 and to the
San Jose Grill being open the full nine month period in 1999 while in 1998 it
was open only five of the nine months.
Same store sales (for restaurants open at least 12 months) decreased 1.4% for
the quarter and increased 0.5% for the nine month period. Excluding a one time
gain ($206,000) from the sale of the LAX Daily Grill in the third quarter of
1998, management and licensing fees increased for both the quarter ($68,000, or
96%) and the nine months ($222,000, or 145%). For the quarter, fees from managed
restaurants were higher due to higher sales at restaurants and the addition of
management fees from the Universal Citywalk Daily Grill which opened in July,
1999. Managed restaurants, other than Citywalk, were open for the full nine
month period in 1999 while they were only open for five months during the nine
month period in 1998.
Cost of Sales
Cost of sales increased by 5.2% for the quarter and 14.8% for the nine months
ended September 26, 1999 as compared to the same periods in 1998. As a
percentage of total revenues cost of sales was 28.0% for the quarter and 27.6%
for the nine months as compared to 28.1% for the third quarter of 1998 and 27.3%
for the nine month period in 1998. The increase in cost of sales as a percentage
of sales during the nine month 1999 period was primarily attributable to the
inclusion of the San Jose Grill in 1999, which has a higher cost of sales
percentage. For the quarter the cost of sales percentage compares favorably.
Restaurant Operating Expenses
Restaurant operating expenses increased by 2.4% for the quarter and 11.5% for
the nine 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 59.7% for both the 1999 quarter
and nine months as compared to 61.4% for the quarter and 61.0% for the nine
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 nine months in 1999 compared with only five months of 1998;
Grill restaurants typically having a lower payroll percentage. The increased
management fees also favorably affected this expense percentage. General and
Administrative Expense
8
<PAGE>
General and Administrative Expense
General and administrative expense increased 16.6% for the quarter and 13.1% for
the nine month period as compared to the same periods in 1998. As a percentage
of total revenues, general and administrative expense totaled 8.4% for the
quarter and 7.4% for the nine month period as compared to 7.6% for the quarter
and 7.5% for the nine 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
new restaurants.
Depreciation and Amortization
Depreciation and amortization expense increased by 16.6% for the quarter and
13.1% for the nine month period as compared to 1998. The increase in
depreciation and amortization expense was primarily attributable to the opening
of two restaurants in 1998 and depreciation of the Burbank managed restaurant
which was remodeled into a Daily Grill in late 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
$185,245 during the 1998 quarter and $677,975 during the 1998 nine month period
compared to none in the 1999 quarter and nine month period. Although the Company
had four restaurant openings during the 1999 nine 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 219% during the quarter and 173% during the
nine 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 Daily Grill. Interest also
includes a charge for interest in connection with the construction of a Grill on
the Alley in Chicago which is scheduled for opening in mid-2000.
9
<PAGE>
Equity in loss of Joint Venture
The equity in loss of the joint venture relates to the Company's investment in a
joint venture which operates the Daily Grill at the Universal Studios CityWalk.
The loss is attributable to preopening expenses incurred to open the restaurant
in July 1999.
Minority Interest
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 offset by a minority interest credit for the
activity of the Chicago Grill on the Alley joint venture.
Preferred Stock Dividends
The Company reported accrued or paid dividends on preferred stock of $12,500
during the quarter and $37,500 for the nine month period compared to $0 during
the quarter and $34,550 during the nine 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 $0 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 September 26, 1999 the Company had negative working capital of $2.6 million
and a cash balance of $0.2 million compared to negative working capital of $2.3
million and a cash balance of $0.4 million at December 27, 1998. The change in
working capital was primarily attributable to the repayment of debt during the
nine months ended September 29, 1999.
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 September 26, 1999, the Company had existing bank borrowing of
$2.0 million, a loan from a San Jose Grill L.L.C. member of $0.5 million, an SBA
loan of $0.1 million, loans from stockholders/officers of $0.2 million,
equipment loans of $1.0 million, a loan from the Chicago Grill partners of $0.2
million and loans/advances from a landlord of $0.1 million.
As of September 26, 1999, the Company had opened three hotel-based managed Daily
Grill restaurants in 1999. 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.
10
<PAGE>
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.
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 2001, as amended by SFAS No.
137 in June 1999. 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 nine months of this year may impact future operating results.
On November 8, 1999 the Company entered into a preliminary agreement with
Sunstone Hotel Properties, the owner of the Salt Lake City Hilton, to close the
Daily Grill Salt Lake City. Effective Monday, November 16, 1999 the Company will
cease to operate the restaurant. In connection with the closing of the Salt Lake
City Daily Grill, it was mutually agreed between Sunstone Hotel Properties, the
owner of The Kahler Hotel, and the Company to not proceed with the opening of
Daily Grill in The Kahler Hotel, Rochester, Minnesota.
The Company's operations during the last two quarters of 1999 will reflect the
addition of a 50% owned non-consolidated 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 and is scheduled to open a majority owned hotel-based Grill
restaurant in early 2000.
11
<PAGE>
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.
The Company has evaluated 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 expect to incur approximately $250,000
during the fourth quarter of 1999 for the purchase of new more efficient
software and hardware. The purchase is expected to be financed over a five year
period.
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, all of the Company's systems
were fully operational in the third quarter of 1999. The Company continues to
assess the Y2K readiness of its key suppliers and business partners in an effort
to ensure the adequacy of product, supplies and resources. This includes a
review of and direct communication with the majority of its product vendors and
key suppliers. Based on the responses received from our product vendors and key
suppliers, the Company is taking the steps necessary to minimize the effect, if
any, on its operations.
12
<PAGE>
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 $1,975,000 at September 26, 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
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: November 10, 1999 By: /s/ Robert Spivak
Robert Spivak, President
and Chief Executive Officer
Dated: November 10, 1999 By: /s/ Lawrence Byer
Lawrence Byer, Controller and
Principal Accounting Officer
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