Unassociated Document
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 March 26, 2006
OR
[
]TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACTS OF 1934
For
the
transition period from __________ to
__________ .
Commission
File No. 0-23226
GRILL
CONCEPTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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13-3319172
|
(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer
Identification
No.)
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11661
San Vicente Blvd., Suite 404, Los Angeles, California 90049
(Address
of principal executive offices) (Zip Code)
(310)
820-5559
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer an accelerated
filer or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one):
Large
accelerated filer oAccelerated
filer oNon-accelerated
filer x
As
of May
5, 2006, 5,777,795 shares of Common Stock of the issuer were
outstanding.
GRILL
CONCEPTS, INC.
INDEX
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Page
Number
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PART
I - FINANCIAL INFORMATION
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Item
1. Financial Statements
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Consolidated
Condensed Balance Sheets - March 26, 2006
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and
December 25, 2005
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3
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Consolidated
Condensed Statements of Operations - For the three
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months
ended March 26, 2006 and March 27, 2005
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5
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Consolidated
Condensed Statements of Cash Flows - For the three
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months
ended March 26, 2006 and March 27, 2005
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6
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Notes
to Consolidated Condensed Financial Statements
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7
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Item
2. Management's Discussion and Analysis of Financial
Condition
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and
Results of Operations
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15
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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23
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Item
4. Controls and Procedures
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23
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PART
II - OTHER INFORMATION
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Item
6. Exhibits
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23
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SIGNATURES
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24
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PART
I -
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
ASSETS
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March
26,
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December
25,
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2006
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2005
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(unaudited)
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Current
assets:
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Cash
and cash equivalents
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$
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2,247,000
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$
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3,161,000
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Inventories
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703,000
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727,000
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Receivables,
net of reserve ($238,000 in 2006 and 2005)
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1,039,000
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784,000
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Reimbursable
costs receivable
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1,098,000
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912,000
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Prepaid
expenses & other current assets
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621,000
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401,000
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Total
current assets
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5,708,000
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5,985,000
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Furniture,
equipment and improvements, net
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13,270,000
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13,372,000
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Goodwill,
net
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205,000
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205,000
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Liquor
licenses
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426,000
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426,000
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Restricted
cash
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1,192,000
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1,042,000
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Deferred
tax asset
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756,000
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577,000
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Note
receivable
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91,000
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90,000
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Other
assets
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589,000
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276,000
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Total
assets
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$
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22,237,000
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$
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21,973,000
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The
accompanying notes are an integral part of these consolidated condensed
financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES,
MINORITY INTEREST AND STOCKHOLDERS' EQUITY
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March
26,
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December
25,
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2006
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2005
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(unaudited)
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Current
liabilities:
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Accounts
payable
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$
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1,361,000
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$
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1,457,000
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Accrued
expenses
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4,018,000
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4,533,000
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Accrued
managed outlet operating expenses
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1,098,000
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912,000
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Current
portion of long term debt
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44,000
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48,000
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Current
portion notes payable - related parties
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316,000
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312,000
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Total
current liabilities
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6,837,000
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7,262,000
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Long-term
debt
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406,000
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206,000
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Notes
payable - related parties
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640,000
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671,000
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Other
long-term liabilities
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7,484,000
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7,398,000
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Total
liabilities
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15,367,000
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15,537,000
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Minority
interest
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1,537,000
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1,630,000
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Stockholders’
equity:
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Preferred
Stock, 1,000,000 shares authorized,
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995,935
shares undesignated in 2006 and 2005
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Series
II, 10% Convertible Preferred Stock, $.001 par
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value;
500 shares authorized, 500 shares
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issued
and outstanding in 2006 and 2005
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-
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-
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Common
stock, $.00004 par value; 12,000,000 shares
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authorized
in 2006 and 2005, 5,770,195 issued
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and
outstanding in 2006 and 5,728,495 issued and outstanding in 2005
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-
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-
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Additional
paid-in capital
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13,731,000
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13,686,000
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Accumulated
deficit
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(8,398,000
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)
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(8,880,000
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)
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Total
stockholders’ equity
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5,333,000
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4,806,000
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Total
liabilities, minority interest and stockholders’ equity
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$
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22,337,000
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$
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21,973,000
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The
accompanying notes are an integral part of these consolidated condensed
financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
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Three
Months Ended
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March
26,
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March
27,
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2006
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2005
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Revenues:
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Sales
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$
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15,062,000
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$
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13,387,000
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Cost
reimbursements
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3,818,000
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3,469,000
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Management
and license fees
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420,000
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356,000
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Total
revenues
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19,300,000
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17,212,000
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Operating
expenses:
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Cost
of sales
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4,174,000
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3,738,000
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Restaurant
operating expenses
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8,940,000
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7,701,000
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Reimbursed
costs
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3,818,000
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3,469,000
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General
and administrative
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1,241,000
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1,046,000
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Depreciation
and amortization
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531,000
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461,000
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Pre-opening
costs
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-
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91,000
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Total
operating expenses
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18,704,000
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16,506,000
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Income
from operations
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596,000
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706,000
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Interest
expense, net
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(21,000
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)
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(37,000
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)
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Income
before provision for income taxes
|
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and
minority interest
|
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575,000
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669,000
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Provision
for income taxes
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(68,000
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)
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(78,000
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)
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Minority
interest in net (profit) loss of subsidiaries
|
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(25,000
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)
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91,000
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Net
income
|
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|
482,000
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682,000
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Preferred
dividends accrued
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(13,000
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)
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(13,000
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)
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Net
income applicable to common stock
|
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$
|
469,000
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$
|
669,000
|
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Net
income per share applicable to common stock:
|
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Basic
net income
|
|
$
|
0.08
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|
$
|
0.12
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Diluted
net income
|
|
$
|
0.08
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|
$
|
0.11
|
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|
|
|
|
|
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Weighted
average shares outstanding:
|
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|
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Basic
|
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5,752,766
|
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5,650,146
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Diluted
|
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|
6,242,486
|
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|
6,092,223
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|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
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Three
Months Ended
|
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March
26,
|
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March
27,
|
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|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
482,000
|
|
$
|
682,000
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
531,000
|
|
|
461,000
|
|
Amortized
deferred rent and lease incentives
|
|
|
(187,000
|
)
|
|
(169,000
|
)
|
Stock
based compensation expense
|
|
|
38,000
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(179,000
|
)
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
-
|
|
|
19,000
|
|
Minority
interest in profit (loss) of subsidiaries
|
|
|
25,000
|
|
|
(91,000
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Inventories
|
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|
24,000
|
|
|
(7,000
|
)
|
Receivables
|
|
|
(255,000
|
)
|
|
(117,000
|
)
|
Reimbursable
costs receivable
|
|
|
(186,000
|
)
|
|
(65,000
|
)
|
Prepaid
expenses and other current assets
|
|
|
53,000
|
|
|
79,000
|
|
Tenant
improvement allowances
|
|
|
-
|
|
|
1,560,000
|
|
Other
assets
|
|
|
-
|
|
|
2,000
|
|
Accounts
payable
|
|
|
(96,000
|
)
|
|
(667,000
|
)
|
Accrued
expenses
|
|
|
(546,000
|
)
|
|
69,000
|
|
Accrued
managed outlet operating expenses
|
|
|
186,000
|
|
|
65,000
|
|
Net
cash provided by (used in) operating activities
|
|
|
(110,000
|
)
|
|
1,821,000
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of furniture, equipment and improvements
|
|
|
(424,000
|
)
|
|
(1,457,000
|
)
|
Restricted
cash
|
|
|
(150,000
|
)
|
|
(160,000
|
)
|
Purchase
of liquor license
|
|
|
-
|
|
|
(17,000
|
)
|
Net
cash used in investing activities
|
|
|
(574,000
|
)
|
|
(1,634,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Capital
contributions from minority interests in LLCs
|
|
|
-
|
|
|
145,000
|
|
Debt
issuance costs
|
|
|
(318,000
|
)
|
|
-
|
|
Proceeds
from line of credit
|
|
|
210,000
|
|
|
-
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
7,000
|
|
|
-
|
|
Payments
on notes payable - related parties
|
|
|
(27,000
|
)
|
|
(34,000
|
)
|
Payments
on long-term debt
|
|
|
(14,000
|
)
|
|
(66,000
|
)
|
Return
of capital and profits to minority shareholder
|
|
|
(88,000
|
)
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(230,000
|
)
|
|
45,000
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(914,000
|
)
|
|
232,000
|
|
Cash
and cash equivalents, beginning of period
|
|
|
3,161,000
|
|
|
1,407,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,247,000
|
|
$
|
1,639,000
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
39,000
|
|
$
|
27,000
|
|
Income
taxes
|
|
$
|
286,000
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
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 our independent registered public accounting firm. The December
25, 2005 balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should be read
in
conjunction with the financial statements and notes included in the Company's
Form 10-K for the year ended December 25, 2005. In the opinion of management,
these interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair presentation 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 31, 2006.
2. |
STOCK-BASED
COMPENSATION
|
We
maintain performance incentive plans under which incentive stock options and
non-qualified stock options may be granted to employees, consultants and
non-employee directors. To date, we have granted both qualified and
non-qualified stock options under these plans. Stock options are granted
at the market price on the date of grant, generally vest at 20% per year, and
generally expire ten years from the date of grant. We issue new shares of
common stock upon exercise of stock options.
Effective
December 26, 2005, the first day of our 2006 fiscal year, we adopted Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment”
(“SFAS 123R”), using the modified prospective transition method, and as a
result, did not retroactively adjust results from prior periods. Under
this transition method, stock-based compensation was recognized for expense
related to the options vesting in the first quarter of 2006 based on the grant
date fair value estimated in accordance with the provisions of SFAS 123R.
We apply the Black-Scholes valuation model in determining the fair value of
share-based payments to employees, non-employee directors and consultants.
The resulting compensation expense is recognized over the requisite service
period, which is generally the option vesting term of five years. Options
issued to non-employee directors are vested 100% at grant date. Prior to fiscal
2006, stock-based compensation was included as a pro forma disclosure in the
Notes to the Consolidated Financial Statements as permitted by SFAS 123.
Compensation
expense is recognized only for those options expected to vest, with forfeitures
estimated based on our historical experience and future expectations.
Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma
expense amounts was recognized as the forfeitures occurred.
As
a result of adopting SFAS 123R, the impact to the Consolidated Statement of
Operations for the quarter ended March 26, 2006 on income before income taxes
and net income was $38,000 and $34,000, respectively, and $0.006 and $0.006
on
basic and diluted earnings per share, respectively.
The
pro
forma table below reflects net income and basic and diluted net income per
share
for the first quarter of fiscal 2005, had we applied the fair value recognition
provisions of SFAS 123:
|
|
March
27, 2005
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
682,000
|
|
Deduct:
stock compensation expense under
fair value method, net of taxes
|
|
|
(40,000
|
)
|
Net
income, pro forma
|
|
$
|
642,000
|
|
Net
income per share, as reported:
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.11
|
|
Net
income per share, pro forma:
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
0.10
|
|
Pro
forma
disclosure for the quarter ended March 26, 2006 is not presented because the
amounts are recognized in the consolidated financial statements.
There
were no options granted in the first quarter of either 2006 or 2005. For all
of
2005 and 2006 we have utilized the Black-Scholes option pricing model for
estimating our stock-based compensation cost.
The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar options, giving
consideration to the contractual terms, vesting schedules and expectations
of
future employee behavior. For fiscal 2006, expected stock price volatility
is based on the historical volatility of our stock. The risk-free interest
rate
is based on the U.S. Treasury yield in effect at the time of grant with an
equivalent remaining term. The Company has
not
paid dividends in the past and does not currently plan to pay any dividends
in
the near future.
Stock
option activity during the quarter ended March 26, 2006 was as follows:
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 25, 2005
|
|
|
713,275
|
|
$
|
2.89
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
4,000
|
|
|
1.66
|
|
|
|
|
|
|
|
Cancelled
|
|
|
5,300
|
|
|
2.495
|
|
|
|
|
|
|
|
Outstanding
at March 26, 2006
|
|
|
703,975
|
|
|
2.90
|
|
|
5.6
|
|
$
|
440,821
|
|
Vested
and expected to vest at March 26, 2006
|
|
|
656,121
|
|
|
2.63
|
|
|
7.7
|
|
$
|
502,188
|
|
Exercisable
at March 26, 2006
|
|
|
436,575
|
|
|
2.85
|
|
|
4.4
|
|
$
|
288,732
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between our closing stock price on March 26,
2006 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders
exercised their options on March 26, 2006. This amount changes based on
the fair market value of our stock. Total intrinsic value of options
exercised for the quarter ended March 26, 2006 was zero. As of March 26,
2006, total unrecognized stock-based compensation expense related to non-vested
stock options was approximately $0.4 million, which is expected to be recognized
over a weighted average period of approximately 3 years. As of March 26,
2006 there were 53,000 shares of common stock available for issuance pursuant
to
future stock option grants.
Additional
information regarding options outstanding as of March 26, 2006 is as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Price
|
|
Number
Outstanding
at
March
26,
2006
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
Outstanding
at
March
26,
2006
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
1.25
|
|
|
1,750
|
|
|
4.2
|
|
$
|
1.25
|
|
|
1,750
|
|
$
|
1.25
|
|
$
1.55
|
|
|
44,800
|
|
|
4.5
|
|
$
|
1.55
|
|
|
44,800
|
|
$
|
1.55
|
|
$
1.65
|
|
|
92,800
|
|
|
5.2
|
|
$
|
1.65
|
|
|
62,200
|
|
$
|
1.65
|
|
$
1.70
|
|
|
35,150
|
|
|
7.2
|
|
$
|
1.70
|
|
|
13,100
|
|
$
|
1.70
|
|
$
2.19
|
|
|
52,650
|
|
|
5.4
|
|
$
|
2.19
|
|
|
39,600
|
|
$
|
2.19
|
|
$
2.23
|
|
|
50,000
|
|
|
8.3
|
|
$
|
2.23
|
|
|
10,000
|
|
$
|
2.23
|
|
$
2.46
|
|
|
12,000
|
|
|
2.2
|
|
$
|
2.46
|
|
|
12,000
|
|
$
|
2.46
|
|
$
2.75
|
|
|
5,000
|
|
|
0.1
|
|
$
|
2.75
|
|
|
5,000
|
|
$
|
2.75
|
|
$
2.86
|
|
|
69,450
|
|
|
6.4
|
|
$
|
2.86
|
|
|
34,250
|
|
$
|
2.86
|
|
$
3.14 - $3.45
|
|
|
168,500
|
|
|
5.1
|
|
$
|
3.22
|
|
|
123,500
|
|
$
|
3.18
|
|
$4.00
to $4.68
|
|
|
147,250
|
|
|
6.7
|
|
$
|
4.19
|
|
|
65,750
|
|
$
|
4.17
|
|
$5.36
to $14.00
|
|
|
17,625
|
|
|
1.0
|
|
$
|
6.40
|
|
|
17,625
|
|
$
|
6.40
|
|
In
January 2006 a $1,010,000 certificate of deposit was established at Union Bank
to act as collateral for the Standby Letter of Credit opened to support our
worker’s compensation insurance policy. Other restricted cash consisted of
$72,000 held in escrow for the Daily Grill at Continental Park in El Segundo,
California and $110,000 that was placed in escrow with our insurance claims
processor in 2004 for worker’s compensation claims.
At
December 25, 2005 restricted cash consisted of a $860,000 certificate of deposit
serving as collateral for our Stand By Letter of Credit, $72,000 held in escrow
for the Daily Grill at Continental Park and $110,000 that was placed in escrow
with our insurance claims processor in 2004 for worker’s compensation claims.
4. |
PREPAID
EXPENSES AND OTHER CURRENT
ASSETS
|
Most
lease agreements contain one or more of the following; tenant improvement
allowances, rent holidays, rent escalation clauses and/or contingent rent
provisions.
Rent
is
recognized on a straight-line basis, including the restaurant build-out period.
This period is normally prior to the commencement of rent payments and is
commonly called the rent holiday period. The build-out period generally begins
when the Company enters the space and begins to make improvements in preparation
for intended use. Tenant improvement allowances are also recognized on a
straight- line basis over the lease term.
Prepaid
expenses and other current assets at March 26, 2006 and December 25, 2005 were
comprised of:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Tenant
improvement allowances receivable
|
|
$
|
273,000
|
|
$
|
-
|
|
Prepaid
expenses, other
|
|
|
348,000
|
|
|
401,000
|
|
Total
prepaid assets and other current assets
|
|
$
|
621,000
|
|
$
|
401,000
|
|
In
March
2006 we signed a new financing agreement with Diamond Creek Investment Partners,
LLC, at which time the previous line was terminated. The Credit Agreement
provides for a revolving term loan (the “Loan”) to the Company of the lesser of
(1) $8.0 million, or (2) 2.25 times the Company’s trailing 12 month EBITDA.
Funds may be borrowed under the Credit Agreement, subject to satisfaction of
all
conditions of funding, in minimum monthly advances of $500,000. Proceeds of
the
Loan may be used to pay expenses of the Loan and for general corporate purposes.
The interest rate on the Loan is, at the option of the Company and subject
to
certain limitations on the use of LIBOR based loans, equivalent to either (1)
prime rate, but not less than 7%, plus an applicable margin, or (2) the London
Interbank Offered Rate, but not less than 4%, plus an applicable margin. The
margin, in each case, varies based upon the Company’s leverage ratio (funded
debt to EBITDA, each as defined) and ranges from 2.75% to 3.50% with respect
to
prime rate loans and 5.50% to 6.25% with respect to LIBOR loans. The current
interest rate is equal to 10.7% and will be adjusted quarterly commencing in
the
fourth quarter of 2006.
The
Credit Agreement provides that the Company will pay all expenses incurred in
connection with the Loan, including expenses incurred by the Lender. By separate
agreement, the Company agreed to pay certain fees associated with the Loan,
including a loan initiation fee of $120,000, an unused line fee of 0.5% of
the
unused portion of the credit facility payable monthly and a loan servicing
fee
of $3,000 per month. In March 2006, we borrowed $210,000 under the line of
credit to pay costs associated with obtaining the financing.
The
Loan
matures, and is payable in full, on March 9, 2011 subject to mandatory
prepayment to the extent, if any, that the outstanding principal balance of
the
Loan exceeds 2.25 times trailing 12 month EBITDA or upon the occurrence of
certain defined extraordinary events. The Company may prepay amounts owing
under
the Credit Agreement subject to payment of a prepayment premium of (1) 3% with
respect to prepayments occurring on or before March 9, 2007, and (2) 1% with
respect to prepayments occurring after March 9, 2007 and on or before March
9,
2008.
The
Company’s obligations under the Credit Agreement are secured by a first lien on
all of the Company’s assets, including all of the capital stock and other equity
interests held by the Company in its subsidiaries, subject to existing liens
on
such assets. The Loan requires the Company to comply with certain ordinary
lending covenants. These include, among others, financial covenants relating
to
maximum debt to EBITDA ratio, minimum EBITDA and maximum capital expenditures.
The Company must also comply with certain information requirements, including
providing periodic financial statements and projections as well as notices
of
defaults, litigation and other matters, maintenance of insurance and compliance
with laws as well as limitations on liens and encumbrances, indebtedness,
dispositions, dividends and retirement of capital stock, consolidations and
mergers, changes in nature of business and other operating, financial and
structural limitations.
Events
of
default in the Credit Agreement include, among others, (a) the failure to pay
when due the obligations owing under the Credit Agreement, (b) the failure
to
perform and not timely remedy certain covenants, (c) certain cross defaults
or
cross accelerations, (d) the occurrence of bankruptcy or insolvency events,
(e)
the failure to make certain payments, or the occurrence of certain events,
relating to retirement plans, (f) certain adverse judgments against the Company
or any of its subsidiaries, (g) certain changes in ownership of the Company’s
stock or the board of directors, or (h) the occurrence of, and failure to
remedy, a Material Adverse Effect (as defined in the Credit Agreement). Upon
the
occurrence of an event of default, the Lender may terminate the loan commitment
and declare the Loan due and payable in full.
On
March
31, 2006, the Company borrowed $1 million under the terms of the Credit
Agreement with Diamond Creek Investment Partners LLC. The borrowed funds were
primarily used to retire $930,132 of collateralized subordinated notes and
manditorily redeemable capital obligations owed to The Michigan Avenue Group
(“MAG”) by the Company’s subsidiary Chicago - The Grill on the Alley LLC
(“Chicago Grill LLC)”, and guaranteed by the Company, with the balance used for
general working capital. The retired obligations related to the initial funding
provided by MAG, as a member/investor in Chicago Grill LLC, with respect to
the
Company’s The Grill on the Alley restaurant in Chicago.
6. |
OTHER
LONG-TERM LIABILITIES
|
In
connection with certain of the Company's leases, the landlord has provided
the
Company with tenant improvement allowances. These lease incentives have been
recorded as long-term liabilities and are being amortized over the life of
the
lease. Additionally, the Company recognizes a liability for deferred rent where
lease payments are lower than rental expense recognized on a straight-line
basis.
Other
Long-Term Liabilities at March 26, 2006 and December 25, 2005 were comprised
of:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Tenant
Improvement Allowances
|
|
$
|
5,283,000
|
|
$
|
5,140,000
|
|
Deferred
Rent
|
|
|
2,201,000
|
|
|
2,258,000
|
|
Total
Other Long-Term Liabilities
|
|
$
|
7,484,000
|
|
$
|
7,398,000
|
|
7. |
RECENTLY
ISSUSED ACCOUNTING
REQUIREMENTS
|
In
November 2005, the FASB issued Staff Position ("FSP") FAS123(R)-3, Transition
Election to Accounting for the Tax Effects of Share-Based Payments Awards.
This
FSP requires an entity to follow either the transition guidance for the
additional-paid-in capital pool as prescribed in SFAS No. 123(R), Share-Based
Payment, or the alternative transition method as described in the FSP. An entity
that adopts SFAS No. 123(R) using the modified prospective application may
make
a one-time election to adopt the transition method described in this FSP. An
entity may take up to one year from the later of its initial adoption of SFAS
No. 123(R) or the effective date of this FSP to evaluate its available
transition alternatives and make its one-time election. This FSP became
effective in November 2005. We continue to evaluate the impact that the adoption
of this FSP could have on our financial statements.
In
October 2005, the FASB posted FASB Staff Position (FSP) 13-1, which requires
that rental costs incurred during and after a construction period for the right
to control the use of a leased asset during and after construction of a lessee
asset to be recognized as rental expense. The provisions of FSP 13-1 shall
be
applied to the first reporting period beginning after December 15, 2005. The
Company’s existing accounting policy for rental costs incurred during and after
the construction period conforms to FSP 13-1. The adoption of FSP 13-1 did
not
have a material impact on the Company’s consolidated financial
statements.
.
8. |
DISTRIBUTION
OF CAPITAL AND PREFERRED
RETURNS
|
The
Company’s San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood,
South Bay Daily Grill and Downtown Daily Grill restaurants are each owned by
limited liability companies (the “LLCs”) in which the Company serves as manager
and owns a controlling interest. Each of the LLCs has minority interest owners,
some of whom have participating rights in the joint venture such as the ability
to approve operating and capital budgets and the borrowing of money. In
connection with the financing of each of the LLCs, the minority members may
have
certain rights to priority distributions of capital until they have received
a
return of their initial investments (“Return of Member Capital”) as well as
rights to receive defined preferred returns on their invested capital
(“Preferred Return”).
The
Universal CityWalk Daily Grill is owned by a partnership (“the CityWalk
Partnership”) for which we serve as manager. Our partner has certain rights to
priority distribution of capital from the CityWalk Partnership until they have
received their initial investments (“Return of Member Capital”).
The
following tables set forth a summary for each of the LLCs and the CityWalk
Partnership of (1) the distributions of capital to the Members and/or the
Company during the quarter ended March 26, 2006, (2) the unreturned balance
of
the capital contributions of the Members and/or the Company at March 26, 2006,
and (3) the accrued but unpaid preferred returns due to the Members and/or
the
Company at March 26, 2006:
|
|
San
Jose
|
|
Chicago
Grill On The Alley
|
|
The
Grill On Hollywood LLC
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Distributions
of profit and note repayments during the quarter ended March 26,
2006:
|
|
$
|
89,000
|
|
$
|
88,000
|
|
$
|
42,000
|
(a)
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial Capital Contributions at March 26, 2006:
|
|
|
-
|
|
|
-
|
|
$
|
874,000
|
|
|
-
|
|
$
|
1,200,000
|
|
$
|
250,000
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%
|
|
8
|
%
|
|
|
|
|
12
|
%
|
|
12
|
%
|
Accrued
but unpaid Preferred Returns at March 26, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(b
|
)
|
|
(b
|
)
|
|
|
South
Bay Daily Grill (Continental Park LLC)
|
|
Universal
Citywalk Daily Grill
|
|
Downtown
Daily Grill (612
Flower Daily Grill, LLC)
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
(d)
|
|
Distributions
of profit during the quarter ended March 26, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial and Additional Capital Contributions at March 26,
2006:
|
|
$
|
1,100,000
|
|
$
|
450,000
|
|
$
|
1,396,106
|
|
$
|
296,106
|
|
$
|
1,375,000
|
|
$
|
275,000
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%(c)
|
|
-
|
|
|
-
|
|
|
9
|
%
|
|
9
|
%
|
Accrued
but unpaid Preferred Returns at March 26, 2006:
|
|
|
(b)
|
|
|
(b)
|
|
|
(b)
|
|
|
-
|
|
$
|
102,103
|
|
$
|
25,029
|
|
(a) |
Distribution
of capital and note repayments as of March 26, 2006 includes $30,000
of
capital and note repayments and $12,000 of interest and preferred
return.
|
(b) |
Due
to the under performance of the restaurant the preferred return is
not
being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation
of the
subsidiary entity. If preferred returns were accrued for The Grill
on
Hollywood the member would have an accrued preferred return of $815,000
and the Company would have an accrued preferred return of $170,000.
If
preferred returns were accrued for the South Bay Daily Grill the
member
would have an accrued preferred return of $377,000 and the Company
would
have an accrued preferred return of $145,000. If preferred returns
were
accrued for the CityWalk Partnership the Member would have an accrued
preferred return of $569,000.
|
(c) |
The Company’s preferred return with respect to the South
Bay Daily Grill is based on unrecovered capital contribution and accrued
but unpaid management fees. |
(d) |
The Company is a non-managing member and a wholly
owned
subsidiary of the Company is the Manager of this
restaurant. |
Pursuant
to SFAS No. 128, “Earnings Per Share,” basic net income per share is computed by
dividing the net income attributable to common shareholders by the
weighted-average number of common shares outstanding during the period.
Diluted
net income per share is computed by dividing the net income attributable
to
common shareholders by the weighted-average number of common and common
equivalent shares outstanding during the period. Common share equivalents
included in the diluted computation represent shares issuable upon assumed
exercise of stock options, warrants and convertible preferred stocks using
the
treasury stock method.
A
reconciliation of earnings available to common stockholders and diluted
earnings
available to common stockholders and the related weighted average shares
for the
quarters ended March 26, 2006 and March 27, 2005 follow:
|
|
2006
|
|
2005
|
|
|
|
Earnings
|
|
Shares
|
|
Earnings
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
482,000
|
|
|
|
|
$
|
682,000
|
|
|
|
|
Less:
preferred stock dividend
|
|
|
(13,000
|
)
|
|
|
|
|
(13,000
|
)
|
|
|
|
Earnings
available for common stockholders
|
|
|
469,000
|
|
|
5,752,776
|
|
|
669,000
|
|
|
5,650,146
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
90,161
|
|
|
-
|
|
|
85,875
|
|
Warrants
|
|
|
-
|
|
|
399,559
|
|
|
-
|
|
|
231,202
|
|
Convertible
Stock
|
|
|
|
|
|
-
|
|
|
|
|
|
125,000
|
|
Dilutive
earnings available to common stockholders
|
|
$
|
469,000
|
|
|
6,242,486
|
|
$
|
669,000
|
|
|
6,092,223
|
|
For
the
three months ended March 26, 2006, 315,375 options, 26,562 warrants and
500
shares of convertible preferred stock were excluded from the calculation
of
diluted earnings per share because they were anti-dilutive. For the three
months
ended March 27, 2005, 338,875 options, 235,703 warrants and 500 shares
of
convertible preferred stock were excluded from the calculation of diluted
earnings per share because they were anti-dilutive.
10. |
LITIGATION
CONTINGENCIES
|
In
June
2004, one of our former hourly restaurant employees filed a class action lawsuit
against us in the Superior Court of California of Orange County. We requested
and were granted a motion to move the suit from Orange County to Los Angeles
County. The lawsuit was then filed in the Superior Court of California of Los
Angeles in December 2004. The plaintiff has alleged violations of California
labor laws with respect to providing meal and rest breaks. The lawsuit sought
unspecified amounts of penalties and other monetary payments on behalf of the
plaintiffs and other purported class members. We believe that all of our
employees were provided with the opportunity to take all required meal and
rest
breaks. The case has been placed in a stay status pending the outcome of a
review by the California Supreme Court of appealed cases of the same nature.
We
intend to vigorously defend our position in all of these matters although the
outcome cannot be ascertained at this time.
A
Class
Action complaint was filed in the Superior Court of the State of California
for
the County of Los Angeles on March 15, 2006. The plaintiff and those
similarly situated (Servers) complain that the company has violated
the labor code by having Servers "Tip Out" Bartenders and Expeditors a
percentage of their tips to these employees who provide no direct table
service. The complaint has labeled this act as "Tip-pooling." The
company has not yet been served with this complaint. There is a hearing
scheduled in June to determine where the case will be heard within the court
system.
On
March
31, 2006, the Company borrowed $1 million under the terms of the Credit
Agreement with Diamond Creek Investment Partners LLC. See Note 5 for complete
discussion of the credit agreement.
On
April
4, 2006 the Company signed a management agreement for a hotel-based Daily Grill
to open at the Westin Memphis Beale Street in Memphis, Tennessee. The restaurant
owner will pay all construction and pre-opening costs. The Company will receive
a management fee with an annual guaranteed minimum fee. The restaurant is
scheduled to open in the spring of 2007.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of
Operations
The
following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this
Form
10-Q. Except for the historical information contained herein, the discussion
in
this Form 10-Q contains certain forward looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward looking statements
wherever they appear in this Form 10-Q. The Company's actual results could
differ materially from those discussed here. For a discussion of certain factors
that could cause actual results to be materially different, refer to the
Company's Annual Report on Form 10-K for the year ended December 25,
2005.
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. We typically analyze
our
operating expenses as a percentage of sales revenues, not total revenues.
|
|
Three
Months Ended
|
|
|
|
March
26,
|
|
March
27,
|
|
|
|
2006
|
|
2005
|
|
|
|
% |
|
% |
|
Revenues:
|
|
|
|
|
|
|
|
Company
restaurant sales
|
|
|
78.0
|
|
|
77.8
|
|
Reimbursed
managed outlet operating expenses
|
|
|
19.8
|
|
|
20.1
|
|
Management
and license fees
|
|
|
2.2
|
|
|
2.1
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
21.6
|
|
|
21.7
|
|
Restaurant
operating expenses
|
|
|
46.3
|
|
|
44.8
|
|
Reimbursed
managed outlet operating expenses
|
|
|
19.8
|
|
|
20.1
|
|
General
and administrative expense
|
|
|
6.4
|
|
|
6.1
|
|
Depreciation
and amortization
|
|
|
2.8
|
|
|
2.7
|
|
Pre-opening
costs
|
|
|
-
|
|
|
0.5
|
|
Total
operating expenses
|
|
|
96.9
|
|
|
95.9
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3.1
|
|
|
4.1
|
|
Interest
expense, net
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Income
before taxes and minority interest
|
|
|
3.0
|
|
|
3.9
|
|
Provision
for income taxes
|
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Minority
interest
|
|
|
(0.1
|
)
|
|
0.5
|
|
Net
income
|
|
|
2.5
|
|
|
3.9
|
|
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.
|
|
|
|
Total
open at
End
of Quarter
|
|
|
|
FY
2006
|
|
FY
2005
|
|
FY
2006
|
|
FY
2005
|
|
Daily
Grill Restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
owned
|
|
|
-
|
|
|
1
|
|
|
12
|
|
|
12
|
|
Managed
and/or licensed
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
8
|
|
Grill
on the Alley restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
owned
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
4
|
|
Other
restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed
and/or licensed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
1
|
|
|
24
|
|
|
24
|
|
|
|
Three
Months Ended
|
|
|
|
March
26, 2006
|
|
March
27, 2005
|
|
|
|
|
|
|
|
Weighted
average weekly sales per company owned
restaurant:
|
|
|
|
|
|
|
|
Daily
Grill
|
|
$
|
65,795
|
|
$
|
61,850
|
|
Grill
on the Alley
|
|
|
92,255
|
|
|
81,714
|
|
|
|
|
|
|
|
|
|
Change
in comparable restaurants (1)
|
|
|
|
|
|
|
|
Daily
Grill
|
|
|
3.9
|
%
|
|
(1.0
|
)%
|
Grill
on the Alley
|
|
|
12.9
|
%
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
Total
sales:
|
|
|
|
|
|
|
|
Daily
Grill
|
|
$
|
10,264,000
|
|
$
|
9,138,000
|
|
Grill
on the Alley
|
|
|
4,798,000
|
|
|
4,249,000
|
|
Total
consolidated sales
|
|
$
|
15,062,000
|
|
$
|
13,387,000
|
|
(1) |
When
computing comparable restaurant sales, restaurants open for at least
12
months are compared from period to
period.
|
We
also
earn management and license fee revenue based on a percentage of gross sales
at
restaurants under management and licensing arrangements. Our management and
license fee revenue typically is earned at a rate of five to eight percent
of
reported sales at these restaurants. In addition to the base fee we also earn
incentive fees based on net income which is reported as management and license
fee revenue. The gross sales of managed and licensed restaurants are not
included in our statements of operations. However, we consider the disclosure
of
these gross sales to be a key indicator of brand strength and important to
understanding how changes in sales at the managed and licensed restaurants
impact our revenue.
Sales
at
non-Company owned Grill Concepts-branded restaurants, categorized as, managed
and licensed restaurants were as follows:
|
|
2006
|
|
2005
|
|
Sales
|
|
|
|
|
|
|
|
Managed
Daily Grills
|
|
$
|
5,299,000
|
|
$
|
4,601,000
|
|
Licensed
Daily Grills
|
|
|
1,697,000
|
|
|
1,809,000
|
|
|
|
$
|
6,996,000
|
|
$
|
6,410,000
|
|
|
|
|
|
|
|
|
|
Management
and license fees
|
|
$
|
420,000
|
|
$
|
356,000
|
|
Percent
of gross sales
|
|
|
6.0
|
%
|
|
5.6
|
%
|
Material
Changes in Results of Operations for the Three Months Ended March 26, 2006
as
Compared to the Three Months Ended March 27, 2005
Revenues.
Total
revenues for the 2006 quarter increased 12.1% to $19.3 million from $17.2
million in the 2005 period. Sales revenues increased 12.5% to $15.1 million
in
2006 from $13.4 million in 2005. Management and license fee revenues increased
18.0% to $420,000 in 2006 from $356,000 in 2005.
Sales
for
Daily Grill restaurants increased by 12.3% from $9.1 million in the 2005 quarter
to $10.3 million in the 2006 period. The increase in sales revenues for the
Daily Grill restaurants from 2005 to 2006 was primarily attributable to the
Santa Monica Daily Grill ($0.7 million) which opened in March 2005 and Downtown
Daily Grill ($0.9 million) which opened in May 2005 and an increase in same
store sales of 3.9% ($0.3 million) for restaurants open for 12 months in both
years, partially off-set by the closure of the La Cienega Daily Grill ($0.7
million) in July 2005. Weighted average weekly sales at the Daily Grill
restaurants increased 6.4% from $61,850 in 2005 to $65,795 in 2006 driven by
new
menu pricing put in place in November 2005, higher average checks at new
restaurants and increased guest counts.
Sales
for
Grill restaurants increased by 12.9% from $4.2 million in the 2005 quarter
to
$4.8 million in 2006. The increase in sales revenues for the Grill restaurants
from 2005 to 2006 was attributable to a 10.5% increase in guest count combined
with a small increase in average check. Weighted average weekly sales at the
Grill restaurants increased 12.9% from $81,714 in 2005 to $92,255 in 2006.
Management
and license fee revenues during the 2006 quarter were attributable to (1) hotel
restaurant management services which accounted for $369,000 of management fees
and (2) licensing fees from the LAX Daily Grill, and Skokie, Illinois Daily
Grill which totaled $51,000. The increase in management fees during 2006 was
attributable to sales increases of 11% to 36% at the Houston Daly Grill, San
Francisco Daily Grill, Long Beach Daily Grill and Burbank Daily
Grill.
Operating
Expenses and Operating Results.
Total
operating expenses, including cost of sales, restaurant operating expenses,
reimbursable costs, general and administrative expense, depreciation and
amortization, and pre-opening costs, increased 13.3% to $18.7 million in the
2006 quarter (representing 96.9% of revenues) from $16.5 million in 2005
(representing 95.9% of revenues).
Cost
of Sales.
While
sales revenues increased by 12.5% ($1.7 million) in the 2006 quarter as compared
to 2005, cost of sales increased by 11.7% ($0.4 million) and decreased as a
percentage of sales from 27.9% in 2005 to 27.7% in 2006. The decrease in cost
of
sales was attributable to improved purchasing and menu
modifications.
Restaurant
Operating Expenses. Restaurant
operating expenses increased 16.1% to $8.9 million in the 2006 quarter from
$7.7
million in 2005. As a percentage of sales, restaurant operating expenses
represented 59.4% in 2006 compared to 57.5% in 2005. The dollar increase in
restaurant operating expenses was primarily attributable to the opening of
Santa
Monica ($352,000) and Downtown ($524,000), increased payroll and related
benefits ($469,000), variable expenses ($204,000) and occupancy costs ($78,000)
at comparable restaurants partially offset by the closure of La Cienega
($489,000). The increase in operating expenses as a percentage of revenues
resulted from a 1.4% increase in payroll and related benefits along with a
0.7%
increase in variable costs as a percentage of revenues.
Reimbursed
Costs. Reimbursed
costs increased 10.1% from $3.5 million in 2005 to $3.8 million in 2006. These
expenses represent the operating costs for which we are the primary obligor
of
the restaurants we do not consolidate. The increase is primarily due to the
increased restaurant operating expenses ($275,000) and cost of sales ($92,000).
General
and Administrative. General
and administrative expenses increased 18.6% to $1.2 million in the 2006 quarter
compared to $1.0 million in 2005. General and administrative expenses
represented 6.4% of revenues in 2006 as compared to 6.1% of revenues in 2005.
The increase in general and administrative expense was attributable to payroll
and related benefits ($71,000), one-time system implementation fees ($72,000),
stock option compensation expense ($38,000) and travel ($22,000).
Depreciation
and Amortization. Depreciation
and amortization expense increased 15.2% for the 2006 quarter representing
2.8%
of revenues in 2006 and 2.7% of revenues in 2005 primarily due to the addition
of the Santa Monica and Downtown Daily Grills.
Pre-opening
Costs.
Pre-opening costs totaled $91,000 in the 2005 period with nothing in 2006.
These
pre-opening costs were attributable to the opening in January 2005 of the Santa
Monica Daily Grill.
Interest
Expense.
Interest
expense, net, totaled $21,000 during the 2006 quarter as compared to $37,000
in
2005. The decrease in interest expense was primarily attributable to reduction
in the MAG loan due to repayment and increased interest income.
Provision
for income taxes.
The
2006
provision for income taxes is comprised of amounts for federal and state taxes
reduced by the income tax benefit resulting from the recognition of deferred
tax
asset that is considered more likely than not to be realized of $0.2 million.
The provision for income taxes differs from the amount of income tax expense
that would result from applying the domestic federal statutory tax rates to
pretax income primarily due to the change in the deferred income tax valuation
allowance, minority interests’ share of net loss of subsidiaries and the impact
of state income taxes.
Minority
Interest.
We
reported a minority interest in the profit of our majority owned subsidiaries
of
$25,000 during the 2006 quarter as compared to a net loss of $91,000 during
the
2005 quarter. The change in minority interest in loss was primarily attributable
to improved operations at the San Jose Grill, the Downtown Daily Grill and
CityWalk Daily Grill and having fully utilized our allocation of minority
interest for the Hollywood Grill.
Net
Income.
We
reported net income of $482,000 in the 2006 quarter as compared to a net income
of $682,000 for 2005.
Material
Changes in Financial Condition, Liquidity and Capital
Resources.
At
March
26, 2006 the Company had negative working capital of $1.1 million and a cash
balance of $2.2 million compared to negative working capital of $1.3 million
and
a cash balance of $3.2 at December 25, 2005.
The
increase in our cash position reflects the following cash flows:
|
|
2006
|
|
2005
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(110,000
|
)
|
$
|
1,821,000
|
|
Net
cash used in investing activities
|
|
|
(574,000
|
)
|
|
(1,634,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(230,000
|
)
|
|
45,000
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(914,000
|
)
|
$
|
232,000
|
|
Included
in cash flows from operating activities were tenant improvement allowances
of
$1.6 million in 2005.
The
positive change in working capital position was principally attributable a
reduction of accrued expenses and an increase in receivables.
Our
need
for capital resources historically has resulted from, and for the foreseeable
future is expected to relate primarily to, the construction and opening of
new
restaurants. Funds necessary to operate restaurants under management agreements
are usually funded by cash generated by the restaurants. Sales from these
outlets are deposited into an agency account belonging to the owner and we
pay
the outlet operating expenses, including our fee, from this agency account.
Historically, we have funded our day-to-day operations through operating cash
flows that have ranged from a $1.8 to $4.6 million over the past three fiscal
years. Growth has been funded through a combination of bank borrowing, loans
from stockholders/officers, the sale of debentures and stock, loans and tenant
allowances from certain of our landlords, and, beginning in 1999, through joint
venture arrangements.
Financing
Facilities.
At March
26, 2006, the Company had $210,000 owing under our new line of credit (see
note
5), $136,000 owing under equipment leasing financing transactions, a loan from
a
member of Chicago - The Grill on the Alley, LLC of $0.8 million, loans from
stockholders-officers of $0.2 million, and loans/advances from a landlord,
the
SBA and others of $0.1 million.
Operating
Leases and Contractual Obligations.
At March
26, 2006, we were obligated under eighteen leases covering the premises in
which
our Daily Grill and Grill Restaurants are located as well as leases on our
executive offices. Such restaurant leases and the executive office lease contain
minimum rent provisions which provide for the payment of minimum aggregate
rental payments of approximately $30.1 million over the life of those leases,
with minimum annual rental payments of $3.6 million in 2006, $7.3 million
between 2007 and 2008, $6.1 million between 2009 and 2010, and $13.1 million
thereafter. There were no material changes in our obligations under operating
leases or other contracts during the quarter ended March 26, 2006 as compared
to
those described in the Company’s Form 10-K for the year ended December 25,
2005.
Commitments
Relating to Managed Restaurants and LLCs.
Under
certain of our operating and management agreements we have an obligation to
potentially make additional cash advances and/or contributions and may not
realize any substantial returns for some time. The agreements and arrangements
under which we may be required to make cash advances or contributions, guarantee
obligations or defer receipt of cash are described in the Company’s Form 10-K
for the year ended December 25, 2005. There were no material developments with
respect to those agreements and arrangements during the quarter ended March
26,
2006.
Detailed
information regarding the initial capital contributions to the LLCs and the
CityWalk Partnership, Preferred Returns for each, management fees payable to
the
Company and principal distribution provisions are included in the Company’s Form
10-K for the year ended December 25, 2005. The following tables set forth a
summary for each of the LLCs and the CityWalk Partnership of (1) the
distributions of capital to the Members and/or the Company during the quarter
ended March 26, 2006, (2) the unreturned balance of the capital contributions
of
the Members and/or the Company at March 26, 2006, and (3) the accrued but unpaid
preferred returns due to the Members and/or the Company at March 26,
2006:
|
|
San
Jose
|
|
Chicago
Grill On The Alley
|
|
The
Grill On Hollywood LLC
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Distributions
of profit and note repayments during the quarter ended March 26,
2006:
|
|
|
89,000
|
|
|
88,000
|
|
$
|
42,000
|
(a)
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial Capital Contributions at March 26, 2006:
|
|
|
-
|
|
|
-
|
|
|
874,000
|
|
|
-
|
|
|
1,200,000
|
|
$
|
250,000
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%
|
|
8
|
%
|
|
|
|
|
12
|
%
|
|
12
|
%
|
Accrued
but unpaid Preferred Returns at March 26, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(b)
|
|
|
(b)
|
|
|
|
South
Bay Daily Grill
(Continental
Park LLC)
|
|
Universal
Citywalk Daily Grill
|
|
Downtown
Daily Grill
(612
Flower Daily Grill, LLC)
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
(d)
|
|
Distributions
of profit during the quarter ended March 26, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial and Additional Capital Contributions at March 26,
2006:
|
|
$
|
1,100,000
|
|
$
|
450,000
|
|
$
|
1,396,106
|
|
$
|
296,106
|
|
$
|
1,375,000
|
|
$
|
275,000
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%(c)
|
|
-
|
|
|
-
|
|
|
9
|
%
|
|
9
|
%
|
Accrued
but unpaid Preferred Returns at March 26, 2006
|
|
|
(b)
|
|
|
(b)
|
|
|
(b)
|
|
|
-
|
|
$
|
102,103
|
|
$
|
25,029
|
|
a) |
Distribution
of capital and note repayments as of March 26, 2006 includes $30,000
of
capital and note repayments and $12,000 of interest and preferred
return.
|
b) |
Due
to the poor performance of the restaurant the preferred return is
not
being accrued. The Company is not liable to pay the preferred return
distributions, such that they represent a non-recourse obligation
of the
subsidiary entity. If preferred returns were accrued for The Grill
on
Hollywood the Member would have an accrued preferred return of $815,000
and the Company would have an accrued preferred return of $170,000.
If
preferred returns were accrued for the South Bay Daily Grill the
Member
would have an accrued preferred return of $377,000 and the Company
would
have a preferred return of $145,000. If preferred returns were accrued
for
the CityWalk Partnership the Member would have an accrued preferred
return
of $569,000.
|
(c) |
The Company’s preferred return with respect to the South
Bay Daily Grill is based on unrecovered capital contribution and accrued
but unpaid management fees. |
(d) |
The
Company is a non-managing member and a wholly owned subsidiary of the
Company is the Manager of this
restaurant. |
Critical
Accounting Policies
The
Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company’s critical
accounting policies is set forth in the Company’s Form 10-K for the year ended
December 25, 2005.
With
the
adoption for stock-based compensation in accordance with the provisions of
SFAS
123R
at
the
beginning of fiscal 2006, we added a new critical accounting policy to the previous disclosure
included in Item 7 Management's Discussion and Analysis
of
Financial Condition and Results of Operations"
of our Annual Report on Form 10-K for the fiscal year ended December
25, 2005,
Stock-Based
Compensation. We
account for stock-based compensation in accordance
with the provisions of SFAS 123R. We use the Black-Scholes option-pricing model which
requires the input of highly subjective assumptions. These assumptions include
estimating the estimated volatility of the Company's common stock price over
the
vesting term and the number options that will ultimately not complete their
vesting requirements ("forfeitures"). Changes in the subjective assumptions
can
materially affect the estimated fair value of stock-based compensation and
consequently, the related amount recognized on the consolidated statements
of
operations. See Note 2 of the Notes to the Consolidated Financial Statements
in
this Form 10-Q for further discussion of stock-based compensation.
There
have been no material changes to the other critical accounting policies previously reported in our Annual Report on Form
10-K for the fiscal year ended December 25, 2005.
Certain
Factors Affecting Future Operating Results
In
addition to the opening of new restaurants during 2006 and the various factors
described in the Company's Annual Report on Form 10-K for the year ended
December 25, 2005, the following developments may impact future operating
results and financial condition.
On
April
4, 2006 the Company signed a management agreement for a hotel-based Daily Grill
to open at the Westin Memphis Beale Street in Memphis, Tennessee. The restaurant
owner will pay all construction and pre-opening costs. The Company will receive
a management fee with an annual guaranteed minimum fee. The restaurant is
scheduled to open in the spring of 2007.
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.
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 our credit line facility. There were $210,000
borrowings outstanding under the Credit Line Facility at March 26, 2006.
Borrowings under the Credit Facility bear interest at the LIBOR rate plus a
margin ranging from 5.5% to 6.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
Item
4. Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding the
required disclosure.
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
An
evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based
on
their evaluation, our certifying officers concluded that these disclosure
controls and procedures are effective in providing reasonable assurance that
the
information required to be disclosed by us in our periodic reports filed with
the Securities and Exchange Commission (“SEC”) is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and
SEC reports.
There
have been no changes in our internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
6. Exhibits
|
31.1
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Section
302 Certification of CEO
|
|
31.2
|
Section
302 Certification of CFO
|
|
32.1
|
Certification
of CEO Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of CFO Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
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.
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|
|
|
GRILL CONCEPTS, INC. |
|
|
|
Dated: May 8, 2006 |
By: |
/s/ Robert
Spivak |
|
Robert
Spivak |
|
President
and
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
By: |
/s/ Philip
Gay |
|
Philip
Gay |
|
Principal
Accounting Officer |