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 June 25, 2006
OR
o
|
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.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-3319172
|
(State
or other jurisdiction
|
|
(IRS
Employer
|
of
incorporation or organization)
|
|
Identification
No.)
|
11661
San Vicente Blvd., Suite 404, Los Angeles, California 90049
(Address
of principal executive offices)(Zip code)
(310)
820-5559
(Registrant's
telephone number, including area code)
_______________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
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 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 o Accelerated
filer o
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As
of
August 3, 2006, 6,388,212 shares of Common Stock of the issuer were
outstanding.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
INDEX
|
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Page
Number
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PART
I - FINANCIAL INFORMATION
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|
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Item
1. Financial Statements
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|
|
|
|
|
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|
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Condensed
Consolidated Balance Sheets -
|
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|
|
|
June
25, 2006 (unaudited) and December 25, 2005
|
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|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations -
|
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|
|
|
For
the three months and six months ended June
|
|
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|
|
25,
2006 and June 26, 2005 (unaudited)
|
|
|
5
|
|
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|
|
|
|
Condensed
Consolidated Statements of Cash Flows -
|
|
|
|
|
For
the six months ended June 25, 2006 and
|
|
|
|
|
June
26, 2005 (unaudited)
|
|
|
6
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
7
|
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition
|
|
|
|
|
and Results of Operations
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|
|
20
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|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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|
34
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|
|
|
|
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|
Item
4. Evaluation of Disclosure Controls and Procedures
|
|
|
34
|
|
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|
|
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|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
|
|
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|
Item
1A. Risk Factors
|
|
|
35
|
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
35
|
|
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
|
35
|
|
|
|
|
|
|
Item
6. Exhibits
|
|
|
36
|
|
|
|
|
|
|
SIGNATURES
|
|
|
37
|
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
(in
thousands, except share data)
|
|
June
25, 2006
|
|
December
25, 2005
|
|
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,648
|
|
$
|
3,161
|
|
Inventories
|
|
|
744
|
|
|
727
|
|
Receivables,
net of reserve ($278 in
|
|
|
|
|
|
|
|
2006
and $238 in 2005)
|
|
|
1,026
|
|
|
784
|
|
Note
receivable - current portion
|
|
|
12
|
|
|
11
|
|
Reimbursable
costs receivable
|
|
|
725
|
|
|
912
|
|
Prepaid
expenses and other current assets
|
|
|
865
|
|
|
401
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,020
|
|
|
5,996
|
|
|
|
|
|
|
|
|
|
Furniture,
equipment, and improvements, net
|
|
|
14,599
|
|
|
13,372
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,192
|
|
|
1,042
|
|
Note
receivable
|
|
|
65
|
|
|
79
|
|
Liquor
licenses
|
|
|
394
|
|
|
426
|
|
Deferred
tax asset
|
|
|
2,763
|
|
|
577
|
|
Other
assets
|
|
|
599
|
|
|
276
|
|
Goodwill,
net
|
|
|
205
|
|
|
205
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
25,837
|
|
$
|
21,973
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Continued)
(in
thousands, except share data)
LIABILITIES,
MINORITY INTEREST AND STOCKHOLDERS' EQUITY
|
|
June
25, 2006
|
|
December
25, 2005
|
|
Current
liabilities:
|
|
|
(unaudited)
|
|
|
|
|
Accounts
payable
|
|
$
|
2,531
|
|
$
|
1,457
|
|
Accrued
expenses
|
|
|
4,172
|
|
|
4,533
|
|
Accrued
managed outlet operating expenses
|
|
|
725
|
|
|
912
|
|
Current
portion of liability for debt extinguishment
|
|
|
50
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
40
|
|
|
48
|
|
Current
portion notes payable - related parties
|
|
|
155
|
|
|
312
|
|
Total
current liabilities
|
|
|
7,673
|
|
|
7,262
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,417
|
|
|
206
|
|
Notes
payable - related parties
|
|
|
-
|
|
|
671
|
|
Liability
for debt extinguishment
|
|
|
100
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
8,039
|
|
|
7,398
|
|
Total
liabilities
|
|
|
17,229
|
|
|
15,537
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,516
|
|
|
1,630
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
Stock, 1,000,000 shares authorized,
|
|
|
|
|
|
|
|
995,935
shares undesignated in 2006 and 2005
|
|
|
-
|
|
|
-
|
|
Series
II, 10% Convertible Preferred Stock, $.001 par
|
|
|
|
|
|
|
|
value;
500 shares, authorized, 500 shares
|
|
|
|
|
|
|
|
issued
and outstanding in 2006 and 2005
|
|
|
-
|
|
|
-
|
|
Common
stock, $.00004 par value; 12,000,000 shares
|
|
|
|
|
|
|
|
authorized
in 2006 and 2005, 6,159,384 shares
|
|
|
|
|
|
|
|
issued
and outstanding in 2006, 5,728,495 shares
|
|
|
|
|
|
|
|
issued
and outstanding in 2005
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
13,980
|
|
|
13,686
|
|
Accumulated
deficit
|
|
|
(6,888
|
)
|
|
(8,880
|
)
|
Total
stockholders' equity
|
|
|
7,092
|
|
|
4,806
|
|
Total
liabilities, minority interest and
|
|
|
|
|
|
|
|
stockholders'
equity
|
|
$
|
25,837
|
|
$
|
21,973
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in
thousands, except share data)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
25, 2006
|
|
June
26, 2005
|
|
June
25, 2006
|
|
June
26, 2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
14,512
|
|
$
|
13,417
|
|
$
|
29,574
|
|
$
|
26,804
|
|
Cost
reimbursements
|
|
|
3,796
|
|
|
3,120
|
|
|
7,614
|
|
|
6,589
|
|
Management
and license fees
|
|
|
418
|
|
|
369
|
|
|
838
|
|
|
725
|
|
Total
revenues
|
|
|
18,726
|
|
|
16,906
|
|
|
38,026
|
|
|
34,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
4,104
|
|
|
3,814
|
|
|
8,278
|
|
|
7,552
|
|
Restaurant
operating
|
|
|
8,639
|
|
|
8,047
|
|
|
17,579
|
|
|
15,748
|
|
Reimbursed
costs
|
|
|
3,796
|
|
|
3,120
|
|
|
7,614
|
|
|
6,589
|
|
General
and administrative
|
|
|
1,621
|
|
|
1,224
|
|
|
2,862
|
|
|
2,270
|
|
Depreciation
and amortization
|
|
|
530
|
|
|
482
|
|
|
1,061
|
|
|
943
|
|
Pre-opening
costs
|
|
|
124
|
|
|
153
|
|
|
124
|
|
|
244
|
|
Total
operating expenses
|
|
|
18,814
|
|
|
16,840
|
|
|
37,518
|
|
|
33,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(88
|
)
|
|
66
|
|
|
508
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(86
|
)
|
|
(43
|
)
|
|
(107
|
)
|
|
(80
|
)
|
Debt
extinguishment costs
|
|
|
(279
|
)
|
|
-
|
|
|
(279
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and minority interest
|
|
|
(453
|
)
|
|
23
|
|
|
122
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
2,043
|
|
|
(131
|
)
|
|
1,975
|
|
|
(209
|
)
|
Minority
interest in net (profit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
of subsidiaries
|
|
|
(80
|
)
|
|
233
|
|
|
(105
|
)
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,510
|
|
|
125
|
|
|
1,992
|
|
|
807
|
|
Preferred
dividends accrued
|
|
|
(12
|
)
|
|
(12
|
)
|
|
(25
|
)
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
$
|
1,498
|
|
$
|
113
|
|
$
|
1,967
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income
|
|
$
|
0.26
|
|
$
|
0.02
|
|
$
|
0.34
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income
|
|
$
|
0.23
|
|
$
|
0.02
|
|
$
|
0.31
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,837,306
|
|
|
5,652,230
|
|
|
5,795,036
|
|
|
5,651,188
|
|
Diluted
|
|
|
6,456,751
|
|
|
6,064,781
|
|
|
6,415,287
|
|
|
6,018,508
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
|
|
Six
Months Ended
|
|
|
|
June
25, 2006
|
|
June
26, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,992
|
|
$
|
807
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,061
|
|
|
943
|
|
Amortized
deferred rent and lease incentives
|
|
|
(318
|
)
|
|
(329
|
)
|
Amortization
of debt issuance costs
|
|
|
35
|
|
|
-
|
|
Deferred
tax asset
|
|
|
(2,186 |
) |
|
- |
|
Stock
based compensation
|
|
|
108
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
40
|
|
|
39
|
|
Loss
on debt extinguishment
|
|
|
219
|
|
|
-
|
|
Gain
on sale of assets
|
|
|
(19
|
)
|
|
-
|
|
Minority
interest in net profit (loss) of subsidiaries
|
|
|
105
|
|
|
(324
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Inventories
|
|
|
(17
|
)
|
|
(55
|
)
|
Receivables
|
|
|
(282
|
)
|
|
(63
|
)
|
Prepaid
expenses and other current assets
|
|
|
(158
|
)
|
|
(75
|
)
|
Tenant
improvement allowances
|
|
|
653
|
|
|
1,772
|
|
Other
assets
|
|
|
51
|
|
|
(4
|
)
|
Accounts
payable
|
|
|
1,074
|
|
|
(329
|
)
|
Accrued
expenses
|
|
|
(423
|
)
|
|
419
|
|
Net
cash provided by operating activities
|
|
|
1,935
|
|
|
2,801
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of liquor license
|
|
|
55
|
|
|
-
|
|
Collections
on note receivable
|
|
|
15
|
|
|
15
|
|
Restricted
cash
|
|
|
(150
|
)
|
|
(160
|
)
|
Purchase
of liquor license
|
|
|
-
|
|
|
(61
|
)
|
Purchase
of furniture, equipment and improvements
|
|
|
(2,283
|
)
|
|
(3,248
|
)
|
Net
cash used in investing activities
|
|
|
(2,363
|
)
|
|
(3,454
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Capital
contributions from minority interests in LLCs
|
|
|
25
|
|
|
976
|
|
Debt
issuance costs
|
|
|
(413
|
)
|
|
-
|
|
Return
of capital and profits to minority shareholder
|
|
|
(184
|
)
|
|
(143
|
)
|
Proceeds
from line of credit and equipment financing
|
|
|
1,233
|
|
|
118
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
186
|
|
|
24
|
|
Payments
on notes payable - to member of Chicago Grill
|
|
|
(902
|
)
|
|
(68
|
)
|
Payments
on long-term debt
|
|
|
(30
|
)
|
|
(124
|
)
|
Net
cash provided by financing activities
|
|
|
(85
|
)
|
|
783
|
|
Net
increase (decrease) in cash
|
|
|
(513
|
)
|
|
130
|
|
Cash,
beginning of period
|
|
|
3,161
|
|
|
1,407
|
|
Cash,
end of period
|
|
$
|
2,648
|
|
$
|
1,537
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
113
|
|
$
|
81
|
|
Income
taxes
|
|
|
709
|
|
|
129
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
GRILL
CONCEPTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM
FINANCIAL PRESENTATION
The
interim condensed consolidated financial statements of Grill Concepts, Inc.
(the
“Company”) 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.
Certain
reclassifications have been made to the prior period financials to make them
comparable.
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.
In
March
2006, the Company’s board of directors adopted the Grill Concepts, Inc. 2006
Equity Incentive Plan (the “2006 Plan”). The shareholders approved the 2006 Plan
in June 2006. Under the 2006 Plan, 500,000 shares are reserved for issuance
pursuant to the exercise of stock options and awards of restricted stock, stock
appreciation rights and other similar equity based award grants. At June 25,
2006, there were 346,250 shares available for grant under the 2006 Plan and
an
additional 35,825 shares available for grant under predecessor
plans.
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 expenses related
to the options vesting in the first six months 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 Condensed Consolidated Statement
of Operations for the six months ended June 25, 2006 on income before income
taxes and net income was $108,000 and $91,000, respectively, and $0.02 and
$0.01
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 three and six month periods ended June 26, 2005, had we applied the
fair
value recognition provisions of SFAS 123:
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
(in
thousands, except per share amounts)
|
|
June
26, 2005
|
|
June
26,2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
125
|
|
$
|
807
|
|
Deduct:
stock compensation expense under fair value method, net of
taxes
|
|
|
(36
|
)
|
|
(76
|
)
|
Net
income, pro forma
|
|
$
|
89
|
|
$
|
731
|
|
Net
income per share, as reported:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.13
|
|
Net
income per share, pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.12
|
|
Pro
forma
disclosure for the three and six months ended June 25, 2006 is not presented
because the amounts are recognized in the consolidated financial statements.
There
were 153,750 options granted in the second quarter of 2006 and none granted
in
the second quarter of 2005. 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 weighted average fair value cost for options granted in 2006 was
$1.83
per share.
The
Company has adopted the simplified method for determining the expected term
of
the options. 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 six months ended June 25, 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
|
|
|
153,750
|
|
|
3.17
|
|
|
|
|
|
|
|
Exercised
|
|
|
(17,400
|
)
|
|
2.06
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,700
|
)
|
|
2.549
|
|
|
|
|
|
|
|
Outstanding
at June 25, 2006
|
|
|
842,925
|
|
|
2.96
|
|
|
6.1
|
|
$
|
386,906
|
|
Vested
and expected to vest at June 25, 2006
|
|
|
769,277
|
|
|
2.71
|
|
|
6.2
|
|
$
|
458,586
|
|
Exercisable
at June 25, 2006
|
|
|
480,645
|
|
|
2.83
|
|
|
4.4
|
|
$
|
284,291
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between our closing stock price on June 25,
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 June 25, 2006. This amount changes based on the fair market
value of our stock. Total intrinsic value of options exercised for the six
months ended June 25, 2006 was $16,110. As of June 25, 2006, total unrecognized
stock-based compensation expense related to non-vested stock options was
$543,619, which is expected to be recognized over a weighted average period
of
approximately 3 years. As of June 25, 2006 there were 382,075 shares of common
stock available for issuance pursuant to future stock option grants.
Additional
information regarding options outstanding as of June 25, 2006 is as follows:
|
|
Options
Outstanding .
|
|
Options
Exercisable
|
|
Range
of
Exercise
Price
|
|
Number
Outstanding
at
June
25,
2006
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
Outstanding
at
June
25,
2006
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
1.25
|
|
|
1,750
|
|
|
4.0
|
|
$
|
1.25
|
|
|
1,750
|
|
$
|
1.25
|
|
$
1.55
|
|
|
41,000
|
|
|
4.2
|
|
$
|
1.55
|
|
|
41,000
|
|
$
|
1.55
|
|
$
1.65
|
|
|
91,500
|
|
|
5.0
|
|
$
|
1.65
|
|
|
74,600
|
|
$
|
1.65
|
|
$
1.70
|
|
|
34,750
|
|
|
6.9
|
|
$
|
1.70
|
|
|
20,050
|
|
$
|
1.70
|
|
$
2.19
|
|
|
49,050
|
|
|
5.2
|
|
$
|
2.19
|
|
|
38,520
|
|
$
|
2.19
|
|
$
2.23
|
|
|
50,000
|
|
|
8.1
|
|
$
|
2.23
|
|
|
10,000
|
|
$
|
2.23
|
|
$
2.46
|
|
|
19,000
|
|
|
1.3
|
|
$
|
2.46
|
|
|
19,000
|
|
$
|
2.46
|
|
$
2.86
|
|
|
69,250
|
|
|
6.2
|
|
$
|
2.86
|
|
|
42,850
|
|
$
|
2.86
|
|
$
3.14
|
|
|
25,000
|
|
|
2.8
|
|
$
|
3.14
|
|
|
10,000
|
|
$
|
3.14
|
|
$
3.16
|
|
|
203,750
|
|
|
6.9
|
|
$
|
3.16
|
|
|
121,000
|
|
$
|
3.16
|
|
$
3.19
|
|
|
50,000
|
|
|
9.7
|
|
$
|
3.19
|
|
|
-
|
|
$
|
3.19
|
|
$
3.30
|
|
|
18,500
|
|
|
0.0
|
|
$
|
3.30
|
|
|
18,500
|
|
$
|
3.30
|
|
$
3.45
|
|
|
25,000
|
|
|
9.4
|
|
$
|
3.45
|
|
|
-
|
|
$
|
3.45
|
|
$
4.00 to $ 4.68
|
|
|
146,750
|
|
|
6.5
|
|
$
|
4.20
|
|
|
65,750
|
|
$
|
4.17
|
|
$
5.36 to $14.00
|
|
|
17,625
|
|
|
0.7
|
|
$
|
6.40
|
|
|
17,625
|
|
$
|
6.40
|
|
3. 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. The Company expenses rent on a straight-line basis during
the
build-out period. Tenant improvement allowances are also recognized on a
straight-line basis beginning at the same time as the commencement of the
straight-line rent expense.
Prepaid
expenses and other current assets at June 25, 2006 and December 25, 2005 were
comprised of:
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Lease
incentives receivable
|
|
$
|
306
|
|
$
|
-
|
|
Prepaid
expenses, other
|
|
|
559
|
|
|
401
|
|
Total
prepaid expenses and other current assets
|
|
|
865
|
|
|
401
|
|
|
|
|
|
|
|
|
|
4. RESTRICTED
CASH
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
workers 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 workers 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 workers compensation claims.
5. INCOME
TAXES
During
the quarter ended June 25, 2006, the Company determined, based on an analysis
of
its taxable income over the preceding three years and the projected taxable
income for the next three years, that it is more likely than not that the
Company will recover the majority of its existing net deferred tax asset.
Accordingly, during the period, most of the previously recorded valuation
allowance with respect to the Company’s deferred tax asset was eliminated. As a
result of the elimination of the valuation allowance, the Company realized
a net
tax benefit of $2.043 million during the quarter ended June 25, 2006 and the
Company’s balance sheet reflected a deferred tax asset of $2.763 million at June
25, 2006.
As
of
June 25, 2005, the amount of the valuation allowance is $1,322,000 , which
represents a decrease of $2,026,000 from December 25, 2005, and consists of
$722,000 for general business credits and $602,000 for net operating loss
carryforwards (“NOLs”). These differences have been allowed for due to the
limitations on usage. The NOLs have not been used to reduce current taxable
income due to the Company not completing its analysis regarding limitations
on
usage. The Company intends to complete its analysis as to the portion of NOLs
that can be utilized. The Company reviews all of the available evidence, both
positive and negative, in evaluating adequacy of the valuation allowance each
quarter.
6. LIABILITY
FOR DEBT EXTINGUISHMENT
In
March
2006 the Company retired the collateralized subordinated notes and mandatorily
redeemable capital obligations owed to the Michigan Avenue Group (“MAG”) a
member of Chicago Grill on the Alley, LLC. As a result of the prepayment MAG
required a $200,000 penalty for earlier extinguishment of the obligations.
The
penalty is payable in four annual installments of $50,000, the first which
was
paid upon repayment of the obligations. The Company guaranteed the payment
of
the debt extinguishment penalty. The balance due to MAG as of June 25, 2006
is
$150,000, which is included in current and long-term liabilities in the
condensed consolidated balance sheet.
The
penalty on early extinguishment will be deemed to be a cash distribution of
the
LLC to MAG if the lease for the restaurant location of the Chicago Grill on
the
Alley is renewed. After renewal, the Company will receive the next $200,000
of
cash distributions from the Chicago Grill on the Alley, LLC, prior to any
distributions being made to MAG. The Company will record this cash distribution
when received.
7. LONG-TERM
DEBT
In
March
2006 we signed a new financing agreement with Diamond Creek Investment Partners,
LLC, (the “Lender”) at which time the previous line was terminated. The Credit
Agreement provides for a revolving term loan (the “Loan” or “Credit Agreement”)
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 monthly
advances in minimum increments 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 London Interbank Offered Rate (“LIBOR”) based loans, equivalent to
either (1) prime rate, but not less than 7%, plus an applicable margin, or
(2)
the LIBOR, 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.
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 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.
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.
8. 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 records deferred rent where lease payments
are
lower than rental expense recognized on a straight-line basis.
Other
Long-Term Liabilities at June 25, 2006 and December 25, 2005 were comprised
of:
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Lease
Incentives
|
|
$
|
5,828
|
|
$
|
5,140
|
|
Deferred
Rent
|
|
|
2,211
|
|
|
2,258
|
|
Total
Other Long-Term Liabilities
|
|
$
|
8,039
|
|
$
|
7,398
|
|
9. RECENT
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation
("FIN") No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation
of FASB Statement No. 109." This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return,
and
provides
guidance on recognition, classification, interest and penalties,
accounting in
interim periods, disclosure, and transition. This Interpretation will be
effective for the Company
on January 1, 2007, with the cumulative effect of the change in accounting
principle
recorded as an adjustment to opening retained earnings. The Company is
currently
assessing the impact of the adoption of the Interpretation on its
financial statements.
In
November 2005, the FASB issued FASB Staff Position (“FSP”) FAS123(R)-3,
Transition Election to Accounting for the Tax Effects of Share-Based Payment
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. The Company has until December
31,
2006 to make its election. 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.
10. RELATED
PARTY TRANSACTIONS
Terms
of the Michigan Avenue Group Obligations Extinguishment
In
March
2006 the Company retired the collateralized subordinated notes and mandatorily
redeemable capital obligations owed to the Michigan Avenue Group (“MAG”) a
member of Chicago Grill on the Alley, LLC. As a result of the prepayment MAG
required a $200,000 penalty for earlier extinguishment of the obligations.
The
penalty is payable in four annual installments of $50,000, the first which
was
paid upon repayment of the obligations. The Company guaranteed the payment
of
the debt extinguishment penalty. The balance due to MAG as of June 25, 2006
is
$150,000, which is included in current and long-term liabilities in the
consolidated condensed balance sheet.
The
penalty on early extinguishment will be deemed to be a cash distribution of
the
LLC to MAG if the lease for the restaurant location of the Chicago Grill on
the
Alley is renewed. After renewal, the Company will receive the next $200,000
of
cash distributions from the Chicago Grill on the Alley, LLC, prior to any
distributions being made to MAG. The Company will record this cash distribution
when received.
Amendment
to Starwood Development Agreement
On
June
21, 2006, the Company entered into a First Amendment to the Development
Agreement (the “First DA Amendment”) with Starwood Hotels and Resorts Worldwide,
Inc. (“Starwood”). The First DA Amendment amends the Company’s July 27, 2001
Development Agreement with Starwood to (1) eliminate the Company’s obligation to
issue warrants to Starwood following the opening of ten, fifteen and twenty
restaurants under the terms of the Development Agreement and (2) modify the
exercise price of warrants issued following the opening of five restaurants
under the terms of the Development Agreement.
Under
the
terms of the First DA Amendment, if a fifth restaurant is opened under the
terms
of the Development Agreement before April 1, 2008, the Company will issue to
Starwood warrants to purchase a number of shares of common stock equal to 4%
of
the then outstanding shares. If the fifth restaurant is opened after April
1,
2008, the Company will issue to Starwood warrants to purchase a number of shares
of common stock equal to 4% of the shares outstanding at December 25, 2005.
The
warrants will have an exercise price equal to (1) if the fair market value
of
the common stock as of the date of issuance of the warrants (the “Threshold Date
Value”) is greater than the fair market value of the common stock as of the date
of the original Development Agreement (the “Closing Date Value”), the greater of
(a) 75% of the Threshold Date Value, or (b) the Closing Date Value, or (2)
if
the Threshold Date Value of the common stock is less than the Closing Date
Value, the Threshold Date Value.
Amendment
to Starwood Stockholders’ Agreement
On
June
21, 2006, the Company entered into a First Amendment to Stockholders’ Agreement
(the “First SA Amendment”) with Starwood. The First SA Amendment amends the July
27, 2001 Stockholders’ Agreement between the Company, Starwood and certain
stockholders of the Company to (1) eliminate the Company’s obligation to cause
at least two nominees of Starwood to be elected to the Company’s board of
directors if ten or more restaurants are operated under the Development
Agreement, and (2) modify certain provisions limiting the size of the Company’s
board of directors.
Under
the
terms of the First SA Amendment, so long as Starwood continues to hold at least
333,334 shares of Company common stock, the Company shall take all actions
reasonably necessary to assure that at least one nominee of Starwood is elected
to the board of directors and to limit the size of the board of directors to
no
more than nine persons.
11. DISTRIBUTION
OF CAPITAL AND PREFERRED RETURNS
The
Company’s San Jose Grill, Chicago Grill on the Alley, The 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
(“members”) 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 investment.
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 six months ended June 25, 2006, (2) the unreturned balance
of
the capital contributions of the Members and/or the Company at June 25, 2006,
and (3) the accrued but unpaid preferred returns due to the Members and/or
the
Company at June 25, 2006:
(in
thousands)
|
|
San
Jose Grill, LLC
|
|
Chicago
Grill On The Alley, LLC
|
|
The
Grill On Hollywood, LLC
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Distributions
of profit and note repayments during the quarter ended June 25,
2006:
|
|
$
|
184
|
|
$
|
184
|
|
$
|
972
(a
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial Capital Contributions at June 25, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
1,200
|
|
$
|
250
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%
|
|
8
|
%
|
|
-
|
|
|
12
|
%
|
|
12
|
%
|
Accrued
but unpaid Preferred Returns at June 25, 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 June 25, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial and Additional Capital Contributions at June 25,
2006:
|
|
$
|
1,100
|
|
$
|
450
|
|
$
|
1,396
|
|
$
|
296
|
|
$
|
1,400
|
|
$
|
313
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10%
(c
|
)
|
|
-
|
|
|
-
|
|
|
9
|
%
|
|
9
|
%
|
Accrued
but unpaid Preferred Returns at June 25, 2006:
|
|
|
(b
|
)
|
|
(b
|
)
|
|
(b
|
)
|
|
-
|
|
$
|
91
|
|
$
|
23
|
|
(a) |
Distribution
of capital and note repayments as of June 25, 2006 includes $902,000
of
retirement of collateralized subordinated notes and mandatorily redeemable
capital obligations and $70,000 of interest and preferred return.
|
(b) |
Due
to the under performance of the restaurants 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 $866,000
and the Company would have an accrued preferred return of $180,000.
If
preferred returns were accrued for the South Bay Daily Grill the
member
would have an accrued preferred return of $427,000 and the Company
would
have an accrued preferred return of $167,000. If
preferred returns were accrued for the CityWalk Partnership the Member
would have an accrued preferred return of $611,000.
|
(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 |
12. PER
SHARE DATA
Pursuant
to SFAS No. 128, “Earnings Per Share,” basic net income per share is computed by
dividing the net income attributable to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income attributable to
common shareholders by the weighted-average number of common and common
equivalent shares outstanding during the period. Common share equivalents
included in the diluted computation represent shares issuable upon assumed
exercise of stock options, warrants and convertible preferred stocks using
the
treasury stock method.
A
reconciliation of earnings available to common stockholders and diluted earnings
available to common stockholders and the related weighted average shares for
the
six and three-month periods ended June 25, 2006 and June 26, 2005
follow:
Six
months
|
|
2006
|
|
2005
|
|
(in
thousands, except share data)
|
|
Earnings
|
|
Shares
|
|
Earnings
|
|
Shares
|
|
Net
income
|
|
$
|
1,992
|
|
|
|
|
$
|
807
|
|
|
|
|
Less:
preferred stock dividend
|
|
|
(25
|
)
|
|
|
|
|
(25
|
)
|
|
|
|
Earnings
available for common stockholders
|
|
|
1,967
|
|
|
5,795,036
|
|
|
782
|
|
|
5,651,188
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
96,264
|
|
|
-
|
|
|
93,196
|
|
Warrants
|
|
|
-
|
|
|
398,988
|
|
|
-
|
|
|
274,124
|
|
Convertible
Preferred Stock
|
|
|
-
|
|
|
125,000
|
|
|
-
|
|
|
-
|
|
Dilutive
earnings available to common stockholders
|
|
$
|
1,967
|
|
|
6,415,287
|
|
$
|
782
|
|
|
6,018,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the
six months ended June 25, 2006, 214,250 options and 26,562 warrants were
excluded from the calculation because they were anti-dilutive. For the six
months ended June 26, 2005, 303,375 options, 58,620 warrants and 500 shares
of
convertible preferred stock were excluded from the calculation because they
were
anti-dilutive.
Three
months
|
|
2006
|
|
2005
|
|
(in
thousands, except share data)
|
|
Earnings
|
|
Shares
|
|
Earnings
|
|
Shares
|
|
Net
income
|
|
$
|
1,510
|
|
|
|
|
$
|
125
|
|
|
|
|
Less:
preferred stock dividend
|
|
|
(12
|
)
|
|
|
|
|
(12
|
)
|
|
|
|
Earnings
available for common stockholders
|
|
|
1,498
|
|
|
5,837,306
|
|
|
113
|
|
|
5,652,230
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
102,133
|
|
|
-
|
|
|
99,561
|
|
Warrants
|
|
|
-
|
|
|
392,312
|
|
|
-
|
|
|
312,990
|
|
Convertible
preferred stock
|
|
|
-
|
|
|
125,000
|
|
|
-
|
|
|
-
|
|
Dilutive
earnings available to common stockholders
|
|
$
|
1,498
|
|
|
6,456,751
|
|
$
|
113
|
|
|
6,064,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the
three months ended June 25, 2006, 195,750 options and 26,562 warrants were
excluded from the calculation because they were anti-dilutive. For the three
months ended June 26, 2005, 303,375 options, 58,620 warrants and 500 shares
of
convertible preferred stock were excluded from the calculation because they
were
anti-dilutive.
13. ISSUANCES
OF COMMON STOCK
During
the six months ended June 25, 2006, the Company issued 413,489 shares of common
stock pursuant to the exercise, by 8 holders, of 1,044,336 warrants originally
issued in a 2001 private placement. The Company received $150,003 from the
exercise of 66,668 warrants at $2.25 per share. The remaining 977,668 shares
were issued pursuant to the cashless exercise of 666,667 warrants at $2.00
and
311,001 warrants at $2.25 per share.
During
the six months ended June 25, 2006, the Company issued 52,500 shares of common
stock pursuant to the exercise of stock options for aggregate consideration
of
$35,812.
14. 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
that
is expected to happen in the first half of 2007. 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 filed
Demurrers to the first amended complaint and a Motion to Strike All Causes
of
Action. The next hearing is scheduled for August 25, 2006.
15. SUBSEQUENT
EVENTS
Seattle
Management Agreement
On
June
27, 2006 the Company signed a management agreement to operate a hotel-based
full
service Daily Grill restaurant in the Sheraton Hotel in Seattle, Washington.
The
agreement has an initial term of ten years with two five-year options. The
Company may contribute approximately $450,000 of the initial remodel costs
if
total construction costs exceed $1,500,000. The Company will earn a preferred
return of 9% per annum on the contribution in addition to management and
incentive fees. The restaurant is scheduled to open in the spring of
2007.
Issuance
of Common Stock
Subsequent
to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
to
the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
private placement. The Company received $462,746 from the exercise of 205,665
warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
to
the cashless exercise of warrants at $2.25 per share.
Management
Changes
In
June
2006, following the Company’s annual stockholders meeting, Robert Spivak retired
as the Company’s President and Chief Executive Officer and Philip Gay, the
Company’s Chief Financial Officer, assumed the positions of President and Chief
Executive Officer. In July 2006, Wayne Lipschitz was appointed as Chief
Financial Officer.
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.
Current
Year Developments
Restaurant
Openings, Leasing and Management.
The
Company opened no new restaurants during the six months ended June 25, 2006.
At
June 25, 2006, the Company continued the build-out of a Grill on the Alley
restaurant in Dallas, Texas that opened in July 2006.
In
April
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.
In
June
2006, the Company signed a management agreement for a hotel-based Daily Grill
to
open at the Sheraton Seattle, in Seattle, Washington. The restaurant owner
will
pay substantially all construction and pre-opening costs, other than
approximately $450,000 of remodeling costs to be contributed by the Company
if
the total construction costs exceed $1,500,000 which contribution will be
entitled to a 9% preferred return to the Company. The Company will receive
management and incentive fees. The restaurant is scheduled to open in the spring
of 2007.
Credit
Facilities.
During
the six months ended June 25, 2006, the Company entered into a 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
monthly advances in minimum increments 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.
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 $874,192 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)”, $5,940 of interest and $50,000 for the first annual
penalty payment 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.
Management
Changes.
In June
2006, following the Company’s annual stockholders meeting, Robert Spivak retired
as the Company’s President and Chief Executive Officer and Philip Gay, the
Company’s Chief Financial Officer, assumed the positions of President and Chief
Executive Officer. In July 2006, Wayne Lipschitz was appointed as Chief
Financial Officer.
Income
Taxes. During
the quarter ended June 25, 2006, the Company determined, based on an analysis
of
its taxable income over the preceding three years and the projected taxable
income for the next three years, that it is more likely than not that the
Company will recover the majority of its existing net deferred tax asset.
Accordingly, during the period, most of the previously recorded valuation
allowance with respect to the Company’s deferred tax asset was eliminated. As a
result of the elimination of the valuation allowance, the Company realized
a net
tax benefit of $2,043,000 during the quarter ended June 25, 2006 and the
Company’s balance sheet reflected a deferred tax asset of $2,763,000 at June 25,
2006.
The
Company still has a valuation allowance of $1,322,000 consisting of $722,000
for
general business credits and $602,000 for net operating losses (“NOLs”). There
is still some analysis to be done as to whether the Company can utilize all of
the NOLs and the general business credits as both of these have limitations.
The
Company will continue to review the valuation allowance each quarter to see
if
any further adjustments are necessary.
Stock
Based Compensation Expense.
Effective December 26, 2005, the first day of the Company’s 2006 fiscal year,
the Company 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 expenses related
to the options vesting in the first six months 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. 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.
As
a
result of the adoption of SFAS 123R, during the six months ended June 25, 2006,
the Company recorded compensation expense relating to stock option grants of
$108,000. The Company recorded no compensation expense during the fiscal 2005
period relating to stock option grants. Had the Company reported stock based
compensation expense under SFAS 123R during 2005, the Company’s pro forma
compensation expense associated with options grants during the six months ended
June 26, 2005 would have been $76,000.
There
were no modifications made to outstanding share options prior to the adoption
of
SFAS 123R. There have been no changes made to the quantity or type of incentive
awards granted since the adoption of SFAS 123R. Terms for incentive compensation
awards have remained the same in 2006 as they were in 2005.
As
of
June 25, 2006, total unrecognized stock-based compensation expense related
to
non-vested stock options was $543,619, which is expected to be recognized over
a
weighted average period of approximately 3 years.
In
March
2006, the Company’s board of directors adopted the Grill Concepts, Inc. 2006
Equity Incentive Plan (the “2006 Plan”). The shareholders approved the 2006 Plan
in June 2006. Under the 2006 Plan, 500,000 shares are reserved for issuance
pursuant to the exercise of stock options and awards of restricted stock, stock
appreciation rights and other similar equity based award grants. There were
153,750 and zero options granted in the first two quarters of 2006 and 2005
respectively. At June 25, 2006, there were 346,250 shares available for grant
under the 2006 Plan and an additional 35,825 shares available for grant under
predecessor plans.
Issuances
of Common Stock.
During
the six months ended June 25, 2006, the Company issued 413,489 shares of
restricted common stock pursuant to the exercise, by 8 holders, of 1,044,336
warrants originally issued in a 2001 private placement. The Company received
$150,003 from the exercise of 66,668 warrants at $2.25 per share. The remaining
346,821 shares were issued pursuant to the cashless exercise of 666,667 warrants
at $2.00 and 311,001 warrants at $2.25 per share.
During
the six months ended June 25, 2006, the Company issued 52,500 shares of common
stock pursuant to the exercise of stock options for aggregate consideration
of
$35,812.
Subsequent
to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
to
the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
private placement. The Company received $462,746 from the exercise of 205,665
warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
to
the cashless exercise of warrants at $2.25 per share.
Amendment
of Starwood Agreements.
On June
21, 2006, the Company entered into a First Amendment to the Development
Agreement (the “First DA Amendment”) with Starwood Hotels and Resorts Worldwide,
Inc. (“Starwood”). The First DA Amendment amends the Company’s July 27, 2001
Development Agreement with Starwood to (1) eliminate the Company’s obligation to
issue warrants to Starwood following the opening of ten, fifteen and twenty
restaurants under the terms of the Development and (2) modify the exercise
price
of warrants issued following the opening of five restaurants under the terms
of
the Development Agreement.
Under
the
terms of the First DA Amendment, if a fifth restaurant is opened under the
terms
of the Development Agreement before April 1, 2008, the Company will issue to
Starwood warrants to purchase a number of shares of common stock equal to 4%
of
the then outstanding shares. If the fifth restaurant is opened after April
1,
2008, the Company will issue to Starwood warrants to purchase a number of shares
of common stock equal to 4% of the shares outstanding at December 25, 2005.
The
warrants will have an exercise price equal to (1) if the fair market value
of
the common stock as of the date of issuance of the warrants (the “Threshold Date
Value”) is greater than the fair market value of the common stock as of the date
of the original Development Agreement (the “Closing Date Value”), the greater of
(a) 75% of the Threshold Date Value, or (b) the Closing Date Value, or (2)
if
the Threshold Date Value of the common stock is less than the Closing Date
Value, the Threshold Date Value.
On
June
21, 2006, the Company entered into a First Amendment to Stockholders’ Agreement
(the “First SA Amendment”) with Starwood. The First SA Amendment amends the July
27, 2001 Stockholders’ Agreement between the Company, Starwood and certain
stockholders of the Company to (1) eliminate the Company’s obligation to cause
at least two nominees of Starwood to be elected to the Company’s board of
directors if ten or more restaurants are operated under the Development
Agreement, and (2) modify certain provisions limiting the size of the Company’s
board of directors.
Under
the
terms of the First SA Amendment, so long as Starwood continues to hold at least
333,334 shares of Company common stock, the Company shall take all actions
reasonably necessary to assure that at least one nominee of Starwood is elected
to the board of directors and to limit the size of the board of directors to
no
more than nine persons.
Results
of Operations
The
following table sets forth, for the periods indicated, information derived
from
the Company's condensed consolidated statements of operations expressed as
a
percentage of total revenues.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
25, 2006
|
|
June
26,2005
|
|
June
25, 2006
|
|
June
26, 2005
|
|
Revenues:
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
Sales
|
|
|
77.5
|
|
|
79.4
|
|
|
77.8
|
|
|
78.6
|
|
Cost
reimbursements
|
|
|
20.3
|
|
|
18.5
|
|
|
20.0
|
|
|
19.3
|
|
Management
and license fees
|
|
|
2.2
|
|
|
2.2
|
|
|
2.2
|
|
|
2.1
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
21.9
|
|
|
22.6
|
|
|
21.8
|
|
|
22.1
|
|
Restaurant
operating
|
|
|
46.1
|
|
|
47.6
|
|
|
46.3
|
|
|
46.2
|
|
Reimbursed
costs
|
|
|
20.3
|
|
|
18.5
|
|
|
20.0
|
|
|
19.3
|
|
General
and administrative
|
|
|
8.7
|
|
|
7.2
|
|
|
7.5
|
|
|
6.7
|
|
Depreciation
and amortization
|
|
|
2.8
|
|
|
2.9
|
|
|
2.8
|
|
|
2.8
|
|
Pre-opening
costs
|
|
|
0.7
|
|
|
0.9
|
|
|
0.3
|
|
|
0.7
|
|
Total
operating expenses
|
|
|
100.5
|
|
|
99.6
|
|
|
98.7
|
|
|
97.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(0.5
|
)
|
|
0.4
|
|
|
1.3
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.2 |
) |
Extinguishment
of debt
|
|
|
(1.5
|
)
|
|
-
|
|
|
(0.7
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and minority interest
|
|
|
(2.4
|
)
|
|
0.2
|
|
|
0.3
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
10.9
|
|
|
(0.7
|
)
|
|
5.2
|
|
|
(0.6
|
)
|
Minority
interest in net (profit) loss of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
(0.4
|
)
|
|
1.2
|
|
|
(0.3
|
)
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
8.1
|
|
|
0.7
|
|
|
5.2
|
|
|
2.3
|
|
The
following table sets forth, for the periods indicated, information derived
from
the Company’s condensed consolidated financial statements of operations
expressed as a percentage of total restaurant sales.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
25, 2006
|
|
June
26, 2005
|
|
June
25, 2006
|
|
June
26, 2005
|
|
Revenues
|
|
|
% |
|
|
% |
|
|
% |
|
|
|
|
Sales
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
Cost
of sales
|
|
|
28.3
|
|
|
28.4
|
|
|
28.0
|
|
|
28.2
|
|
Restaurant
operating expenses
|
|
|
60.0
|
|
|
60.0
|
|
|
59.5
|
|
|
58.8
|
|
The
following tables set forth certain unaudited financial information and other
restaurant data relating to Company owned restaurants and Company managed and/or
licensed restaurants.
|
|
Second
Quarter Openings
|
|
Year-to-date
Openings
|
|
Total
open at
End of Quarter
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
Grill restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
owned
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
2
|
|
|
12
|
|
|
13
|
|
Managed
and/or licensed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
8
|
|
Grill
on the Alley restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
owned
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
4
|
|
Total
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
2
|
|
|
24
|
|
|
25
|
|
|
|
Three
Months Ended
|
|
Six Months Ended
|
|
|
|
June
25, 2006
|
|
June
26, 2005
|
|
June
25, 2006
|
|
June
26,2005
|
|
Weighted
average weekly sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
company owned restaurant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
Grill
|
|
$
|
59,200
|
|
$
|
58,824
|
|
$
|
64,964
|
|
$
|
61,792
|
|
Grill
on the Alley
|
|
|
86,697
|
|
|
79,939
|
|
|
89,476
|
|
|
80,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in comparable restaurant sales (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
Grill
|
|
|
6.8
|
%
|
|
(1.5
|
)%
|
|
5.3
|
%
|
|
(1.3
|
)%
|
Grill
on the Alley
|
|
|
8.5
|
%
|
|
13.4
|
%
|
|
10.7
|
%
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
Grill
|
|
$
|
10,004
|
|
$
|
9,260
|
|
$
|
20,269
|
|
$
|
18,398
|
|
Grill
on the Alley
|
|
|
4,508
|
|
|
4,157
|
|
|
9,305
|
|
|
8,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated sales
|
|
$
|
14,512
|
|
$
|
13,417
|
|
$
|
29,574
|
|
$
|
26,804
|
|
(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. The sales of managed and licensed
restaurants are not included in our statements of operations. However, we
consider the disclosure of these 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:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(in
thousands)
|
|
June
25, 2006
|
|
June
26, 2005
|
|
June
25, 2006
|
|
June
26,2005
|
|
Managed
Daily Grills
|
|
$
|
5,196
|
|
$
|
4,512
|
|
$
|
10,497
|
|
$
|
9,113
|
|
Licensed
Daily Grills
|
|
|
1,988
|
|
|
1,961
|
|
|
3,685
|
|
|
3,770
|
|
|
|
$
|
7,184
|
|
$
|
6,473
|
|
$
|
14,182
|
|
$
|
12,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
and license fees
|
|
$
|
418
|
|
$
|
369
|
|
$
|
838
|
|
$
|
725
|
|
Percent
of gross sales
|
|
|
5.8
|
%
|
|
5.7
|
%
|
|
5.9
|
%
|
|
5.6
|
%
|
Material
Changes in Results of Operations for the Three and Six Months Ended June 25,
2006 as compared to the Three and Six Months Ended June 26,
2005
Revenues.
Total
revenues increased 10.8% to $18.7 million for the 2006 second quarter from
$16.9
million in the 2005 second quarter and increased 11.5% to $38.0 million for
the
2006 year-to-date period from $34.1 million for the 2005 year-to-date period.
For the quarter, total revenues consisted of sales revenues of $14.5 million,
up
8.2% from $13.4 million in the 2005 quarter, management and license fees of
$418,000, up 13.3% from $369,000 in the 2005 quarter, and reimbursed managed
outlet expenses of $3.8 million, up 21.7% from $3.1 million in the 2005 quarter.
For the year-to-date period, total revenues consisted of sales revenues of
$29.6
million, up 10.3% from $26.8 million in the 2005 year-to-date period, management
and license fees of $838,000, up 15.6% from, $725,000 in the 2005 year-to-date
period, and reimbursed managed outlet expenses of $7.6 million, up 15.6% from
$6.6 million in the 2005 year-to-date period.
Sales
for
Daily Grill restaurants increased by 8.0% from $9.3 million in the 2005 quarter
to $10.0 million in the 2006 period. The increase in sales revenues for the
Daily Grill restaurants from 2005 to 2006 was primarily attributable to a full
six months of operations at the Downtown Daily Grill ($0.7 million) and an
increase in same store
sales of 6.8% ($0.5 million) for restaurants open for the entire 26 weeks in
both 2005 and 2006 partially offset by a decrease in sales at the La Cienega
Daily Grill ($0.5 million) due to closure of the restaurant in July 2005.
Sales
for
Daily Grill restaurants increased by 10.2% from $18.4 million for the six months
in 2005 to $20.3 million in 2006. The increase in sales revenues for the Daily
Grill restaurants from 2005 to 2006 was primarily due to the 2005 opening of
the
Santa Monica Daily Grill and the Downtown Daily Grill ($2.2 million) combined
with improved sales at the comparable restaurants of 5.3% ($0.9 million)
partially offset by a decrease at the La Cienega Daily Grill ($1.2 million)
due
to closure of the restaurant in July 2005. Management considers performance
of
same store or comparable store sales to be an important measure of growth when
evaluating performance. Weighted average weekly sales at the Daily Grill
restaurants increased 5.1% from $61,792 in 2005 to $64,964 in 2006. Comparable
restaurant sales and weighted average weekly sales at the Daily Grill
restaurants in 2006 reflected a menu price increase in November of 2005. The
increase in same store sales was principally attributable to an increase in
check averages partially offset by a decrease in guest counts.
Sales
for
Grill restaurants increased by 8.4% from $4.2 million in the 2005 quarter to
$4.6 million in the 2006 quarter. The increase in sales revenues for the Grill
restaurants from 2005 to 2006 was primarily attributable to an increase in
guest
counts.
Sales
for
Grill restaurants increased 10.7% from $8.4 million for the six months in 2005
to $9.3 million for the six-months in 2006. The increase in sales revenues
for
the Grill restaurants from 2005 to 2006 was attributable to improved guest
counts. Weighted average weekly sales at the Grill restaurants increased 10.7%
from $80,826 in 2005 to $89,476 in 2006.
Management
and license fee revenues were attributable to hotel restaurant management
services which accounted for $346,000 of management fees during the 2006 quarter
as compared to $300,000 during the 2005 quarter and licensing fees of $72,000
during the 2006 quarter compared to $69,000 during the 2005 quarter. The
increase in management and license fees during 2006 was attributable to improved
sales at almost every restaurant.
For
the
year-to-date period, management and license fee revenues were attributable
to
hotel restaurant management services which accounted for $715,000 of management
fees during the 2006 period as compared to $605,000 during the 2005 period
and
licensing fees of $123,000 during the 2006 period as compared to $120,000 during
the 2005 period. The increase in management and license fees during 2006 was
attributable to improved sales at almost every restaurant.
Cost
reimbursements represent amounts incurred by the Company on behalf of managed
outlets for which the Company receives reimbursement from the owner. The
increase in revenues attributable to cost reimbursements for both the quarter
and year-to-date periods were attributable to increased sales at managed
restaurants.
Operating
Expenses and Operating Results.
Total
operating expenses, including cost of sales, restaurant operating expenses,
reimbursed costs, general and administrative expenses, depreciation and
amortization, and pre-opening costs, increased 11.7% to $18.8 million in the
2006 quarter (representing 100.5% of revenues) from $16.8 million in 2005
(representing 99.6% of revenues). For the six months, total operating expenses
increased 12.5% to $37.5 million (representing 98.7% of
revenues) from $33.3 million in 2005 (representing 97.7% of
revenues).
Cost
of Sales. While
sales revenues increased by 8.2% ($1.1 million) in the 2006 quarter and 10.3%
($2.8 million) for the six months as compared to 2005, total cost of sales
increased by 7.6%, or $0.3 million, for the quarter and 9.61% or $0.7 million,
for the six months ended June 25, 2006 as compared to the same periods in 2005.
The dollar increase in cost of sales is primarily due to the increase in sales.
Cost of sales as a percentage of restaurant sales was 28.3% for the quarter
and
28.0% for the six
months ended June 25, 2006 as compared to 28.4% for the second quarter and
28.2%
for the year-to-date period in 2005.
Restaurant
operating expenses. Restaurant
operating expenses increased by $0.6 million, or 7.6%, for the quarter and
$1.8
million, or 11.8%, for the six months as compared to the same periods in 2005.
The dollar increase in restaurant operating expenses for the quarter was
primarily attributable to the opening of the Downtown Daily Grill ($0.4 million)
and payroll and related costs at comparable restaurants ($0.3 million). The
dollar increase in operating expenses for the six months was primarily
attributable to a full 26 weeks of operations at the Downtown Daily Grill
compared to 4 weeks in 2005, a full 26 weeks of operations at the Santa Monica
Daily Grill compared to 15 weeks in 2005, and increased wages and related
benefits at the comparable restaurants. Restaurant operating expenses, as a
percentage of restaurant sales, were flat at 60.0% in the second quarter of
2006
and 2005. For the six months, the percentages were 59.5% in 2006 and 58.8%
in
2005.
Reimbursed
Costs. Reimbursed
costs increased 21.7% from $3.1 million to $3.8 million for the quarter and
15.6% from $6.6 million in to $7.6 million in 2006 for the six months. 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
increased cost of goods and variable expenses resulting from a 12.6% increase
in
sales.
General
and Administrative. General
and administrative expense increased 32.4% for the current quarter and 26.1%
for
the six months as compared to the same periods in 2005. As a percentage of
revenues, general and administrative expense totaled 8.7% for the quarter and
7.5% for the six months as compared to 7.2% for the current quarter and 6.7%
for
the six months in 2005. The increase in total general and administrative expense
of $0.3 million, or 32.4%, for the 2006 quarter was primarily attributable
to
increases in travel related to potential site visits and transition of
management ($98,000), stock related compensation expenses ($70,000), outside
accounting services ($59,000), establishment of the training department
($54,000), non-recurring legal fees ($41,000), as well as, salaries and related
benefits ($31,000). The increase in total general and administrative expense
of
$592,000, or 26.1%, for the 2006 six month period is attributable to travel
related to potential site visits and the transition of management ($125,000),
salaries and related benefits ($132,000), stock related compensation expenses
($108,000), establishment of the training department ($93,000), consulting
fees
($68,000), and non-recurring legal fees ($41,000).
Depreciation
and Amortization. Depreciation
and amortization expense increased by 10.0% for the current quarter and
increased 12.5% for the six months of 2006 compared to 2005, representing 3.6%
of restaurant sales for the six months of 2006 and 3.5% of sales in 2005. The
increase in depreciation and amortization expense for the six months was
primarily due to the opening of the Santa Monica and Downtown Daily Grills
in
2005.
Pre-opening
Costs. Pre-opening
costs totaled $124,000 in the 2006 quarter as compared to $153,000 in the 2005
quarter and $124,000 in the 2006 six month period as compared with $244,000
in
2005. The 2006 pre-opening costs were attributable to the Dallas Grill opening
and the 2005 costs were attributable to the opening of the Santa Monica and
Downtown Daily Grills.
Interest
Expense.
Total
net interest expense increased by $43,000, or 100.0%, during the current quarter
and $27,000, or 33.85%, during the current six months compared to the same
periods in 2005. The increase in interest expense was primarily attributable
to
the amortization of deferred loan costs related to the new line of
credit.
Debt
Extinguishment Costs.
On March
31, 2006 the Company retired the collateralized subordinated note payable and
mandatorily redeemable capital obligations payable to the Michigan Avenue Group.
The Company recorded a debt extinguishment loss on retirement of $279,000.
A
condition of the early debt retirement was a $200,000 penalty to be paid out
in
four annual installments of $50,000 each. Additionally $69,000 of warrant costs
and $10,000 of deferred loan costs associated with the debt were written off.
Income
Tax Provision/Benefit.
During
the quarter and six months ended June 25, 2006, the Company reported a tax
benefit of $2,043,000 and $1,975,000, respectively. During the quarter ended
June 26, 2005, the Company reported a tax benefit of $35,500 and for the six
months a tax provision of $210,500. The favorable change in taxes reported
during 2006 was attributable to the elimination of the majority of the valuation
allowance with respect to the Company’s deferred tax asset. The benefit realized
by the Company during 2006 was attributable to the determination, based on
its
taxable income over the preceding three years and its taxable income projected
for the next three years, that it is more likely than not that the Company
will
recover its existing net deferred tax asset.
Minority
Interest.
We
reported a minority interest in the profit of consolidated affiliates of $80,000
during the 2006 second quarter as compared to a minority interest in the loss
of
our majority owned subsidiaries of $233,000 during the 2005 quarter. For the
six
months, we reported a minority interest in the profit of majority owned
subsidiaries of $105,000 during 2006 as compared to a minority interest in
the
loss of consolidated affiliates of $324,000 during 2005. The change in minority
interest for the quarter and six months was primarily attributable to improved
operations at the San Jose Grill, the Downtown Daily Grill, the CityWalk Daily
Grill and having fully utilized our allocation of minority interest for the
Hollywood Grill.
Net
Income. We
reported net income of $1.5 million for the second quarter and net income of
$2.0 million for the six months of 2006 as compared to net income of $0.1
million for the second quarter and $0.8 million for
the
six months in 2005.
Material
Changes in Financial Condition, Liquidity and Capital
Resources.
At
June
25, 2006 we had negative working capital of $1.7 million and a cash balance
of
$2.6 million compared to negative working capital of $1.3 million and a cash
balance of $3.2 million at December 25, 2005.
The
change in our cash position reflects the following cash flows:
(in
thousands)
|
|
2006
|
|
2005
|
|
Net
cash provided by operating activities
|
|
$
|
1,935
|
|
$
|
2,801
|
|
Net
cash used in investing activities
|
|
|
(2,363
|
)
|
|
(3,454
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(85
|
)
|
|
783
|
|
Net
increase (decrease) in cash
|
|
$
|
(513
|
)
|
$
|
130
|
|
Included
in cash flows from operating activities were tenant improvement allowances
of
$0.7 million and $1.8 million in 2006 and 2005, respectively.
The
negative change in working capital position was principally attributable a
$1.1
million increase in accounts payable, a $0.5 million dollar increase in prepaid
and other current assets offset by a $0.5 million decrease in cash, a $0.4
million dollar decrease in accrued expenses and a $0.2 million increase in
accounts receivable.
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 $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.
Issuances
of Common Stock.
During
the six months ended June 25, 2006, the Company received aggregate proceeds
of
$185,815 from the sale of 119,168 shares of common stock pursuant to the
exercise of outstanding warrants and options. The Company issued an additional
346,821 shares of common stock during the six months ended June 25, 2006 as
a
result of the exercise of 977,668 warrants pursuant to cashless exercise
provisions by which the Company received no cash. The warrants exercised during
the period were issued pursuant to a 2001 private placement and were exercisable
at $2.00 or $2.25 per share. Subsequent to June 25, 2006, an additional 228,828
shares were issued pursuant to the exercise of the warrants resulting in net
proceeds to the Company of $462,746 and after which no warrants remain
outstanding.
Financing
Facilities.
At June
25, 2006, the Company had $1.2 million owing under our line of credit, $0.1
million owing under equipment lease financing transactions, loans from
stockholders/officers of $0.2 million, and loans/advances from a landlord,
the
SBA and others of $0.1 million. As of June 25, 2006, $0.6 million of the tenant
improvement allowance on the Dallas Grill has been received. These tenant
incentive allowances have been recorded in other long-term liabilities and
are
being amortized against rent expense over the lease terms.
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 $874,192 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)”, $5,940 of interest and $50,000 for the first annual
penalty payment 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.
Operating
Leases and Contractual Obligations.
At June
25, 2006, we were obligated under eighteen leases covering the premises in
which
our Daily Grill and Grill Restaurants are located as well as a lease on our
executive office. 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.
The
following table details our contractual obligations as of June 25,
2006:
|
|
Payments
due by period (in thousands)
|
|
|
|
Total
|
|
2006
|
|
2007
- 2008
|
|
2009
- 2010
|
|
Thereafter
|
|
Long-term
debt
|
|
$
|
1,612
|
|
$
|
193
|
|
$
|
82
|
|
$
|
1,299
|
|
$
|
38
|
|
Capital
lease obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
lease commitments
|
|
|
30,139
|
|
|
3,647
|
|
|
7,324
|
|
|
6,061
|
|
|
13,107
|
|
Other
contractual purchase
Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
31,751
|
|
$
|
3,840
|
|
$
|
7,406
|
|
$
|
7,360
|
|
$
|
13,145
|
|
Capital
Expenditures.
During
the six months ended June 25, 2006, the Company’s capital expenditures totaled
$2.3 million. Capital expenditures during the period related principally to
the
opening of a Grill restaurant in Dallas, Texas. $0.6 million of the capital
expenditures during the period in connection with the Dallas Grill were funded
by tenant improvement allowances.
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 and six months
ended June 25, 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 six months
ended June 25, 2006, (2) the unreturned balance of the capital contributions
of
the Members and/or the Company at June 25, 2006, and the accrued but unpaid
preferred returns due to the Members and/or the Company at June 25, 2006:
(in
thousands)
|
|
San
Jose Grill, LLC
|
|
Chicago
Grill On The Alley, LLC
|
|
The
Grill On
Hollywood, LLC
|
|
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Members
|
|
Company
|
|
Distributions
of profit and note repayments during the quarter ended June 25,
2006:
|
|
$
|
184
|
|
$
|
184
|
|
$
|
972
(a
|
)
|
|
-
|
|
|
-
|
|
-
|
Unreturned
Initial Capital Contributions at June 25, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
1,200
|
|
$250
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10
|
%
|
|
8
|
%
|
|
-
|
|
|
12
|
%
|
12%
|
Accrued
but unpaid Preferred Returns at June 25, 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 June 25, 2006:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unreturned
Initial and Additional Capital Contributions at June 25,
2006:
|
|
$
|
1,100
|
|
$
|
450
|
|
$
|
1,396
|
|
$
|
296
|
|
$
|
1,400
|
|
$
|
313
|
|
Preferred
Return rate:
|
|
|
10
|
%
|
|
10%
(c
|
)
|
|
-
|
|
|
-
|
|
|
9
|
%
|
|
9
|
%
|
Accrued
but unpaid Preferred Returns at June 25, 2006
|
|
|
(b
|
)
|
|
(b
|
)
|
|
(b
|
)
|
|
-
|
|
$
|
91
|
|
$
|
23
|
|
a) |
Distribution
of capital and note repayments as of June 25, 2006 includes $902,000
of
retirement of collateralized subordinated notes and mandatorily redeemable
capital obligations and $70,000 of interest and preferred
return.
|
b) |
Due
to the under performance of the restaurants 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 $866,000
and the Company would have an accrued preferred return of $180,000.
If
preferred returns were accrued for the South Bay Daily Grill the
Member
would have an accrued preferred return of $427,000 and the Company
would
have a preferred return of $167,000. If preferred returns were accrued
for
the CityWalk Partnership the Member would have an accrued preferred
return
of $611,000.
|
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. |
In
addition to existing contractual and other commitments with respect to managed
restaurants, the Company has entered into agreements to manage Daily Grill
restaurants in Memphis, Tennessee and Seattle, Washington. Both of those
restaurants are expected to open in the spring of 2007. The Company is obligated
to contribute approximately $450,000, if construction exceeds
$1,500,000, toward the initial remodeling cost of the Seattle Daily Grill.
The Company has no required contribution to the Memphis Daily
Grill.
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.
We
maintain a large deductible insurance policy related to workers’ compensation
coverage. Predetermined loss limits have been arranged with insurance companies
to limit our per occurrence cash outlay. Accrued expenses and other liabilities
include estimated costs to settle unpaid claims and estimated incurred, but
not
reported, claims using actuarial methodologies. During the quarter and six
months ended June 25, 2006, we recorded a provision to increase the reserve
for
workers compensation claims of $26,000 and $358,000, respectively.
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 of 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 Condensed Consolidated
Statements of Operations. See Note 2 of the Notes to the Condensed Consolidated
Financial Statements in this Form 10-Q for further discussion of stock-based
compensation.
Except
as
noted above, 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
This
Form
10-Q contains forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Our actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: adverse weather conditions and other conditions affecting
agricultural output which may cause shortages of key food ingredients and
volatility of food prices and which, in turn, may reduce operating margins;
changes in consumer tastes, demographics and adverse economic conditions which
may result in reduced frequency of dining at our restaurants; the dependence
on
key personnel and ability to attract and retain qualified management and
restaurant personnel to support existing operations and future growth;
regulatory developments, particularly relating to labor matters (i.e., minimum
wage, health insurance and other benefit requirements), health and safety
conditions, service of alcoholic beverages and taxation, which could increase
the cost of restaurant operations; establishment of market position and consumer
acceptance in new markets in light of intense competition in the restaurant
industry and the geographic separation of senior management from such markets;
potential delays in securing sites for new restaurants and delays in opening
restaurants which may entail additional costs and lower revenues than would
otherwise exist in the absence of such delays; the availability of capital
to
fund future restaurant openings; rising energy costs and the occurrence of
rolling blackouts in California which may result in higher occupancy costs
and
periodic restaurant closures; national terrorist attacks; earthquakes in
California; and, other risks described more fully in "Risk Factors" in Part
I,
Item 1A of the Company’s Form 10-K for the year ended December 31, 2005 and in
Part II, Item 1A of this Form 10-Q.
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 $1,233,000
borrowings outstanding under the Credit Line Facility at June 25, 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
1A. Risk Factors
There
have been no material changes in our Risk Factors disclosed in our 2005 Annual
Report on Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the six months ended June 25, 2006, the Company issued 413,489 shares of common
stock (including 413,489 shares issued as previously reported on Form 8-K dated
June 20, 2006 and filed June 26, 2006) pursuant to the exercise, by 8 holders,
of 1,044,336 warrants originally issued in a 2001 private placement. The Company
received $150,003 from the exercise of 66,668 warrants at $2.25 per share.
The
remaining 346,821 shares were issued pursuant to the cashless exercise of
666,667 warrants at $2.00 and 311,001 warrants at $2.25 per share.
Subsequent
to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
to
the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
private placement. The Company received $462,746 from the exercise of 205,665
warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
to
the cashless exercise of warrants at $2.25 per share.
The
shares were issued pursuant to Section 4(2) of the Securities Act and the rules
and regulations promulgated thereunder on the basis that such transaction did
not involve a public offering and the offerees were sophisticated, accredited
investors with access to the the kind of information that registration would
provide. No sales were commissions were paid.
Item
4. Submission of Matters to a Vote of Security Holders
The
annual meeting of shareholders of Grill Concepts, Inc. was held on June 21,
2006, at which the stockholders voted on three proposals: the election of
directors, approval of the 2006 Equity Incentive Plan and ratification of the
appointment of Moss Adams LLP as the Company’s independent registered public
accounting firm.
The
first
matter voted on was a proposal to elect Robert Spivak, Michael Weinstock, Glenn
Golenberg, Stephen Ross, Bruce Schwartz, Richard Dantas and Philip Gay, as
directors of the Company. All director nominees were elected. The following
table sets forth the votes in such election:
|
|
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
Robert
Spivak
|
|
|
3,678,508
|
|
|
261
|
|
|
304
|
|
Michael
Weinstock
|
|
|
3,677,908
|
|
|
861
|
|
|
304
|
|
Glenn
Golenberg
|
|
|
3,678,508
|
|
|
261
|
|
|
304
|
|
Stephen
Ross
|
|
|
3,678,503
|
|
|
266
|
|
|
304
|
|
Bruce
Schwartz
|
|
|
3,678,480
|
|
|
289
|
|
|
304
|
|
Richard
Dantas
|
|
|
3,678,480
|
|
|
289
|
|
|
304
|
|
Philip
Gay
|
|
|
3,678,480
|
|
|
289
|
|
|
304
|
|
In
addition to the election of directors as noted above, the following matters
were
voted upon at such meeting:
The
second matter voted on was a proposal to approve the 2006 Equity Incentive
Plan
was approved with 2,266,729 votes cast for, 45,754 votes cast against and 604
votes abstained.
The
third
matter votes on was a proposal to ratify the appointment of Moss Adams, LLP
as
the Company’s independent registered public
accounting firm was approved with 3,669,501 votes cast for, 9,536 votes cast
against, and 36 votes abstained.
Item
6. Exhibits
Exhibit
No.
|
|
Description |
31.1
|
|
Section
302 Certification of CEO
|
|
|
|
31.2
|
|
Section
302 Certification of Principal Financial Officer
|
|
|
|
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 Principal Financial Officer 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.
Signature |
|
Title |
|
Date |
/s/
Philip Gay |
|
|
|
|
Philip Gay |
|
President and Chief |
|
August 9, 2006 |
|
|
Executive Officer |
|
|
|
|
(Principal
Executive and Financial Officer)
|
|
|