As filed with the Securities and Exchange Commission on September ___, 1996.
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form SB-2
Registration Statement
Under
The Securities Act of 1933
GRILL CONCEPTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 5812 13-3319172
(State or Jurisdiction (Primary Standard Industrial (IRS Employer
of Incorporation Classification Code Number) Identification Number)
or Organization)
Robert Spivak, President
Grill Concepts, Inc.
11661 San Vicente Blvd., Suite 404 11661 San Vicente Blvd., Suite 404
Los Angeles, California 90049 Los Angeles, California 90049
(310) 820-5559 (310) 820-5559
- -------------------------------- -------------------------
(Address and telephone number, (Name, address and telephone number
of principal executive offices of agent for service)
and principal place of business)
Copies to:
Michael Sanders, Esquire
Vanderkam & Sanders
440 Louisiana, Suite 475
Houston, Texas 77002
(713) 547-8900
(713) 547-8910 Fax
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X].
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
===============================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share <F1> Price Registration Fee
- ---------------------------------------------------------------------------------------------------------------
Common Stock 551,620 $ 2.125 $ 1,172,192.50 $ 404.20
- ---------------------------------------------------------------------------------------------------------------
Common Stock underlying
Warrants 100,000 $ 3.00 $ 300,000.00 $ 103.45
- ---------------------------------------------------------------------------------------------------------------
Total $ 1,472,192.50 $ 507.65
================================================================================================================
<FN>
<F1> Calculated in accordance with Rule 457(c) solely for the purpose of
determining the registration fee. Offering prices for shares underlying
outstanding warrants are the exercise price of the outstanding warrants.
With respect to shares of Common Stock which may be offered by Selling
Securityholders from time to time, the offering price per share is the
average of closing bid and ask price ($2.125) of the Common Stock on
September 10, 1996, as reported on the Nasdaq SmallCap Market.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
GRILL CONCEPTS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Registration Statement
Item Number and Heading Location in Prospectus
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover Page of Prospectus.............................Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus......................................................Inside Front and Outside Cover Pages
3. Summary Information and Risk Factors...............................Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds....................................................Use of Proceeds
5. Determination of Offering Price....................................Cover Page; Risk Factors
6. Dilution...........................................................Not Applicable
7. Selling Security Holders...........................................Principal and Selling Shareholders
8. Plan of Distribution...............................................The Offer
9. Legal Proceedings..................................................Business -- Legal and Administrative
.............................................................Proceedings
10.Directors, Executive Officers, Promoters
and Control Persons................................................Management
11.Security Ownership of Certain Beneficial Owners
and Management.....................................................Principal and Selling Shareholders
12.Description of Securities .........................................Description of Securities
13.Interests of Named Experts and Counsel.............................Legal Matters; Experts
14.Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities....................................................Management; Part II
15.Organization within Last Five Years................................Not Applicable
16.Description of Business............................................Business
17.Management's Discussion and Analysis or
Plan of Operation..................................................Management's Discussion and Analysis
18.Description of Property............................................Business -- Property
19.Certain Relationships and Related Transactions.....................Certain Relationships and Transactions
20.Market for Common Equity and Related
Stockholder Matters................................................Market for Common Equity and Related
...................................................................Stockholder Matters
21.Executive Compensation.............................................Management
22.Financial Statements...............................................Financial Statements
23.Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.............................Changes in and Disagreements with
.............................................................Accountants on Accounting and Financial
Disclosure
</TABLE>
<PAGE>
PROSPECTUS
GRILL CONCEPTS, INC.
551,620 Shares of Common Stock
100,000 Shares of Common Stock Underlying Warrants
This Prospectus relates to an aggregate offering of up to 651,620 shares
of common stock, $0.00001 par value (the "Common Stock"), of Grill Concepts,
Inc., a Delaware corporation (the "Company"), which may be offered and sold from
time to time. Of the 651,620 shares of Common Stock offered hereby, 100,000
shares are being offered by the Company upon exercise of outstanding warrants
(the "Finders Fee Warrants"). The remaining 551,620 shares of Common Stock
offered hereby are being offered by certain selling stockholders (the "Selling
Securityholders"). See "Principal and Selling Shareholders." The Company will
receive the proceeds from the exercise of the Finders Fee Warrants but will not
receive any proceeds from the sale of the Common Stock by the Selling
Securityholders.
The shares of Common Stock being offered hereby consist of (1) 401,620
shares of Common Stock issued to certain Selling Securityholders in connection
with the Company's acquisition of The Grill restaurant, and (2) 150,000 shares
of Common Stock and shares underlying 100,000 Finders Fee Warrants issued to
four Selling Securityholders as partial consideration for services rendered in
connection with the combination of Grill Concepts, Inc. and Magellan Restaurant
Systems, Inc. The Finders Fee Warrants are exercisable to purchase one share of
Common Stock per Finders Fee Warrant at a price of $3.00 per share and expire on
March 2, 2000.
See "Description of Securities - Warrants."
The Company's Common Stock is traded in the over the counter market on the
Nasdaq SmallCap Market ("Nasdaq"). On September 10, 1996, the closing bid price
of the Company's Common Stock was $2.00. Such quotation reflects inter-dealer
prices without retail mark-up, mark-down or commission and may not represent
actual transactions. See "Market for Common Equity and Related Stockholder
Matters."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================================
Discounts and Proceeds to Proceeds to Selling
Price to Public Commissions Company <F3> Stockholders <F4>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Offered by
the Company $ 3.00 <F2> $300,000.00 $ -0-
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Offered by
Selling Securityholders <F1> <F2> $ -0- <F4>
================================================================================================================================
<FN>
<F1> Shares of Common Stock offered by the Selling Securityholders will be
offered from time to time at prices related to the prevailing market prices
or at negotiated prices. See "The Offer."
<F2> No discounts or commissions will be paid by the Company in connection
with the sale of the shares of Common Stock underlying the Finders Fee
Warrants. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders in connection with
the sale of shares of Common Stock by the Selling Securityholders. See "The
Offer."
<F3> Before deducting expenses of the Offering payable by the Company,
estimated at $40,000. The Company has agreed to pay all of the expenses
related to the registration of the securities by the Selling
Securityholders, which are included in the expenses of this Offering.
<F4> The Company will not receive any of the proceeds from the sale of
Common Stock offered by the Selling Securityholders.
</FN>
</TABLE>
The date of this Prospectus is , 1996
--------------
<PAGE>
THE OFFERING OF COMMON STOCK UNDERLYING THE FINDERS FEE WARRANTS
INVOLVES CERTAIN RISKS. THE EXERCISE OF THE FINDERS FEE WARRANTS REQUIRES THE
PAYMENT TO THE COMPANY OF THE THEN EFFECTIVE WARRANT EXERCISE PRICE. SEE "RISK
FACTORS."
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction or to any person in which or to
whom it is unlawful to do so, or in any jurisdiction in which the person making
such offer or solicitation is not qualified to do so.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The reports
and other information filed by the Company may be inspected and copied at the
public reference facilities of the Securities and Exchange Commission in
Washington, D.C. and at some of its Regional Offices and copies of such material
can be obtained from the Public Reference Section of the commission, Washington,
D.C. 20549 at prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements, examined by an independent public
accounting firm, and may provide quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial information.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the 1933 Act with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company, the Common Stock and the Finders Fee Warrants,
reference is hereby made to the Registration Statement and the exhibits thereto.
The Registration Statement may be inspected by anyone without charge at the
Commissions's principal office at 450 Fifth Street, N.W., Washington D.C., and
copies of all or any part of the Registration Statement may be obtained, upon
payment of the prescribed fees, from the Commission's principal office in
Washington D.C.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
Grill Concepts, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in November of 1985. The Company was originally
incorporated under the name "Uno Concepts, Inc." In December of 1992, the
Company changed its name to "Magellan Restaurant Systems, Inc." and, in May of
1993, the Company "went public" pursuant to a merger with MRS Funding, Inc.
In March of 1995, the Company consummated an exchange (the "Exchange")
pursuant to which the Company issued 8,500,000 shares of Common Stock in
exchange for 100% of the outstanding stock of Grill Concepts, Inc., a California
corporation ("GCI"). Following the Exchange, the Company changed its name to
"Grill Concepts, Inc.," management of GCI assumed effective management and
control of the Company and the Company effectively altered its future operating
plans to emphasize the expansion of the "Daily Grill" restaurant format of GCI.
The Company, prior to the Exchange, is sometimes referred to herein as
"Magellan."
The Company presently owns and operates ten restaurants, consisting of
six Daily Grill restaurants, The Grill on the Alley restaurant and three
Pizzeria Uno Restaurants, and owns a controlling interest in one Rhino Chasers
brew pub/restaurant. The Company plans to open three additional Daily Grill
restaurants during 1996.
In addition to its existing operations, in July of 1996, the Company
submitted a proposal pursuant to which the Company would acquire 19 restaurants
from Hamburger Hamlet Restaurants, Inc. ("Hamburger Hamlet") for $8.5 million in
cash, contingent performance notes in an amount between $3.0 and $3.2 million,
and 500,000 warrants. Hamburger Hamlet is presently operating in bankruptcy.
Consummation of the Hamburger Hamlet acquisition is subject to approval of the
bankruptcy court and the creditors of Hamburger Hamlet, completion of due
diligence, arrangement of satisfactory financing and other contingencies.
Accordingly, there can be no assurance as to when, if ever, the Hamburger Hamlet
acquisition will be consummated.
The Company's principal executive offices are located at 11661 San Vicente
Blvd., Suite 404, Los Angeles, California 90049 and its telephone number is
(310) 820-5559. See "Business."
3
<PAGE>
THE OFFERING
This Prospectus relates to the offer and sale (the "Offer") of (i) up
to 100,000 shares of Common Stock issuable by the Company to the holders of the
Finders Fee Warrants upon exercise of such warrants, and (ii) up to 551,620
shares of Common Stock which may be offered from time to time by the Selling
Securityholders.
<TABLE>
<CAPTION>
<S> <C>
Securities Offered
by Company........................................... 100,000 shares of Common Stock issuable
pursuant to 100,000 outstanding Finders Fee
Warrants. See "Description of Securities."
Securities Offered
by Selling Securityholders.......................... 551,620 shares of Common Stock. See "The
Offer."
Common Stock Outstanding as of September 6, 1996:
Prior to Exercise of Finders Fee Warrants........... 13,972,260 shares
After Exercise of Finders Fee Warrants.............. 14,072,260 shares <F1><F2>
Use of Proceeds....................................... For general corporate purposes, including
working capital. See "Use of Proceeds."
NASDAQ Symbol......................................... GRIL
Risk Factors.......................................... Purchase of the Common Stock offered hereby
involves certain risks, including risks associated
with intense competition, dependence upon
receipt of additional capital, and dependence
upon key personnel, among others. See "Risk
Factors."
<FN>
<F1> Assumes exercise of the Finders Fee Warrants purchasable by the Selling Securityholders.
<F2> Assumes no exercise or conversion of (i) $1.3 million of Series A Preferred Stock, (ii) options
granted pursuant to the Company's incentive stock option plan; and (iii) 250,000 warrants granted
in connection with the issuance of the Series A Preferred Stock. See "Management - Stock
Option Plans" and "Description of Securities."
</FN>
</TABLE>
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN
THIS PROSPECTUS. THE PURCHASE OF THE COMMON STOCK BEING OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG
OTHER MATTERS, THE FOLLOWING RISKS AND OTHER FACTORS BEFORE MAKING A DECISION TO
PURCHASE THE SECURITIES OFFERED HEREBY.
LIMITED HISTORY OF PROFITABLE OPERATIONS. The Company reported net income
of approximately $63,000 during fiscal 1995 and a net loss of approximately
$82,000 during the first half of 1996. Prior to 1995, the Company reported
substantial net losses in each of the three preceding years, of $670,000 in
1994, $835,000 in 1993 and $439,000 in 1992. The losses incurred from 1992
through 1994 were largely attributable to the costs of opening new restaurants
combined with infrastructure build-up costs incurred to support future growth.
Because the Company expenses substantially all costs incurred in opening new
restaurants within 12 months of opening, it is possible that multiple restaurant
openings in any single year (the Company's growth plans call for multiple
openings in 1996, 1997 and in the future) will materially adversely impact net
income during the first year of operations of each new restaurant. Accordingly,
there is no assurance that the Company's operations will be profitable, or that
the Company will not incur operating losses in 1996 and beyond. See "Financial
Statements" and "Management's Discussion and Analysis."
LIMITED OPERATING HISTORY AND MARKET OF DAILY GRILL RESTAURANTS. While the
Company presently operates six Daily Grill restaurants and such restaurants have
produced increasing revenues, the Daily Grill format has only been utilized by
GCI since 1988. Further, with the exception of two restaurants, one in Palm
Desert, California and one in Newport Beach, California, all Daily Grill
restaurants are located in the Los Angeles metropolitan area. Accordingly, the
Company has a limited operating history and has not operated a Daily Grill
restaurant outside of Southern California. While the Company believes that the
Daily Grill format will be favorably received in other markets and intends to
open its first east coast Daily Grill restaurant in Washington, D.C. during the
first quarter of 1997 and to expand into other markets, there is no assurance
that the Daily Grill format will be favorably received outside of Southern
California. See "Business - Daily Grill Restaurants."
RECESSIONARY ECONOMY IN CALIFORNIA. All of the Company's existing Daily
Grill restaurants are located in Southern California, with four located in Los
Angeles County. Since 1990, the California economy has been affected by an
economic recession which, until the third quarter of 1992, also affected most of
the United States. While the rest of the United States has since seen
improvements in its economy, California, and particularly Los Angeles County,
have continued to experience recessionary conditions. As a result of the
concentration of Daily Grill restaurants in Southern California, the
continuation or worsening of current economic conditions in California could
have an adverse effect on the Company's business. See "Business - Daily Grill
Restaurants."
EXPOSURE TO POSSIBLE EARTHQUAKE RELATED LOSSES. During the first
quarter of 1994, three Daily Grill restaurants experienced temporary closure and
a fourth Daily Grill restaurant was closed for nearly two months as a result of
a major earthquake in Los Angeles. Due to the nature of the damage and the
losses incurred (i.e., water related losses due to broken pipes), the Company's
losses were covered by insurance which compensated for such closures. However,
while the Company carries a full range of insurance typically carried by such a
business, all of the Company's insurance policies exclude coverage for losses
incurred as a result of earthquakes. Accordingly, in the event of future
earthquake related losses, unless such losses can be attributed to other covered
risks (e.g., water damage, etc.), the Company may experience losses under
similar circumstances which are not covered by insurance.
EXPANSION PLANS. The Company is presently evaluating possible expansion
into new markets, including the opening of the Company's first east coast Daily
Grill in Washington, D.C. scheduled for the first quarter of 1997. The Company's
ability to implement this expansion will depend on various factors, including
the availability of suitable locations and the ability to secure appropriate
government permits and approvals, provide for adequate supervision of
construction, obtain liquor licenses and recruit and train additional qualified
restaurant management personnel. Many of these factors are beyond the control of
the Company and there can
5
<PAGE>
be no assurance that the Company will be able to open additional restaurants or
that, if opened, those restaurants can be operated at satisfactory sales and
profit levels. See "Business - Business Expansion."
POTENTIAL ACQUISITION OF HAMBURGER HAMLET RESTAURANTS. In addition to
the Company's proposed expansion and opening of additional Daily Grill
restaurants, the Company, in July of 1996, submitted a proposal pursuant to
which it would acquire 19 restaurants from Hamburger Hamlet Restaurants, Inc.
("Hamburger Hamlet") for $8.5 million in cash, contingent performance notes in
an amount between $3.0 and $3.2 million, and 500,000 warrants. Hamburger Hamlet
is presently operating in bankruptcy and has closed 12 unprofitable stores.
Management believes that the terms on which the Hamburger Hamlet restaurants are
proposed to be acquired are favorable and that such restaurants can be operated
profitably. However, given the past financial difficulties of Hamburger Hamlet,
there is no assurance that the restaurants proposed to be acquired can be
operated on a profitable basis. Further, consummation of the Hamburger Hamlet
acquisition is subject to approval of the bankruptcy court and the creditors of
Hamburger Hamlet, completion of due diligence, arrangement of satisfactory
financing and other contingencies. Accordingly, there can be no assurance as to
when, if ever, the Hamburger Hamlet acquisition will be consummated. See
"Business - Business Expansion."
ADDITIONAL CAPITAL REQUIREMENTS. In order to implement its current
expansion plans, in particular the proposed Hamburger Hamlet acquisition, the
Company will require substantial additional capital. Management estimates that
between $9 and $10 million of financing will be required to fund the Hamburger
Hamlet acquisition and operation of those restaurants. Management estimates the
cost of opening new restaurants at between $1.0 and $1.4 million per restaurant.
In some locations, concessions from landlords may reduce the cost of opening
restaurants. Management determined that cash on hand and operating cash flow
would be adequate to fund the planned openings during 1996. In order to fund the
Washington, D.C. opening, presently scheduled for the first quarter of 1997, the
Company, in June of 1996, sold $1.5 million of Series A Preferred Stock. See
"Description of Securities." Since that date, the Company has undertaken no
additional efforts to secure additional financing and the Company has no
agreements to provide additional financing. While the Company intends to pursue
efforts to raise additional capital in the future so as to support future
restaurant openings, the Company has no definitive plans at this time in that
regard. It is expected that additional funding will be required to carry out
fully the Company's expansion plans. There is no assurance that the Company will
be successful in raising the funds needed if and when such capital is needed to
support existing operations or expansion. See "Management's Discussion and
Analysis."
POTENTIAL ONGOING LIABILITIES RELATING TO TAILGATORS. The Company's
predecessor, Magellan, commenced operation of Tailgators (formerly known as Jo
Jo Players) in August of 1993. From the commencement of operations through the
Exchange, Tailgators produced operating losses.
Following approval of the Exchange, the newly appointed management team
of the Company determined that the format and operations of Tailgators was not
compatible with the Company's future growth objectives and determined to pursue
all viable options for converting the format of Tailgators or, if no
satisfactory alternatives were available, disposing of Tailgators. In connection
with such determination, the Company established a reserve during the first
quarter of 1995 for possible losses resulting from the disposal or closure of
Tailgators. After extensive evaluation of possible alternatives, the Company
determined to close Tailgators in June of 1996. However, the Company, as general
partner of the partnership which owned and operated Tailgators may continue to
be obligated under the lease on the Tailgators site. Such lease has a remaining
term of approximately seventeen years and currently provides for a monthly
payment of $11,000. Management is continuing to make efforts to market the
Tailgators site or to otherwise relieve or minimize the Company's potential
liability under the lease on such site. See "Management's Discussion and
Analysis."
RELIANCE ON KEY PERSONNEL. The Company is materially dependent upon the
personal efforts and abilities of its President and Chief Executive Officer,
Robert Spivak, and various other officers and key personnel. Such officers and
employees devote substantially all of their time and attention to the affairs of
the Company. The loss or unavailability of any of such persons could have a
material adverse effect on the Company. With the exception of a $1 million "key
man" life insurance policy on Mr. Spivak and employment contracts with Mr.
Spivak and the Company's Chairman, Robert Wechsler, the Company presently has no
employment contracts with, and carries no key-man insurance on the lives of,
such officers or key employees. See "Management."
6
<PAGE>
UNCERTAINTY WITH RESPECT TO INTEGRATION AND GEOGRAPHIC SEPARATION OF
OPERATIONS. Following consummation of the Exchange, the Company operates two
distinct restaurant types consisting of six Daily Grill restaurants, all located
in California, and three Pizzeria Uno restaurants, all located in the northeast
United States. The Company also plans to open a Daily Grill restaurant in
Washington, D.C. during the first quarter of 1997. Further, if the Hamburger
Hamlet acquisition is consummated, the Company will operate a third distinct
restaurant type. While management anticipates that certain economies of scale
can be achieved as a result of the Exchange and the anticipated Hamburger Hamlet
acquisition and expansion of operations, there is no assurance that the
operation of such diverse restaurants can be successfully integrated so as to
achieve the anticipated benefits. In particular, the geographic separation of
the restaurants may make integration and management of the operations of such
restaurants difficult. While management anticipates that the Daily Grill concept
will be expanded into the northeast and other geographic regions and that
trained management personnel will be relocated to the northeast and such other
regions as necessary to supervise and oversee new restaurant openings and
operations, the initial geographic separation of senior management personnel
located in California from operations in the northeast can be expected to entail
either a lesser degree of oversight by such management or the incurrence of
additional expense to oversee such operations, or both. Further, the addition of
the Hamburger Hamlet restaurants, if such acquisition is consummated, can be
expected to require significant management time and effort, as well as
additional personnel, to successfully integrate and oversee such additional
restaurants. See "Business."
COMPETITION. The restaurant business is highly competitive with respect
to price, service, restaurant location and food quality and is affected by
changes in consumer tastes, economic conditions and population and traffic
patterns. The Company believes it competes favorably with respect to these
factors. However, many of its competitors have been in existence longer than the
Company, have a more established market presence and have substantially greater
financial, marketing and other resources, which may give them certain
competitive advantages. The Company believes that its ability to compete
effectively will continue to depend in large measure on its ability to offer a
diverse selection of high quality, fresh food products with an attractive
price/value relationship served in a friendly atmosphere. The Daily Grill
restaurants compete within the rapidly growing mid-price, full-service casual
dining segment. The Daily Grill's competitors include national and regional
chains, as well as local owner-operated restaurants. The primary competitors to
the Company's Pizza Restaurants are casual theme restaurant chains including
Friday's and the Olive Garden. Rhino Chasers' competition is limited to
restaurants and bars within the commuter terminal of LAX. See "Business
Competition."
DEPENDENCE UPON FRANCHISOR. The Company's ability to operate its
existing Pizzeria Uno restaurants (the "Pizza Restaurants") on a profitable
basis is dependent to a large degree upon the continued efforts and success of
its Franchisor. The Franchisor, in addition to licensing use of the "Pizzeria
Uno" name and proprietary recipes and secrets, conducts certain ongoing
advertising and provides ongoing managerial assistance and training, in addition
to certain other services. If, for any reason, the Franchisor were unable to
continue to provide the services required to be provided pursuant to its
franchise agreements with the Company (the "Franchise Agreements") or were to
experience an unfavorable change in public perception, the Pizza Restaurants
would be materially adversely effected. The Franchisor also has broad authority
to direct various aspects of the operations of its franchisees, including the
preparation of required menu items, the size of portions and other decisions
affecting the operations of the Company. Such control by the Franchisor may, in
some instances, adversely affect the operations and profitability of the
Company, as evidenced by an increase in cost of sales experienced by the Company
following a directive by the Franchisor to increase portion sizes. Further,
while the Company is generally required to pay a percentage of revenues in order
to retain its franchise rights at each location, certain minimum fees are
required to be paid regardless of the level of revenues. See "Management's
Discussion and Analysis" and "Business - The Franchise Agreements."
7
<PAGE>
FACTORS AFFECTING THE RESTAURANT INDUSTRY. Factors such as inflation,
increased food, labor and benefits costs and the availability of experienced
restaurant managers and hourly employees may adversely affect the restaurant
industry in general and the Company's restaurants in particular. An increase in
the minimum wage which becomes effective in the Fall of 1996, can be expected to
increase the cost of operations for the Company and other restaurant operators.
While it is possible that the Company may be able to pass through such increased
costs in the form of higher menu prices, there is no assurance that the Company
can recoup any such increases in labor cost. In addition, restaurants are often
affected by changes in consumer tastes, national, regional and local economic
conditions, demographic trends, traffic patterns and the type, number and
location of competing restaurants. Multi-unit restaurants such as those operated
by the Company can also be substantially adversely affected by publicity, such
as that resulting from food quality, illness, injury or other health and safety
concerns stemming from any restaurant, including those Pizzeria Uno restaurants
not owned by the Company.
GOVERNMENTAL REGULATION. The Company is subject to various federal,
state and local laws and regulations affecting its employees and guests, its
properties and the operation of its restaurants. Difficulties or failures in
obtaining required licensing or other regulatory approvals could delay or
prevent the opening of a new restaurant. The suspension of, or inability to
renew, a license could interrupt operations at an existing restaurant. In
particular, the Company's restaurants are subject to state and local licensing
and regulation with respect to the sale and service of alcoholic beverages,
which accounted for in excess of 9% of combined sales during 1995. In certain
states, the Company is, or will be, subject to "dram shop" statutes, which
generally give a person injured by an intoxicated person the right to recover
damages from the establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company is from time to time a defendant in "dram shop"
actions. The Company is also subject to federal and state laws establishing
minimum wages, unemployment and sales taxes and regulating overtime and other
working conditions and similar matters over which they have no control.
Significant additional government-imposed increases in minimum wages, paid
leaves of absence and mandated health benefits, or increased tax reporting
requirements for employees who receive gratuities, could be detrimental to the
economic viability of the Company's restaurants. See "Business - Government
Regulation."
POTENTIAL CONFLICTS OF INTEREST. The Company has, in the past, entered into
transactions with affiliates, including (i) the acquisition of The Grill
restaurant from an entity controlled by the principal shareholders and officers
of the Company, (ii) the lease of a restaurant location, (iii) the making of
certain loans to the Company from affiliates and (iv) the formation of a
partnership to operate Tailgators in which an officer of the Company was a
partner. While management believes that all such transactions have been on terms
no less favorable than those which could be obtained from non-affiliated third
parties and no future transactions with affiliates are anticipated, the Company
has no existing policy in place which would prohibit such transactions or fix
the terms of such transactions. Accordingly, conflicts of interest may arise
between the Company and its affiliates with respect to the transactions which
have occurred to date or which may occur in the future. See "Certain
Relationships and Transactions."
LACK OF DIVERSIFICATION. The Company's operations are currently limited to
operation of the Daily Grills, Pizza Restaurants and Rhino Chasers. To the
extent that there are economic factors or industry issues which are adverse to
the Company's continued efforts in that pursuit, the Company's lack of diversity
may have a potential adverse impact on the success of the Company. See
"Business."
CONTROL BY MANAGEMENT. Without giving effect to the exercise of outstanding
warrants, at September 6, 1996, the Company's officers and directors, consisting
of ten persons, owned approximately 54.5% of the common stock outstanding.
Stockholders of the Company do not have cumulative voting rights unless
California law becomes applicable in that regard. See "Description of Securities
- - Application of California Corporate Law Following 1996." Therefore, each share
is entitled to one vote on all matters submitted to a vote of stockholders, and
directors will be elected by a plurality of the votes cast at meetings at which
directors are to be elected. Thus, stockholders holding a majority of the
outstanding shares of Common Stock will be able to elect all of the directors.
See "Principal and Selling Shareholders."
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NO DIVIDENDS. The Company has not declared or paid, and does not
anticipate declaring or paying in the foreseeable future, any cash dividends.
The Company's ability to pay dividends is dependent upon, among other things,
future earnings, the operating and financial condition of the Company, its
capital requirements, general business conditions and other pertinent factors,
and is subject to the discretion of the Board of Directors. Further, no
distribution may be made with respect to the Company's Common Stock unless all
cumulative dividends with respect to any series of preferred stock having a
dividend preference have been paid. Accordingly, there is no assurance that any
dividends will ever be paid on the Company's Common Stock. See "Description of
Securities."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. At September 6, 1996, the Company had an aggregate of
approximately 3,523,732 shares of Common Stock authorized but unissued and not
reserved for specific purposes and approximately 2,504,008 additional shares of
Common Stock unissued but reserved for issuance pursuant to the Company's
currently outstanding warrants and its incentive stock option plan (the
"Incentive Stock Option Plan"). Additionally, an indeterminate number of shares
may be issued upon conversion of the presently outstanding Series A Convertible
Preferred Shares. All of such shares may be issued without any action or
approval by the Company's stockholders. Although there are no other present
plans, agreements, commitments or undertakings by the Company with respect to
the issuance of additional shares (except for those required to be issued as
noted above), or securities convertible into any such shares, any shares issued
would further dilute the percentage ownership of the Company held by existing
stockholders. See "Description of Securities."
POSSIBLE ISSUANCE OF PREFERRED STOCK AND SUPERIOR RIGHTS OF PREFERRED
STOCK. In addition to the above referenced shares of Common Stock which may be
issued without stockholder approval, the Company has 1,000,000 shares of
authorized preferred stock. The Company had 1,300 shares of Series A Preferred
Stock issued and outstanding as of September 6, 1996. Prior to the distribution
of any amount to the holders of common stock, whether as dividends or on
liquidation, the holders of outstanding preferred stock must have received their
cumulative dividend or liquidation preference, as appropriate. While the Company
has no present plans to issue any additional shares of preferred stock, the
Board of Directors has the authority, without stockholder approval, to create
and issue one or more series of such preferred stock and to determine the
voting, dividend and other rights of holders of such preferred stock. The
issuance of any of such series of preferred stock could have an adverse effect
on the holders of Common Stock. See "Description of Securities - Preferred
Stock."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK. While the Company's Common
Stock has been listed on the Nasdaq SmallCap Market since December of 1993,
trading in the Company's Common Stock has been characterized by a high degree of
volatility. Trading in the Company's Common Stock to date has been dominated by
a small number of firms which make a market in such securities. To the extent
that the market continues to be dominated by a small number of market makers,
the market in the Company's Common Stock may continue to experience a high
degree of volatility. Such degree of volatility and market dominance may
adversely affect the price and liquidity of the Company's securities in the
future. See "Market For Common Equity and Related Stockholder Matters."
SHARES ELIGIBLE FOR FUTURE SALES. The resale of "restricted securities," as
well as securities held by "affiliates" of the Company, is subject to the
provisions of Rule 144 as promulgated under the Securities Act. Rule 144
provides for the sale of limited quantities of restricted securities without
registration under the Securities Act. In general, under Rule 144 a person (or
persons whose shares are aggregated) who has satisfied a two (2) year holding
period may, under certain circumstances, sell within any three (3) month period,
a number of shares which does not exceed the greater of one percent (1%) of the
then outstanding shares of Common Stock or the average weekly trading volume
during the four (4) calendar weeks prior to such sale. With regard to the sale
of securities by affiliates, Rule 144 permits the resale of such securities
subject to the volume limitations and certain other requirements of Rule 144.
The holding period requirements of Rule 144 have been satisfied with respect to
all previously issued shares of "restricted stock" of the Company with the
exception of 150,000 shares issued in connection with the Exchange and included
in the shares offered hereby. Such shares will otherwise become eligible for
resale under Rule 144 in March of 1997. At September 6, 1996, an additional
7,471,000 shares were held by persons who may be deemed to be affiliates of the
Company. Such shares may be resold immediately pursuant to Rule 144 subject to
the volume limitations therein, as well as certain other
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<PAGE>
provisions of Rule 144. Based on the shares outstanding at September 6, 1996,
the volume limitations of Rule 144 will permit the resale by any of such
affiliates within any three-month period of up to the greater of (i)
approximately 140,000 shares (1% of the outstanding shares) or (ii) the average
weekly trading volume during the four calendar weeks preceding such sale. The
Company is unable to predict the effect that future sales under Rule 144 may
have on the then prevailing market price of Common Stock. It can be expected,
however, that the sale of any substantial number of shares of Common Stock will
have a depressive effect on the market price of the Common Stock. See
"Description of Securities."
INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Bylaws and
Certificate of Incorporation provide for indemnification of officers and
directors to the fullest extent permitted by Delaware law. It is possible that
the Company will be required to pay certain judgments, fines and expenses
incurred by officers or directors, including reasonable attorneys fees, as a
result of actions or proceedings in which such officers or directors are
involved by reason of being or having been officers or directors, provided that
the officers or directors acted in good faith. See "Management - Exculpation and
Indemnification Arrangements."
THE OFFER
GENERAL
This Prospectus relates to the offer and sale (the "Offer") of (i) up
to 100,000 shares of Common Stock issuable by the Company to the holders of the
Finders Fee Warrants upon exercise of such warrants, and (ii) up to 551,620
shares of Common Stock which may be offered from time to time by the Selling
Securityholders.
This Prospectus is being mailed to each of the Selling Securityholders
on or about the date of this Prospectus. Otherwise, the Company is undertaking
no efforts, through its officers or through third parties, to solicit the
exercise of Finders Fee Warrants or the sale of the shares of Common Stock
offered hereby.
FINDERS FEE WARRANTS
The Finders Fee Warrants may be exercised by completing and executing
the form of election to purchase and returning the same, together with payment
of the applicable exercise price, to the Company. Payment for shares upon
exercise of the Finders Fee Warrants must be in United States dollars by check
or money order drawn on a bank located in the United States of America and
payable to Grill Concepts, Inc. Stock certificates evidencing the shares
issuable upon exercise of the Finders Fee Warrants will be mailed by the
Company's transfer agent promptly after receipt by the Company of the duly
completed and executed form of election to purchase accompanied by payment of
the applicable exercise price. If less than all of the Finders Fee Warrants
evidenced by a warrant certificate are exercised, a new certificate will be
issued for the remaining number of warrants.
The exercise price of the Finders Fee Warrants was determined by
negotiation among the Company and the holders of such warrants. The exercise
price is not necessarily related to or indicative of the Company's assets, book
value, earnings, net worth or any other established criteria of value.
No warrant solicitation fee or other form of commission will be paid by
the Company in connection with the exercise of the Finders Fee Warrants.
PLAN OF DISTRIBUTION
The Common Stock offered hereby may be sold from time to time directly
by any of the Selling Securityholders or by certain transferees or affiliates of
such Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer such securities through underwriters, dealers or agents.
The distribution of such securities by a Selling Securityholder may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, in privately-negotiated transactions,
through sales to one or more broker-dealers for resale of such securities as
principals, at market
10
<PAGE>
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices, or otherwise. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The Selling
Securityholders and intermediaries through whom the securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
USE OF PROCEEDS
The only proceeds which will be available to the Company as a result of
the matters discussed herein will be funds received if and when the Finders Fee
Warrants are exercised.
There are a total of 100,000 Finders Fee Warrants exercisable to
purchase an aggregate of 100,000 shares of Common Stock at $3.00 per share, or
an aggregate of $300,000. All proceeds, if any, received from the exercise of
the Finders Fee Warrants, after payment of the costs incurred in connection with
the preparation and distribution of this Prospectus, will be added to the
Company's working capital and used for general corporate purposes. The costs of
preparing and distributing this Prospectus is estimated to be approximately
$40,000. The Company may also incur additional costs from time to time as
necessary to maintain and distribute a current Prospectus in the future.
While the foregoing represents the Company's best estimate of the use
of proceeds of this offering, the exact manner of use of such proceeds is
subject to the discretion of management as to the exact allocation and timing of
use of such proceeds.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The following discussion relates to the historical operating results
and financial condition of the Company since the Exchange, the pro forma
combined operating results and financial condition of the Company giving effect
to the Exchange and, where appropriate, to the historical operating results and
financial condition of Magellan and GCI. See "Business." All references herein,
whether of a historical nature or a prospective nature, unless otherwise noted,
are to the Company, and reflect the combined entity including both Magellan and
GCI.
During the fiscal year ended December 31, 1995, and the six months ended
June 30, 1996, the Company owned and operated a total of nine restaurants,
consisting of six Daily Grill restaurants and three Pizza Uno restaurants, and,
in addition, owned interests in one Tailgators Sports Pub ("Tailgators") and,
since October of 1995, one Rhino Chasers brew pub/restaurant. During the fiscal
year ended December 25, 1994, Magellan owned and operated four franchised
"Pizzeria Uno" restaurants (the "Pizza Restaurants") and was a 51% partner in a
partnership which owns, Tailgators (formerly known as Jo Jo Players). During the
same period, GCI owned and operated six Daily Grill restaurants. Subsequent to
December 25, 1994, Magellan terminated the operation of one of its Pizza
Restaurants and, in March of 1995, consummated an exchange pursuant to which it
acquired all of the stock of GCI. See "Business." In connection with the
Exchange, the Company determined to sell or close Tailgators and, in June of
1996, closed Tailgators. The assets of Tailgators were written off and the
closure of Tailgators accounted for in connection with the Exchange.
Due to the Exchange explained in the Notes to Consolidated Financial
Statements, the results of operations for the 26 week period ended June 30, 1996
include all operations of the Company, including the six Daily Grill
restaurants, three Pizzeria Uno Restaurants and Rhino Chasers while results for
the same period in 1995 including the operations of the six Daily Grill
Restaurants for the entire 26 week period and the operations of the Pizzeria Uno
Restaurants and Tailgators (the Pizzeria Uno restaurants and Tailgators are
collectively referred to as the "Magellan Units") for the last 16 weeks of such
period. Similarly, operating results for the 53 week period ended December 31,
1995 include the operations of GCI for the entire 53 week period while
reflecting the operations of the Magellan Units for only 43 weeks from March 3,
1995 (the Exchange date) to December 31, 1995. Therefore, 1995 results include
operations for a 43 week period of three Pizzeria Uno restaurants and
Tailgators, in addition to the operation for the entire 53 week period of six
Daily Grill restaurants and for the period from October 15, 1995 to December 31,
1995 of Rhino Chasers. The 1994 results include only the operations of the six
Daily Grill restaurants.
Revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 79.9% of combined 1995 sales
were food and 20.1% were beverage. Revenues from restaurant operations are
primarily influenced by the number of restaurants in operation at any time, the
timing of the opening of such restaurants and the sales volumes of each
restaurant.
The Company's expenses are comprised primarily of cost of food and
beverages, payroll and restaurant operating expenses, including rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. While the Franchisor of the Company's Pizza Restaurants,
Pizzeria Uno Corporation, specifies the menu items which must be offered by the
Company, as well as the recipes and procedures to be utilized in preparing
various menu items, the Company is generally not required to purchase
ingredients from the Franchisor. However, certain key ingredients are
proprietary in nature and may be acquired only from certain distributors which
sell such ingredients under private label for the Franchisor. Restaurant
operating expenses consist primarily of wages paid to part-time and full-time
employees, rent, utilities, insurance and taxes.
In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreements, the Company pays a continuing license fee
with respect to
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each of its Pizza Restaurants, an advertising fee and is required to expend
certain minimum amounts on local advertising and promotion. See "Business -The
Pizza Restaurants -- The Franchise Agreements."
The Company's consolidated balance sheet and results of operations reflect
the capitalization and amortization of the initial franchise fees paid by
Magellan as well as costs of acquiring liquor licenses and goodwill arising in
connection with the Exchange each of which is deemed to provide a benefit to the
Company over periods ranging up to 40 years. At December 31, 1995, franchise
fees totaling $90,000 had been capitalized and were being amortized over the
twenty year lives of the respective franchises. Additionally, the Company
capitalizes and amortizes pre-opening expenses incurred prior to the opening of
each of its restaurants. Such amount includes store opening/training fees paid
to the Franchisor pursuant to the Franchise Agreements. Such pre-opening
expenses are amortized ratably over a twelve month period commencing when each
restaurant opens. The Company had no capitalized and unamortized pre-opening
expenses remaining on its balance sheet at December 31, 1995. Goodwill arising
in connection with the Exchange of $2 million was capitalized at December 31,
1995 and is being amortized over 30 years. Finally, the Company at December 31,
1995 had capitalized and unamortized costs of obtaining its various liquor
licenses totaling approximately $593,000. Such costs consist primarily of
amounts paid to purchase such licenses. The Company is amortizing the
capitalized cost of its liquor licenses over a forty year period. As each of the
foregoing items involves the payment of certain amounts in advance and the
expensing of such amounts in subsequent years, the Company's operating results
reflect significant amortization expense which does not affect the Company's
operating cash flows.
In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers and clerical personnel, rent,
legal and accounting costs, travel, insurance and various office expenses.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Statements of Operations, and the percentages such items bear to revenues, for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31/25, Six Months Ended June 30/25,
------------------------------ --------------------------------
1995 1994 1996 1995
-------------------- ------------------ -------------------- -------------
Amount % Amount % Amount % Amount %
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales...................$ 20,253 100.0 % $ 14,823 100.0 % $10,937 100.0 % $ 9,906 100.0 %
Cost of sales........... 5,437 26.8 4,142 27.9 2,892 26.4 2,669 26.9
------ ----- ------ ----- ----- ----- ----- -----
Gross profit............. 14,816 73.2 10,680 72.1 8,045 73.6 7,237 73.1
Restaurant operating
expense................. 12,109 59.8 8,804 59.4 6,767 61.9 6,046 61.0
General and
administrative expense.. 1,717 8.5 1,501 10.1 911 8.3 698 7.0
Depreciation and
amortization............ 792 3.9 825 5.6 378 3.5 354 3.6
------ ---- ------ ---- ----- ---- ----- ----
Total operating expenses. 14,618 72.2 11,130 75.1 8,056 73.7 7,098 71.7
Operating income (loss).. 198 1.0 ( 450 )( 3.0 ) (11) (0.1) 139 1.4
Interest expense, net.... 127 0.6 219 1.5 70 0.6 64 0.6
------ ---- ----- ---- ----- ---- ----- ----
Income (loss) before
income tax.............. 71 0.3 ( 669 )( 4.5 ) (81) (0.7) 75 0.8
Provision for taxes...... 8 0.0 1 0.0 1 0.0 1 0.0
------ ---- ----- ---- ----- ---- ----- ----
Net income (loss)........ $ 63 0.3 % $( 670 )( 4.5 )% $(82) (0.7) % $74 0.7 %
====== ==== ===== ==== ===== ==== ===== ====
</TABLE>
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SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 25, 1995
SALES. The Company's revenues for the six month period increased 10.4% to
$10.9 million from $9.9 million for the sames period in 1995. The increase in
revenues was primarily attributable to sales for the added period of time the
Pizzeria Uno Restaurants were included in 1996 and the addition of The Grill
restaurant in the second quarter of 1996, which was partially offset by the
closing of Tailgators. Comparable store sales year-to-year decreased 3.3%.
COST OF SALES AND GROSS PROFIT. While revenues increased by 10.4% in the
first half of 1996 compared to the same period in 1995, cost of sales increased
only 8.4 % and decreased as a percentage of sales from 26.9% to 26.4%. The
consolidated cost of sales percentage increased during the second quarter to
27.2% as compared with 27% in the second quarter of 1995. The increase in cost
of sales as a percentage of sales during the second quarter was attributable to
the acquisition of The Grill which has historically experienced a 31% cost of
sales as compared to approximately 27% cost of sales for Daily Grill. The higher
cost of sales at The Grill is offset by lower labor cost at The Grill.
As a result, gross profits increased 11.2% from $7.2 million (73.1% of
sales) in 1995 to $8.0 million (73.6% of sales) in 1996.
OPERATING EXPENSES AND OPERATING RESULTS. Total operating expenses rose
13.5% to $8.1 million in 1996, representing 73.7% of sales, from $7.1 million,
or 71.7% of sales, for the same period in 1995. The increase in operating
expenses was primarily attributable to increased restaurant operating expenses.
Restaurant operating expenses increased 11.9% to $6.8 million in 1996 from $6.0
million for the same period in 1995 (compared to a 10.4% increase in sales and
11.2% increase in gross profit). As a percentage of sales, restaurant operating
expense increased from 61.0% for the period in 1995 to 61.9% in 1996. The
percentage increase is primarily attributable to the addition of Pizzeria Uno
Restaurants which have a higher operating cost than Daily Grill.
General and administrative expenses increased 30.6% to represent 8.3% of
sales in 1996 as compared to 7.0% of sales for the first half of 1995. The
increase resulted from added corporate costs for the Pizzeria Uno Restaurants
included for the full period in 1996.
ACQUISITION OF THE GRILL. The acquisition of The Grill in April of 1996 is
expected to contribute both sales and store level income to the Company helping
to absorb part of the existing overhead. On a pro forma basis, assuming
consummation of The Grill purchase at December 26, 1994, the combined operations
of Grill Concepts and The Grill produced a pro forma net loss of $26,000 during
the first half of 1996 as compared to a pro forma net income of $144,000 for the
first six months of 1995. During such periods, The Grill on a stand alone basis,
reported a 25% increase in revenues from $1.3 million in 1995 to $1.7 million in
1996 and a 24% increase in gross profits from $0.9 million in 1995 to $1.1
million in 1996.
The increase in sales of The Grill is attributable, in part, to the opening
of The Grill for business on Sunday evening commencing in July of 1995.
Additionally, during the past year, The Grill has been featured in several
magazines and was inducted into the "Fine Dining Hall of Fame" which has
increased guest counts and resulting sales. The Grill operating expensed
increased from $0.8 million (62.3% of sales) in 1995 to $0.9 million (55.4% of
sales) in 1996. This decreased expense percentage resulted from the spreading of
fixed costs over significantly higher sales volume. As a result of the
foregoing, The Grill, on a stand-alone basis, reported a net income of $230,000
for the first six months of 1996 as compared to a net income of $89,000 for the
first six months of 1996.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
SALES. The Company's revenues for 1995 increased 36.6% to $20.2 million
from $14.8 million in 1994. The Magellan Units contributed $4.9 million of the
total $5.4 million increase in revenues during 1995. The remaining increase was
primarily attributable to the operation of a Daily Grill store during 1995 which
was closed for approximately seven weeks in early 1994 as a result of the
January 1994 earthquake in Southern California. The four Daily Grill locations
which were open during all of fiscal 1994 and 1995 reported an aggregate 3.1%
increase in same store sales from 1994 to 1995. The increase in same store sales
was partially attributable to the 1995 fiscal year including one week more (53
weeks) than fiscal 1994 (52 weeks).
COST OF SALES AND GROSS PROFIT. While revenues increased by 36.6% ($5.4
million) in 1995 as compared to 1994, cost of sales increased by only 31.3%
($1.3 million) and decreased as a percentage of sales from 27.9% to 26.8%. $1.2
million of the increase in cost of sales was attributable to the addition of the
Magellan Units. The Daily Grill cost of sales represented 27.5% of sales for
1995 as compared to 27.9% of sales for 1994. This cost reduction is attributable
to an ongoing effort by chefs and management to closely and constantly monitor
and control food and beverage costs. As a result, gross profit increased 38.7%
from $10.7 million (72.1% of sales) in 1994 to $14.8 million (73.2% of sales) in
1995.
OPERATING EXPENSES AND OPERATING RESULTS. While sales increased 36.6%
and gross profit increased 38.7%, total operating expenses rose only 31.3% to
$14.6 million in 1995 (representing 72.2% of sales) from $11.1 million
(representing 75.1% of sales) in 1994. This reduction in operating expense
percentages was primarily attributable to a substantial reduction in
amortization of pre-opening costs (1.7% of the percentage reduction) and a
reduced rate of growth in general and administrative expenses (representing 1.6%
of the percentage reduction).
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Restaurant operating expenses increased 37.5% to $12.1 million in 1995,
from $8.8 million in 1994. As a percentage of sales, restaurant operating
expenses represented 59.8% and 59.4%, respectively, in 1995 and 1994.
General and administrative expenses increased only 14.4% to represent
8.5% of sales in 1995 as compared to 10.1% of sales in 1994. Essentially, no
significant increase in general and administrative expenses was necessary to
handle the additional revenues generated in the most current year. The increase
in this category was a combination of increased executive and office salaries,
increased advertising and increased insurance premiums offset by reduced
consulting costs and savings from closing the former Magellan eastern office.
OTHER INCOME AND EXPENSES AND NET INCOME. Net interest expense
decreased by approximately $92,000 due to increased interest income, the
conversion of outstanding Debentures at the time of the Exchange and the lower
interest rated achieved by the receipt of a 4% SBA loan.
As a result of the above, the Company reported net income of $63,000
for 1995 compared with a loss of $670,000 during 1994.
MAGELLAN PRO FORMA RESULTS. On a pro forma basis, assuming consummation
of the Exchange at December 27, 1993, the combined operations of Grill Concepts
and Magellan produced a net loss of $174,000 in 1995 as compared to a net loss
of $1.0 million in 1994. During such periods, Magellan, on a stand-alone basis,
reported a 22% decrease in revenues from $7.9 million in 1994 to $6.1 million in
1995 and a 21% decrease in gross profit from $5.8 million in 1994 to $4.6
million in 1995. The decrease in Magellan's revenues and gross profit was
primarily attributable to the closure of Magellan's Henrietta, New York,
restaurant in December of 1994. Partially offsetting Magellan's decrease in
gross profits was a 21% reduction in combined restaurant operating expenses and
depreciation and amortization expenses, the majority of which reduction in
expenses was attributable to the closure of the Henrietta restaurant. General
and administrative expenses of Magellan in the 1995 period included a charge of
$150,000 for Exchange costs. Excluding this item, Magellan's general and
administrative expenses decreased 72%, a result of consolidating and
transferring corporate responsibility to Grill Concepts. Magellan also reported
a one-time charge of $125,000 in 1994 relating to a financial services fee and a
loss of $154,000 on closure of the Henrietta restaurant. As a result of the
foregoing, Magellan, on a stand-alone basis, reported a loss of $112,000 for
1995 as compared to a loss of $577,000 for 1994.
KNOWN AND ANTICIPATED FUTURE TRENDS AND CONTINGENCIES. The following
statements are based on current expectations. These statements are
forward-looking and actual results may differ materially. Prior to the
consummation of the Exchange, incoming management agreed to make every effort to
sell, or close, Magellan's sports themed restaurant (originally known as Jo Jo
Players and changed to Tailgators following the Exchange). As a result of such
determination, the net assets acquired pursuant to the Exchange were reduced,
and excess of cost over net assets acquired was increased by $512,000. While the
closure of such restaurant will result in reduced revenue for the Company and
increased amortization of goodwill, the impact on subsequent net income is
expected to be positive. At June 15, 1996, operations at Tailgators had been
terminated and management was pursuing efforts to sell the restaurant or secure
releases under the lease on the premises. Because of the adjustment to goodwill
taken in 1995, no charge is expected to be required in connection with the
closure or upon the ultimate sale of Tailgators. However, there can be no
assurance that the Company will not incur additional charges in the future
relating to the closure, sale or continued liability on the underlying lease of
Tailgators.
With control shifting to the GCI management team in California,
Magellan's New Jersey corporate office was closed on May 31, 1995 and all
accounting and related corporate administration was transferred to the Company's
California offices. The Company has, however, opened a small office in New
Jersey, close to an existing Pizzeria Uno restaurant for management of the
existing and future east coast restaurants.
In December of 1995, an expansion and remodeling of the Daily Grill in
Brentwood, California was completed. Adjacent space of 900 square feet was
leased to facilitate the addition of approximately 20 seats plus a full service
bar. Previously, this restaurant served only wine, beer and non-alcoholic
beverages. This expansion has increased the store's sales volume and is expected
to continue to produce increased sales volumes in the future.
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Also, in October of 1995, a Rhino Chasers restaurant and bar was opened
in the Commuter Terminal at Los Angeles International Airport. This location is
the first of two restaurants to be opened under an Operating Agreement with CA
One Services, Inc. ("CA One") wherein the Company will receive a management fee
of 4% of sales plus 51% of net income after repayment of funds advanced by CA
One to build and start-up the restaurants. From opening of Rhino Chasers to
December 31, 1995, the Company's management fee and allocable share of earnings
from Rhino Chasers totaled approximately $24,000, which is included in the
Company's reported sales. Early results from Rhino Chasers have been positive.
Current expansion plans include the opening of three new restaurants,
including (1) a Daily Grill to be opened at LAX pursuant to the Operating
Agreement with CA One, (2) a Daily Grill in Irvine, California, and (3) a Daily
Grill in Washington, D.C. The Daily Grill to be opened in the International
Terminal at LAX is now scheduled to open in October of 1996. Pursuant to the
Operating Agreement with CA One, all costs of constructing the Daily Grill at
LAX are being advanced by CA One.
The Daily Grill to be opened in Irvine, California is expected to open
during the third quarter of 1996. The site of such restaurant previously housed
a restaurant and is presently under lease by the Company. Because of the
previous operation of a restaurant at such site, build out at such site will be
less extensive than the required build-out for other Daily Grill's which is
expected to reduce the construction and start-up costs of such restaurant to
approximately $750,000, as compared to a typical restaurant which costs $1.2
million or more to build out and start-up.
After evaluation of numerous sites at which to open the first east coast
Daily Grill, the Company has entered into a lease in Washington D.C. with such
restaurant expected to be operational by the first quarter of 1997. See
"Business - Business Expansion."
The anticipated opening of the east coast Daily Grill, and to a lesser
extent the Irvine location, is expected to result in the incurrence of various
pre-opening expenses which may adversely impact earnings during the first year
of operations of such restaurants. However, management anticipates that each of
such operations can be operated profitably within the first year and that the
opening of each of the three Daily Grill restaurants presently contemplated will
improve both revenues and profitability during 1996 and future years. There can
be no assurance as to when the three proposed restaurants will actually open or
as to the future profitability of those restaurants.
In addition to the proposed opening of three new Daily Grill
restaurants during 1996, the Company entered into an agreement with a
partnership which controlled The Grill on the Alley restaurant in Beverly Hills,
California, pursuant to which the Company acquired The Grill on the Alley in
April of 1996 in exchange for 850,000 shares of common stock of the Company. The
Grill on the Alley was founded, and was previously managed, by the principal
shareholders of the Company and is the restaurant after which the Daily Grill
was patterned. The Grill is a prominent well-established restaurant which has
operated profitably for many years. The acquisition of The Grill on the Alley is
anticipated to increase the Company's revenues and profits proportionately. The
Company incurred certain costs to carry out such acquisition.
In July of 1996, the Company submitted a proposal pursuant to which it
would acquire 19 restaurants from Hamburger Hamlet Restaurants, Inc. ("Hamburger
Hamlet") for $8.5 million in cash, contingent performance notes in an amount
between $3.0 and $3.2 million, and 500,000 warrants. Hamburger Hamlet is
presently operating in bankruptcy and has closed 12 unprofitable stores.
Management believes that the terms on which the Hamburger Hamlet restaurants are
proposed to be acquired are favorable and that such restaurants can be operated
profitably. However, given the past financial difficulties of Hamburger Hamlet,
there is no assurance that the restaurants proposed to be acquired can be
operated on a profitable basis. Further, consummation of the Hamburger Hamlet
acquisition is subject to approval of the bankruptcy court and the creditors of
Hamburger Hamlet, completion of due diligence, arrangement of satisfactory
financing and other contingencies. Accordingly, there can be no assurance as to
when, if ever, the Hamburger Hamlet acquisition will be consummated. See
"Business - Business Expansion."
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $0.4 million and a
cash balance of $1.8 million as compared to negative working capital of $0.9
million and a cash balance of $0.6 million at December 31, 1995. The improvement
in the Company's working capital and cash was primarily attributable the receipt
of $1.5 million of proceeds from the sale of Series A Preferred Stock and to
reductions in payables and accrued liabilities during the period.
As a result of the Exchange, in March of 1995, the financial resources,
operations and obligations of Magellan and GCI were combined. Following the
Exchange, the Company assumed GCI's business plan and the primary obligations of
the Company were those of GCI.
Historically, the Company has funded its day-to-day operations through
its operating cash flow, while funding growth through a combination of bank
borrowing, loans from stockholders/officers, the sale of debentures and the
issuance of warrants and loans and tenant allowances from certain of its
landlords. At June 30, 1996, the Company had existing bank borrowing of
$1,173,000, an SBA loan of $165,000, loans from stockholders/officers of $84,000
and loans/advances from landlords and others of $159,000.
On April 30, 1995, $1.6 million of the Company's bank borrowings was termed
out over a 5-year period payable in 60 equal monthly installments of $26,667
which began on April 30, 1995, with all remaining principal amounts due on March
31, 2000. Interest is payable monthly at a variable rate equal to the lender's
reference rate plus 0.625% (8.87% at March 31, 1996). The Company has an
additional $500,000 line of credit originally available through November 30,
1995 which has been extended through November 30, 1996. All amounts owing under
the bank loan and credit line have been guaranteed by trusts maintained by each
of Richard Shapiro and Michael Weinstock, both of whom are directors of the
company and are secured by first priority liens on the Company's equipment,
fixtures, inventory, receivables, contract rights and general intangibles
(whether now owned or acquired in the future), together with the proceeds
thereof.
Under the terms of the credit line, the Company is permitted to use
credit line funds only for repayment of existing term debt, general working
capital and the funding of new restaurant openings. Among other things, the bank
loan and the credit line require the Company to maintain certain financial
ratios and insurance coverage. In addition, unless the lender's consent is
obtained, the Company must conduct its operations consistent with various
affirmative and negative covenants of the type often found in bank lending
agreements. Also, any debt to stockholders of the Company must be subordinated
to repayment of the bank loan and credit line.
During 1995, the Company and its subsidiaries were obligated under
eleven leases covering the premises in which the Company's Daily Grill, Pizza
Restaurants, Rhino Chasers and Tailgators are located as well as leases on its
executive offices and an office in Cherry Hill, New Jersey. Ten of such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $1.5 million in 1995, with varying escalation and percentage rent
clauses in each of the restaurant leases. The Rhino Chasers lease contains no
minimum rent provisions but obligates Airport LLC to pay rentals in an amount
equal to 16.5% of sales. In January and March of 1996, the Company entered into
leases for new Daily Grill restaurants in Irvine, California and Washington,
D.C. Additionally, Airport LLC, which operates restaurants at LAX with CA One,
is obligated under a lease covering a proposed Daily Grill to be operated in the
International Terminal of LAX which is expected to open in October of 1996.
Minimum rental payments during 1996 on existing leases, excluding the Irvine and
Washington, D.C. sites, total $1.5 million. The Irvine and Washington, D.C.
leases provide for minimum annual rentals of $120,000 and $225,000,
respectively. Additionally, pursuant to the lease at LAX, Airport LLC is
obligated to pay rentals in an amount equal to 16.5% of sales.
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As noted above, the Company has closed Tailgators and is presently
involved in efforts to sell such restaurant or relieve the Company of ongoing
liability under its lease. The Company is a general partner of the partnership
which is the tenant under the lease on the Tailgators' premises, which lease
provides for variable annual rentals based on the mortgage payments with respect
to the property plus a percentage of the partnership's cash flow with current
monthly payments being approximately $11,000. The Company may be obligated for
all or a portion of the balance of any lease obligations thereunder. In
connection with the contemplated sale, the Company will endeavor to secure a
written release from liability under the lease; the Company believes that
conditions and circumstances exist which may mitigate its obligations which
would otherwise exist under the lease. See "Management's Discussion and Analysis
- -- Known and Anticipated Future Trends and Contingencies."
The Company presently anticipates opening three new restaurants through the
first quarter of 1997 and, during the second quarter, acquired The Grill
restaurant as discussed above. While the Company does not expect to incur any
costs in connection with the opening of the proposed Daily Grill at LAX, which
costs are being funded by CA One, and expects to incur costs in connection with
the acquisition of The Grill, opening of the Irvine, California Daily Grill is
anticipated to cost approximately $750,000 and opening of a Daily Grill in
Washington, D.C. is anticipated to cost approximately $1.3 million.
Management believes that the Company has adequate resources on hand to
sustain operations for at least the following 12 months and to open LAX and
Irvine restaurants. In order to fund the opening of the Washington, D.C. Daily
Grill, and any additional restaurants, the Company will require, and intends to
raise, additional capital through the issuance of debt or equity securities. In
order to raise funds needed to open the Washington, D.C. Daily Grill, in June of
1996, the Company sold $1.5 million of Series A Preferred Stock. The Series A
Preferred Stock bears a 10% annual dividend, payable in cash or stock, and is
convertible into Common Stock at the lesser of $2.25 per share or 85% of the
average closing price of the Common Stock for the five trading days prior to
conversion. In connection with the sale of the Series A Preferred Stock, the
Company issued 250,000 warrants which are exercisable until June of 2001 at
$3.00 per share. See "Description of Securities," "Business -- Business
Expansion" and "Management's Discussion and Analysis -- Known and Anticipated
Future Trends and Contingencies."
Additionally, as noted above, the Company has submitted a proposal
pursuant to which it would acquire 19 Hamburger Hamlet restaurants. Consummation
of such acquisition is dependent upon, among other things, securing satisfactory
financing. Management presently anticipates that the total financing required to
fund the acquisition and initial working capital needs of such restaurants will
be between $9 and $10 million. The Company has no present commitments to provide
such financing and, while management believes that such financing can be secured
on acceptible terms, there can be no assurance that such financing will
ultimately be available. Further, if the Hamburger Hamlet acquisition is
consummated, the Company will be obligated to issue a Performance Note in an
amount between $3.0 and not to exceed $3.2 million. Such Performance Note will
be payable from 50% of earnings before interest, taxes, depreciation and
amortization ("EBITDA") to the extent annual EBITDA of those operations exceeds
$2.5 million, provided, however, that payments on such Performance Note shall
terminate after seven years. The actual amount of the Performance Note will be
at the option of Hamburger Hamlet, provided that annual payments on the
Performance Note will be limited to $750,000 if Hamburger Hamlet determines that
the Performance Note should be in the amount of $3.2 million.
At June 30, 1996 the Company had outstanding 190,793 warrants previously
issued by Magellan and exercisable at a price of $2.00 per share. Additionally,
in connection with the Exchange and a private placement during 1995, the Company
issued an additional 100,000 warrants which are exercisable at $3.00 per share.
The exercise of all warrants outstanding at June 30, 1996, including the
warrants issued in connection with the issuance of the Series A Preferred Stock,
would provide an additional $1,431,586 of capital to the Company. There is no
assurance, however, that any of such warrants will be exercised. See
"Description of Securities."
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IMPACT OF INFLATION
To date, inflation has not been a major factor in the Company's
business. There can be no assurances, however, that this will continue to be the
case. To the extent that it is commercially feasible, menu prices will be
adjusted for increases in food and labor costs when appropriate.
BUSINESS
GENERAL AND DEVELOPMENT OF BUSINESS
Grill Concepts, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in November of 1985. The Company was originally
incorporated under the name "Uno Concepts, Inc." In December of 1992, the
Company changed its name to "Magellan Restaurant Systems, Inc." and, in May of
1993, the Company "went public" pursuant to a merger with MRS Funding, Inc.
In March of 1995, the Company consummated an exchange (the "Exchange")
pursuant to which the Company issued 8,500,000 shares of Common Stock in
exchange for 100% of the outstanding stock of Grill Concepts, Inc., a California
corporation ("GCI"). Following the Exchange, the Company changed its name to
"Grill Concepts, Inc.," management of GCI assumed effective management and
control of the Company and the Company effectively altered its future operating
plans to emphasize the expansion of the "Daily Grill" restaurant format of GCI.
The Company, prior to the Exchange, is sometimes referred to herein as
"Magellan."
The Company presently owns and operates ten restaurants, consisting of
six Daily Grill restaurants, The Grill on the Alley restaurant and three
Pizzeria Uno Restaurants, and owns a controlling interest in one Rhino Chasers
brew pub/restaurant. The Company plans to open three additional Daily Grill
restaurants during 1996.
DAILY GRILL RESTAURANTS
Background. The Company, through its subsidiary, GCI, owns and operates
six existing Daily Grill restaurants in Southern California and plans to open
three new Daily Grill restaurants during 1996. Daily Grill restaurants are
patterned after "The Grill on the Alley" in Beverly Hills, a fine dining
American-style grill restaurant which was previously managed, and is now owned,
by the Company. See "The Grill on the Alley" and "Business Expansion." The Grill
on the Alley was founded by Robert Spivak, Michael Weinstock and Richard Shapiro
(the founders of GCI) in the early 1980's to offer classic American foods in the
tradition of the classic American dinner house. After successfully operating The
Grill on the Alley for a number of years, in 1988, Messrs. Spivak, Weinstock and
Shapiro decided to expand on that theme by opening the first Daily Grill
restaurant. Daily Grill, in an effort to offer the same qualities that made The
Grill on the Alley successful, but at more value oriented prices, adopted six
operating principles that characterize each Daily Grill restaurant: high quality
food, excellent service, good value, consistency, appealing atmosphere and
cleanliness. GCI emphasized those principles in an effort to create a loyal
patron who will be a "regular" at its restaurants. The Daily Grill motto is
"Satisfaction Served Daily."
Restaurant Sites. The Company presently operates six Daily Grill
restaurants which opened in the following months and years:
Location Opened
Brentwood, California September 1988
Los Angeles, California April 1990
Newport Beach, California April 1991
Encino, California April 1992
Studio City, California August 1993
Palm Desert, California January 1994
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The Company plans to open three additional Daily Grill restaurants at the
following sites during 1996 and the first quarter of 1997 (See "Business
Expansion"):
Location Scheduled Opening
-------- -----------------
Irvine, California Third Quarter, 1996
Los Angeles International Airport1 Fourth Quarter, 1996
Washington, D.C. First Quarter, 1997
All Daily Grill restaurants are presently open for lunch and dinner
seven days a week.
Each Daily Grill restaurant is located in leased facilities. Site
selection is viewed as critical to the success of the Company and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.
The site selection process focuses on local demographics and household income
levels, as well as specific site characteristics such as visibility,
accessibility, parking availability and traffic volume. Each site must have
sufficient traffic such that management believes the site can support at least
twelve strong meal periods a week (i.e., five lunches and seven dinners).
Preferred Daily Grill sites, which characterize the existing restaurants, are
high-end, mid-size retail shopping malls in large residential areas with
significant daytime office populations and some entertainment facilities.
Historically, Daily Grill restaurants have been anchor tenants at high profile
malls and, therefore, have received significant tenant improvement allowances.
Existing Daily Grill restaurants range in size from 3,750 to 5,000
square feet, of which approximately 2,000 square feet is devoted to kitchen and
service areas, and seat between 100 and 200 persons. Opening costs of existing
restaurants, including leasehold improvements, furniture, fixtures and equipment
and pre-opening expenses, have averaged $1.2 million per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu. The menu was designed to be reminiscent of the selection
available at American-style grill restaurants of the 1930's and 1940's, in
contrast to the "nouvelle cuisine" and diet meal fads of the 1980's. Daily Grill
offers such "signature" items as Cobb salad, Caesar salad, chicken hash,
meatloaf with mashed potatoes, chicken pot pie, chicken burgers, hamburgers,
rice pudding and fresh fruit cobbler. The emphasis at the Daily Grill is on
freshly prepared American food served in generous portions.
Entrees range in price from $7.50 for an "original" beef dip sandwich
to $19.95 for a char-broiled 16 oz. T-bone steak with all the trimmings. The
average lunch check is $11 per person and the average dinner check is $14 per
person, including beverage. Each Daily Grill restaurant also offers a children's
menu with reduced portions of selected items at reduced prices. All of the
existing Daily Grill restaurants offer a full range of beverages, including
beer, wine and full bar service.
Proprietary recipes have been developed for substantially all of the
items offered on the Daily Grill menu. The same recipes are used at each
location and all chefs undergo extensive training in order to assure consistency
and quality in the preparation of food. Virtually all of the menu items offered
at the Daily Grill are cooked from scratch utilizing fresh food ingredients. The
Company's management believes that its standards for ingredients and the
preparation of menu items are among the most stringent in the industry.
Each Daily Grill restaurant has up to seven cooks on duty during
regular lunch and dinner hours to provide prompt, specialized service.
Restaurant staff members utilize a "point-of-sale" computer system to monitor
the movement of food items to assure prompt and proper service of guests and for
fiscal control purposes.
- ----------------------
1
The Daily Grill restaurant to be opened at Los Angeles International Airport
will be operated by The Airport Grill LLC, a limited liability company in which
the Company owns a 51% interest. See "The Airport Grill LLC - LAX Daily Grill."
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Atmosphere and Service. Each Daily Grill location is designed to
provide the sense and feel of comfort. In the tradition of an old-time
American-style grill, the setting is an open kitchen adjacent to tables, booths
and/or counters. The open kitchen setting emphasizes the quality and freshness
of Daily Grill food dishes in addition to the cleanliness of operations. The
dining area is well-lit and is characterized by a "high energy level".
The feeling of comfort and tradition is enhanced by the restaurant
policy of requiring no reservations and accepting no reservations except for
groups of six or more. As a result, patrons are served on a first-come-
first-served basis and never have to wait for a table while a vacant table is
being held for patrons with reservations.
The attention to detail and quality of the decor is carried through to
the professional service. All Daily Grill employees are trained to treat each
person who visits the restaurant as a "guest" and not merely a customer. Each
server is responsible for assuring that his or her guest is satisfied. In
keeping with the traditions of the past, each Daily Grill employee is taught
that at the Daily Grill "the guest is always right." The Daily Grill's policy is
to accommodate all guest requests, ranging from substitutions of menu items to
take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 70% of the guests at the Daily Grills which
have been open for over a year represent repeat business, and many guests have
become "regulars" in the tradition of the neighborhood restaurant.
THE AIRPORT GRILL LLC
Operating Agreement. In March of 1995, the Company entered into an
operating agreement (the "Operating Agreement") with CA One Services, Inc., a
major national airport concessionaire and division of Delaware North Companies,
Inc. Pursuant to the Operating Agreement, the Company and CA One Services formed
The Airport Grill LLC (the "Airport LLC") to own and operate restaurants within
Los Angeles International Airport ("LAX"). Under the Operating Agreement, CA One
Services is advancing all required capital to open and operate one or more
restaurants, other than certain minimum capital ($10,200) which the Company
contributed, and the Company will provide certain managerial oversight and
assistance. Profits of the Airport LLC will be shared 51% by the Company and 49%
by CA One Services after the payment of a 4% management fee to each of the
Company and CA One Services and after the repayment of CA One Services' advances
to the Airport LLC, with interest.
Rhino Chasers. In October of 1995, the Airport LLC opened its first
restaurant in LAX, "Rhino Chasers" brew pub restaurant/bar. Rhino Chasers
features hand-crafted beer and a selection of foods developed by the Company
specifically for such restaurant.
Rhino Chasers occupies approximately 1,756 square feet in Terminal One
of LAX and seats up to 60 persons. Rhino Chasers is designed to offer a casual,
friendly and entertaining atmosphere for travelers to enjoy a casual meal and
drinks at moderate prices. Entree selections currently range in price from
approximately $4.95 to $7.95, with an average cost per person per meal,
including beverage, of approximately $9.00. Based on operating results to date,
approximately 47% of Rhino Chasers' revenues have been attributable to alcohol
sales with the remaining sales being attributable to food and non-alcoholic
beverages.
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Rhino Chasers employs two full time managers and approximately 24
part-time and full-time employees. Rhino Chasers is open from 5:30 a.m. to 11:00
p.m., seven days per week.
LAX Daily Grill. The Airport LLC has entered into a lease and plans to open
a Daily Grill restaurant in the International Terminal of LAX. Construction is
presently underway on an 8,300 square foot full-service restaurant seating
approximately 300 persons which is expected to open by August of 1996. Such
restaurant will be operated by the Airport LLC in the Tom Bradley International
Terminal of LAX. See "Business Expansion."
THE GRILL ON THE ALLEY
In addition to its ownership interests in the various restaurants
operated by its various subsidiaries, commencing in 1995, the Company, through
its executives, provided management services to The Grill on the Alley. The
Company, in return, received a management fee equal to 5% of the revenues of The
Grill on the Alley.
The Grill on the Alley is an upscale Beverly Hills restaurant which
opened in 1984 and served as the model for the Daily Grill restaurants. The
Grill on the Alley is set in the traditional style of the old-time grills of New
York and San Francisco, with black-and-white marbled floors, polished wooden
booths and deep green upholstery. In 1995, The Grill on the Alley was inducted
into Nation's Restaurant News' Fine Dining Hall of Fame and was described by W
Magazine as "home of the quintessential Beverly Hills power lunch." The Grill on
the Alley offers five-star American cuisine and uncompromising service in a
comfortable, dignified atmosphere. See "Daily Grill Restaurants."
Until April of 1996, The Grill on the Alley was owned by a partnership
the managing partner of which was controlled by the principal shareholders and
directors of the Company (Robert Spivak, Michael Weinstock and Richard Shapiro).
In April of 1996, the Company acquired The Grill on the Alley in exchange for
850,000 shares of common stock. Upon consummation of such acquisition, the
Company terminated the existing management fee arrangement and now owns and
operates The Grill on the Alley.
THE PIZZA RESTAURANTS
Restaurants. Through its wholly-owned subsidiaries, the Company
presently operates three "Pizzeria Uno Restaurant & Bar" locations. The
Company's present Pizza Restaurants are located in the following cities and were
opened in the months and years indicated:
Location Opened
-------- ------
South Plainfield, New Jersey January, 1987
Media, Pennsylvania February, 1987
Cherry Hill, New Jersey March, 1990
The Company chose to franchise with Pizzeria Uno Corporation in order
to capitalize on the increasing popularity of pizza and the operating and
marketing strategies developed by the Franchisor. The Company's Pizza
Restaurants are operated in accordance with certain guidelines established, and
managerial assistance and training provided, by the Franchisor. See "- The
Franchise Agreements" below.
The Pizza Restaurants offer a diverse menu in accordance with
guidelines established by the Franchisor, featuring gourmet, Chicago-style
deep-dish pizzas, filled with ingredients such as fresh meats, spices,
vegetables and cheese and baked to order based on proprietary recipes of the
Franchisor. The Pizza Restaurants also offer a variety of sandwiches,
hamburgers, appetizers, salads, desserts and beverages, including a full liquor
selection. All of the menu items offered by the Pizza Restaurants are also
available for delivery or carry-out. Delivery service is provided by third
parties pursuant to contractual arrangements.
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In accordance with the design and operating guidelines established by
the Franchisor, the Pizza Restaurants are characterized by a casual, friendly
and entertaining atmosphere, full and efficient service, and high-quality menu
items at moderate prices. Entree selections currently range in price from
approximately $4.95 to $8.95, with an average cost per person per meal,
including beverage, of approximately $6.25 for lunch and $9.25 for dinner. The
Pizza Restaurants are generally more upscale than typical pizza restaurants and
are targeted primarily to middle to upper-middle income families and individuals
in the 17 to 49 year-old age group.
The Pizza Restaurants are located in suburban areas in leased premises
built-out to design and quality specifications established by the Franchisor.
The Pizza Restaurants range in size from approximately 5,300 square feet to
approximately 7,900 square feet, including a bar and lounge area, and have
seating capacities ranging from 180 to 200 customers. Each of the Pizza
Restaurants employs between three and four full time managers and assistant
managers and between 45 and 85 part-time and full-time employees. The Pizza
Restaurants are generally open from 11:00 a.m. to midnight, seven days per week,
except on Friday and Saturday when the Pizza Restaurants remain open until 1:00
a.m.
The Franchise Agreements. The Company acquired the rights to operate
under the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreements, the Company has the exclusive
rights to utilize the proprietary marks, recipes, procedures and system
developed by the Franchisor within a three mile radius of the Pizza Restaurants'
designated locations. The Franchise Agreements each have a term of 20 years with
three successive ten-year renewal periods at the option of the Company, provided
that the agreements have not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set
forth in the Franchisor's Operating Manual and to maintain its confidentiality.
Among the various guidelines and prohibitions imposed on the Company pursuant to
the Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts, an advertising fee (1% of gross revenues) and the
expenditure of certain minimum amounts on local advertising and promotion (2% of
gross revenues).
BUSINESS EXPANSION
The Company has historically sought to expand its operations through
the construction or acquisition of additional franchised or non-franchised
restaurants. Following the Exchange, the Company adopted GCI's expansion plans
and intends to focus on the addition of Daily Grill restaurants.
During 1995, management reviewed possible expansion into new markets
and will continue to do so in the future. Such review will entail careful
analysis of potential locations to assure that the demographic make-up and
general setting of new restaurants is consistent with the patterns which have
proven successful at the existing Daily Grills. While the general appearance and
operations of future Daily Grills are expected to conform generally to those of
existing facilities, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future Daily Grill restaurants are
expected to feature full bar service.
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In January of 1996, the Company entered into a lease pursuant to which the
Company expects to open a new Daily Grill in Irvine, California during the third
quarter of 1996 at an estimated cost of $750,000. Additionally, in March of
1996, the Company entered into a lease pursuant to which the Company expects to
open its first East Coast Daily Grill in Washington, D.C. during the first
quarter of 1997 at an estimated cost of $1.3 million. The Company will continue
to evaluate sites for future restaurants and, while management has not selected
sites for such additional restaurants, the Company has targeted Chicago, San
Francisco and Las Vegas as potential markets for future expansion. Management
anticipates that the cost to open additional Daily Grill restaurants will range
from $1.0 to $1.4 million per restaurant, with each restaurant expected to be
approximately 5,000 to 6,000 square feet in size. Actual costs may vary
significantly depending upon the market conditions, rental rates, labor costs
and other economic factors prevailing in each market in which the Company
pursues expansion. There can be no assurance, however, that the Company will be
successful in opening additional Daily Grill restaurants in the cities or at the
costs indicated, or, even if such restaurants can be opened at such costs, that
such restaurants can be operated on a profitable basis.
During 1995, the Company entered into the Operating Agreement with CA
One Services, Inc., pursuant to which the Airport LLC was formed to own and
operate restaurants within Los Angeles International Airport, and the rights to
operate a Daily Grill restaurant at LAX were granted to the Airport LLC by the
City of Los Angeles. Construction is presently underway on an 8,300 square foot
full-service restaurant seating approximately 300 persons which is expected to
open by October of 1996. Such restaurant will be operated by the Airport LLC in
the Tom Bradley International Terminal of LAX. Pursuant to such arrangement, CA
One Services is advancing all required capital to open and operate such
restaurant, other than $10,200 which the Company has contributed, and the
Company will provide certain managerial oversight and assistance. Profits of the
Airport LLC will be shared in accordance with the Operating Agreement. See "The
Airport Grill LLC - Operating Agreement."
In addition to the anticipated opening of a Daily Grill at LAX, pursuant to
the Operating Agreement, the Airport LLC, in October of 1995 opened, and
operates, a Rhino Chasers brew pub/restaurant in Terminal One of LAX. At this
time, the Company, and the Airport LLC, have no plans to open additional Rhino
Chasers. However, the Company, and or the Airport LLC, may evaluate the opening
and operation of additional Rhino Chasers where favorable opportunities become
available in airports and other locations. See "The Airport Grill LLC - Rhino
Chasers."
In July of 1996, the Company submitted a proposal to acquire selected
assets constituting all of the operations of Hamburger Hamlet Restaurants, Inc.
("Hamburger Hamlet"). Hamburger Hamlet, and its predecessors, has operated high
end casual dining restaurants since 1950. The operations of Hamburger Hamlet
were acquired by the then management of the company in a leveraged buyout in
1988 and in November of 1991 Hamburger Hamlet completed an initial public
offering. In 1996, Hamburger Hamlet filed bankruptcy and closed 12 unprofitable
restaurants, all of which had been opened since the leveraged buyout.
Pursuant to the Company's proposal, the Company has offered to acquire
the remaining 19 Hamburger Hamlet restaurants for (i) $8.5 million in cash (ii)
500,000 warrants exercisable for three years at a price equal to the price of
the Company's common stock at the closing of the acquisition increased by 5%,
and (iii) a non-interest bearing performance note (the "Performance Note") in
the amount of $3.2 million payable solely from 50% of annual earnings before
interest, taxes, depreciation and amortization ("EBITDA") attributable to the
acquired restaurants to the extent EBITDA exceeds $2.5 million, not to exceed
$750,000 per year (or, at the option of Hamburger Hamlet, $3.0 million from 50%
of annual EBITDA in excess of $2.5 million without the $750,000 annual cap).
Management of Hamburger Hamlet has submitted a plan of reorganization
based on acceptance of the Company's offer. Additionally, the secured creditors
of Hamburger Hamlet have agreed in principal to approve the Company's offer. The
general creditors of Hamburger Hamlet have, in prior discussions, rejected the
Company's offer. Consummation of the acquisition of the Hamburger Hamlet
restaurants is subject to a number of contingencies, including completion of
definitive documents, further due diligence, approval of the plan by the
creditors and the bankruptcy court and the arrangement of satisfactory
financing.
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RESTAURANT MANAGEMENT
The Company strives to maintain quality and consistency in its
restaurants through the careful hiring, training and supervision of personnel
and the adherence to standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel. The Company believes that
its concept and high sales volume enable it to attract quality, experienced
restaurant management and hourly personnel. The Company has experienced a
relatively low turnover at every level at its Daily Grill restaurants. See "-
Daily Grill Restaurants" above.
Daily Grill. Each Daily Grill restaurant is managed by one general
manager and one or two managers or assistant managers. Each restaurant also has
one head chef and one or two sous chefs, depending on volume. On average,
general managers have approximately seven years experience in the restaurant
industry and three years with the Company. The general manager has primary
responsibility for the operation of the restaurant and reports directly to the
Company's Vice President - Western Operations. In addition to ensuring that food
is prepared properly, each restaurant chef is responsible for product quality,
food costs and kitchen labor costs. Each restaurant has approximately 85
employees. Restaurant operations are standardized, and a comprehensive
management manual exists to ensure operational quality and consistency.
The Company maintains financial and accounting controls for each Daily
Grill restaurant through the use of a "point-of-sale" computer system integrated
with centralized accounting and management information systems. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue and
cash control.
All managers participate in a comprehensive seven week training program
during which they are prepared for overall management of the restaurant. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports. Two or
three times every month, an independent service is paid to go to each location
and prepare a report on every aspect of the meal, the service and the ambiance.
Servers at each restaurant participate in approximately three weeks of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.
Rhino Chasers. The staff of the Company's Rhino Chasers brew
pub/restaurant consists of two managers and approximately 24 hourly employees,
most of whom are part-time employees.
CA One has primary responsibility for the operation of Rhino Chasers.
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Pizza Restaurants. The staff of the Company's Pizza Restaurants
consists of between three and four managers and between 40 and 85 hourly
employees, most of whom are part-time employees, per location.
All managers of the Pizza Restaurants participate in an onsite training
program and are provided with the Franchisor's Operating Manual, which provides
detailed standards and specifications for all elements of operations.
Additionally, selected management personnel participate in periodic meetings
conducted by the Franchisor focusing on marketing, new products and other
aspects of business management.
The Eastern Coast Director of Operations oversees and supervises the
operations of each of the Company's Pizza Restaurants, providing ongoing
guidance and assistance to managers as necessary. Additionally, field-service
supervisors of the Franchisor periodically visit and inspect the operations of
the Pizza Restaurants to assure compliance with the quality, service and other
standards imposed by the Franchisor.
PURCHASING
Daily Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill restaurants. In order to
assure quality and consistency at each of the Daily Grill restaurants,
ingredients approved for the recipes are ordered on a unit basis by each
restaurant's head chef from a supplier designated by the Company's Food and
Beverage Director. Because of the Daily Grill's emphasis on cooking from
scratch, virtually all food items are purchased "fresh" rather than frozen or
pre-cooked, with the exception being bread, which is ordered from a central
supplier which prepares the bread according to a Daily Grill recipe and delivers
twice daily to assure freshness. In order to reduce food preparation time and
labor costs while maintaining consistency, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings and seasoning combinations.
The Company utilizes its point-of-sale computer system to monitor
inventory levels and sales, then orders food ingredients daily based on such
levels. The Company employs contract purchasing in order to lock in food prices
and reduce short term exposure to price increases. The Company's Vice President
- - Executive Chef establishes general purchasing policies and is responsible for
controlling the price and quality of all ingredients. The Vice President -
Executive Chef, in conjunction with the Company's team of chefs, constantly
monitors the quality, freshness and cost of all food ingredients. All essential
food and beverage products are available, or upon short notice can be made
available, from alternative qualified suppliers.
Pizza Restaurants. The Company has no contracts governing purchases of
food and beverage supplies but negotiates purchases for its Pizza Restaurants
directly with suppliers, often with the assistance of the Franchisor. Such
purchases cover all primary food ingredients and beverage products to ensure
adequate supplies and to obtain competitive prices. The Company purchases
primarily through Franchisor-authorized local or national distributors and seeks
competitive bids from suppliers on many of its primary food ingredients on an
annual basis. All ingredients are required to adhere to certain standards and
specifications established by the Franchisor or the Company. As a number of key
ingredients are proprietary ingredients developed by the Franchisor, the Company
can only acquire such ingredients from selected authorized distributors.
However, all essential food and beverage products are available, or upon short
notice can be obtained, from alternative qualified suppliers.
ADVERTISING AND MARKETING
Daily Grill. The Company has historically relied primarily on
reputation, local reviews and word of mouth to promote its Daily Grill
restaurants. Daily Grill restaurants have been featured in articles and reviews
in numerous local as well as national publications. The Company supplements its
reputation with a program of marketing and public relations activities designed
to keep the Daily Grill name before the public. Such activities include media
advertising, participating in local charity events and providing a location and
refreshments for meetings of charity organizations. During 1995, expenditures
for advertising and promotion were approximately 1.8% of gross revenues,
including a cable television advertising program.
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In February of 1996, the Company expanded and formalized its marketing
efforts with the hiring of an in-house marketing director and the retention of a
national consumer research firm to coordinate the Company's future advertising
and marketing efforts and to facilitate expansion into new markets. John Buchin,
as the Company's marketing director, will be responsible for advertising, public
relations and a wide range of marketing-related activities. Working with Mr.
Buchin and the Company will be Pulse Marketing, a nationally known consumer
research firm, which has been retained to undertake research designed to
facilitate successful expansion into new markets.
Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."
The Company budgets an average of 3% of Pizza Restaurant sales annually
for advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers. The Company supplements such philosophy with periodic in-store
promotions and coupons and two or three major advertising spots annually through
cable television, radio, newspaper and/or direct mail. In order to reinforce the
image of the Pizza Restaurants as high-quality theme restaurants, rather than
lost-cost, low-quality restaurants, the Company generally limits coupon
promotions to special events and the introduction of new products.
COMPETITION
The Daily Grill restaurants compete within the rapidly growing
mid-price, full-service casual dining segment. The Daily Grill's competitors
include national and regional chains, as well as local owner-operated
restaurants. The primary competitors to the Company's Pizza Restaurants are
casual theme restaurant chains including Friday's and the Olive Garden. Rhino
Chasers' competition is limited to restaurants and bars within the commuter
terminal of LAX.
The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. However,
many of its competitors have been in existence longer than the Company, have a
more established market presence and have substantially greater financial,
marketing and other resources, which may give them certain competitive
advantages. The Company believes that its ability to compete effectively will
continue to depend in large measure on its ability to offer a diverse selection
of high quality, fresh food products with an attractive price/value relationship
served in a friendly atmosphere.
Management believes that its affiliation with, and operation under the
name of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enables the Company to compete effectively with other local and national-chain
restaurants.
EMPLOYEES
The Company and its subsidiaries employ approximately 600 people, 13 of
whom are corporate personnel and 60 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 250 are full-time employees, with the
remainder being part-time employees.
None of the Company's employees are represented by labor unions or are
subject to collective bargaining or other similar agreements. Management
believes that its employee relations are good at the present time.
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TRADEMARKS AND SERVICE MARKS
The Company regards its trademarks and service marks as having
significant value and as being important to its marketing efforts. The Company
has registered its "Daily Grill" mark and logo and its "Satisfaction Served
Daily" mark with the United States Patent and Trademark Office as service marks
for restaurant service, and has secured California state registration of such
marks. The Company's policy is to pursue registration of its marks and to oppose
strenuously any infringement.
Pursuant to the Franchise Agreements, the Company's Pizza Restaurants
operate under the "Pizzeria Uno" trademark and service marks. The Franchisor has
undertaken to keep in place and renew, as necessary, its trademark registrations
and to vigorously oppose any infringements of its marks.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws
affecting its business. Each of the Company's restaurants is subject to
licensing and regulation by a number of governmental authorities, which may
include alcoholic beverage control, health and safety, and fire agencies in the
state or municipality in which the restaurants are located. Difficulties or
failures in obtaining or renewing the required licenses or approvals could
result in temporary or permanent closure of the Company's restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which served alcoholic beverages to such
person. In addition to potential liability under "dram-shop" statutes, a number
of states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.
Various federal and state labor laws govern the Company's relationship
with its employees, including such matters as minimum wage requirements,
overtime and other working conditions. Significant additional government-imposed
increases in minimum wages, paid leaves of absence and mandated health benefits,
or increased tax reporting requirements for employees who receive gratuities,
could be detrimental to the economic viability of the Company's restaurants.
Management is not aware of any environmental regulations that have had a
material effect on the Company to date.
PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant, all
of the Company's restaurants are located in space leased from parties
unaffiliated with the Company. The leases have initial terms ranging from 10 to
25 years, with varying renewal options on all but one of such leases. Each of
the leases provides for a base rent plus payment of real estate taxes, insurance
and other expenses, plus additional percentage rents based on revenues of the
restaurant.
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by the Company's chairman, Robert
L. Wechsler. See "Certain Relationships and Transactions."
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The Company's executive offices are located in 2,000 square feet of
office space located in Los Angeles, California. Such space is leased from an
unaffiliated party on a month to month basis.
The Company also maintains east coast offices in a building located in
Cherry Hill, New Jersey. Such offices are rented on a month-to-month basis for
$400 per month from the same affiliated company from which the Company leases,
and are located in the same complex as, the Cherry Hill restaurant.
Management believes that the Company's existing restaurant space is
adequate to support current operations. The Company intends to lease additional
office space in the near future and, from time to time, such additional office
space and restaurant sites as management deems necessary to support its future
growth plans.
LEGAL PROCEEDINGS
The Company from time to time is involved in various claims and legal
actions arising in the ordinary course of business, including actions filed
pursuant to "dram-shop" laws. None of such claims or legal actions which have
arisen to date is material in the opinion of management.
The Company is not presently a party to any material pending litigation
nor is the management of the Company aware of any threatened litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and offices of the
present directors and executive officers of the Company. The periods during
which such persons have served in such capacities are indicated in the
description of business experience of such persons below.
Name and Age Position
------------ --------
Robert L. Wechsler (67)....... Chairman of the Board
Robert Spivak (53)............ President, Chief Executive Officer and Director
Michael Weinstock (54)........ Vice Chairman of the Board,
Executive Vice President and Secretary
Tonio Hipp (43)............... Vice President - Western Operations
John Sola (43)................ Vice President - Executive Chef
Ben Sumner (61)............... Treasurer and Chief Financial Officer
Richard Shapiro (53).......... Director
Charles Frank (47)............ Director
Glenn Golenberg (54).......... Director
Peter Balas (64).............. Director
Officers and directors are elected on an annual basis. The present
terms for each director will expire at the next annual meeting of shareholders
or at such time as a successor is duly elected. Officers serve at the discretion
of the Board of Directors. See "Principal and Selling Stockholders." There are
no family relationships among any of the directors or officers of the Company.
The following is a biographical summary of the business experience of
the present directors and executive officers of the Company.
Robert L. Wechsler. Mr. Wechsler was the founder and served as President,
Chief Executive Officer and Chairman of Magellan Restaurant Systems ("Magellan")
from 1986 to March of 1995. Following the combination (the "Exchange") of Grill
Concepts, Inc. ("GCI") and Magellan, in March of 1995, Mr. Wechsler stepped down
as President and Chief Executive Officer but continues to serve as Chairman of
the Board of the Company. Mr. Wechsler previously served in various capacities,
including President and Chief Executive Officer, of Wechsler Coffee Corporation,
a coffee wholesaler and roaster, from 1959 to 1982. Mr. Wechsler also served as
a director of Restaurant Associates, Inc., a restaurant operating company, from
1969 to 1988.
Robert Spivak. Mr. Spivak was a co-founder of GCI and served as
President, Chief Executive Officer and a director of GCI from 1988 until the
Exchange when he assumed the same positions with the Company. Prior to forming
GCI, Mr. Spivak co-founded, and operated, The Grill on the Alley restaurant in
Beverly Hills in 1984. Mr. Spivak previously served as (i) vice president of
Office Construction Company, where he headed that company's restaurant
construction division from 1980 to 1983, (ii) a partner of Soup 'n Such from
1976 to 1980, (iii) food department manager of Fedco Stores from 1972 to 1976,
and (iv) manager of Redwood House and Smokey Joe's, both family owned restaurant
operations, from 1965 to 1972. Mr. Spivak is a director of the California
Restaurant Association and a founder and past president of the Beverly Hills
Restaurant Association. Mr. Spivak also served on the board of directors of the
California Culinary Academy of San Francisco and serves on the executive
advisory board of the School of Hotel and Restaurant Management at California
State Polytechnic University at Pomona.
Michael Weinstock. Mr. Weinstock was a co-founder of GCI and served as
Chairman of the Board, Vice President, Secretary and a director of GCI from 1988
until the Exchange when he assumed the positions of Vice Chairman of the Board,
Executive Vice President and director of the Company. Prior to forming GCI, Mr.
Weinstock co-founded The Grill on the Alley restaurant in Beverly Hills in 1984.
Mr. Weinstock previously served as President, Chief Executive Officer and a
director of Morse Security Group, Inc., a security systems manufacturer.
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Tonio Hipp. Mr. Hipp served as Director of Food and Beverage for GCI from
1988 until the Exchange when he assumed the position of Vice President - Western
Operations for the Company. Mr. Hipp oversees purchasing and vendor relations,
and maintenance, as well as hiring and training of all management and dining
room staff for the Daily Grills. Mr. Hipp has over 20 years experience in the
restaurant industry, ranging from service as executive chef at restaurants in
Europe and the United States to ownership and operation of a fast food
restaurant. Mr. Hipp is a co-founder of the Beverly Hills Restaurant
Association.
John Sola. Mr. Sola served as Executive Chef for GCI from 1988 until the
Exchange when he assumed the position of Vice President - Executive Chef of the
Company. Mr. Sola oversees all kitchen operations, including kitchen design,
recipe development and implementation, personnel, food purchasing, preparation
and food vendor relations, as well as monitoring and maintaining the overall
performance of the kitchens and establishing procedures and policies in
connection with the opening of new Daily Grill restaurants. Mr. Sola, along with
Mr. Spivak, created the Daily Grill menu. Prior to joining GCI, Mr. Sola served
as opening chef at The Grill on the Alley from inception in 1984 to 1988.
Previously, Mr. Sola served in various positions, including Executive Chef, at a
wide range of restaurants.
Ben Sumner. Mr. Sumner served as Chief Financial Officer of GCI from
May of 1994 until the Exchange when he assumed the same position as well as the
position of Treasurer with the Company. Prior to joining GCI, Mr. Sumner served
as Controller of Ecology Control Industries, a trucking operator, from 1992 to
1993 and as Vice President of Finance, Secretary and a director of Judy's, Inc.,
a publicly-held retail chain operator, from 1972 until 1990.
Richard Shapiro. Mr. Shapiro was a co-founder of GCI and served Vice
Chairman, Vice President and a director of GCI from 1988 until the Exchange when
he stepped down as an officer. Since the Exchange, Mr. Shapiro has served as a
director of the Company. Since 1966, Mr. Shapiro has served as President and
Chief Executive Officer of Spectrum Investments, Inc., a Budget Rent-a-Car
franchisee operating locations throughout California. Spectrum Investments, Inc.
sold all of its franchise rights and terminated active franchise operations in
1992.
Charles Frank. Mr. Frank has served as a director of the Company since the
Exchange in March of 1995. Since early 1995, Mr. Frank has served as President
of MSA Industries, a manufacturing company. Since 1989, Mr. Frank has served as
President of CAF Restaurant Services, Inc., a restaurant consulting firm, and
has provided consulting services to the Company and its subsidiary, GCI, since
1994. From 1992 to 1993, Mr. Frank served as President and Chief Operating
Officer of Il Fornaio (America) Corp., a restaurant chain operator.
Glenn Golenberg. Mr. Golenberg has served as a director of the Company
since the Exchange in March of 1995. Since 1995, Mr. Golenberg has served as
Managing Director of Golenberg & Co., a merchant banking firm. From 1991 to
1995, Mr. Golenberg served as Managing Director of Golenberg & Geller, Inc., a
merchant banking firm, which provided financial services to the Company and GCI
during 1994 and 1995.
Peter Balas. Mr. Balas has served as a director of the Company since 1995.
Mr. Balas has served as an independent consultant to the hospitality industry
for in excess of five years. Previously, Mr. Balas served as President of the
International Hotel Association and in various capacities with Inter-Continental
Hotels, Inc., including Vice President Food and Beverage, President and area
Chief Executive for Europe and the Middle East and manager of the
Inter-Continental Hotel, Paris.
COMPENSATION OF DIRECTORS
Each non-employee director of the Company is paid a fee of $500 for
each Board of Directors meeting attended and $250 for each committee meeting
attended. The Company also reimburses each director for all expenses of
attending such meetings. Additionally, each non-employee director is currently
granted options, pursuant to the Company's 1995 Stock Option Plan, to purchase
25,000 shares of Common Stock upon their initial appointment as a director.
Thereafter, each non-employee director on the day following each annual meeting
of shareholders of the Company shall automatically receive options to purchase
an additional 5,000
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shares, plus an additional 1,000 shares for each committee on which such
non-employee director serves. All such options are exercisable at the fair
market value of the Company's Common Stock on the date of grant. Such options
are fully vested and exercisable with respect to all of the shares covered on
the date of each grant.
No additional compensation of any nature is paid to employee directors.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the year ended December 31, 1995 of each person who served as the
Company's Chief Executive Officer during fiscal 1995 and the four other most
highly paid executive officers whose total annual salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1995 (the "Named Officers").
Long Term
Annual Compensation Compensation
------------------- ------------
Other Annual Stock
Name and Principal Position Year Salary($) Bonus ($) Compensation($) Options(#)
- --------------------------- ---- ---------- --------- --------------------------
Robert Spivak (2)............ 1995 138,365 -0- (1) 75,000
President and 1994 109,500 -0- (1) -0-
Chief Executive Officer 1993 104,250 -0- (1) -0-
Robert L. Wechsler (3)....... 1995 75,000 -0- (1) 35,000
Chairman of the Board 1994 10,405 -0- (1) -0-
1993 -0- -0- (1) -0-
(1) Although the officers receive certain perquisites such as auto
allowances and Company provided life insurance, the value of such
perquisites did not exceed the lesser of $50,000 or 10% of the
officer's salary and bonus.
(2) Compensation indicated for Mr. Spivak for periods prior to March of
1995 represent amounts paid by the Company's subsidiary, GCI, prior to
the combination of Magellan and GCI.
(3) Mr. Wechsler served as Chairman, President and Chief Executive Officer
of Magellan until the combination of Magellan and GCI in March of 1995
after which time he stepped down as President and Chief Executive
Officer.
STOCK OPTION PLANS
1986 Plan. The Company adopted an Incentive Stock Option Plan (the
"1986 Plan") in December of 1986. The purpose of the 1986 Plan is to assist the
Company and its subsidiaries in retaining the services of and motivating
selected key management employees by providing the opportunity for such
personnel to acquire a proprietary interest in the Company and thus share in its
growth and success. A total of 463,215 shares of common stock are reserved for
issuance under the 1986 Plan. The 1986 Plan provides for the granting of
non-qualified stock options and "incentive stock options" within the meaning of
Section 422A of the Internal Revenue Code of 1986 to any employee, officer or
director of the Company and its subsidiaries (any company in which the Company
owns, directly or indirectly, stock possessing fifty percent or more of the
total combined voting power of all classes of stock). The Company's Board of
Directors administers the 1986 Plan and members of the Board of Directors may
receive awards under the 1986 Plan. The Board designates optionees, the exercise
price of options (which may not be less than one hundred percent of the market
value of the shares on the date of grant or one hundred ten percent of the fair
market value of the shares with respect to an optionee who owns ten percent or
more of the Company's common stock at the date of grant), the date of grant and
the period of the option, which may not be longer than five years from the date
of grant with respect to an optionee who owns ten percent or more of the
Company's common stock at the date of grant and which may not be longer than ten
years from the date of grant with respect to all other optionees.
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In lieu of tendering a cash payment to satisfy the option price, the
optionee may satisfy all or a portion of such purchase price by delivering to
the Company shares of common stock. Such shares will be valued at fair market
value at the date of exercise. Executive officers of the Company may not
exercise any non-qualified stock option earlier than six months following the
date of its grant.
In the event of an optionee's death during the course of employment,
any option which was exercisable on the date of death may be exercised until one
year following the date of death, but in no event later than the original
expiration date of the option. Upon the termination of employment of an optionee
for reasons other than death, the optionee's right to exercise any option which
was exercisable on the date of termination of employment shall terminate.
Options under the 1986 Plan are non-transferable other than by will or the laws
of descent and distribution.
At December 31, 1995, a total of 45,000 options were outstanding under the
1986 Plan. The 1986 Plan will terminate on December 1, 1996.
1995 Plan. On June 1, 1995, the Company's Compensation Committee and
Board of Directors adopted and approved a new stock option plan for the Company,
the Grill Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan"), under which
stock options awards may be made to employees, directors and consultants of the
Company. The purpose of the 1995 Plan is to promote the interests of the Company
and its shareholders by establishing a direct link between the financial
interests of participating employees, directors and consultants and the
performance of the Company and enabling the Company to attract and retain highly
competent employees, directors and consultants.
The 1995 Plan was approved by the shareholders at the 1996 annual
shareholders meeting and became effective on the date it was adopted by the
Board of Directors, June 1, 1995, and it will remain effective until the tenth
anniversary of the effective date unless terminated earlier by the Board of
Directors.
The maximum number of shares of Common Stock which may be issued or
delivered and as to which awards may be granted under the 1995 Plan will be
1,500,000 shares. The exercise price for a stock option must be at least equal
to 100% of the fair market value of the Common Stock on the date of grant of
such stock option.
The shares of Common Stock to be issued or delivered under the 1995
Plan will be authorized and unissued shares or previously issued and outstanding
shares of Common Stock reacquired by the Company. Shares of Common Stock covered
by any unexercised portions of terminated options and shares of Common Stock
subject to any awards which are otherwise surrendered by plan participants
without receiving any payment or other benefit with respect thereto may again be
subject to new awards under the 1995 Plan.
The 1995 Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee is comprised solely of
non-employee directors of the Company. The Compensation Committee will determine
the employees who will be eligible for and granted awards, determine the amount
and type of awards, establish rules and guidelines relating to the 1995 Plan,
establish, modify and determine terms and conditions of awards and take such
other action as may be necessary for the proper administration of the 1995 Plan.
Any employee of the Company may be selected by the Compensation
Committee to receive an award under the 1995 Plan. Presently, there are
approximately 600 employees eligible to participate in the 1995 Plan.
Additionally, each non-employee director of the Company will automatically
receive an award of 25,000 options on their initial appointment as a director.
Thereafter, each non-employee director on the day following each annual meeting
of shareholders of the Company shall automatically receive options to purchase
an additional 5,000 shares, plus an additional 1,000 shares for each committee
on which such non-employee director serves. There are presently four
non-employee directors eligible to participate in the 1995 Plan. Finally, key
consultants, as determined by the Compensation Committee, may receive awards of
non-qualified options under the 1995 Plan.
33
<PAGE>
Awards under the 1995 Plan may take the form of stock options meeting
the requirements of Section 422 of the Internal Revenue Code of 1986 ("Incentive
Stock Options") and stock options which do not meet such requirements
("Nonqualified Stock Options"). Only employees of the Company are eligible to
receive Incentive Stock Options under the 1995 Plan. The duration of each option
will be determined by the Compensation Committee, but no option will be
exercisable more than ten years from the date of grant (or, with respect to
Incentive Stock Options granted to persons holding ten percent or more of the
outstanding Common Stock, five years from the date of grant). The exercise price
for stock options must be at least equal to 100% of the fair market value of the
Common Stock on the date of grant of such option (or, with respect to Incentive
Stock Options granted to persons holding ten percent or more of the outstanding
Common Stock, 110% of the fair market value of the Common Stock). The exercise
price will be payable in cash or in such other form as the Compensation
Committee may approve in the applicable award agreement, including, without
limitation, by a cashless exercise or the delivery to the Company of shares of
Common Stock owned by the participant.
The options will be subject to restrictions on exercise, such as
exercise in periodic installments or upon attainment of specified performance
criteria, as determined by the Compensation Committee. Stock options granted
under the 1995 Plan will not be transferable except by will or the laws of
descent and distribution and may be exercised only by a participant during his
or her lifetime.
Unless otherwise determined by the Compensation Committee and provided
in the applicable option agreement, options will be exercisable within three
months of any termination of employment, including termination due to
disability, death or normal retirement (but not later than the expiration date
of the option).
The Board may amend or terminate the 1995 Plan at any time but,
without an optionee's consent, no such action will affect or in any way impair
the rights of such optionee under any award granted prior to such action, and no
amendment will be made without the approval of the Company's shareholders if
such approval is required to maintain the compliance of the 1995 Plan with Rule
16b-3 of the Securities and Exchange Commission or Section 422 of the Internal
Revenue Code of 1986.
The amount of shares authorized to be issued under the 1995 Plan, and
the terms of outstanding stock options, may be adjusted to prevent dilution or
enlargement of rights in the event of any stock dividend, reorganization,
reclassification, recapitalization, stock split, combination, merger,
consolidation or other capitalization change of similar effect.
The Company has the right to deduct from an optionee's salary, bonus
or other compensation any taxes required to be withheld with respect to options
granted under the 1995 Plan.
The following is a brief summary of the principal federal income tax
consequences of awards under the 1995 Plan based upon current federal income tax
laws. The summary is not intended to be exhaustive and, among other things, does
not describe state, local or foreign tax consequences. An optionee is not
subject to federal income tax either at the time of grant or at the time of
exercise of an Incentive Stock Option. However, some optionees are subject to
the "alternative minimum tax" and the amount by which the fair market value of
the Common Stock subject to an Incentive Stock Option on the date of exercise
exceeds the exercise price will generally be added to the optionee's income for
purposes of calculating his or her alternative minimum taxable income. If an
optionee does not dispose of shares of Common Stock acquired through the
exercise of an Incentive Stock Option within one year after their receipt and
within two years after the date of grant of the Incentive Stock Option (either
event, a "disqualifying disposition") the taxable income recognized upon the
sale of such shares will be taxed at the long-term capital gains rate.
The Company will not receive any tax deduction in connection with the
exercise of an Incentive Stock Option unless there is a disqualifying
disposition. If there is a disqualifying disposition, the optionee will be
treated as receiving compensation subject to ordinary income tax in the year of
the disqualifying disposition and the Company will be entitled to an equal
deduction for compensation expense. The tax will be imposed on the lesser of (i)
the difference between the fair market value of the stock at the time of
exercise and the exercise price or (ii) the amount of gain realized on the
disposition. Any appreciation in value after the time of exercise will be taxed
as capital gain and will not result in any deduction by the Company.
34
<PAGE>
If Nonqualified Stock Options are granted to an optionee, there are no
federal income tax consequences at the time of grant. Upon exercise of the
option, the optionee will recognize ordinary income in an amount equal to the
difference between the exercise price and the fair market value of the Common
Stock on the date of exercise. When the optionee thereafter sells the shares,
the difference between any amount realized on such sale and the fair market
value of the shares at the time of exercise will be taxed as capital gain or
loss, which will be short-term or long-term, depending on whether the applicable
capital gain holding period has been satisfied.
Options to acquire a total of 633,000 shares of common stock have been
granted to date under the 1995 Plan and remain outstanding. The options granted
to date under the 1995 Plan are exercisable at prices ranging from $1.17 to
$1.48 per share and expire between May of 2000 and May of 2006. All options
granted under the 1995 Plan to employees vest ratably over a five year period
while options granted to non-employee directors and consultants vest immediately
upon issuance.
STOCK OPTION GRANTS
The following table sets forth information concerning the grant of
stock options made during 1995 to each of the Named Officers:
Percent of
Total Options
Granted to
Options Employees in Price Expiration
Name Granted (1) Fiscal Year Per Share Date
---- ----------- ----------- --------- -------
Robert Spivak......... 75,000 20.1% $ 1.48 05/31/00
Robert L. Wechsler.... 35,000 9.4% 1.34 05/31/05
(1) All options were granted under the Company's 1995 Plan. All such options
became exercisable 20% in December of 1995 and 20% on each anniversary of
the grant of such options commencing with the second anniversary. See "-
Stock Option Plans - 1995 Plan."
STOCK OPTION EXERCISES
The following table sets forth information concerning the exercise of
stock options during 1995 by each of the Named Officers and the number and value
of unexercised options held by the Named Officers at the end of 1995:
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at In-the Money Options
Acquired on Value at FY-End (#) at FY-End ($)<F1>
------------------------------- -----------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Spivak........ -0- -0- 15,000 60,000 -0- -0-
Robert L. Wechsler... -0- -0- 47,000 28,000 -0- -0-
<FN>
<F1> Based on the fair market value per share of the Common Stock at year
end, minus the exercise price of "in-the-money" options. The closing
price for the Company's Common Stock on December 29, 1995 on the Nasdaq
Small-Cap Market was $1.25. Accordingly, none of the options held at
year-end were "in-the-money."
</FN>
</TABLE>
EMPLOYMENT CONTRACTS
Pursuant to the terms of the combination between Magellan and GCI, the
Company entered into an employment agreement with its Chairman, Robert L.
Wechsler, commencing December 1, 1994 and running for a term of five years.
Pursuant to such agreement, Mr. Wechsler serves as Chairman of the Board of the
35
<PAGE>
Company and receives an annual salary of $75,000. Such agreement provides that
unless it is terminated for "cause" on the part of Mr. Wechsler, Mr. Wechsler or
his estate will continue to receive payments thereunder for the full term,
regardless of his death, disability or other termination.
Effective January 1, 1996, the Company entered into a three year
employment agreement with Robert Spivak, the Company's President and Chief
Executive Officer. Mr. Spivak's employment agreement provides for an annual
salary of $150,000 in 1996, $175,000 in 1997 and $200,000 in 1998. In addition,
such agreement provides that Mr. Spivak shall receive the use of a leased
automobile and reimbursement of all expenses related to the use thereof, a
$1,500 per month non-accountable expense allowance, five weeks paid vacation per
year, a $1,000,000 term life insurance policy, reimbursement of business related
travel and meal expenses and participation in all medical, retirement and other
benefit plans available to the Company's executives.
The Company has no other employment agreements with any of its
employees.
EXCULPATION AND INDEMNIFICATION ARRANGEMENTS
The Delaware Supreme Court has held that a director's duty of care to a
corporation and its stockholders requires the exercise of an informed business
judgment. Having become informed of all material information reasonably
available to them, directors must act with requisite care in the discharge of
their duties. However, the Company's Certificate of Incorporation provides, as
permitted under Delaware law, that no director shall be personally liable to the
Company or any of its stockholders for monetary damages for breach of fiduciary
duty as a director. This limitation will apply in all instances except for
liability imposed by statute: (i) for any breach of a director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law or (iii)
pursuant to Section 174 of the Delaware General Corporation Law (which makes
directors personally liable for unlawful dividends or unlawful stock repurchases
or redemptions in certain circumstances). The limitation of liability provision
does not eliminate a stockholder's right to seek non-monetary, equitable
remedies such as injunction or rescission to redress an action taken by
directors. However, as a practical matter, equitable remedies may not be
available in all situations, and there may be instances in which no effective
remedy is available.
In addition, the Company's Certificate of Incorporation and Bylaws
provide for the indemnification of the directors, officers, employees and agents
of the Company to the full extent permitted by Delaware law, in addition to
various procedures relating thereto. Under Delaware law, directors, officers,
employees and other individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than a "derivative action" by or in the
right of the corporation) if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of a derivative action, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such an action and Delaware law
requires court approval before there can be any indemnification of expenses
where the person seeking indemnification has been found liable to the
corporation. Delaware law further provides that the indemnification and
advancement of expenses provided by, or granted pursuant to, provisions of
Delaware law shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
In the event that certain provisions of California corporate law are applicable
to the Company (see "Description of Securities - Application of California
Corporate Law Following 1996"), California's indemnification provisions will
apply in lieu of Delaware's. Such provisions are, however, substantially
identical to Delaware's.
It is the position of the Commission that insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
36
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In February of 1996, the Company entered into an agreement in principle
to acquire The Grill restaurant in Beverly Hills for 850,000 shares of common
stock. The Grill was established by Messrs. Spivak, Weinstock and Shapiro, the
principal shareholders and directors of the Company, and was owned and operated
by a partnership of which Messrs. Spivak, Weinstock and Shapiro controlled the
managing partner and 50.9% of the total partnership interests. Messrs. Spivak,
Weinstock and Shapiro abstained from voting on such transaction, both with
respect to determination by the Company's Board to pursue such transaction and
the partnership's determination to pursue the transaction. The acquisition of
The Grill was consummated in April of 1996. As a result of the acquisition of
The Grill, Messrs. Spivak, Weinstock and Shapiro received an aggregate of
432,735 shares of common stock of the Company.
Since June of 1989, the Company has leased its Cherry Hill restaurant
from Denbob Corporation ("Denbob"), a company controlled by Robert L. Wechsler,
the Company's Chairman, and Dennis Pedra, the former President of Magellan. The
premises are occupied under a twenty year lease with annual rent commencing at
approximately $118,500, plus 6% of annual gross sales in excess of $1,800,000,
15% of the landlord's cost for leasehold improvements, equipment and fixtures,
and a pro rata share of real estate taxes, insurance and other common area
charges. After five years, the Company had the option to pay for all or part of
any improvements and reduce or eliminate the 15% additional rent. At the end of
each five years, the rent and the gross sales level at which the 6% charge
commences increase by 15%. During 1995, the Company also entered into a lease
with Denbob pursuant to which the Company leases office space in the same
facility which houses the Cherry Hill restaurant. Such offices, which serve as
the Company's east coast offices, are leased on a month to month basis for $400
per month. During fiscal year 1995, the Company paid a total of $231,990 to
Denbob for the lease of the Cherry Hill restaurant and office space.
On August 1, 1993, the Company exercised the option under the Cherry
Hill lease to purchase certain fixtures, equipment and leasehold improvements
used therein and reduce the 15% additional rent provided for in the lease. The
purchase price of the items acquired was $618,740 and was evidenced by a
promissory note bearing interest at 15% and payable on an interest only basis
until August 1, 1995, when the balance of such note was due. In lieu of paying
the note in full at August 1, 1995, the Company could notify Denbob of its
intent to pay such balance in monthly installments of $4,166.66 plus interest
until August 1, 1998, when the entire unpaid balance would be due and payable.
The depreciated basis of the assets on the books of Denbob at the time the
option was exercised, computed in accordance with generally accepted accounting
principles, was $532,558.
Pursuant to the terms of the Exchange between Magellan and GCI,
Magellan was required to reconvey the Cherry Hill assets to Denbob in exchange
for the extinguishment of the debt evidenced by the promissory note delivered to
Denbob by Magellan and representing the full purchase price of such assets.
Magellan was required to add such assets back to the existing lease with respect
to the Cherry Hill restaurant on terms identical to the original lease. The
reconveyance of such assets, extinguishment of the related debt and the addition
of such assets to the existing lease from Denbob was consummated in November of
1994.
The Company believes that its leases with Denbob are on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties. Such belief is based on management's knowledge of the prevailing rental
market in the area at the time the leases were entered into, as well as a review
of the Company's leases with third party landlords on its other restaurants,
each of which contains comparable percentage lease provisions and other charges.
In November of 1992, Mr. Wechsler and Louis Resnick, a stockholder of
Magellan, loaned $427,209.48 and $650,000, respectively, to Magellan. Such loans
were unsecured and were repayable in full, with interest accruing on the unpaid
balance at 9% per annum, in monthly installments of interest with the principal
balance due on January 15, 1994. Such persons extended the maturity date of such
loans during the third quarter of 1993 until January of 1995 and subsequently
further extended the date for repayment of $650,000 of such loans until November
of 1996, with the balance of such loans, in the amount of $427,209 owed to Mr.
Wechsler, being converted to preferred stock. The loans from Mr. Wechsler and
Mr. Resnick were made in order to provide adequate capital to Magellan to pursue
acquisitions and other corporate opportunities pending the receipt of
37
<PAGE>
proceeds from the exercise of warrants. Pending the use of such loan proceeds,
such proceeds were added to Magellan's working capital and invested in
short-term U.S. government obligations. Repayment of the loan from Mr. Resnick
was unconditionally guaranteed by Mr. Wechsler.
In February of 1994, Mr. Wechsler and Christi Pedra, a stockholder of
Magellan, loaned $61,473 and $50,000, respectively, to Magellan. Such loans
accrued interest at 5% per annum, with accrued interest being payable at the end
of the first year and the balance being repayable in full with accrued interest
in two years. The proceeds of such loans were used to partially prepay the loan
from Louis Resnick described above. In July of 1994, Magellan repaid the
remaining balance of $550,000 owed to Louis Resnick from funds received upon the
exercise of outstanding warrants.
Pursuant to discussions with management of GCI, in August of 1994 Magellan
redeemed the preferred stock which it had previously issued to Mr. Wechsler and
paid the balance of the remaining indebtedness owed to Mr. Wechsler and to Ms.
Pedra.
In connection with the formation of the partnership (the "Partnership")
which operated the Company's Tailgators Sports Pub, Pante, Inc., a corporation
controlled by Joseph Pante, a former Executive Vice President of Magellan and
former Vice President - Eastern Operations of the Company, acquired a 6%
partnership interest in the Partnership for $24,336. Such partnership interest
entitled Pante, Inc. to 10% of the first $20,000 of net income of the
partnership, 10% of 20% of the cash flow from the partnership and 6% of profits
and losses thereafter. The partnership agreement also provided that Pante, Inc.
would be paid a consulting fee equal to 0.4% of the gross receipts of the
Partnership, with such consulting fee to terminate when aggregate consulting
fees paid to Pante, Inc. equaled $26,500. Pante, Inc. was permitted to acquire
such partnership interest as incentive for the efforts of Joseph Pante in
bringing the partnership's restaurant operational and overseeing its management.
Charles Frank, a director of GCI and a director of the Company
following the Exchange, has provided consulting services to GCI since 1993 and
to the Company following the Exchange. Mr. Frank billed consulting fees to the
Company (including GCI) totaling $40,915 during 1994 and $12,655 during 1995.
Golenberg & Geller, Inc., a firm controlled by Glenn Golenberg, a
director of the Company following the Exchange, provided financial services to
GCI in connection with the Exchange and various other matters. In connection
with the Exchange, Golenberg & Geller, Inc. received $75,000 and Messrs.
Golenberg and Geller each received 37,500 shares of Common Stock of the Company
for services in connection with the Exchange. In addition, the Company issued
25,000 warrants each to Mr. Golenberg and Mr. Geller, for services in connection
with a private placement conducted in connection with the Exchange. The warrants
are exercisable for a period of five years to purchase common stock at $3.00 per
share.
The Company has no existing corporate policy which prohibits or governs
the terms of any such transactions. Any such transactions are, however, reviewed
by the Audit Committee to determine the fairness of such transactions.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 6, 1996 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each of
the Company's directors, (ii) each Named Officer, (iii) all executive officers
and directors as a group, (iv) each person who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, and (v) each Selling
Stockholder.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares to Shares Beneficially Owned
Name and Address Prior to Offering <F1><F2> be Sold After Offering <F1><F2>
---------------------------- ------------------------
of Beneficial Owner Number Percent in Offering Number Percent
<S> <C> <C> <C> <C> <C>
Robert Spivak............................... 2,266,063 <F3> 16.2 0 2,266,063 <F3> 16.1
11661 San Vicente Blvd., Ste 404
Los Angeles, CA 90049
Michael Weinstock........................... 2,370,150 <F4> 16.9 0 2,370,150 <F4> 16.8
11661 San Vicente Blvd., Ste 404
Los Angeles, CA 90049
Robert Shapiro.............................. 2,447,076 <F5> 17.4 0 2,447,076 <F5> 17.3
11661 San Vicente Blvd., Ste 404
Los Angeles, CA 90049
Robert L. Wechsler.......................... 645,122 <F6> 4.6 0 645,122 <F6> 4.5
Charles Frank............................... 103,568 <F7> * 0 103,568 <F7> *
Glenn Golenberg............................. 87,500 <F8> * 62,500 <F9> 25,000 <F9> *
Peter Balas................................. 25,000 <F10> * 0 25,000 <F10> *
All executive officers and
directors as a group (10 persons).......... 8,052,232 <F11> 55.9 62,500 <F9> 7,989,823 <F11> 55.1
Marshall Geller............................. 62,500 <F12> * 62,500 <F12> 0 -
Millennium Capital Corp..................... 62,500 <F13> * 62,500 <F13> 0 -
Whale Securities Co., L.P................... 62,500 <F14> * 62,500 <F14> 0 -
Raymond Adams............................... 5,219 * 5,219 0 -
1991 Barkin Family Exemption Trust.......... 2,610 * 2,610 0 -
1994 Joyce Barkin Revocable Trust........... 2,610 * 2,610 0 -
Jeffrey and Laura Benson Family Trust....... 23,525 * 10,430 13,095 *
Brown Family Trust "A"...................... 10,430 * 10,430 0 -
Maxwell M. and Sally Blecher................ 45,176 * 10,430 34,746 *
M&P Blumenthal Family Trust................. 10,430 * 10,430 0 -
Abbott L. Brown............................. 5,215 * 5,215 0 -
Phil Caldwell Inc. Defined Benefit
Pension Plan.............................. 36,278 * 5,215 31,063 *
Estate of Conrad J. Cornfeldt............... 6,953 * 6,953 0 -
James F. Donald............................. 5,219 * 5,219 0 -
Edwards 1991 Family Trust................... 10,430 * 10,430 0 -
Robert A. Finkelstein....................... 5,219 * 5,219 0 -
Flame, Sanger, Grayson & Ginsburg........... 5,219 * 5,219 0 -
Frank Living Trust.......................... 5,215 * 5,215 0 -
Phyllis Gelber.............................. 10,430 * 10,430 0 -
Lessing E. Gold............................. 5,219 * 5,219 0 -
Sam Goldstein............................... 10,430 * 10,430 0 -
Richard and Irene Hirsch.................... 25,679 * 5,219 20,460 *
E. Gregory Hookstratten..................... 10,430 * 10,430 0 -
Peter Horton................................ 15,449 * 5,219 10,230 -
Howard Family Trust......................... 10,430 * 10,430 0 -
Mary Kinzelberg............................. 5,219 * 5,219 0 -
39
<PAGE>
Landers Family Trust........................ 10,430 * 10,430 0 -
Lana Leavitt................................ 45,176 * 10,430 34,746 *
Suzanne Lehman Trust........................ 3,477 * 3,477 0 -
Allan Ludwig................................ 41,727 * 41,727 0 -
Jacqueline L. Moss.......................... 10,430 * 10,430 0 -
Abe Perlmutter.............................. 5,219 * 5,219 0 -
Michelle Pfeiffer........................... 44,020 * 5,219 38,801 *
Arthur L. Price............................. 10,430 * 10,430 0 -
Mazel Trust I............................... 5,215 * 5,215 0 -
Norman Rubin................................ 5,219 * 5,219 0 -
Bruce Shapiro............................... 23,937 * 3,477 20,460 *
Shapiro Family Trust........................ 30,890 * 10,430 20,460 *
Phil Singer................................. 10,430 * 10,430 0 -
Bette Sirota................................ 10,430 * 10,430 0 -
M. Melvin and Bette Sirota.................. 10,430 * 10,430 0 -
Lawrence J. Solomon......................... 5,215 * 5,215 0 -
Ralph L. Spear.............................. 10,430 * 10,430 0 -
Sperber Living Trust........................ 5,219 * 5,219 0 -
Grant A. Tinker............................. 10,430 * 10,430 0 -
David C. and Gail Towbin.................... 6,953 * 6,953 0 -
Leon B. Ungar............................... 10,430 * 10,430 0 -
Jack J. Walker.............................. 5,219 * 5,219 0 -
Anne Weinstock.............................. 10,430 * 10,430 0 -
G. & L. Weinstock Family Trust.............. 20,861 * 20,861 0 -
* Less than 1%.
<FN>
<F1> The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in the footnotes to the table.
<F2> Includes shares of Common Stock not outstanding, but which are subject to
options and warrants exercisable within 60 days of the date of the
information set forth in this table, which are deemed to be outstanding for
the purpose of computing the shares held and percentage of outstanding
Common Stock with respect to the holder of such options. Such shares are
not, however, deemed to be outstanding for the purpose of computing the
percentage of any other person.
<F3> Includes (i) 1,704,364 shares owned beneficially and of record by Mr.
Spivak, (ii) 15,000 shares out of 75,000 shares issuable upon exercise of
incentive stock options held by Mr. Spivak, and (iii) 546,699 shares out of
1,640,099 shares held equally by Robert Spivak, Michael Weinstock and
Richard Shapiro which are pledged to a former stockholder of GCI to secure
the repayment of a $1,400,000 note evidencing the purchase price of such
shares. Excludes certain shares held by the spouse, children and certain
trusts for the benefit of family members. Mr. Spivak disclaims any
beneficial interest in such shares.
<F4> Includes (i) 1,753,950 shares owned beneficially and of record by Mr.
Weinstock as trustee of the Michael Weinstock Living Trust, (ii) 69,500
shares out of 97,500 shares issuable upon exercise of incentive stock
options held by Mr. Weinstock, and (iii) 546,700 shares out of 1,640,099
shares held equally by Robert Spivak, Michael Weinstock and Richard Shapiro
which are pledged to a former stockholder of GCI to secure the repayment of
a $1,400,000 note evidencing the purchase price of such shares. Excludes
certain shares held by the spouse, children and certain trusts for the
benefit of family members. Mr. Weinstock disclaims any beneficial interest
in such shares.
<F5> Includes (i) 1,812,876 shares owned beneficially and of record by Mr.
Shapiro, (ii) 87,500 shares issuable upon exercise of non-qualified stock
options held by Mr. Shapiro, and (iii) 546,700 shares out of 1,640,099
shares held equally by Robert Spivak, Michael Weinstock and Richard Shapiro
which are pledged to a former stockholder of GCI to secure the repayment of
a $1,400,000 note evidencing the purchase price of such shares. Excludes
certain shares held by the spouse, children and certain trusts for the
benefit of family members. Mr. Shapiro disclaims any beneficial interest in
such shares.
40
<PAGE>
<F6> Includes (i) 499,970 shares owned beneficially and of record by Mr.
Wechsler, (ii) 47,000 shares issuable upon exercise of 75,000 incentive
stock options, and (iii) 98,152 shares issuable upon the exercise of
warrants held by Mr. Wechsler. Excludes certain shares held by the Wechsler
Foundation, the spouse and children of Mr. Wechsler with respect to which
Mr. Wechsler disclaims beneficial ownership.
<F7> Includes (i) 78,568 shares owned beneficially and of record by Mr. Frank,
and (ii) 25,000 shares issuable upon exercise of non-qualified stock
options held by Mr. Frank.
<F8> Includes (i) 37,500 shares owned beneficially and of record by Mr.
Golenberg, (ii) 25,000 shares issuable upon exercise of non-qualified stock
options, and (iii) 25,000 shares issuable upon exercise of Finders Fee
Warrants held by Mr. Golenberg. See "Description of Securities - Warrants."
<F9> Assumes the sale by Mr. Golenberg from time to time of 37,500 shares of
Common Stock held of record and 25,000 shares of Common Stock issuable upon
exercise of the Finders Fee Warrants.
<F10>Includes (i) 25,000 shares issuable upon exercise of non-qualified stock
options held by Mr. Balas.
<F11>Includes 437,152 shares of Common Stock subject to stock options and
warrants held by the officers and directors and exercisable within 60 days.
<F12>Assumes the sale by Mr. Geller from time to time of 37,500 shares of
Common Stock held of record and 25,000 shares of Common Stock issuable upon
exercise of the Finders Fee Warrants.
<F13>Assumes the sale by Millennium Capital Corp. from time to time of 37,500
shares of Common Stock held of record and 25,000 shares of Common Stock
issuable upon exercise of the Finders Fee Warrants.
<F14>Assumes the sale by Whale Securities Co., L.P. from time to time of 37,500
shares of Common Stock held of record and 25,000 shares of Common Stock
issuable upon exercise of the Finders Fee Warrants.
</FN>
</TABLE>
41
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The Company's common stock commenced quotation on Nasdaq under the
symbol "MGRS" on December 8, 1993. Prior to such date, the Company's common
stock was quoted in the over-the-counter market on the NASD Bulletin Board.
Prior to the commencement of quotations on Nasdaq, the trading market in the
Company's common stock was sporadic. The following table sets forth the high and
low bid price per share for the Company's common stock for each quarterly period
since the commencement of trading on Nasdaq:
High Low
---- ---
1994 - First Quarter 6-1/4 1/2
Second Quarter 1-11/16 1/2
Third Quarter 5-1/8 1-5/16
Fourth Quarter 4-13/16 2-11/16
1995 - First Quarter 3-1/32 2
Second Quarter 2 7/8
Third Quarter 1-13/16 1-1/16
Fourth Quarter 1-3/4 1-1/32
1996 - First Quarter 1-11/16 1-1/8
Second Quarter 1-11/16 1-3/16
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At September 10, 1996, the bid price of the Common Stock was $2.00.
As of September 10, 1996, there were approximately 451 holders of record of
the Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
42
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
GENERAL. The Company presently has 20,000,000 authorized shares of common
stock, $.00001 par value, 13,972,260 shares of which were issued and outstanding
at September 6, 1996. All shares of common stock currently outstanding are
validly issued, fully paid and non-assessable, and all shares which are issuable
pursuant to the exercise of the Finders Fee Warrants, when issued, will be
validly issued, fully paid and non-assessable.
VOTING RIGHTS. Each share of Common Stock entitles the holder thereof
to one vote, either in person or by proxy, at meetings of stockholders. The
holders are not, and will not be, permitted to vote their shares cumulatively,
subject to the application of California law (see "- Application of California
Corporate Law Following 1996" below). Accordingly, the holders of more than 50%
of the issued and outstanding shares of common stock are, and will continue to
be, able to elect all of the directors of the Company unless and until
California law is applicable. See "Principal Shareholders."
DIVIDEND POLICY. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of common stock. The Company has not paid any cash
or other dividends since its inception and presently anticipates that all
earnings, if any, will be retained for development of the Company's business. As
a result, no dividends on the shares of the Company's Common Stock will be
declared in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and the rights of any outstanding
preferred stock, and will depend upon, among other things, future earnings, the
operating and financial condition of the Company, its capital requirements,
general business conditions and other pertinent facts. Therefore, there can be
no assurance that any dividends on the Common Stock will ever be paid.
CERTAIN CHARTER PROVISIONS AND ANTI-TAKEOVER EFFECTS OF DELAWARE LAW.
As noted below, the Company's Board of Directors has authority to issue shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company.
The Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law. In general, that statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock.
MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of Common Stock have no
preemptive or other subscription rights, conversion rights, redemption rights or
sinking fund provisions. In the event of the dissolution, whether voluntary or
involuntary, of the Company, subject to the rights of any outstanding preferred
stock, each share of Common Stock is, or will be, entitled to share ratably in
any assets available for distribution to holders of the equity of the Company
after satisfaction of all liabilities.
PREFERRED STOCK
The Company has 1,000,000 authorized shares of preferred stock, $0.001
par value. The Board of Directors has the authority, without action by the
stockholders, to create one or more series of preferred stock and to determine
the dividend rights, dividend rate, rights and terms of redemption, liquidation
preferences,
43
<PAGE>
sinking fund terms, and conversion and voting rights of any such series, as well
as the number of shares constituting any such series and the designation thereof
and the price therefor.
As of September 6, 1996, 1,300 shares of Series A 10% Convertible Preferred
Stock ("Series A Preferred Stock") were issued and outstanding. Each share of
Series A Preferred Stock entitles the holder hereof to annual dividends in the
amount of $100 payable semi-annually and carries a liquidation preference of
$1,000 per share. The Series A Preferred Stock is convertible, at the holders'
option, into Common Stock of the Company at the lesser of $2.25 per share or 85%
of the average closing bid price of the Common Stock for the five trading days
preceding notice of conversion, subject to a minimum conversion price of $1.125
per share. The holders of shares of Series A Preferred Stock may cause the
shares to be redeemed on or after June 17, 2000, subject to the right of the
Company to redeem such shares or cause the conversion of such shares on or after
June 17, 1998.
WARRANTS
As of September 6, 1996, the Company had issued and outstanding an
aggregate of 540,793 warrants to purchase Common Stock.
190,793 of the outstanding warrants were issued to shareholders of
Magellan Restaurant Systems (the "Magellan Warrants") prior to the combination
of Magellan and Grill Concepts. The Magellan Warrants are exercisable to acquire
one share of Common Stock per warrant at a price of $2.00 per share. The
Magellan Warrants expire on June 30, 2000.
100,000 of the outstanding warrants were issued in 1995 as a finders
fee (the "Finders Fee Warrants") in connection with a private placement
undertaken by the Company. The Finders Fee Warrants are exercisable to acquire
one share of Common Stock per warrant at a price of $3.00 per share. The Finders
Fee Warrants expire on March 2, 2000. In connection with the issuance of the
Finders Fee Warrants, the Company agreed to grant "piggy-back registration
rights" with respect to the shares underlying such warrants.
250,000 of the outstanding warrants were issued in June of 1996 in
connection with the sale of the Company's Series A Preferred Stock (the "Reg S
Warrants"). The Reg S Warrants are exercisable to acquire one share of Common
Stock per warrant at a price of $3.00 per share. The Reg S Warrants expire on
June 17, 2001, subject to the Company's right to redeem the Reg S Warrants at
$.01 per Warrant commencing June 17, 1999, provided that the closing bid price
of the Common Stock has equaled or exceeded $4.50 per share for the 20 trading
days preceding notice of redemption.
TRANSFER AND WARRANT AGENT
The Transfer for the Company's Common Stock is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.
APPLICATION OF CALIFORNIA CORPORATE LAW FOLLOWING 1996.
Under California Corporations Code Section 2115 ("Section 2115"), a
corporation that is not incorporated in California (such as the Company) will
still be subject to certain provisions under California corporate law if, among
other things, over one-half of its outstanding voting securities are held of
record by California residents and it has the requisite level of property
holdings, payroll and sales in California. If the requirements are met, the
provisions of the California Corporations Code which are applicable include: (i)
Section 303 (relating to removal of directors without cause); (ii) Section 304
(relating to removal of directors by court proceedings); (iii) Section 309
(relating to directors' standard of care); (iv) Sections 500 through 505,
inclusive (relating to limitations on corporate distributions in cash or
property); (v) Section 506 (relating to liability of a stockholder who receives
an unlawful distribution; (vi) Section 708, subdivisions (a), (b) and (c)
(relating to a stockholder's right to cumulate votes at an election of
directors); (vii) Section 710 (relating to supermajority vote requirements);
(viii) Chapter 13 (commencing with Section 1300) (relating to dissenters'
rights); and (ix) Sections 1500 and 1501 (relating to records and reports). Some
of the applicable provisions may
44
<PAGE>
provide stockholder rights which are greater than those available under Delaware
law, while others may provide lesser rights. Because the foregoing is only a
summary and is not intended to, and does not, constitute a complete description
of a stockholder's rights under California law, each person is urged to consult
his, her or its own counsel with respect to such rights and how they may differ
from the rights available under Delaware law.
Based on the circumstances known at this time, it appears that the
Company meets the requirements for application of Section 2115. If such
requirements continue to be met on the date that determination of the
applicability of Section 2115 is made under California law, it is expected that
the Company will become subject to the specified California corporate law
provisions commencing on or about January 1, 1997. Thereafter, such corporate
law provisions will continue to apply until the end of the fiscal year in which
the Company files a report showing that at least one of the criteria for
application of Section 2115 is no longer being met.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby and
certain other legal matters will be passed upon for the Company by the law firm
of Vanderkam & Sanders.
EXPERTS
The consolidated balance sheets of Grill Concepts, Inc. as of December 31,
1995 and December 25, 1994 and the consolidated statements of operation,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995 included in this Prospectus have been included herein
reliance of the report of Coopers & Lybrand L.L.P., independent accountants,
given on authority of that firm as experts in accounting and auditing.
The financial statements of The Grill, A California Limited
Partnership, as of December 31, 1995 and for the year then ended included in
this Prospectus have been audited by Barkin, Perren & Schwager, independent
auditors, as stated in their report appearing herein. Such financial statements
have been included herein in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Following the combination of Magellan and GCI, on May 22, 1995, the
Company's Board of Directors selected Coopers & Lybrand L.L.P. to serve as its
new independent accountants and dismissed Arthur Yorkes & Company which
previously served as the independent accountants for Magellan.
Arthur Yorkes & Company's reports on the financial statements of
Magellan for the fiscal years 1993 and 1994 contain no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In connection with its audits for fiscal
years 1993 and 1994 and through May 22, 1995, there were no disagreements with
Arthur Yorkes & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Arthur Yorkes & Company
would have caused them to make reference thereto in its reports on the financial
statements for such years.
45
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
[CAPTION]
<TABLE>
Page
Grill Concepts, Inc.
<S> <C>
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheet as of December 31, 1995 and December 25, 1994................................. F-3
Consolidated Statements of Operation for the years ended December 31, 1995
and December 25, 1994.................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and December 25, 1994................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995
and December 25, 1994.................................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
Consolidated Balance Sheet as of June 30, 1996 (unaudited)............................................... F-18
Consolidated Statements of Operation for the three and six months ended June 30, 1996
and June 25, 1995 (unaudited).......................................................................... F-20
Consolidated Statements of Cash Flows for the six months ended June 30, 1996
and June 25, 1995 (unaudited).......................................................................... F-21
Notes to Consolidated Financial Statements (unaudited)................................................... F-22
The Grill, a California Limited Partnership
Independent Auditors' Report............................................................................. F-25
Balance Sheet as of December 31, 1995.................................................................... F-26
Statement of Income and Partners' Capital for the year ended December 31, 1995........................... F-27
Statement of Cash Flows for the year ended December 31, 1995............................................. F-28
Notes to Financial Statements............................................................................ F-29
Balance Sheet as of March 31, 1996 and December 31, 1995 (unaudited)..................................... F-32
Statement of Operations for the three months ended
March 31, 1996 (unaudited)............................................................................. F-33
Statement of Cash Flows for the three months ended March 31, 1996
and March 25, 1995 (unaudited)......................................................................... F-34
Notes to Financial Statements (unaudited)................................................................ F-35
Pro Forma Financial Information
Introduction to Pro Forma Condensed Combined Financial Information....................................... F-36
Pro Forma Condensed Combined Balance Sheet as of March 31, 1996 (unaudited).............................. F-37
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 and the three months ended March 31, 1996 (unaudited)................................ F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors
Grill Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Grill Concepts,
Inc. and Subsidiaries as of December 31, 1995 and December 25, 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Grill Concepts,
Inc. and Subsidiaries at December 31, 1995 and December 25, 1994 and their
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 15, 1996
F-2
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995 and December 25, 1994
----------
<TABLE>
<CAPTION>
1995 1994
---- ----
A S S E T S:
<S> <C> <C>
Current assets:
Cash and cash equivalents $631,116 $191,242
Inventories 154,898 126,482
Prepaid expenses 742,419 372,408
------- -------
Total current assets 1,528,433 690,132
Furniture, equipment and improvements, net 3,737,523 2,872,405
Other assets:
Goodwill, net 2,003,144 -
Other 762,712 352,498
--------- ----------
Total assets $8,031,812 $3,915,035
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $1,038,440 $997,939
Accrued expenses 988,258 834,636
Current portion of long-term debt 450,386 296,098
---------- ---------
Total current liabilities 2,477,084 2,128,673
Long-term debt 1,241,426 1,631,648
Long-term debt-related parties 84,500 1,220,000
---------- ---------
Total liabilities 3,803,010 4,980,321
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock - $1 par value, 1,000,000 shares authorized, none
issued and outstanding in 1995. No par value, 1,500,000 shares
authorized, none issued and outstanding in 1994. - -
Common stock - $.00001 par value, 20,000,000
shares authorized. 12,999,230 issued and
outstanding in 1995. No par value, 15,000,000
shares authorized, 2,407,700 issued and
outstanding in 1994. 130 1,495,347
Additional paid-in capital 6,726,081 -
Accumulated deficit (2,497,409) (2,560,633)
--------- ---------
Stockholders' equity (deficit) 4,228,802 (1,065,286)
--------- ---------
Total liabilities and stockholders' equity $8,031,812 $3,915,035
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1995 and
December 25, 1994
----------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales $20,253,248 $14,822,574
Cost of sales 5,437,041 4,142,382
----------- -----------
Gross profit 14,816,207 10,680,192
---------- ----------
Operating expenses:
Restaurant operating expenses 12,109,505 8,804,259
General and administration 1,716,514 1,501,040
Depreciation and amortization 787,715 570,689
Amortization of preopening expenses 4,043 254,275
----------- -----------
Total operating expenses 14,617,777 11,130,263
---------- ----------
Income (loss) from operations 198,430 (450,071)
Interest expense, net (105,114) (129,385)
Interest expenses - related parties (22,492) (89,910)
----------- -----------
Income (loss) before provision for income
taxes 70,824 (669,366)
------ -------
Provision for income taxes 7,600 (800)
----------- -----------
Net income (loss) $63,224 ($670,166)
======= =======
Net income (loss) per share $0.01 ($0.08)
==== ====
Weighted average shares outstanding 12,387,081 8,500,000
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
</TABLE>
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For
The Years Ended December 31, 1995 and December 25, 1994
----------
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
In Capital
----------
<S> <C> <C> <C> <C> <C>
Balance, December 26, 1993 2,358,000 $1,470,000 ($1,890,467) ($420,467)
Common stock issued for services 49,700 25,347 25,347
Net loss (670,166) (670,166)
-------- --------- -------- --------
Balance, December 25, 1994 2,407,700 $1,495,347 ($2,560,633) ($1,065,286)
Adjustment to reflect the reverse acquisition
of Grill Concepts, Inc. (formerly Magellan
Restaurant Systems, Inc.) by Grill Concepts, Inc. 10,591,530 (1,495,217) $6,726,081 5,230,864
Net income 63,224 63,224
-------- --------- ---------- -------- -------
Balance, December 31, 1995 12,999,230 $130 $6,726,081 ($2,497,409) $4,228,802
========== ========= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1995 And
December 25, 1994
----------
<TABLE>
<CAPTION>
December 31,1995 December 25, 1994
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $63,224 ($670,166)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 592,635 824,964
Gain on disposal of motor vehicles - (10,832)
Common stock issued for services - 25,347
Amortization of Goodwill 58,000
Changes in operating assets and liabilities:
Inventories 17,081 (842)
Prepaid expenses (261,416) (201,421)
Other assets 164,822 (374,991)
Accounts payable (146,263) 405,374
Accrued liabilities (296,852) 229,797
------- -------
Net cash provided by operating activities 191,231 227,230
------- -------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (300,800) (714,536)
Proceeds from disposal of motor vehicles 26,500
Net cash acquired through purchase of business 940,377 -
------- -------
Net cash provided by (used in) investing activities 639,577 (688,036)
------- -------
Cash flows from financing activities:
Decrease in restricted cash - 200,000
Decrease in bank overdraft - ( 278,591)
Proceeds from issue of long-term debt 178,700 2,762,612
Payments on long-term debt (429,634) (2,684,494)
Proceeds from long-term debt - related parties - 870,500
Payments on long-term debt - related parties (140,000) (360,000)
------- ----------
Net cash (used in) provided by financing activities (390,934) 510,027
------- -------
Net increase in cash 439,874 49,221
Cash and cash equivalents, beginning of period 191,242 142,021
------- -------
Cash and cash equivalents, end of period $631,116 $191,242
======= =======
Net cash acquired through purchase of business
Working capital, other than cash $505,591
Furniture, equipment and improvements (1,348,853)
Goodwill (2,061,144)
Other assets (519,217)
Long-term debt 15,000
Fair value of stock exchanged 4,349,000
---------
Net cash acquired $940,377
========
Supplemental cash flows information: Cash paid during the year for:
Interest $138,912 $175,381
Income taxes $11,800 $800
</TABLE>
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Summary of Significant Accounting Policies:
General
-------
Grill Concepts, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in November 1985. The Company was originally
incorporated under the name "Uno Concepts, Inc." In December 1992, the
Company changed its name to "Magellan Restaurant Systems, Inc."
("Magellan") and, in connection with an exchange agreement (the
"Exchange") with Grill Concepts, Inc., a California corporation
("GCI"), changed its name to "Grill Concepts, Inc." in February 1995.
As of December 31, 1995, the Company operates ten restaurants,
consisting of six Daily Grill restaurants in Southern California and
three Pizzeria Uno Restaurants and a sports themed restaurant located
in the eastern part of the United States.
Fiscal Year
-----------
The Company's fiscal year ends on the last Sunday in December. The
fiscal year ended December 31, 1995 was comprised of 53 weeks, compared
with 52 weeks in 1994.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.
Inventories
-----------
Inventories consist of food, wine and liquor and are stated at the
lower of cost or market, cost generally being determined on a first-in,
first-out basis.
Furniture, Equipment And Improvements
-------------------------------------
Furniture, equipment and improvements are stated at cost and at
appraised value for assets acquired in the exchange. Depreciation is
being provided for using the straight-line method over estimated useful
lives of five to seven years.
Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful lives of the improvements or the
terms of the related leases.
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Goodwill
--------
Goodwill is amortized on a straight-line basis over thirty years.
Expendables
-----------
Initial amounts spent for china, glassware and flatware in connection
with the opening of a new restaurant are capitalized. Subsequent
purchases are expensed as incurred.
Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The Company
currently maintains substantially all of its day-to-day operating cash
balances with major financial institutions. At times, cash balances may
be in excess of Federal Depository Insurance ("FDIC") insurance limits.
Cash equivalents principally consist of an investment account with a
major brokerage house. The Company does not believe it is exposed to
any significant credit risk for cash and cash equivalents.
Preopening Costs
----------------
Costs related to the opening of new restaurants, payroll and other
costs incurred in the training and introduction period, are deferred
and then amortized over a one-year period commencing with the opening
of each respective restaurant.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS No. 109, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future
years to the difference between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Reclassifications
-----------------
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
1. Summary of Significant Accounting Policies, Continued:
Recent Accounting Pronouncements
--------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived and certain identifiable assets to be
disposed of. The Company is required to adapt the provision of SFAS No.
121 for fiscal 1996, and the Company currently believes the effect upon
its adoption to be immaterial to the financial position and results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS NO. 123 establishes a fair value based
methodology for the financial accounting and reporting for stock-based
employee compensation plans. Examples of such plans include stock
purchase plans, stock options, restricted stock, and stock appreciation
rights. Prior to the issuance of SFAS No. 123, stock-based compensation
measurements utilized the intrinsic value based method of accounting as
specified by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123, effective for fiscal 1996, permits entities
to continue to utilize the traditional accounting for stock-based
employee compensation plans as prescribed by APB Opinion No. 25.
However, under this option, entities will be required to disclose the
pro forma effect of stock-based employee compensation plans on net
income and earnings per share as if SFAS No. 123 had been adopted. The
Company intends to continue utilizing the provisions of APB Opinion No.
25 in accounting for its stock-based employee compensation plans.
Use Of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions for the reporting period and as of the
financial statement date. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent liabilities, and the reported amounts of revenue and
expenses. Actual results could differ from those estimates.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------------------
1. Summary of Significant Accounting Policies, Continued:
Fair Value Of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standard No. 107, Disclosure about
Fair Value of Financial Instrument ("SFAS No. 107"), requires
disclosure of fair value information about most financial instruments
both on and off the balance sheet, if it is practicable to estimate.
SFAS No. 107 excludes certain financial instruments, such as certain
insurance contracts, and all non-financial instruments from its
disclosure requirements. A financial instrument is defined as
contractual obligation that ultimately ends with the delivery of cash
or an ownership interest in an entity. Disclosures regarding the fair
value of financial instruments have been derived using external market
sources, estimates using present value or other valuation techniques.
Cash, accounts payable, accrued liabilities and short term debt are
reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The fair value of long-term
debt closely approximates its carrying value.
2. Business and Organization:
On March 3, 1995, pursuant to an exchange agreement previously entered
into by Magellan Restaurant Systems, Inc. ("Magellan") and Grill
Concepts, Inc. ("GCI"), GCI became a wholly owned subsidiary of
Magellan. Immediately following the exchange, the name of Magellan was
changed to Grill Concepts, Inc., a Delaware corporation.
All of GCI's common stock was exchanged for 8,500,000 shares of
Magellan Common Stock. As a result, following the Exchange, holders of
GCI common stock controlled 63% of the outstanding common stock of the
Company, and for accounting purposes the acquisition has been treated
as a recapitalization of GCI with GCI as the acquiror. The transaction
was therefore accounted for as a purchase under the "reverse
acquisition" method. The resulting excess of cost over net assets
acquired is being amortized over 30 years.
As a result of the above, these statements include the accounts of GCI
and Magellan on a consolidated basis for 1995. The Balance Sheets and
Statements of Operations for 1994 reflect only the accounts of GCI
while the Statement of Operations for 1995 includes the operations of
GCI for the entire 53 week period and the operations of Magellan for
only the 43 week period between March 3, 1995 and December 31, 1995.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------------
2. Business and Organization, Continued:
The unaudited pro forma financial information set forth below is
presented as if the purchase had been consummated as of December 26,
1994.
The pro forma financial information is not necessarily indicative of
what actual results of operations of the Company would have been
assuming the acquisitions had been consummated as of December 28, 1993,
nor does it purport to represent the results of operations for future
periods.
1995 1994
---- ----
Sales $21,494,108 $21,477,316
Net loss ($181,258) (1,036,876)
Net income per share ($0.02) ($0.08)
Weighted average shares outstanding 12,387,081 13,135,512
The pro forma financial information included the following adjustments:
(i) an increase in depreciation and amortization expense; and (ii) an
increase in interest expense.
3. Closure Jo Jo Players:
Prior to the consummation of the Exchange, the Company's management
decided that it would sell, or close, the Company's sports themed
restaurant, Jo Jo Players. In March 1995, the property and business was
listed for sale with a real estate agent. The effect of such closure
has been considered, and reflected, in accounting for the Exchange
resulting in a reduction in the net assets acquired pursuant to the
Exchange, and a corresponding increase in goodwill attributable to the
Exchange of $521,000.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------------
4. Furniture, Equipment And Improvements:
Properties at December 31, 1995 and December 25, 1994 consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $3,008,843 $2,577,327
Leasehold improvement 3,100,938 2,136,405
Motor vehicle 14,256 14,256
Expendables 44,711 44,711
Construction in process 172,218 -
---------- ---------
Furniture, equipment and improvements 6,340,966 4,772,699
Less, accumulated depreciation (2,603,443) (1,900,294)
--------- ---------
Net furniture, equipment and
improvements $3,737,523 $2,872,405
========= =========
</TABLE>
5. Long-Term Debt:
Long-term debt at December 31, 1995 and December 25, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to bank under revolving credit agreement, expiring March 31,
2000, payable in sixty equal monthly installments starting April 30, 1995, plus
interest. Also available is $500,000 under a revolving line of credit expiring
November 30, 1996 Interest is payable monthly at the Bank's Reference Rate (8
1/2% at December 31, 1995) plus 0.625%. The Company has the option of fixing the
interest rate. The note is collateralized by an interest in the assets of the
Company. In addition, two of the Company's principal shareholders have
guaranteed the credit facility. In connection with this line of credit, the
Company is required to comply with a number of restrictive covenants, including
meeting certain interest cover requirements. $1,360,005 $1,617,612
Note payable to small business administration collateralized by
property, payable monthly, approximately $1,648, interest at 4.0% due
September 23, 2006. 171,707 -
</TABLE>
<PAGE>
5. Long-Term Debt, Continued:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to lessor, uncollateralized, payable monthly, approximately
$1,435 plus interest at 10.0%. $145,100 $148,076
Uncollateralized non-interest-bearing note payable to a lessor in monthly
installments equal to the greater of $3,000 or the excess of 7.0% of gross sales
over the minimum rent of one restaurant, until paid in full. - 162,058
Note payable, 10.0% subordinated promissory note, due January 3, 1996. 15,000 -
-------- ---------
1,691,812 1,927,746
Less, Current portion of long-term debt (450,386) (296,098)
---------- ----------
Total $1,241,426 $1,631,648
========= =========
</TABLE>
Principal maturities of long-term debt are as follows:
Year Ending December 31
1996 $ 450,386
1997 336,660
1998 337,475
1999 338,336
2000 99,247
Thereafter 214,208
-----------
Total $1,776,312
------------
<PAGE>
6. Long-Term Debt-Related Parties:
<TABLE>
<CAPTION>
Long-term debt with related parties at December 31, 1995 and December 25,
1994 consisted of: 1995 1994
---- ----
<S> <C> <C>
Uncollateralized note payable to
shareholders/officers, with interest
payable monthly at a rate of 7.0% per
annum. All unpaid principle and interest
are due December 31, 1996 $84,500 $224,500
Convertible debentures placed with individuals who are stockholders.
Interest at a rate of 8.0% per annum. - 995,500
--------- ----------
Total $84,500 $1,220,000
========= ==========
</TABLE>
7. Commitments And Contingencies
The Company is committed to minimum rental payments under operating
leases for its restaurant locations and corporate headquarters
facilities as follows:
Year Ending December 31
1996 $1,329,257
1997 1,344,002
1998 1,294,788
1999 1,296,443
2000 1,173,735
Thereafter 9,207,776
---------
Total $15,646,001
-----------
Rent expense was $2,123,488 and $978,374 for 1995 and 1994,
respectively, including $102,031 and $101,744 for 1995 and 1994,
respectively, for contingent rentals which are payable on the basis of
a percentage of sales in excess of stipulated.
<PAGE>
8. Income Taxes:
The provision for income taxes for the fiscal year ended December 31,
1995 is as follows:
Current - federal $5,900
Current - state 1,700
-----
$7,600
Deferred tax assets and liabilities consist of the following as of
December 31, 1995:
Deferred tax assets:
Net operating loss $1,391,883
State taxes 7,933
AMT credit 5,903
----------
Total gross deferred tax assets 1,405,719
Less, Valuation allowance (1,236,084)
Net deferred tax assets 169,635
Deferred tax liabilities:
Fixed assets, intangibles and state taxes (169,635)
----------
Net deferred tax assets and liabilities $ -
==========
At December 31, 1995, the Company has available federal and state net
operating loss carryforwards of approximately $3,496,267 and
$2,031,524, respectively, that may be utilized to offset future federal
and state taxable earnings. These net operating losses begin to expire
in 2006 and 1997, respectively. A full valuation allowance has been
established against the resulting deferred tax asset because
realization is not assured.
<PAGE>
9. Capital Shares:
Warrants
--------
During the year, the Company abandoned its efforts to extend the
expiration date of its outstanding public warrants. As a result of such
determination, 329,194 warrants exercisable at $1.00 per share expired
effective February 10, 1995.
In addition, 247,047 private warrants exercisable at $1.62 per share
and 30,869 private warrants exercisable at $1.13 per share expired.
At December 31, 1995, the Company had outstanding 190,793 warrants
previously issued by Magellan and exercisable at a price of $2.00 per
share. Additionally, in connection with the Exchange and a private
placement during 1995, the Company issued an additional 100,000
warrants which are exercisable at $3.00 per share.
Options
-------
During the quarter ended June 25, 1995, 10,000 options under the old
Magellan plan, exercisable at $.91 per share, issued pursuant to the
Company's stock option plan expired as a result of the termination of
employment of the holder of such options. As of December 31, 1995,
50,000 options, exercisable at $.91 per share, remained outstanding.
On June 1, 1995, the Company's board of directors adopted the Grill
Concept, Inc. 1995 Stock Option Plan (the "Plan"). A total of 1,500,000
shares are reserved for issuance pursuant to the Plan. During the year,
with adoption of the Plan by the Board, upon recommendation of the
Compensation Committee, a total of 523,000 options were granted under
the Plan ranging from $1.17 to $1.48. Operation of the Plan, including
the exercise of options granted, is subject to approval of the Plan by
the Company's shareholders at the next annual meeting of shareholders.
Cancellation of Escrow Shares
-----------------------------
Pursuant to the terms of the Exchange Agreement between Grill Concepts,
Inc. and Magellan Restaurant Systems, Inc., 614,391 shares of the
Company's common stock originally issued in escrow for disbursement or
cancellation in accordance with such agreement were cancelled effective
July 1, 1995.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. Subsequent Events:
In December 1995, the Board of Directors expressed its intent to
acquire The Grill on the Alley restaurant, subject to the approval by
the restaurant's owners and execution of formal documentation by the
Company. Certain restaurant owners are also officers, directors and
shareholders of the Company. All contingencies and the finalization of
the purchase price relating to the acquisition of The Grill on the
Alley are anticipated by the Company to be satisfied during the second
quarter of 1996. The Grill on the Alley is located in Beverly Hills,
California.
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS
June 30, December 31,
1996 1995
---------- --------------
Current assets:
Cash and cash equivalents $1,788,528 $631,116
Receivables 38,338
Inventory 213,407 154,898
Prepaid expenses 675,535 742,419
---------- --------
Total current assets 2,715,808 1,528,433
--------- ---------
Property and equipment, at cost 7,211,289 6,340.966
Less: accumulated depreciation (2,908,153) (2,603,443)
----------- -----------
Property and equipment, net 4,303,136 3,737,523
---------- ---------
Other assets:
Goodwill 1,968,792 2,003,144
Liquor license, net 702,676 658,569
Other 181,191 104,143
--------- ---------
Total other assets 2,852,659 2,765,856
---------- ---------
Total assets $9,871,603 $8,031,812
========== ==========
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1996 1995
----------- ------------
Current liabilities:
Accounts payable $943,131 $1,038,440
Accrued expenses 896,339 988,258
Current portion of long term debt 450,969 450,386
----------- ------------
Total current liabilities 2,290,439 2,477,084
----------- ------------
Long-term debt, net of current 1,129,585 1,325,926
----------- ------------
Shareholders' equity:
Preferred stock, $.001 par value
authorized 1,000,000 shares;
Shares issued and outstanding
none in 1995, 1500 in 1996 2
Common stock, $.00001 par value:
20,000,000 shares authorized:
shares issued and outstanding:
12,999,230 in 1995 and
13,849,230 in 1996 138 130
Capital in excess of par value 9,031,071 6,726,081
Accumulated deficit (2,579,632) ( 2,497,409)
----------- ------------
Shareholder's equity 6,451,579 4,228,802
----------- ------------
Total liabilities and
shareholder's equity $9,871,603 $8,031,812
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ----------------
<S> <C> <C> <C> <C>
June June 25, June 30 June 25
1996 1995 1996 1995
---------- ---------- ------- ---------
Sales $5,691,606 $5,385,837 $10,937,385 $9,905,992
Cost of sales 1,546,185 1,452,721 2,892,312 2,669,339
---------- ---------- ----------- ----------
Gross profit 4,145,421 3,933,116 8,045,073 7,236,653
---------- ---------- ----------- ----------
Costs and expenses:
Restaurant operating expenses 3,580,099 3,308,517 6,766,900 6,046,079
General and administrative 440,217 396,973 911,151 697,747
Depreciation and amortization 186,552 187,585 377,987 350,227
Amortization of preopening expenses - - - 4,043
---------- ---------- ----------- ----------
Total operating expenses 4,206,868 3,893,075 8,056,038 7,098,096
---------- ---------- ----------- ----------
Income (loss) from operations (61,447) 40,041 (10,965) 138,557
---------- ---------- ----------- ----------
Interest expense, net 32,561 28,661 70,458 64,024
---------- ---------- ----------- ----------
Income (loss) before taxes on income (94,008) 11,380 (81,423) 74,533
Provision for taxes on income - - 800 800
---------- ---------- ----------- ----------
Net income (loss) ($94,008) $11,380 $(82,223) $73,733
========== ========== =========== ==========
Net income (loss) per share ($0.01) $0.00 ($0.01) $0.01
========== ========== =========== ==========
Average weighted shares outstanding 13,653,076 13,613,621 13,326,153 11,731,134
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 25,
1996 1995
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($82,223) $73,733
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 371,507 354,270
Changes in operating assets and liabilities
Inventories (9,041) (24,070)
Prepaid expenses 32,049 (22,116)
Other assets (31,027) 6,113
Accounts payable (153,793) 97,295
Accrued liabilities (199,371) (18,535)
----------- -----------
Net cash provided by (used in) operations ( 71,899) 466,690
----------- -----------
Cash flows from investing activities:
Additions to furniture, equipment and
improvements (397,084) (127,756)
Net cash acquired through purchase of business 337,153 1,105,707
----------- -----------
Net cash provided by (used in) investing activities ( 59,931) 977,951
----------- -----------
Cash flows from financing activities:
Proceeds from issue of Preferred Stock 1,455,000
Proceeds from issue of long-term debt 178,700
Payments on long-term debt (195,758) (55,239)
Payments of shareholder's loan (150,000)
----------- -----------
Net cash provided by (used) in financing activities 1,259,242 (26,539)
----------- -----------
Net increase in cash and cash equivalents 1,127,412 1,418,102
Cash and cash equivalents, Beginning of period 631,116 191,242
----------- -----------
Cash and cash equivalents, End of period $1,758,52 $1,609,344
=========== ===========
*Net cash acquired through purchase of business
Working capital, other than cash $16,168 $505,591
Furniture, equipment and improvements (473,239) (1,348,853)
Excess of cost over net assets acquired (1,895,814)
Other assets (55,776) (519,217)
Long-term debt 15,000
Fair value of stock exchanged 850,000 4,349,000
----------- -----------
Net cash acquired $337,153 $1,105,707
----------- -----------
Supplemental cash flow information:
Cash paid during the year for:
Interest $104,935 $118,476
Income taxes $800 $800
</TABLE>
The accompanying notes are an integral part of these financial statements
F-21
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL PRESENTATION
The unaudited interim consolidated financial statements as of June 30, 1996
and for the six months ended June 30, 1996 and June 25, 1995 have been
prepared in accordance with generally accepted accounting principles and
include all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of
the results of operations for such interim periods presented and financial
position at such date. The current period results of operations are not
necessarily indicative of results which utimately will be reported for the
full year ending December 29, 1996.
The December 31, 1995 balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally
accepted accounting principles. The interm financial statement and notes
thereto should be read in conjunction with the financial statements and
notes
included in the Company's Form10-KSB dated December 31, 1995.
2. BUSINESS AND ORGANIZATION
On March 3, 1995, pursuant to an exchange agreement previously entered into
by Magellan Restaurant Systems, Inc. (Magellan) and Grill Concepts, Inc.
(GCI), GCI became a wholly owned subsidiary of Magellan. Immediately
following the exchange, the name of Magellan was changed to Grill Concepts,
Inc., a Delaware corporation, and now is the Company.
All of GCI's common stock was exchanged for 8,500,000 shares of Magellan
Common Stock. As a result, following the Exchange, holders of GCI common
stock controlled 63% of the outstanding common stock of the Company, and
for accounting purposes the acquisition has been treated as a
recapitalization of GCI with GCI as the acquiror. The transaction was
therefore accounted for as a purchase under the "reverse acquisition"
method. The resulting excess of cost over net assets acquired will be
amortized over 30 years.
As a result of the above, these interim statements include the accounts of
GCI and Magellan on a consolidated basis for 1996. The Statement of
Operations for 1995 includes the operations of GCI for the entire 26 week
period and the operations of Magellan for only the 16 week period between
March 3, 1995 and June 25, 1995.
The operations of Tailgators are not included in 1996 since it was closed.
The second quarter of 1996 includes the accounts of "The Grill".
See note 4 below.
3. SHAREHOLDER'S EQUITY
During the quarter ended June 30, 1996, the Company completed an offering
of $1.5 million of Series A 10% Convertible Preferred Stock to an offshore
invester pursuant to Regulation S under the Securities Act of 1933, as
amended. The preferred shares are convertable at the option of the holder
in 25% increments commencing 60, 90, 120 and 150 days after June 17, 1996.
The conversion price of the preferred shares is equal to the lesser of
$2.25 per share or 85% of the average closing bid price of the common stock
for the five trading days preceding notice of conversion; provided,
however, that conversion shall be prohibited during periods where the
reported short interest in the Company's common stock exceeds 200% of the
average daily trading volume and provided, further, that the conversion
price shall in no event be less than $1.125 per share. In the event
conversion is precluded for a period of 30 days as a result of the fixed
floor on conversion price, the Company will have 15 days to redeem the
preferred shares at 110% offering price or, in the alternative, permit
conversion at the then applicable price without regard to the floor on
conversion price. The preferred shares are entitled to receive a 10%
cumulative dividend payable semi-annually until the preferred shares
are either redeemed or converted. The Company may, at its option, redeem
the preferred shares at their initial offering price or force conversion of
the preferred shares at the
F-22
<PAGE>
then applicable conversion price commencing June 17, 1998. The holder of
the preferred shares may, at its option, cause any preferred shares
remaining outstanding at June 17, 2000 to be redeemed at their initial
offering price.
In connection with the offshore placement of the Series A Convertible
Preferred Shares, the Company issued warrants to acquire an aggregate of
250,000 shares of the Company's common stock at a price of $3.00 per share
for a period expiring June 17, 2001. The warrants are redeemable at the
Company's option commencing June 17, 1999 at a price of $.01 per warrant
provided that the closing bid price of the Company's common stock has
equaled or exceeded $4.50 per share for 20 trading days.
4. ACQUISITION OF THE GRILL
On April 1, 1996, the Company acquired 100% of the common stock of EMNDEE,
Inc. ("EMNDEE") pursuant to a share exchange. The Company issued an
aggregate of 432,735 shares of common stock in exchange for the stock of
EMNDEE. EMNDEE was the general partner of, and held a 50.91% interest in,
The Grill Limited Partnership, a California limited partnership (the "Grill
Partnership"), which owned and operated The Grill on the Alley (the
"Grill"), an upscale Beverly Hills restaurant which opened in 1984 and
served as the model for the Company's Daily Grill restaurants.
On April 22, 1996, the Company consummated the acquisition of 100% of the
common stock of The Grill on the Alley, Inc. ("Grill, Inc."). Grill, Inc.
is a partner, and held the remaining 49.09% interest, in the Grill
Partnership. The Company issued an aggregate of 417,265 shares of common
stock in exchange for the stock of Grill, Inc.
The Company's principal shareholders and directors (Robert Spivak, Michael
Weinstock and Richard Shapiro) controlled and were the principal
shareholders of EMNDEE. From 1995 through the date of acquisition, the
Company provided management services to The Grill in exchange for a
management fee in an amount equal to 5% of the revenues of The Grill.
5. PROPOSED ACQUISITION OF HAMBURGER HAMLET
In July of 1996, the Company submitted a proposal to acquire selected
assets constituting all of the remaining operations of Hamburger Hamlet
Restaurants, Inc. ("Hamburger Hamlet"). Hamburger Hamlet, and its
predecessors, has operated high end casual dining restaurants since 1950.
The operations of Hamburger Hamlet were acquired by the then management of
the company in a leveraged buyout in 1988 and in 1991 Hamburger Hamlet
completed an initial public offering. In 1996, Hamburger Hamlet filed
bankruptcy and closed 12 unprofitable restaurants, all of which had been
opened since the leveraged buyout.
Pursuant to the Company's proposal, the Company has offered to acquire the
remaining 19 Hamburger solely from 50% of annual earnings before interest,
taxes, depreciation and amortization ("EBITDA") attributable to the
acquired restaurants to the extent EBITDA exceeds $2.5 million, not to
exceed Hamlet restaurants for (i) $8.5 million in cash (ii) 500,000
warrants exercisable for three years at a price equal to 105% of the price
of the Company's common stock at the closing of the acquisition, and (iii)
a non-interest bearing performance note (the "Performance Note") in the
amount of $3.2 million payable $750,000 per year (or, at the option of
Hamburger Hamlet, $3.0 million from 50% of annual EBITDA in excess of $2.5
million without the $750,000 annual cap).
Management of Hamburger Hamlet has submitted a plan of reorganization based
on acceptance of the Company's offer. Additionally, the secured creditors
of Hamburger Hamlet have agreed in principal to approve the Company's
offer. The general creditors of Hamburger Hamlet have, in prior
discussions, rejected the Company's offer. Consummation of the acquisition
of the Hamburger Hamlet restaurants is subject to a number of
contingencies, including completion of a definitive documents, further due
diligence, approval of the plan by the creditors and the bankruptcy court
and arrangement of satisfactory financing.
F-23
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Grill Proforma Proforma
Concepts, Inc. The Grill Adjustments Combined
--------------- --------- ----------- --------
<S> <C> <C> <C> <C>
Sales $10,123,258 $1,669,422 $11,792,680
Cost of sales 2,636,932 523,427 3,160.359
--------------- ---------- -----------
Gross profit 7,486,326 1,145,995 8,632,321
--------------- ---------- -----------
Restaurant operating expenses 6,372,334 841,333 7,213,667
General and administration 927,229 76,226 ($38,603) <F2>
38603 <F2> 1,003,455
Depreciation and amortization 357,369 6,480 9,456 <F1> 373,305
--------------- ----------- -------------- -----------
Total operating expenses 7,656,932 924,039 9,456 8,590,427
--------------- ----------- -------------- -----------
Income (loss) from operations (170,606) 221,956 9,456 41,894
Interest (income)/expense 74,863 ( 7,838) -.- 67,025
--------------- ----------- -------------- -----------
Income (loss) before income taxes (245,469) 229,794 9,456 (25,131)
Taxes on income 800 -.- 800
-------------- ----------- -------------- -----------
Net income (loss) ($246,269) $229,794 $9,456 ($25,931)
============== =========== =========== ===========
Net income (loss) per share ($0.00)
Weighted average shares outstanding 13,326,153
FOR THE SIX MONTHS ENDED JUNE 25, 1995
Grill Proforma Proforma
Concepts, Inc. The Grill Adjustments Combined
--------------- --------- ----------- --------
Sales $9,905,992 $1,330,267 $11,236,259
Cost of sales 2,669,339 407,882 3,077,221
--------------- ---------- -----------
Gross profit 7,236,653 922,385 8,159,038
--------------- ---------- -----------
Restaurant operating expenses 6,046,079 753,721 6,799,800
General and administration 697,747 69,495 (19,038) <F2>
19,038 <F2> 767,242
Depreciation and amortization 354,270 5,668 18,912 <F1> 378,850
-------------- ----------- ----------- -----------
Total Operating expenses 7,098,096 828,884 18,912 7,945,892
-------------- ----------- ----------- -----------
Income from operations 138,557 93,501 18,912 213,146
Interest expense, net 64,024 232 64,256
-------------- ----------- ---------- -----------
Income before income taxes 74,533 93,269 18,912 148,890
Taxes on income 800 4,000 4,800
-------------- ---------- ----------- -----------
Net income/(loss) $73,733 $ 89,269 $18,912 $144,090
============== =========== =========== ===========
Net income per share $0.01
=====
Weighted average shares outstanding 13,613,621
<FN>
===========
<F1> To record depreciation on increased value of property and equipment
due to purchase price accounting.
<F2> To eliminate inter-company management fee to Grill Concepts.
</FN>
</TABLE>
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Grill
We have audited the accompanying balance sheet of The Grill, a California
Limited Partnership, as of December 31, 1995, and the related statement of
income and partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Grill, a California Limited
Partnership, as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
June 5, 1996
/s/Barkin, Perren & Schwager
- ----------------------------
Barkin, Perren & Schwager
Woodland Hills, California
F-25
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Balance Sheet
December 31, 1995
ASSETS
Current Assets
Cash and cash equivalents (Note 1) $ 216,655
Investment securities, available for sale 233,486
Accounts receivable 30,820
Advances to employees 15,000
Inventories 45,521
Prepaid expenses 60,122
-------
Total Current Assets 601,604
Property and Equipment, at cost (Notes 1 & 2) 59,349
-------
Other Assets
Deposits 15,776
Liquor License 40,000
Total Other Assets 55,776
Total Assets $ 716,729
=======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 95,268
Accrued expenses 48,843
Due to Grill Concepts, Inc. (Note 5) 97,420
Due to partner (Note 5) 16,794
-------
Total Current Liabilities 258,325
Commitments and Contingencies (Note 3)
Partners' Capital 458,404
Total Liabilities and Partners' Capital $ 716,729
=======
See Independent Auditors' Report
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Statement of Income and Partners' Capital
For the Year Ended December 31, 1995
Sales
Food $2,030,126
Beverage 724,752
Total Sales 2,754,878
Cost of Sales
Food 668,257
Beverage 196,178
Total Cost of Sales 864,435
Gross Profit 1,890,443
Operating Expenses
Payroll expenses 853,643
General and Administrative - Fixed 219,518
General and Administrative - Variable 294,487
Occupancy Costs 443,392
---------
Total Operating Expenses 1,811,040
Operating Income 79,403
Other Income (Expenses)
Interest Income 6,477
Interest Expense (1,592)
Depreciation (9,494)
---------
Total Other Income (Expenses) (4,609)
Net Income Before Taxes 74,794
Provision For Income Taxes (Note 1) 1,600
---------
Net Income 73,194
Partners' Capital - Beg. of Year 478,859
Unrealized Loss on Investment Securities
Available for Sale, Net (3,649)
Distributions (90,000)
Partners' Capital - End of Year $ 458,404
=========
See Independent Auditors' Report.
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Statement of Cash Flows
For the Year Ended December 31, 1995
Cash Flows From Operating Activities
Received from sales $2,654,463
Received from interest 5,427
Paid for cost of sales (835,734)
Paid for operating expenses (1,621,543)
Paid for taxes to government (1,600)
---------
Net cash flows from operating activities
(Note 4) 201,013
---------
Cash Flows from Investing Activities
Purchase of investment securities (237,135)
Purchase of property and equipment (11,751)
Net cash used by investing activities (248,886)
---------
Cash Flow from Financing Activites
Distribution to Partners (90,000)
Net cash used by financing activities (90,000)
---------
Net decrease in cash (137,873)
Cash and cash equivalents at beginning of year 354,528
---------
Cash and cash equivalents at end of year $ 216,655
=========
See Independent Auditors' Report.
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Notes to Financial Statements
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal business activity
- ---------------------------
The Company is a Limited Partnership formed in the State of California in 1983
and is engaged in the business of operating a restaurant in Beverly Hills,
California.
Inventories
- -----------
Inventories consisting of food, beverages and supplies are carried at the lower
of cost (first-in, first-out method) or market.
Property and Equipment
- ----------------------
Property and equipment are stated at cost and depreciated using the
double-declining balance and straight-line methods over their estimated useful
lives as follows:
Furniture and fixtures 3 - 7 years
Office equipment 5 - 7 years
Leasehold improvements 10 - 31.5 years
Maintenance and repairs are expensed as incurred and major betterments are
capitalized.
Income taxes
- ------------
The financial statements do not include a provision for federal income taxes
because the partnership does not incur federal or state income taxes. Instead
its earnings are passed through to its partners and they are responsible for any
taxes on their share of income allocated to them. The State of California
charges a minimum tax of $800 paid with the annual filing of the state
partnership return.
Cash and cash equivalents
- -------------------------
The "cash and cash equivalents" asset account, for purposes of the statement of
cash flows, includes all cash accounts and short-term investments with three
months or less to maturity at the financial statement date.
F-29
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Notes to Financial Statements
December 31, 1995
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
Furniture and fixtures $ 21,460
Equipment 514,431
Leasehold improvements 228,243
-------
764,134
Less Accumulated Depreciation (704,785)
$ 59,349
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company leases the building located at 9560 Dayton Way, Beverly Hills,
California under an operating lease originally dated October 12, 1982, amended
on March 18, 1997 and extended on February 26. 1992. The lease was extended
until May 1, 1998 under the same conditions as the original lease. In addition,
the Company is required to pay all real estate taxes, insurance and business
licenses.
Rent expense was $171,153 for the year ended December 31, 1995.
Future minimum lease payments required as of December 31, 1995 related to this
operatin lease are as follows:
1996 $167,913
1997 167,913
1998 55,971
-------
$391,797
=======
NOTE 4 - CASH FLOW FROM OPERATING ACTIVITIES - INDIRECT METHOD
Net income $ 73,194
--------
Noncash Revenue and Expense Adjustments:
Depreciation expense 9,494
Increase in accounts receivable (5,978)
Decrease in inventory 13,701
Increase in prepaid expenses (21,960)
Increase in accounts payable 31,571
Decrease in accrued expenses (9,071)
Increase in Due to Grill Concepts, Inc. 108,470
Increase in Due to Emndee, Inc. 1,592
--------
127,819
Net cash flows from operating activities $ 201,013
========
F-30
<PAGE>
THE GRILL
(A CALIFORNIA LIMITED PARTNERSHIP)
Notes to Financial Statements
NOTE 5 - RELATED PARTY TRANSACTIONS
The company owes $97,420 to Grill Concepts, Inc. for various expenses including
management fees and insurance reimbursement. Some of the majority owners of
Grill Concepts, Inc. are also shareholders of Emndee, Inc. Emndee, Inc. is the
general partner of the Company. The Company intends to repay this liability
within the current period. No interest has been accrued on this amount.
The company owes $16,794 to its general partner, Emndee, Inc. for loans advanced
in earlier years. Interest is accrued at 10% and compounded monthly.
NOTE 6 - SUBSEQUENT EVENTS
In March 1996, a new entity, "The Grill on the Alley, Inc.", was formed for the
purpose of acquiring all of the limited partnership interests in the Company. In
exchange for each limited partnership unit, partners received shares in The
Grill on the Alley, Inc.
In April 1996, Grill Concepts, Inc. acquired all of the shares of both The Grill
on the Alley, Inc. and Emndee, Inc., in exchange for 850,000 shares of Grill
Concepts, Inc. common stock. The stock was distributed as follows: 432,735
shares to the general partner and 417,265 shares to the limited partners.
The Company extended the lease for the property discussed in Note 3 for an
additonal 10 years with a termination date of April 30, 2008. The base rent
shall be $10,500 per month, subject to CPI adjustments.
F-31
<PAGE>
THE GRILL
BALANCE SHEETS (UNAUDITED)
ASSETS
March 31, December 31,
1996 1995
--------- --------
Current assets:
Cash and cash equivalents $379,015 $450,141
Inventories 37,973 45,521
Accounts receivable 45,557 45,820
Prepaid expenses 54,944 60,122
-------- --------
Total current assets 517,489 601,604
-------- --------
Property and equipment, at cost 59,032 59,349
Other assets
Liquor licenses, net 40,000 40,000
Other 15,776 15,776
-------- --------
Total assets 632,297 $716,729
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $124,104 $95,268
Accrued expenses 34,042 163,057
-------- --------
Total current liabilities 158,146 258,325
-------- --------
Partners' Capital 474,151 458,404
-------- --------
Liabilities and Partners' Capital $632,297 $716,729
======== ========
The accompanying notes are an integral part of these financial statements
F-32
<PAGE>
THE GRILL
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 25, 1995
1996 1995
-------- --------
Sales $855,294 $649,644
Cost of sales 268,047 185,569
--------- --------
Gross Profit 587,247 464,075
--------- --------
Cost and expenses
Restaurant operating expenses 445,845 320,914
General and administration 76,226 37,027
Depreciation and amortization 2,862 2,778
--------- --------
Total operating expenses 524,933 360,719
--------- --------
Income from operations 62,314 103,356
Interest income 3,433 -
--------- -------
Income before taxes on income $ 65,747 $103,356
--------- -------
Provisions for taxes on income 0 0
--------- -------
Net income $65,747 $103,356
========= ========
The accompanying notes are an integral part of these financial statements
F-33
<PAGE>
THE GRILL
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 and MARCH 25, 1995
1996 1995
-------- --------
Cash flows from operating activities:
Net income $65,747 $103,356
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,862 2,778
Changes in operating assets and liabilities:
Inventories 7,548 19,354
Receivables 263 12,407
Prepaid expenses 5,178 (81,197)
Accounts payable 28,836 (41,446)
Accrued liabilities (129,015) (22,666)
---------- ----------
Net cash used in operations (18,581) (7,414)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,545) (6,020)
--------- ---------
Cash flows from financing activities
Distribution to Partners (50,000) -
--------- ---------
Net decrease in cash and cash equivalents (71,126) (13,434)
Cash and cash equivalents, beginning of period 450,141 354,528
--------- ---------
Cash and cash equivalents, end of period $379,015 $341,094
========= =========
The accompanying notes are an integral part of these financial statements
F-34
<PAGE>
THE GRILL
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements and notes thereto should be read in conjunction
with the financial statements and notes included in The Grill audited financial
statements for the year ended December 31, 1995. In the opinion of management,
these interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair statement of the results for the interim period
presented.
2. CASH DISTRIBUTION
In March, 1996 a cash distribution of $50,000 was made to the partners.
F-35
<PAGE>
GRILL CONCEPTS, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
reflects the 1996 acquisition of The Grill dba, "The Grill on the Alley", by
Grill Concepts, Inc. (the "Company") for 850,000 shares of the Company's Common
Stock valued at $850,000. The pro forma balance sheet data at March 31, 1996
assumes the acquisition of The Grill occurred at March 31, 1996. The pro forma
statement of operations for the three months ended March 31, 1996 and the year
ended December 31, 1995 assumes the 1996 acquisition of The Grill occurred on
December 26, 1994 (i.e., the first day of the fiscal year for the Company).
The historical financial information of the Company and The Grill as of and for
the three months ended March 31, 1996 and the year ended December 31, 1995 have
been derived from the respective companies consolidated financial statements
included elsewhere herein. The pro forma financial information should be read in
conjunction with the accompanying notes thereto and with the financial
statements of the Company and The Grill.
The pro forma condensed combined financial information does not purport to be
indicative of the financial position or operating results which would be
achieved had the acquisition been consummated as of the dates indicated and
should not be construed as representative of future financial position or
operating results. In management's opinion, all adjustments necessary to reflect
the effects of the acquisition have been made.
F-36
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Grill Adjustments
Concepts, Inc. The Grill Dr./(Cr) Combined
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $334,710 $379,015 $713,725
Inventories 161,732 37,973 199,705
Accounts receivable 45,557 45,557
Prepaid expenses 769,248 54,944 ______ 824,192
------- ------- --------
Total current assets 1,265,690 517,489 1,783,179
Furniture, equipment and improvements 3,600,924 59,032 $415,849 <F1> 4,075,805
Other assets:
Goodwill, net 1,985,968 1,985,968
Liquor licenses, net 665,506 40,000 705,506
Other 75,970 15,776 _______ 91,746
------ ------ ------
Total assets 7,594,058 $632,297 $415,849 $8,642,204
========= ======== ======== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable $814,813 $124,104 $40,000 <F2> $978,947
Accrued expenses 846,238 34,042 880,280
Current portion of long-term debt 448,500 _______ ________ 448,500
------- -------
Total current liabilities 2,109,581 158,146 40,000 2,907,727
Long-term debt 1,159,390 1,159,390
Long-term debt - related parties 84,500 84,500
Total liabilities 3,353,471 158,146 40,000 3,551,617
--------- ------- ------ ---------
Stockholders' equity:
Common stock 130 8 <F1> 138
Additional paid-in capital 6,726,081 849,992 <F1> 7,576,073
Partners' capital 474,151 (474,151)<F1> 0
Accumulated deficit (2,485,624) ________ ________ (2,485,624)
----------- -----------
Stockholders' equity 4,240,587 474,151 375,849 5,090,587
--------- ------- ------- ---------
Total liabilities and
stockholders' equity $7,594,058 $632,297 $415,849 $8,642,204
========== ======== ========= ==========
<FN>
<F1> To record issuance of 850,000 shares of GCI Common Stock valued at $1.00
per share; the elimination of partners' capital and to allocate the
purchase price of cost in excess of net assets acquired to the fair value
of assets acquired.
<F2> To accrue Grill Concepts' additional cost of the acquisition.
</FN>
</TABLE>
F-37
<PAGE>
GRILL CONCEPTS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
[CAPTION]
<TABLE>
Grill Adjustments
Concepts, Inc. The Grill Dr/(Cr) Combined
<S> <C> <C> <C> <C>
Sales $20,253,248 $2,754,878 $23,008,126
Cost of sales 5,437,041 864,435 _________ 6,301,476
----------- --------- ----------
Gross profit 14,816,207 1,890,443 _________ 15,706,650
----------- ----------- ----------
Restaurant operating expenses 12,109,505 1,673,040 13,782,545
General and administration 1,716,514 138,000 ( $138,000) <F2>
138,000 <F2> 1,854,514
Depreciation and amortization 791,758 9,494 37,822 <F1> 839,074
---------- ---------- --------- ----------
Total operating expenses 14,617,777 1,820,534 37,822 16,476,133
---------- ---------- --------- ----------
Income from operations 198,430 69,909 ( 37,822) 230,517
Interest (income)/expense 127,606 ( 4,885) 37,822 122,721
--------- ---------- --------- ----------
Income before income taxes 70,824 74,794 ( 37,822) 107,796
Taxes on income 7,600 1,600 ________ 9,200
--------- -------- ---------- ----------
Net income $63,224 $73,194 ($37,822) $98,596
========= ======== ======== =========
Net income per share $0.01
=====
Weighted average shares outstanding 12,387,081
==========
FOR THE THREE MONTH ENDED MARCH 31, 1996
Grill Adjustments
Concepts, Inc. The Grill Dr./(Cr) Combined
Sales $5,245,779 $855,294 $6,101,073
Cost of sales 1,346,127 268,047 _______ 1,614,174
---------- ------- ---------
Gross profit 3,899,652 587,247 _______ 4,486,899
---------- ------- ---------
Restaurant operating expenses 3,186,801 445,845 3,632,646
General and administration 470,934 76,226 $38,603 <F2>
(38,603)<F2> 547,160
Depreciation and amortization 191,435 2,862 9,456 <F1> 203,753
--------- ------- -------- ---------
Total Operating expenses 3,849,170 524,933 9,456 4,383,559
--------- ------- -------- ---------
Income from operations 50,482 62,314 (9,456) 103,340
Interest (income)/expense 37,897 (3,433) ______ 34,464
---------- -------- --------
Income before income taxes 12,585 65,747 (9,456) 68,876
Taxes on income 800 ______ ______ 800
---------- ---------
Net income/(loss) $11,785 $ 65,747 ($9,456) $68,076
========== ========== ======== =========
Net income per share $0.01
=====
Weighted average shares outstanding 12,999,230
==========
<FN>
<F1> To record depreciation on increased value of property and equipment due to
purchase price accounting.
<F2> Also eliminated was an inter-company management fee to Grill Concepts.
</FN>
</TABLE>
F-38
<PAGE>
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations in connection with this offering
other than those contained in this Prospectus. Any information or
representations not herein contained, if given or made, must not be relied upon
as having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered by this Prospectus, nor does it constitute an offer to sell
or a solicitation of an offer to buy the securities by any person in any
jurisdiction where such offer or solicitation is not authorized, or in which the
person making such offer is not qualified to do so, or to any person to whom it
is unlawful to make such offer or solicitation. The delivery of this Prospectus
shall not, under any circumstances, create any implication that there has been
no change in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Prospectus Summary........................................................
Risk Factors..............................................................
The Offer.................................................................
Use of Proceeds...........................................................
Management's Discussion and Analysis......................................
Business..................................................................
Management................................................................
Certain Relationships and Transactions....................................
Principal and Selling Shareholders........................................
Market For Common Equity and Related
Stockholder Matters.....................................................
Description of Securities.................................................
Legal Matters.............................................................
Experts...................................................................
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................
Index to Financial Statements............................................. F-1
551,620 Shares of Common Stock and
100,000 Shares of Common Stock
underlying Common Stock
Purchase Warrants
GRILL CONCEPTS, INC.
PROSPECTUS
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation, as amended, eliminate the
personal liability of directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the extent permitted by Delaware law.
The Company's Bylaws provide that the Company shall indemnify its officers and
directors to the extent permitted by the general corporation law of the State of
Delaware. Section 145 of the General Corporation Law of the State of Delaware
authorizes a Corporation to indemnify directors, officers, employees or agents
of the Corporation in non-derivative suits if such party acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interest
of the Corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful, as determined in
accordance with Delaware law. Section 145 further provides that indemnification
shall be provided if the party in question is successful on the merits or
otherwise.
Reference is hereby made to the caption "Management - Exculpation and
Indemnification Arrangements" in the Prospectus which is a part of this
Registration Statement for a more detailed description of indemnification
arrangements between the Company and its directors.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the Offer, all of which are to be borne by
the Company, are as follows:
SEC Filing Fee...................................................... 507.65
Accounting Fees and Expenses........................................ 15,000.00
Legal Fees and Expenses............................................. 20,000.00
Miscellaneous....................................................... 4,492.35
Total............................................................. $ 40,000.00
===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has sold the following securities within the past three
years which were not registered under the Securities Act of 1933:
1. In December of 1994 and January of 1995, the Company sold an aggregate
of 609,286 shares of Common Stock to four non-U.S. resident investors for
$1,066,250 in cash. Vanguard Ltd. acted as placement agent with respect to the
sale of those shares. The Company paid a total of $30,000 to Vanguard, Ltd. as
compensation and reimbursement of expenses in connection with the placement of
such shares. Those securities were issued pursuant to the exemption from
registration for offers and sales outside of the United States provided under
Regulation S of the Securities Act of 1933, as amended.
2. In March of 1995, the Company issued to an aggregate of 150,000 shares
of Common Stock to Glenn Golenberg, Marshall Geller, Whale Securities and
Millennium Capital as a Merger and Acquisition Fee paid by the Company in
connection with services provided by such parties relating to an Exchange
Agreement between Magellan Restaurant Systems, Inc. and Grill Concepts, Inc.
Additionally, the Company issued an aggregate of 100,000 warrants to Whale
Securities Co., L.P., Millennium Capital Corp., Glenn Golenberg and Marshall
Geller for introducing the Company to Vanguard, Ltd. The securities issued to
Messrs. Golenberg and Geller and to Whale Securities and Millennium Capital were
issued pursuant to the exemption from registration for offers and sales not
involving a public offering pursuant to Section 4(2) of the Securities Act of
1933, as amended.
II-3
<PAGE>
3. In April of 1996, the Company issued an aggregate of 850,000 shares of
Common Stock to the shareholders of The Grill on the Alley, Inc. and EMNDEE,
Inc. (The Grill on the Alley and EMNDEE were partners in a California limited
partnership which owned and operated The Grill on the Alley restaurant) in
exchange for all of the shares of such companies. The securities issued to the
shareholders of The Grill on the Alley, Inc. and EMNDEE, Inc. were issued
pursuant to the exemption from registration for offers and sales not involving a
public offering pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
4. In June of 1996, the Company issued 1,500 shares of Series A Convertible
Preferred Stock to Cameron Capital Ltd., a non-U.S. resident, for $1,500,000 in
cash. In connection with such issuance, the Company issued to Cameron Capital
Management Ltd. 250,000 warrants to purchase common stock at $3.00 per share for
a period of five years. The Company paid a total of $45,000 in expense
reimbursements to Cameron Capital Management Ltd., including $15,000 which was
payable to Vanderkam & Sanders as a finders fee and in payment of legal fees
incurred in the transaction. The securities issued to Cameron Capital Ltd. and
to Cameron Capital Management Ltd. were issued pursuant to the exemption from
registration for offers and sales outside of the United States provided under
Regulation S of the Securities Act of 1933, as amended.
Except as otherwise noted, no underwriters were utilized in connection
with the above transactions and no commissions or discounts were paid to any
party.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NUMBER
- --------------
2.1 Agreement and Plan of Merger between MRS Funding, Inc., Continental
Capital Resources, Inc. and Magellan Restaurant Systems, Inc. dated
November ____, 1992 (1)
2.2 Exchange Agreement dated September 13, 1994 by and between Magellan
Restaurant Systems, Inc. and Grill Concepts, Inc. (2)
2.3 Amendment to Exchange Agreement dated December 9, 1994 (2)
2.4 Second Amendment to Exchange Agreement dated January 25, 1995 (2)
2.5 Letter Agreement regarding acquisition of The Grill (12)
3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc. (3)
3.2 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.3 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated
December 29, 1994 (2)
3.4 Certificate of Designation fixing terms of Series A Preferred Stock
(13)
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Privately Issued Warrant (1)
4.3 Form of Offshore Warrant dated June 14, 1996 (13)
5.1 Form of Opinion of Vanderkam & Sanders regarding the legality of the
securities being registered *
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and Denbob
Corp. dated June 29, 1989 for premises in Cherry Hill, New Jersey (1)
++10.3 1986 Incentive Stock Option Plan (1)
10.4 Agreement between Magellan Restaurant Systems, Inc. and Carl H. Canter
dated November , 1992 regarding surrender of shares by Carl Canter,
amended (4)
10.5 Promissory Notes from Uno Concepts, Inc. to Robert Wechsler and Louis
Resnick regarding shareholder loan (1)
10.6 Loan Extension Agreement dated October 20, 1993 between Louis Resnick
and the Company (5)
10.7 Loan Conversion Agreement dated November 15, 1993 between Robert
Wechsler and the Company (5)
10.8 Neptune Sports Bar Partnership Agreement dated April 15, 1993 (6)
10.9 Cash Flow and Equity Purchase Agreement dated April 15, 1993 relating
to Neptune Sports Bar (6)
II-4
<PAGE>
10.10Agreement dated April 15, 1993 relating to assignment of rights under
Cash Flow and Equity Purchase Agreement to the Company (6)
10.11Form of Promissory Notes from the Company to Robert Wechsler and
Christi Pedra (7)
10.12Release and Termination Agreement dated May 17, 1994 relating to the
termination of operations of the Company's Henrietta restaurant (8)
++10.13 Employment Agreement with Robert Wechsler (2)
10.14Finders Fee Agreement dated October 5, 1994 between the Company and
Golenberg & Geller, Inc. and Millennium Capital Corp. (2)
10.15Merger & Acquisition Fee Agreement dated October 5, 1994 between the
Company and Golenberg & Geller, Inc. and Whale Securities Co., L.P.
(2)
10.16Form of Escrow Agreement relating to issuance of additional shares
pursuant to terms of exchange with Grill Concepts, Inc. (2)
10.17Form of Expense Sharing Agreement between Magellan and Grill Concepts
(2)
10.18Operating Agreement for The Airport Grill LLC between Grill Concepts
and CA One Services, Inc. dated March 15, 1995 (9)
++10.19 Grill Concepts, Inc. 1995 Stock Option Plan (10)
++10.20 Employment Agreement with Robert Spivak (11)
21.1 Subsidiaries of Registrant (9)
24.1 Consent of Vanderkam & Sanders (included in Exhibit 5.1) *
24.2 Consent of Coopers & Lybrand L.L.P. (appears on Page II-8) *
24.3 Consent of Barkin, Perren & Schwager (appears on Page II-9) *
* Filed herewith
++ Compensatory plan or management agreement.
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993.
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No.
33-85730) declared effective by the Securities and Exchange Commission on
February 3, 1995.
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the exhibits filed with the Registrant's Current Report
on Form 8-K dated March 3, 1995.
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the respective exhibits filed with the Company's
Current Report on Form 8-K dated March 11, 1994.
(5) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated November 15, 1993.
(6) Incorporated by reference to the respective exhibits filed with the
Company's Form 10-QSB for the quarter ended June 27, 1993.
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated January 19, 1994.
(8) Incorporated by reference to the respective exhibits filed with the
registrant's Current Report on Form 8-K dated May 17, 1994.
(9) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10- KSB for the year ended December 25,
1994.
(10) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.
(11) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10- KSB for the year ended December 31,
1995.
(12) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated April 1, 1996.
(13) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by registrant of expenses incurred or
paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Registrant hereby undertakes:
A. To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement to:
1. Include any prospectus required by Section 10(a)(3) of the Act;
2. Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set
forth in the registration statement; and
3. Include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
B. That, for the purpose of determining any liability under the Act, each
post effective amendment to the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof:
C. To remove from registration by means of a post effective amendment any
of the securities being registered which remain unsold at the
termination of the offering; and
D. To provide, upon effectiveness, certificates in such denominations and
registered in such names as are required to permit prompt delivery to
each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, registrant
has duly caused this registration statement or amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on the 13th day of September, 1996.
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak
---------------------
ROBERT SPIVAK, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Robert Spivak President, Chief Executive Officer September 13, 1996
- ------------------------
Robert Spivak and Director (Principal Executive
Officer)
Chairman of the Board of Directors September , 1996
Robert Wechsler
/s/ Michael Weinstock Executive Vice President and September 12, 1996
- ------------------------
Michael Weinstock Director
/s/ Richard Shapiro Vice President and Director September 13, 1996
- ------------------------
Richard Shapiro
/s/ Ben Sumner Chief Financial Officer (Principal September 13, 1996
Ben Sumner Accounting and Financial Officer)
Director September , 1996
Charles Frank
/s/ Glenn Golenberg Director September 13, 1996
Glenn Golenberg
Director September , 1996
Peter Balas
II-7
<PAGE>
Registration No.33-
SECURITIES AND EXCHANGE COMMISSION
EXHIBITS
TO
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
GRILL CONCEPTS, INC.
<PAGE>
Exhibit Index
Exhibit Number Page Number
2.1 Agreement and Plan of Merger between MRS Funding, Inc., Continental Capital
Resources, Inc. and Magellan Restaurant Systems, Inc. dated November ____,
1992..................................................................... *
2.2 Exchange Agreement dated September 13, 1994 by and between Magellan
Restaurant Systems, Inc. and Grill Concepts,
Inc...................................................................... *
2.3 Amendment to Exchange Agreement dated December 9,
1994..................................................................... *
2.4 Second Amendment to Exchange Agreement dated January 25,
1995..................................................................... *
2.5 Letter Agreement regarding acquisition of The
Grill.................................................................... *
3.1 Certificate of Incorporation, as amended, of Grill Concepts,
Inc...................................................................... *
3.2 Bylaws, as amended, of Grill Concepts,
Inc...................................................................... *
3.3 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated December 29,
1994..................................................................... *
3.4 Certificate of Designation fixing terms of Series A Preferred
Stock.................................................................... *
4.1 Specimen Common Stock Certificate........................................ *
4.2 Form of Privately Issued Warrant......................................... *
4.3 Form of Offshore Warrant dated June 14, 1996............................. *
5.1 Form of Opinion of Vanderkam & Sanders regarding the legality of the
securities being
registered...............................................................
10.1 Form of Franchise Agreement.............................................. *
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and Denbob Corp.
dated June 29, 1989 for premises in Cherry Hill, New Jersey............. *
++10.3 1986 Incentive Stock Option
Plan..................................................................... *
10.4 Agreement between Magellan Restaurant Systems, Inc. and Carl H. Canter
dated November , 1992 regarding surrender of shares by Carl Canter,
amended.................................................................. *
10.5 Promissory Notes from Uno Concepts, Inc. to Robert Wechsler and Louis
Resnick regarding shareholder
loan..................................................................... *
10.6 Loan Extension Agreement dated October 20, 1993 between Louis Resnick and
the
Company.................................................................. *
10.7 Loan Conversion Agreement dated November 15, 1993 between Robert Wechsler
and the
Company.................................................................. *
10.8 Neptune Sports Bar Partnership Agreement dated April 15,
1993..................................................................... *
10.9 Cash Flow and Equity Purchase Agreement dated April 15, 1993 relating to
Neptune Sports
Bar...................................................................... *
10.10Agreement dated April 15, 1993 relating to assignment of rights under Cash
Flow and Equity Purchase Agreement to the
Company.................................................................. *
10.11Form of Promissory Notes from the Company to Robert Wechsler and Christi
Pedra.................................................................... *
10.12Release and Termination Agreement dated May 17, 1994 relating to the
termination of operations of the Company's Henrietta
restaurant............................................................... *
++10.13 Employment Agreement with Robert
Wechsler................................................................. *
10.14Finders Fee Agreement dated October 5, 1994 between the Company and
Golenberg & Geller, Inc. and Millennium Capital
Corp..................................................................... *
10.15Merger & Acquisition Fee Agreement dated October 5, 1994 between the
Company and Golenberg & Geller, Inc. and Whale Securities Co.,
L.P...................................................................... *
10.16Form of Escrow Agreement relating to issuance of additional shares
pursuant to terms of exchange with Grill Concepts,
Inc...................................................................... *
10.17Form of Expense Sharing Agreement between Magellan and Grill
Concepts................................................................. *
10.18Operating Agreement for The Airport Grill LLC between Grill Concepts and
CA One Services, Inc. dated March 15,
1995..................................................................... *
++10.19 Grill Concepts, Inc. 1995 Stock Option
Plan..................................................................... *
++10.20 Employment Agreement with Robert
Spivak................................................................... *
21.1 Subsidiaries of
Registrant............................................................... *
24.1 Consent of Vanderkam & Sanders (included in Exhibit 5.1)
24.2 Consent of Coopers & Lybrand L.L.P. (appears on Page II-8)
24.3 Consent of Barkin, Perren & Schwager (appears on Page II-9)
- -------------------
* Incorporated by reference pursuant to Rule 12b-23
** Previously filed
<PAGE>
September 16, 1996
Grill Concepts, Inc.
11661 San Vicente Blvd., Suite 404
Los Angeles, California 90049
Gentlemen:
You have requested that we furnish you our legal opinion with respect
to the legality of the following described securities of Grill Concepts, Inc.
(the "Company") covered by a Form SB-2 Registration Statement, as amended
through the date hereof (the "Registration Statement") initially filed with the
Securities and Exchange Commission (File No. 33- ) by the Company on August ,
1996 for the purpose of registering such securities under the Securities Act of
1933:
1. 551,620 shares of common stock, $.001 par value (the
"Offered Shares") being offered by certain existing
shareholders of the Company;
2. 100,000 shares of Common Stock (the "Warrant Shares")
issuable upon the exercise of outstanding Warrants.
The Offered Shares and the Warrant Shares are referred to
collectively as the "Registered Securities."
In connection with this opinion, we have examined the corporate records
of the Company, including the Company's Articles of Incorporation, Bylaws, and
the Minutes of its Board of Directors and Shareholders meetings, the
Registration Statement, and such other documents and records as we deemed
relevant in order to render this opinion.
Based upon the foregoing, it is our opinion that:
1. The Company is duly and validly organized and is validly
existing and in good standing under the laws of the State
of Delaware.
2. The Registered Securities, when sold and issued in accordance
with the Registration Statement and the final prospectus
thereunder, and for the consideration therein referred to,
will be legally issued, fully paid, and non-assessable.
<PAGE>
Grill Concepts, Inc.
September 16, 1996
Page 2
In giving the opinions expressed above, we advise that our opinions
herein are with respect to federal law and the law of the State of Texas only
and that, to the extent such opinions are derived from laws of other
jurisdictions, such statements are based upon an examination of relevant
authorities and are believed to be correct, but we have obtained no legal
opinions as to such matters from attorneys licensed to practice in such other
jurisdictions.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and further
consent to statements made therein regarding our firm and the use of our name
under the heading "Legal Matters" in the Prospectus constituting a part of such
Registration Statement.
Very truly yours,
VANDERKAM & SANDERS
/s/ Vanderkam & Sanders
legalopi.gci
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated March 15, 1996, on our audits of the financial statements of Grill
Concepts, Inc. We also consent to the reference to our firm under the caption
"Experts".
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
Los Angeles, California
September 16, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated December 31, 1995, in the Registration Statement on
Form SB-2 and the related Prospectus of Grill Concepts, Inc.
/s/Barkin, Perren & Schwager
- -----------------------------
Barkin, Perren & Schwager
Woodland Hills, California
September 16, 1996
<PAGE>
