SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3319172
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-------------------------------------------------------------------------
(Address of principal executive offices)
(310) 820-5559
--------------------
(Issuer's telephone number)
--------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of May 2, 1998, 15,790,128 shares of Common Stock of the issuer were
outstanding.
<PAGE>
GRILL CONCEPTS, INC.
--------------------
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - March 29, 1998
and December 28, 1997........................................ 1
Consolidated Condensed Statements of Operations - For the
three months ended March 29, 1998 and March 30,1997.......... 3
Consolidated Condensed Statements of Cash Flows - For the
three months ended March 29, 1998 and March 30, 1997......... 4
Notes to Consolidated Condensed Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 9
SIGNATURES............................................................ 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 29, December 28,
1998 1997
------------- ------------
Current assets:
Cash and cash equivalents $614,660 $272,567
Inventories 295,951 302,631
Receivables 329,720 375,117
Prepaid expenses 1,092,971 955,329
-------------- ------------
Total current assets 2,333,302 1,905,644
-------------- ------------
Property and equipment, at cost 11,276,181 10,340,678
Less: accumulated depreciation (4,520,818) (4,277,546)
-------------- ------------
Property and equipment, net 6,755,363 6,063,132
-------------- ------------
Goodwill 235,635 237,636
Liquor licenses, net 613,686 613,686
Other assets 145,136 190,757
-------------- ------------
Total assets $10,083,122 $9,010,855
============== ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
1
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
March 29, December 28,
1998 1997
-------------- -------------
<S> <C> <C>
Current liabilities:
Bank line of credit $535,000 $480,000
Accounts payable 1,042,351 1,359,529
Accrued expenses 1,126,329 858,050
Current portion of long term debt 350,300 346,208
Note payable - related party 84,500 84,500
-------------- -------------
Total current liabilities 3,138,480 3,128,287
Long-term debt, net of current 1,410,307 699,364
-------------- -------------
Total liabilities 4,548,787 3,827,651
-------------- -------------
Minority interest 199,800 --
Stockholders' equity:
Series B, Convertible Preferred Stock, $.001 par value, authorized
1,000,000 shares; shares issued and outstanding: 22 in 1998, 32 in
1997. 1 1
Series I, Convertible Preferred Stock,$.001 par value, authorized
1,000,000 shares, shares issued and outstanding: 1000 shares in
1998 and 1997 1 1
Series II, Convertible Preferred Stock, $.001 par value, authorized
1,000,000 shares, shares issued and outstanding: 500 shares in
1998 and 1997 1 1
Common stock, $.00001 par value: 30,000,000 shares authorized,
shares issued and outstanding: 15,790,128 in 1998 and
15,672,481 in 1997 158 157
Additional paid-in capital 11,053,913 11,053,913
Accumulated deficit (5,719,539) (5,870,869)
-------------- -------------
Stockholders' equity 5,334,535 5,183,204
-------------- -------------
Total liabilities and stockholders' equity $10,083,122 $9,010,855
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
2
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
-----------------------------
March 29, March 30,
1998 1997
------------- --------------
Sales $8,361,241 $7,140,720
Cost of sales 2,203,050 1,956,217
------------- --------------
Gross Profit 6,158,191 5,184,503
------------- --------------
Costs and expenses:
Restaurant operating expenses 5,045,368 4,340,867
General and administrative 622,594 523,484
Depreciation and amortization 243,270 199,678
Amortization of preopening expenses 45,600 50,300
------------- --------------
Total operating expenses 5,956,832 5,114,329
------------- --------------
Income from operations 201,359 70,174
Non-recurring credit - 49,286
Interest expense - net (39,119) (44,047)
------------- --------------
Income before provision for income taxes 162,240 75,413
Provision for income taxes (1,200) (800)
------------- --------------
Net income $161,040 $74,613
------------- --------------
Preferred stock:
Preferred dividends accrued or paid (22,328) --
Accounting deemed dividends (42,133) --
------------- --------------
($64,461) --
------------- --------------
Net income applicable to common stock $96,579 $74,613
============= ==============
Net income per share
Basic net income $0.01 $0.01
------------- --------------
Preferred stock
Dividends 0.00 --
Accounting deemed dividends 0.00 --
------------- --------------
0.00 --
------------- --------------
Basic net income applicable to common stock $0.01 $0.01
============= ==============
Average weighted shares outstanding 15,704,802 14,328,736
=============== =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
-------------------------------
March 29, March 30,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $161,040 $74,613
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 288,870 249,978
Changes in operating assets and liabilities
Inventories 6,680 (43,802)
Receivables 45,397 --
Prepaid expenses (137,642) 193,166
Other assets (7,687) (97,314)
Accounts payable (317,178) 44,170
Accrued liabilities 268,281 (219,806)
------------- -------------
Net cash provided by operating activities 307,761 201,005
------------- -------------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (935,503) (1,020,292)
-------------- -------------
Net cash (used in) investing activities (935,503) (1,020,292)
------------- -------------
Cash flows from financing activities:
Proceeds from note payable 800,000 --
Proceeds from investment in L.L.C. 199,800 --
Proceeds from line of credit 55,000 645,000
Payments on long-term debt (84,965) (83,856)
------------- -------------
Net cash provided by financing activities 969,835 561,144
------------- -------------
Net increase (decrease) in cash and cash equivalents 342,093 (258,143)
Cash and cash equivalents, beginning of period 272,567 372,317
------------- --------------
Cash and cash equivalents, end of period $614,660 $114,174
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $38,830 $39,614
Income taxes -- $421
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10- QSB. These financial statements have
not been audited by independent accountants. The December 28, 1997 balance
sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should be
read in conjunction with the financial statements and notes included in the
Company's Form 10-KSB dated December 28, 1997. In the opinion of
management, these interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending December 27, 1998.
2. STOCKHOLDERS' EQUITY
During the quarter ended March 29, 1998, 100,000 shares of Series B
Convertible Preferred Stock were converted resulting in the issuance of an
aggregate of 117,647 shares of common stock at an average price of $0.85
per share.
3. DEEMED DIVIDEND
In accordance with the position of the Securities and Exchange Commission
regarding accounting for Preferred Stock which is convertible at a discount
from market price for common stock, the Company has reflected an accounting
"deemed dividend." This accounting deemed dividend, which relates to the
issuance of the Preferred Stock, is a non-cash, non-recurring accounting
entry for determining income (loss) applicable to common stock and income
(loss) per share.
4. MINORITY INTEREST
In connection with the building of a new restaurant, in January 1998, a
limited liability company was formed for the operation of "The Grill"
restaurant in San Jose, California, of which the Company owns 50.05%.
Construction of the restaurant has been funded by a capital contribution
from the Company of $200,200 and by a capital contribution of $199,800 and
a $800,000 loan from the other minority interest member of the limited
liability company. The consolidated condensed financial statements include
the accounts of the limited liability company.
5. NET INCOME PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", was adopted in the fourth quarter of 1997 and supersedes the
Company's previous standards for computing net income per share under
Accounting Principles Board No. 15. The new standard requires dual
presentation of net income per common share and net income per common
share, assuming dilution, on the face of the income statement. Net income
per share data has been restated for 1997 in accordance with the new
standard. Dilutive net income (loss) per share is not presented since all
of the dilutive shares are antidilutive for the periods presented.
5
<PAGE>
6. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", was adopted during the
first quarter of 1998. The standard establishes guidelines for the
reporting and display of comprehensive income and its components in
financial statements. Companies are required to report total comprehensive
income for interim periods beginning first quarter of 1998. Disclosure of
comprehensive income and its components will be required beginning fiscal
year end 1998. The adoption of the new standard did not have an impact on
the Company's financial statements since the Company had no comprehensive
income components as defined in SFAS No. 130 for the periods presented.
7. FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". The standard establishes guidelines
for reporting information on operating segments in interim and annual
financial statements. The new standard will be effective for the 1998
fiscal year. Abbreviated quarterly disclosure will be required beginning
first quarter of 1999, and will include both 1999 and 1998 information. The
Company does not believe that the new standard will have a material impact
on the reporting of its segments.
As is currently the practice of many restaurant entities, the Company
defers its restaurant preopening costs and amortizes them over a one-year
period following the opening of each respective restaurant. In April 1997,
the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued a draft Statement of Position ("SOP")
entitled "Reporting on the Costs of Start-Up Activities." The proposed SOP
would require entities to expense as incurred all start-up and preopening
costs that are not otherwise capitalizable as long- lived assets. In
February 1998, the FASB adopted the SOP for final issuance, subject to
certain changes. The Company believes the final SOP will be issued during
the second quarter of fiscal 1998 and will be effective for fiscal years
beginning after December 15, 1998. Restatement of previously issued
financial statements is not permitted by the draft SOP, and entities are
not permitted to report the pro forma effects of the retroactive
application of the new accounting standard. The Company's adoption of the
new accounting standard proposed by the SOP will involve the recognition of
the cumulative effect of the change in accounting principle required by the
SOP as a one-time charge against earnings, net of any related income tax
effect, retroactive to the beginning of the fiscal year of adoption. The
Company's total deferred preopening costs were $24,660 at March 29, 1998.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included elsewhere in this Form
10-QSB. Except for the historical information contained herein, the discussion
in this Form 10-QSB contains certain forward looking statements that involve
risks and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-QSB
should be read as being applicable to all related forward statements wherever
they appear in this Form 10-QSB. The Company's actual results could differ
materially from those discussed here. For a discussion of certain factors that
could cause actual results to be materially different, refer to the Company's
Annual Report on Form 10-KSB for the year ended December 28, 1997.
Material Changes in Results of Operations for the Three Months Ended March 29,
1998 as Compared to the Three Months Ended March 30, 1997.
The results of operations for the 13 week period ended March 29, 1998 include
the operations of eight Daily Grill restaurants; three Pizzeria Uno units and
The Grill restaurant. The first quarter of 1997 includes seven Daily Grill
restaurants for the full quarter plus the Washington, D.C. Daily Grill for three
weeks, three Pizzeria Uno stores and The Grill.
The Company's revenues for the three month period increased 17.1% to $8,361,000
from $7,141,000 for the same period in 1997. The increase of $1.2 million is
primarily a result of added sales by the inclusion of the Washington D.C. Daily
Grill, for a full quarter ($1,041,000). Additionally, same store sales increased
5.6% over the 1997 first quarter.
While revenues increased by 17.1% in the 1998 three month period when compared
with the similar period in 1997, cost of sales increased 12.6% and decreased as
a percentage of sales from 27.4% to 26.3%. This decrease in cost of sales as a
percentage of sales during the 1998 period is attributable principally to a new
buying program begun in late 1997 which has reduced net food costs.
As a result, gross profit increased 18.8% from $5,185,000 (72.6% of sales) in
1997 to $6,158,000 (73.6% of sales) in 1998.
Restaurant operating expenses increased 16.2% to $5,045,000 (60.3% of sales) in
1998 from $4,341,000 (60.8% of sales) in 1997. The dollar increase in restaurant
operating expenses was primarily attributable to the operation of the new
Washington, D.C. restaurant during the 1998 period ($556,000).
General and administrative expenses increased 18.9% to represent 7.4% of sales
in the 1998 three months while amounting to 7.3% of sales in the 1997 period.
The dollar increase in the corporate overhead category amounted to $100,000 and
resulted primarily from added corporate personnel, merit increases and related
payroll taxes. Also, the office space was expanded with increased rent during
the second quarter of 1997.
Depreciation and amortization expense, excluding amortization of pre-opening
expenses, increased by $44,000 during the 1998 three month period as a result of
the opening of the Washington, D.C. restaurant. Amortization of preopening
expenses for this new Daily Grill restaurant totaled $46,000 during the quarter.
The Company had amortization of preopening expenses of $50,300 during the
similar period in 1997.
In accordance with the position of the Securities and Exchange Commission
relating to accounting for Preferred Stock which is convertible into common
stock at a discount from the market price of the common stock, the Company
reported a "deemed dividend" of approximately $42,000 during the quarter.
Additionally, the Company reported accrued or paid dividends on preferred stock
of $22,000 during the quarter. The "deemed dividend," which relates to the
issuance of convertible preferred stock during 1997, is a non-cash,
non-recurring accounting entry which, along with the accrued dividends on
preferred stock, is a deduction from net income in calculating income (loss)
applicable to common stock.
7
<PAGE>
Material Changes in Financial Condition, Liquidity and Capital Resources.
At March 29, 1998 the Company had negative working capital of $0.8 million and a
cash balance of $0.6 million compared to negative working capital of $1.2
million and a cash balance of $0.3 million at December 28, 1997. The change in
working capital and cash was primarily attributable to the investment received
in the San Jose Grill L.L.C.
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction and
acquisition of restaurants. Historically, the Company has funded its day-to-day
operations through its operating cash flow, while funding growth through a
combination of bank borrowing, loans from stockholders/officers, the sale of
Debentures, the sale of Preferred Stock, the issuance of warrants, and loans and
tenant allowances from certain of its landlords. At March 29,1998, the Company
had existing bank borrowing of $1.1 million, a loan from a San Jose Grill L.L.C.
member of $0.8 million, an SBA loan of $0.1 million, loans from
stockholders/officers of $0.1 million and loans/advances from a landlord and
others of $0.2 million.
The Company presently anticipates opening 2 new restaurants during 1998. The
first, The Grill at the San Jose Fairmont Hotel is nearing completion and is
scheduled to open in May, 1998. The second, a Daily Grill in Tyson's Corner,
Virginia is expected to open in September, 1998. The Company has entered into a
lease covering a 6,400 square foot site in Tyson's Corner, Virginia and has
begun construction of the restaurant which will be its second Washington, D.C.
area Daily Grill restaurant.
The cost to build and open The Grill at the San Jose Fairmont Hotel is estimated
at $1.5 million. The restaurant is being built and will be owned and operated by
a limited liability company of which the Company owns 50.05%. Construction of
the restaurant has been funded by a capital contribution from the Company of
$200,200 and by a capital contribution of $199,800 and a $800,000 loan from the
other member of the limited liability company. The Company, and the other
member, each expect to be required to contribute approximately an additional
$150,000 to the limited liability company. Substantially all operating cash
flows from the limited liability company will be used to pay down the $800,000
loan prior to the distribution of funds to the members. The Company will,
however, receive a management fee of 5% of sales.
The cost to build new Daily Grill restaurants is anticipated to range from $1
million to $2 million per site depending upon the location and available tenant
allowances. The Company has budgeted $1.2 million to build the Tyson's Corner
Daily Grill. Construction and opening of the Tyson's Corner Daily Grill is
expected to be funded by a combination of operating cash flow and bank
borrowing. The Company is presently in discussions with its bank with respect to
increasing the amount available under the Company's line of credit with a
portion of the increased bank line expected to be used to fund the Tyson's
Corner Daily Grill opening. There is no assurance that the Company will be
successful in securing a sufficient increase in its bank credit line to fund the
opening of the restaurant.
Other than for the opening of new restaurants, management believes that the
Company has adequate resources on hand and through cash flow to sustain
operations for at least the following 12 months.
Future Accounting Requirements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard establishes guidelines for
reporting information on operating segments in interim and annual financial
statements. The new standard will be effective for the 1998 fiscal year.
Abbreviated quarterly disclosure will be required beginning first quarter of
1999, and will include both 1999 and 1998 information. The Company does not
believe that the new standard will have a material impact on the reporting of
its segments.
As is currently the practice of many restaurant entities, the Company defers its
restaurant preopening costs and amortizes them over a one-year period following
the opening of each respective restaurant. In April 1997, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued a draft Statement of Position ("SOP") entitled "Reporting on
the Costs of Start-Up Activities." The proposed SOP would require entities to
expense as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. In February 1998, the FASB adopted the SOP
for final issuance, subject to certain changes. The Company believes the final
SOP will be issued during the second quarter of fiscal 1998 and will be
effective for fiscal years beginning after December 15, 1998. Restatement of
previously issued financial statements is not permitted by the draft SOP, and
entities are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard. The Company's adoption of the new
accounting standard proposed by the SOP will involve the recognition of the
cumulative effect of the change in accounting principle required by the SOP as a
one-time charge against earnings, net of any related income tax effect,
retroactive to the beginning of the fiscal year of adoption. The Company's total
deferred preopening costs were $24,660 at March 29, 1998.
8
<PAGE>
Certain Factors Affecting Future Operating Results
In addition to the anticipated opening of new restaurants during 1998, as
described above, and the various factors described in the Company's Annual
Report on Form 10-KSB for the year ended December 28, 1997, the following
developments during the quarter may impact future operating results.
In March 1998, the Company initiated a pilot program to provide management of
the food service operations at the San Jose Hilton Hotel, for which it will
receive a performance based fee. The arrangement is part of a test project
developed by the Company to provide hotel restaurant management services. The
program will require minimal investment and risk. This project is in the early
stages and further implementation will depend upon results.
As of the end of April, 1998, the Company continued in its efforts to sell its
Pizza Restaurants. Additionally, the Company was continuing in its negotiations
with CA One Services to modify the terms of the operating agreement for the LAX
Daily Grill.
There can be no assurance that the Company will be successful in opening new
restaurants in accordance with its anticipated opening schedule; that sufficient
capital resources will be available to fund scheduled restaurant openings and
start-up costs; that new restaurants can be operated profitably; that hotel
restaurant management services will produce satisfactory cash flow and operating
results to support such operations; that additional hotels will elect to retain
the Company's hotel restaurant management services; that the Pizza Restaurants
can be sold on terms satisfactory to the Company; that proceeds, if any, from
the sale of the Pizza Restaurants can be deployed in a manner so as to replace
the cash flows, revenues and operating profits from the Pizza Restaurants; or,
that the operating agreement relating to the LAX Daily Grill can, or will, be
modified on terms deemed acceptable to the Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Management Agreement re: San Jose Grill
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: May 8, 1998 By: /s/ ROBERT SPIVAK
-----------------------------------
Robert Spivak, President and C.E.O
Dated: May 8, 1998 By: /s/ BEN SUMNER
-----------------------------------
Ben Sumner, Chief Financial Officer
and Accounting Officer
10
MANAGEMENT AGREEMENT
FOR
THE CITY BAR & GRILL
IN THE SAN JOSE HILTON HOTEL
This Consulting / Management Agreement is entered into as of February 20,
1998, by and between The Hilton Hotel (Hotel) in San Jose, CA and Grill
Concepts, Inc. (GCI) in Los Angeles, CA. The parties agree to the following:
1. Scope of Agreement
------------------
1.1 Hotel wishes to retain GCI as Manager of the restaurant operation known
as The City Bar & Grill ("the restaurant"), located in The Hilton Hotel in San
Jose. The scope of operations to be included under this agreement are to include
all food and beverages, and accompanying services, sold from the current
operation, excluding all banquet sales. Specifically, Manager will manage
restaurant sales for all hours of operations including: breakfast, lunch,
dinner, bar sales and room service sales.
1.2 Banquet sales will be sold and managed by the Hotel, however, food and
beverage which is prepared by the restaurant, will be sold to the Hotel at cost
plus a 10% fee. Additionally, all labor costs associated with banquet sales will
be accounted for and charged separately for means of accounting net income for
the restaurant operation. Banquet allocations and the system of accounting shall
be reviewed after 90 days of operation under the Management Contract.
1.3 This Agreement shall commence on the date noted above, and shall
continue for a period of ten (10) years unless earlier terminated pursuant to
the provisions contained herein. The Consulting phase of this agreement will not
exceed 90 days. The Management Agreement will begin as of the date that the
Consulting phase is complete.
2. Management Fee
--------------
2.1 In return for management of the restaurant, Manager will receive a
Management Fee equal to eight-percent (8%) of Gross Receipts received by the
Hotel in connection with or resulting from food and beverage sales in the
restaurant and room service, excluding banquet revenue. In addition, the Hotel
shall pay Manager fifty-percent (50%) of all annual profits in excess of the
1997 profit level of $230,000.001, using identical accounting practices to those
used to generate the 1997 reports. An additional expense line item shall be
added to the Profit & Loss report to reflect the 8% Management Fee paid to
Manager which will not alter the predetermined net income amount that is
required for Manager to be eligible to participate in profits.
<PAGE>
2.2 Other exclusions from the Gross Receipt calculation are: 1) Taxes:
sales tax, excise taxes, gross receipts taxes, admission taxes, use taxes, and
other similar taxes now or later imposed upon the sale of food beverage,
merchandise or services ; 2) uncollectible amounts of any check, bank draft,
charge or credit account; 3) the amount of any gratuities paid or given to
employees of the restaurant; 4) amounts attributed to meals served or provided
at no charge to employees of the restaurant; and 5) Sales & Promotion
allowances. Gross receipts are to be calculated using identical accounting
practices to those used to generate the 1997 Profit & Loss reports.
2.3 The Hotel will provide to Manager a detailed Profit & Loss statement
for the business year 1997, which will be on record as the model Profit & Loss
statement from which all future comparisons, as described within this agreement,
will be calculated. Upon request from Manager, the Hotel will provide, within
reason, any "back-up" to the 1997 Profit & Loss statement as it relates directly
to the calculations used in determining payment of the Management Fee.
2.4 Payment of the Management Fee will begin as of the time and date that
all operational changes, as agreed to, have been executed by Manager. This date
will mark the commencement of the Management Contract. Management Fee is to be
paid monthly, and will be due by the 10th day of each month for the preceding
month.
3. Scope of Responsibility
-----------------------
3.1 Manager shall oversee the operation of the restaurant and shall
supervise the General Manager, who will remain an employee of Hotel and will
conform to overall hotel direction and policies, and who will also be
responsible for managing the day-to day operation of the restaurant.
Additionally, Manager day-to-day operation of the restaurant. Additionally,
Manager will advise in the area will advise in the areas of purchasing, facility
maintenance, advertising and public relations.s of purchasing, facility
maintenance, advertising and public relations.
- --------
1 This number has been calculated to include the pre-established 1997 profit
level of $200,000.00 plus a $30,000.00 credit for the 10% fee on banquet
food cost.
2
<PAGE>
3.2. Operational changes are to include: 1) implementation of a new menu,
based upon the menu currently utilized in Daily Grill restaurant operations, to
the extent that the kitchen facilities of the restaurant are adequate to
reproduce the menu in its entirety; 2) management and service staff training as
agreed upon by both parties to incorporate the philosophy and style of service
as currently performed at Daily Grill operations, and 3) implementation of all
other elements of Daily Grill's operating system, as deemed necessary in a
mutually agreed upon Strategic Plan, as it relates to the successful management
of the restaurant, which may include modifications to policies and procedures in
various areas of operations. A detailed description of the areas to be covered
by this agreement are attached in Exhibit 1: Management Consulting Plan.
3.3 The restaurant must, under Manager, realize profit levels that are
comparable to or better than current operations, using the exact methods of
accounting as currently utilized by the Hotel. Manager will be granted a three
month Grace Period, from the start date of the Management Agreement, within
which period, they will not be held responsible to realize profit levels equal
to that of previous profits. In the event that the agreed upon remodeling has
not been completed, the Grace Period will be extended until such time that the
remodeling is complete.
4. Consulting Phase
----------------
4.1 During the initial Consultation Agreement, not to exceed ninety (90)
days, Manager will be considered a consultant to the Hotel and will be paid on a
daily rate for each employee assigned to the project. The rate for each employee
shall be calculated to a prorated amount of the employee's current base salary
plus 25% to cover all fringe benefits for the first 45 days, and shall revert to
only the prorated base salary, less fringe benefits on any days exceeding 45.
4.2 The Hotel will provide food at the restaurant and lodging for Manager's
supervisory and training personnel during the consultation phase of this
agreement. Additionally, all out-of-pocket expenses will be billed to and
reimbursed by the Hotel.
5. Hotel's Obligations
-------------------
5.1 Hotel is obligated and solely liable to pay for any and all
improvements, including capital improvements, to the restaurant. The Hotel shall
be required to maintain, at a minimum, the current condition and standard of the
physical plant.
3
<PAGE>
5.2 The Hotel shall provide to Manager, hotel rooms, at no charge, for
twelve (12) nights per year as well as on-site meals during such occupancy.
5.3 Within ten (10) days after the end of each calendar month and within
thirty (30) days after the end of each calendar year, the Hotel shall submit to
Manager a Profit & Loss statement which shall fairly and accurately reflect
Gross Receipts, Operating Expenses and Net Income for the period in question. If
Manager elects to audit any such statement and if such audit reveals an
understatement of Gross Receipts and/or Net Income of more than two-percent
(2%), the Hotel shall pay the cost of the audit.
5.4 Hotel agrees to indemnify, defend, and hold harmless Manager from all
claims, loss, damage or expense (including legal fees and costs) resulting
directly or indirectly from its performance as Manager, including without
limitation claims, losses, and/or damages and expenses arising directly or
indirectly from the negligence of Manager's agents and employees. The foregoing
indemnity shall not include indemnification for acts of gross negligence or
willful misconduct when Manager is in control of such employees and has
liability for such conduct, nor shall it include indemnification from any acts
which constitute a breach of Manager's obligations hereunder.
5.5 The Hotel agrees to preserve and protect the distinctive features of
Manager's Operating Systems, including; menus; recipes; operating procedure;
manuals; training systems; marketing plans and all other distinctive elements
designed by Manager to enhance the restaurant, and that all previously noted
elements be used solely in the restaurant located in the Hilton Hotel in San
Jose, CA. It is understood that this Operating System remains the property of
Manager and in the event of termination of this agreement shall be returned to
Manager and use by Hotel will be discontinued.
4
<PAGE>
6. Termination of Agreement
------------------------
6.1 Manager does not have the right to assign or delegate any of its
obligations contained herein to any person or entity without the prior written
consent of the Hotel. If Hotel sells or conveys the facility containing the
restaurant, Hotel will notify Manager of the transfer. Manager may, at its sole
option, terminate the rights and obligations of the parties effective on the
date of such transfer or conveyance.
6.2 Hotel maintains the right to terminate this agreement should Manager
fail to perform to the current level of profits as set by the 1997 model Profit
& Loss statement during either, a) two (2) consecutive accounting quarters, or
b) in a calendar year. Manager shall have the option to cure any profit
deficiency for the purpose of keeping this agreement in force.
6.3 Either party shall have the right to terminate this agreement with
30-day written notice, with or without cause. In the event that Hotel shall
exercise this option, Hotel shall reimburse Manager for any and all costs which
have not been recovered by Manager through payment of the 8% Management Fee.
Additionally, Hotel's use of all Operating Systems shall cease upon termination
(Section 5.5).
7. No Joint Venture
----------------
7.1 Nothing contained in this Agreement shall be deemed or construed by the
parties hereto or by any third party as creating a relationship of principal or
agent, a partnership or joint venture between the parties. It is understood and
agreed that neither any provision contained in this Agreement nor any acts of
the parties shall be deemed to create any relationship between them other than
the relationship set forth herein and agents shall at all times be considered an
independent contractor.
IN WITNESS WHEREOF, this Consulting / Management Agreement has been
executed as of the date first set forth above.
HILTON HOTEL
By:
-------------------------------------
Its:
-------------------------------------
GRILL CONCEPTS, INC.
By:
------------------------------------
Its:
------------------------------------
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