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 September 27, 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.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3319172
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of principal executive offices) (Zip Code)
(310) 820-5559
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(Issuer's telephone number)
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(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 November 10, 1998, 16,015,553 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 - September 27, 1998
and December 28, 1997............................................ 1
Consolidated Condensed Statements of Operations - For the three
and nine months ended September 27, 1998 and September 28, 1997.. 3
Consolidated Condensed Statements of Cash Flows - For the nine
months ended September 27, 1998 and September 28, 1997 .......... 4
Notes to Consolidated Condensed Financial Statements............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 13
SIGNATURES................................................................ 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September 27, 1998 December 28, 1997
------------------ -----------------
Current assets:
Cash and cash equivalents $448,011 $272,567
Inventories 356,744 302,631
Receivables 454,811 375,117
Prepaid expenses 1,220,582 955,329
---------- ----------
Total current assets 2,480,148 1,905,644
---------- ----------
Property and equipment, at cost 13,393,863 10,340,678
Less: accumulated depreciation (5,042,734) (4,277,546)
---------- ----------
Property and equipment, net 8,351,129 6,063,132
---------- ----------
Goodwill 231,632 237,636
Liquor licenses 613,686 613,686
Other assets 257,539 190,757
---------- ----------
Total assets $11,934,134 $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>
September 27, 1998 December 28, 1997
------------------ -----------------
<S> <C> <C>
Current liabilities:
Bank line of credit $600,000 $480,000
Accounts payable 1,741,786 1,359,529
Accrued expenses 1,374,422 858,050
Current portion of long term debt 358,400 346,208
Note payable - related party 84,500 84,500
---------- ---------
Total current liabilities 4,159,108 3,128,287
Long-term debt, net of current 2,221,646 699,364
---------- ---------
Total liabilities 6,380,754 3,827,651
---------- ---------
Minority interest 268,266 --
Stockholders' equity:
Series B, Convertible Preferred Stock, $.001 par value,
authorized 1,000,000 shares; shares issued and
outstanding: 0 in 1998, 32 in 1997. -- 1
Series I, Convertible Preferred Stock,$.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:
16,015,553 in 1998 and 15,672,481 in 1997 160 157
Additional paid-in capital 11,053,913 11,053,913
Accumulated deficit (5,768,961) (5,870,869)
---------- ---------
Stockholders' equity 5,553,380 5,183,204
---------- ---------
Total liabilities and stockholders' equity $11,934,134 $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
<TABLE>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $8,354,440 $7,066,991 $25,094,244 $21,514,492
Management and license fees 287,000 - 358,715 -
---------- --------- ---------- ----------
Total Revenues 8,641,440 7,066,991 25,452,959 21,514,492
Cost of sales 2,424,390 1,949,128 6,950,367 5,892,371
---------- --------- ---------- ----------
Gross Profit 6,217,050 5,117,863 18,502,592 15,622,121
---------- --------- ---------- ----------
Costs and expenses:
Restaurant operating expenses 5,302,029 4,412,527 15,515,032 13,289,238
General and administrative 654,037 543,904 1,896,636 1,607,024
Depreciation and amortization 272,545 220,378 793,185 645,038
Amortization of preopening expenses 58,500 90,400 135,600 226,000
---------- --------- ---------- ----------
Total operating expenses 6,287,111 5,267,209 18,340,453 15,767,300
---------- --------- ---------- ----------
Income (loss) from operations (70,061) (149,346) 162,139 (145,179)
Non-recurring credit - - - 93,000
Interest expense, net (53,255) (22,070) (138,015) (95,684)
---------- --------- ---------- ----------
Income (loss) before taxes on income
and minority interest (123,316) (171,416) 24,124 (147,863)
Provision for taxes on income (1,200) -- (3,600) (800)
Minority interest 49,381 -- 81,384 --
---------- --------- ---------- ----------
Net income (loss) ($75,135) ($171,416) $101,908 ($148,663)
---------- --------- ---------- ----------
Preferred stock:
Dividends accrued - (12,639) (34,550) (13,056)
Accounting deemed dividends - (42,133) (82,877) (168,522)
---------- --------- ---------- ----------
- (54,772) (117,427) (181,578)
---------- --------- ---------- ----------
Net income (loss) applicable to
common stock ($75,135) ($226,188) ($15,519) ($330,241)
========== ========= ========== ==========
Net income (loss) per share ($0.01)
Basic net income (loss) - - $0.01 ($0.01)
---------- --------- ---------- ----------
Preferred Stock
Dividends - ($0.00) ($0.00) ($0.00)
Accounting deemed dividends - ($0.00) ($0.01) ($0.01)
---------- --------- ---------- ----------
- ($0.00) ($0.01) ($0.02)
---------- --------- ---------- ----------
Net loss applicable to common stocks $0.00 ($0.01) $0.00 ($0.02)
========== ========= ========== ==========
Average weighted shares outstanding 16,015,553 15,672,481 15,840,956 14,901,494
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
---------------------------------------
September 27, 1998 September 28, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $101,908 ($148,663)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 928,785 871,038
Changes in operating assets and liabilities
Inventories (54,113) (12,331)
Receivables (79,694)
Prepaid expenses (265,253) (8,868)
Other assets 19,158 22,332
Accounts payable 382,257 (162,163)
Accrued liabilities 541,107 (419,169)
--------- ---------
Net cash provided by operating activities 1,574,155 142,176
--------- ---------
Cash flows from investing activities;
Additions to furniture, equipment and improvements (3,053,185) (1,667,088)
--------- ---------
Net cash used in investing activities (3,053,185) (1,667,088)
--------- ---------
Cash flows from financing activities:
Proceeds from note payable 800,000
Proceeds from investment in L.L.C. 349,650
Proceeds from issue of Common and Preferred Stock - 1,456,630
Proceeds from line of credit 120,000 400,000
Increase in bank term loan 580,000
Payments on long-term debt (195,176) (262,622)
--------- ---------
Net cash provided by financial activities 1,654,474 1,594,008
--------- ---------
Net increase (decrease) in cash and cash equivalents 175,444 (69,096)
Cash and cash equivalents, beginning of period 272,567 372,317
--------- ---------
Cash and cash equivalents, end of period $448,011 $303,221
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $117,039 $80,265
Income taxes $5,800 $2,650
</TABLE>
The accompanying notes are an integral part of these consolidated
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 nine months ended September 27, 1998, 22 shares of Series B
Convertible Preferred Stock were converted resulting in the issuance of an
aggregate of 225,425 shares of common stock including 24,512 shares paid in
lieu of dividends at an average price of $.80 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 and has been fully amortized as of June 28, 1998.
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 $350,350 and by a capital contribution of $349,650 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.
Consistent with practices in the restaurant industry, the Company defers
its restaurant preopening costs and amortizes them over a twelve month
period following the opening of the respective restaurant. In April 1998,
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities." The SOP requires entities to expense as incurred all start-up
and preopening costs that are not otherwise capitalizable as long-lived
assets. The SOP is effective for the fiscal years beginning after December
15, 1998, with earlier adoption encouraged. Restatement of previously
issued financial statements is not permitted by the SOP, and entities are
not required to report the pro forma effects of the retroactive application
of the new accounting standard. The Company's adoption of the required new
accounting principle at January 1, 1999 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 that date. Net deferred preopening costs were
approximately $131,660 at September 27, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. The new rules will be effective the
first quarter of 2000. The Company does not believe that the new standard
will have a material impact on the Company's financial statements.
8. BANK BORROWING
In July, 1998 the Company renewed its credit facilities with a bank,
increasing its term loan to $1,500,000, payable in sixty equal monthly
installments of $25,000 beginning September 1, 1998. Interest at Bank's
Reference Rate plus 0.25% (8.75% at September 27, 1998) is payable monthly.
The previous $1,000,000 revolving line of credit was reduced to $600,000
with interest at the same rate as noted above.
6
<PAGE>
9. AIRPORT GRILL L.L.C.-SALE AND LICENSE AGREEMENT
Since January 1997, the Company, as a 51% owner of Airport Grill, L.L.C.,
has owned and operated a Daily Grill restaurant located in the Thomas
Bradley International Airport in Los Angeles.
Effective April 1, 1998, the company sold and assigned its interest in
Airport Grill, L.L.C. to Air Terminal Services, Inc., an affiliate of CA
One Services, Inc., which owns the remaining interest in Airport Grill,
L.L.C. Pursuant to the terms of the sale of such interest, Air Terminal
Services, Inc. agreed to pay to the Company $309,955.71, payable in three
equal installments of $103,318.57 with the first installment being due at
closing and subsequent installments being due on April 1, 1999 and April 1,
2000. As a result the Company's ownership interest in Airport Grill, L.L.C.
has terminated.
Simultaneous with the sale of its interest in Airport Grill, L.L.C., the
Company and Airport Grill, L.L.C. entered into a License Agreement pursuant
to which Airport Grill, L.L.C. will continue to have the right to utilize
the Daily Grill" name, logos, recipes and other rights associated with the
operation of the Daily Grill restaurant at Thomas Bradley International
Airport. Pursuant to the terms of the License Agreement, the Company is
entitled to receive royalties in an amount equal to 2.5% of the first $5
million of annual revenues from the restaurant and 4% of annual revenues in
excess of $5 million.
As a result of the sale and licensing arrangement discussed above, the
Company recognized $236,000 of income during the nine months ended
September 27, 1998.
10. HOTEL RESTAURANT AGREEMENTS
Commencing in 1998, the Company has expanded its operating strategy to
include the operation of Daily Grill and The Grill restaurants in Hotel
properties.
a. Agreement-Hotel Restaurant Properties, Inc.
-------------------------------------------
In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered
into an Agreement with Hotel Restaurant Properties, Inc. ("HRP") pursuant
to which HRP has agreed to assist the Company in locating suitable hotel
locations for the opening of the Company's restaurants. HRP is responsible
for identifying suitable hotel locations in which a Grill or Daily Grill
can be operated ("Managed Outlets") and negotiating and entering into
leases or management agreements for those properties. The Company will, in
turn, enter into management agreements with HRP or the hotel owners, as
appropriate. The Company will advance certain pre-opening costs and certain
required advances ("Manager Loans") and will manage and supervise the day
to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $4,167 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each
Managed Outlet will be allocated 75% to the Company and 25% to HRP. The
Agreement also provides that both HRP and the Company will have certain
rights to cause the Company to acquire HRP commencing in May of 2004.
b. Management Agreement-The City Bar & Grill in the San Jose Hilton Hotel
----------------------------------------------------------------------
In February of 1998, the Company entered into a Management Agreement
pursuant to which the Company assumed management responsibilities for all
food and beverage services, including room service but excluding banquet
sales, of the City Bar & Grill located in the Hilton Hotel in San Jose. The
Company is entitled to a management fee equal to 8% of the gross receipts
of the City Bar & Grill. Additionally, the Company will receive 50% of the
annual profits of the City Bar & Grill in excess of the profits of the City
Bar & Grill during 1997, with certain defined modifications. The Company
began management of the City Bar & Grill in May of 1998.
7
<PAGE>
c. Restaurant Lease and Concession-The Hilton Hotel of Salt Lake City
------------------------------------------------------------------
In July of 1998, HRP entered into a Restaurant Lease and Concession
Agreement with Sunstone Hotel Properties, Inc. pursuant to which HRP leased
7,000 square feet of restaurant and bar space in the Hilton Hotel of Salt
Lake City. It is presently anticipated that a Daily Grill restaurant will
begin operations at the site beginning in February of 1999. The restaurant
will be operated in accordance with the terms of the Agreement between the
Company and HRP.
d. Daily Grill Restaurant Management Agreement-Georgetown Inn
----------------------------------------------------------
In July of 1998, HRP and the Company entered into a Management Agreement
with CapStar Georgetown Company, L.L.C. pursuant to which HRP will operate
a Daily Grill in a 5,000 square foot restaurant facility in the Georgetown
Inn in Washington, D.C. It is presently anticipated that a Daily Grill
restaurant will begin operations at the site beginning in March of 1999.
The restaurant will be operated in accordance with the terms of the
Agreement between the Company and HRP.
8
<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, intentions and Year 2000 issues. 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 Nine Months Ended September
27, 1998 as Compared to the Nine Months Ended September 28, 1997.
The results of operations for the 39 week period ended September 27, 1998
include the operations of eight Daily Grill restaurants; three Pizzeria Uno
units; The Grill restaurant and twenty weeks operation of the San Jose Grill
restaurant. The first nine months of 1997 includes seven Daily Grill restaurants
for the full period plus the Washington, D.C. Daily Grill for twenty nine weeks,
three Pizzeria Uno stores and The Grill.
The Company's total revenues for the nine month period increased 18.3% to
$25,453,000 from $21,514,000 for the same period in 1997. Total revenues
included $25,094,000 of sales revenues and $359,000 of management and licensing
fees in 1998 as compared to $21,514,000 of sales revenues and no management and
licensing fees in 1997. The increase of $3.6 million, or 16.6%, in sales
revenues is primarily a result of (1) $1.0 million of added sales from the
inclusion of the Washington, D.C. Daily Grill for the full nine month period,
(2) $1.4 million of sales from the San Jose Grill which opened in May of 1998,
and (3) a 5.5% ($1.1 million) increase in same store sales as a result of
increased customer count. Management and licensing fees during 1998 consisted of
(1) $123,000 of fees from a hotel restaurant management service implemented in
the second quarter of 1998, and (2) $236,000 of gain and licensing fees from the
LAX Daily Grill pursuant to a sale of the Company's interest in the LAX Daily
Grill and a license arrangement entered into effective April 1, 1998.
While revenues increased by 18.3% in the 1998 nine month period when compared
with the similar period in 1997, cost of sales increased 18.0% and decreased as
a percentage of revenues from 27.4% to 27.3%. This decrease in cost of sales as
a percentage of revenues 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 18.4% from $15,622,000 (72.6% of revenues)
in 1997 to $18,503,000 (72.7% of revenues) in 1998.
Restaurant operating expenses increased 16.7% to $15,515,000 (61.0% of revenues)
in 1998 from $13,289,000 (61.8% of revenues) in 1997. The dollar increase in
restaurant operating expenses was primarily attributable to the operation of the
new Washington, D.C. restaurant for a full nine months, and the opening of the
new San Jose Grill restaurant during the 1998 period.
General and administrative expenses increased 18.0% to represent 7.5% of
revenues in the 1998 nine months while amounting to a similar 7.5% of revenues
in the 1997 period. The dollar increase in this corporate overhead category
amounted to $289,000 and resulted primarily from added corporate personnel,
merit increases and related payroll costs.
Depreciation and amortization expense, excluding amortization of pre-opening
expenses, increased by $148,000 during the 1998 nine month period reflecting the
operation of the Washington, D.C. and San Jose restaurants. Amortization of
preopening expenses for these new restaurants totaled $136,000 during the 1998
period. The Company had amortization of preopening expenses of $226,000 during
the similar period in 1997.
9
<PAGE>
The quarter and nine month operations also reflect a minority interest from the
inclusion of the results of the San Jose Grill L.L.C.
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 $83,000 during the current nine
month period. Additionally, the Company reported accrued or paid dividends on
preferred stock of $35,000 during the similar period. 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. The deemed dividend had been fully amortized as of
June 28, 1998.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At September 27, 1998 the Company had negative working capital of $1.7 million
and a cash balance of $0.4million 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 added borrowing for
investment in the San Jose Grill and the new Daily Grill opened in Tyson's
Corner, Virginia in October 1998.
The Company's need for capital resources has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction of
restaurants. Historically, the Company has funded its day-to-day operations
through its operating cash flow, while funding growth through a combination of
bank borrowing, loans from stockholders/officers, the sale of Debentures, the
sale of Preferred Stock, the issuance of warrants, and loans and tenant
allowances from certain of its landlords. At September 27 1998, the Company had
existing bank borrowing of $2.1 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 $0.1 million.
In July, 1998 the Company increased its bank credit availability from $1.6
million to $2.1 million consisting of a $600,000 line of credit and a $1.5
million term loan payable in 60 equal monthly installments of $25,000 plus
interest.
Construction of The Grill at the San Jose Fairmont Hotel was completed and the
restaurant opened on May 13, 1998. A Daily Grill restaurant in Tyson's Corner,
Virginia was completed and opened on October 19, 1998. This restaurant is the
second Washington, D.C. area Daily Grill restaurant.
The Grill at the San Jose Fairmont Hotel was built and is owned and operated by
a limited liability company of which the Company owns 50.05%. Construction of
the restaurant was funded by a capital contribution from the Company of $350,350
and by a capital contribution of $349,650 and a $800,000 loan from the other
member of 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 budgeted $1.2 million to build the Tyson's Corner Daily
Grill. Construction and opening of the Tyson's Corner Daily Grill was funded by
a combination of operating cash flow and bank borrowing. The Company recently
increased the amount available under its lines of credit with a portion of the
increased bank line used to fund part of the Tyson's Corner Daily Grill opening.
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.
10
<PAGE>
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.
Consistent with practices in the restaurant industry, the Company defers its
restaurant preopening costs and amortizes them over a twelve month period
following the opening of the respective restaurant. In April 1998, The American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." The SOP requires
entities to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. The SOP is effective for the
fiscal years beginning after December 15, 1998, with earlier adoption
encouraged. Restatement of previously issued financial statements is not
permitted by the SOP, and entities are not required to report the pro forma
effects of the retroactive application of the new accounting standard. The
Company's adoption of the required new accounting principle at January 1, 1999
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 that date. Net deferred
preopening costs were approximately $131,660 at September 27, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company does not
believe that the new standard will have a material impact on the Company's
financial statements.
Year 2000 Issue
The Company recognizes the need to ensure that its operations, as well as those
of third parties with whom the Company conducts business, will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems
through a combination of actions including the implementation of a new
financial, payroll, human resources software packages that are Year 2000
compliant and new hardware in both its corporate headquarters and restaurants.
The corporate network of the Company's headquarters has been replaced with new
hardware with a Windows NT software package. The Company plans to order a new
accounting, payroll and accounts payable software package which is Year 2000
compliant. Installation is anticipated for January of 1999.
Each new restaurant has had new year 2000 compliant software installed with the
new in-restaurant point of sale and back office computer systems.
The Company is evaluating the software currently being utilized in its 6 older
restaurants. While we have received assurance from the software's supplier that
such software is year 2000 compliant, we are investigating new more efficient
software to replace the older software and expect a decision before the end of
1998.
The Company has incurred approximately $40,000 for the new corporate hardware
and anticipates a cost of $60,000 for new corporate software.
New restaurant computer systems and software cost approximately $60,000 per
restaurant. This is, however, a part of the initial capital contribution for new
restaurants. Regarding the Year 2000 issue, the greatest risk to the Company is
that the systems placed in service by the Company itself and/or its vendors will
not be fully operational by the end of calendar year 1999. This could adversely
impact the day to day operations of the Company. However, it is the Company's
belief that all of its systems will be in full operation in adequate time to
ensure the Company is fully operational by mid 1999. Beginning in calendar year
1999, if any current vendors are not Year 2000 compliant, the Company will
identify alternative vendors who are Year 2000 compliant. Should any part of the
implementation by the Company or its vendors not function as anticipated, the
Company believes that it has ample time to develop contingency plans to ensure
Company operations will not be materially affected.
11
<PAGE>
Certain Factors Affecting Future Operating Results
In addition to the 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
first half of this year may impact future operating results.
Since January 1997, the Company, as a 51% owner of Airport Grill, L.L.C., has
owned and operated a Daily Grill restaurant located in the Thomas Bradley
International Airport in Los Angeles.
Effective April 1, 1998, the company sold and assigned its interest in Airport
Grill, L.L.C. to Air Terminal Services, Inc., an affiliate of CA One Services,
Inc., which owns the remaining interest in Airport Grill, L.L.C. Pursuant to the
terms of the sale of such interest, Air Terminal Services, Inc. agreed to pay to
the Company $309,955.71, payable in three equal installments of $103,318.57 with
the first installment being due at closing and subsequent installments being due
on April 1, 1999 and April 1, 2000. As a result the Company's ownership interest
in Airport Grill, L.L.C. has terminated.
Simultaneous with the sale of its interest in Airport Grill, L.L.C., the Company
and Airport Grill, L.L.C. entered into a License Agreement pursuant to which
Airport Grill, L.L.C. will continue to have the right to utilize the Daily
Grill" name, logos, recipes and other rights associated with the operation of
the Daily Grill restaurant at Thomas Bradley International Airport. Pursuant to
the terms of the License Agreement, the Company is entitled to receive royalties
in an amount equal to 2.5% of the first $5 million of annual revenues from the
restaurant and 4% of annual revenues in excess of $5 million.
As a result of the sale and licensing arrangement discussed above, the Company
recognized $236,000 of income during the nine months ended September 27, 1998
and will recognize ongoing licensing revenues.
Commencing with the Company's management of the City Grill in the San Jose
Hilton, in May, 1998, the Company has expanded its operating strategy to include
the operation of Daily Grill and The Grill restaurants in Hotel properties. The
Company provides management services for the City Bar & Grill and is entitled to
a management fee equal to 8% of gross receipts of the City Bar & Grill and 50%
of annual profits of the City Bar & Grill in excess of certain historical
profits.
In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered into an
Agreement with Hotel Restaurant Properties, Inc. ("HRP") pursuant to which HRP
has agreed to assist the Company in locating suitable hotel locations for the
opening of the Company's restaurants. HRP is responsible for identifying
suitable hotel locations in which a Grill or Daily Grill can be operated
("Managed Outlets") and negotiating and entering into leases or management
agreements for those properties. The Company will, in turn, enter into
management agreements with HRP or the hotel owners, as appropriate. The Company
will advance certain pre-opening costs and certain required capital
contributions ("Manager Loans") and will manage and supervise the day to day
operations of each Managed Outlet. The Company will be entitled to receive from
HRP a base overhead fee equal to $4,167 per month per Managed Outlet. Net income
after repayments required on Manager Loans from each Managed Outlet will be
allocated 75% to the Company and 25% to HRP. The Agreement also provides that
both HRP and the Company will have certain rights to cause the Company to
acquire HRP commencing in May of 2004.
12
<PAGE>
In July of 1998, HRP entered into a Restaurant Lease and Concession Agreement
with Sunstone Hotel Properties, Inc. pursuant to which HRP leased 7,000 square
feet of restaurant and bar space in the Hilton Hotel of Salt Lake City. It is
presently anticipated that a Daily Grill restaurant will begin operations at the
site beginning in February of 1999. The restaurant will be operated in
accordance with the terms of the Agreement between the Company and HRP.
In July of 1998, HRP and the Company entered into a Management Agreement with
CapStar Georgetown Company, L.L.C. pursuant to which HRP will operate a Daily
Grill in a 5,000 square foot restaurant facility in the Georgetown Inn in
Washington, D.C. It is presently anticipated that a Daily Grill restaurant will
begin operations at the site beginning in March of 1999. The restaurant will be
operated in accordance with the terms of the Agreement between the Company and
HRP.
The Company expects that the opening of restaurants pursuant to the agreement
with HRP, including restaurants at the Hilton Hotel of Salt Lake City and the
Georgetown Inn, will require minimal capital commitment on the Company's part,
other than for routine opening costs.
The Company continues in its efforts to sell its Pizza Restaurants.
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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -------------
10.1 Blanket Conveyance, Bill of Sale and Assignment between Grill
Concepts, Inc. and Air Terminal Services, Inc.
10.2 License Agreement between Grill Concepts, Inc. and Airport Grill,
L.L.C.
10.3 Agreement, dated August 27, 1998, between Grill Concepts, Inc. and
Hotel Restaurant Properties, Inc.
10.4 Management Agreement for the City Bar & Grill in the San Jose Hilton
Hotel
10.5 Restaurant Management Agreement between Grill Concepts, Inc., Hotel
Restaurant Properties, Inc. and CapStar Georgetown Company, L.L.C. for
the Georgetown Inn
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
Dated: November 10, 1998 By: /s/ ROBERT SPIVAK
-------------------------------
Robert Spivak, President and C.E.O
Dated: November 10, 1998 By: /s/ BEN SUMNER
-------------------------------
Ben Sumner, Chief Financial Officer
and Accounting Officer
BLANKET CONVEYANCE, BILL OF SALE
AND ASSIGNMENT
This BLANKET CONVEYANCE, BILL OF SALE AND ASSIGNMENT (this "Assignment") is
entered into by and between Grill Concepts, Inc. ("Assignor") Air Terminal
Services, Inc. ("Assignee"), and CA One Services, Inc. ("Guarantor").
1. For and in consideration of the sum of $309,955.71 payable in three
equal installments as described in Section 4 hereof and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Assignor, Assignor hereby ASSIGNS, TRANSFERS, SETS OVER and DELIVERS to Assignee
all of the following (collectively, the "Assigned Properties"):
(a) All of Assignor's "Economic Interest" and "Membership Interest" in
a certain limited liability company organized under the name Airport Grill,
LLC ("LLC") under the laws of the State of California effective February
15, 1995 (such interests representing 51% of the Economic and Membership
Interests of the LLC), as such Interests are defined in such LLC's
Operating Agreement as executed by its Members dated March 15, 1995,
together with any and all other related rights of Assignor under such
Operating Agreement to Distributions of any kind or nature, whether same
have accrued under such agreement or accrue in the future and/or related to
operations heretofore or hereafter conducted by such LLC.
(b) All of Assignor's legal rights as a Member of the LLC.
TO HAVE AND TO HOLD the Assigned Properties unto Assignee, its successors
and assigns, forever.
2. Except as expressly provided herein with respect to title, this
Assignment is made, and the Assigned Properties are conveyed hereby, without any
representation or warranty by Assignor of any kind, whether by contract, statute
or operation of law, and the Assigned Properties are transferred in their "AS
IS, WHERE IS" condition. Assignee by its acceptance of this Assignment and the
Assigned Properties, acknowledges and agrees that, except as expressly provided
herein to the contrary, no representation or warranty as to merchantability,
fitness for a particular purpose, or fitness for an intended use has been made
by Assignor, or relied upon by Assignee, in connection with this Assignment and
the consummation of the transactions contemplated herein.
Assignor hereby warrants and covenants to forever defend, all and singular,
the title to the Assigned Properties unto Assignee, its successors and assigns,
against every person whomsoever lawfully claiming or to claim the same, or any
part thereof, by, through or under Assignor, but not otherwise.
<PAGE>
3. Assignor represents and warrants to Assignee as follows:
(a) Assignor owns good and marketable title to the Assigned
Properties, free of all liens, mortgages, security interests and tax liens
of any kind, except any security interest created under the Operating
Agreement or under a certain Promissory Note in the original principal
amount of $3,300,000 issued by the LLC to Guarantor dated March 15, 1995.
(b) Assignor (i) has the right, power and authority to execute this
Assignment and consummate the transactions contemplated herein pursuant to
this Assignment, (ii) is not prohibited from consummating the transactions
contemplated in this Assignment by any law, regulation, agreement, order or
judgment or by the terms of its Articles of Incorporation, Bylaws or any
agreement to which it is a party, and (iii) has obtained all necessary
consents and permissions necessary to execute this Assignment and
consummate the transactions contemplated herein.
4. In consideration for the Assigned Properties, Assignee covenants to pay
Assignor the sum of $309,955.71 in three equal installments of$103,318.57 each.
The first of such installments shall be due~and payable on the date hereof. The
second payment shall be due April 1, 1999 and the third installment shall be due
April 1, 2000.
5. Assignee represents and warrants to Assignor that Assignee: (a) has the
right, power and authority to execute this Assignment and consummate the
transactions contemplated herein pursuant to this Assignment, (1)is not
prohibited from consummating the transactions contemplated in this Assignment by
any law, regulation, agreement, order or judgment by the terms of its Articles
of Incorporation, Bylaws or any agreement to which it is a party, and (c) has
obtained all necessary consents and permissions necessary to execute this
Assignment and consummate the transactions contemplated herein.
6. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE VALIDITY,
ENFORCEMENT AND INTERPRETATION OF THIS ASSIGNMENT.
7. All warranties and covenants contained herein shall survive the closing.
8. Guarantor joins in this Assignment document for purposes of approving
the transfer (as the sole other Member of the LL C), as provided under the
Operating Agreement. Guarantor further acknowledges that as the sole shareholder
of Assignee, it has a direct vested economic interest in this transaction and
that therefore, in consideration for the mutual covenants and agreements
contained herein, it does hereby guarantee payment to Assignor of the sums
required under Section 4 above.
9. As additional consideration for the payments and transfers to be made
hereunder, Guarantor and Assignor, respectively, each (the "First Party") has
remised, released, and forever discharged and by these presents does for itself;
its shareholders, officers, directors, successors and assigns, remise, release
and forever discharge the other party together with all of its affiliates,
subsidiaries and all officers, directors, employees and agents thereof, and its
successors and assigns, ("Other Party et al"), of and from all, and all manner
of action and actions, cause and causes of action, suits, debts, dues, sums of
money, accounts, reckoning, bonds, bills, specialities, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
extents, executions, claims and demands whatsoever, in law or in equity, which
against the said Other Party et al, the First Party ever had, now has or which
First Party or its successors and assigns, shareholders, officers, directors and
employees, hereafter can, shall or may have for, upon or by reason of any
matter, cause or thing whatsoever from the beginning of the world through the
day of the date of these presents, except for: the executory provisions
described in this Assignment Agreement including without lirnitation the
provisions of paragraph 4 above and the respective rights and obligations of the
parties to that certain License Agreement of even date.
The effective date of this Assignment shall be the day after reciept of approval
from the Department of Alcoholic Beverage Control of the State of California for
the transfer contemplated hereunder. Both parties agree to execute promptly any
and all documentation necessary to obtain such approval as soon as possible.
Assignee shall be solely responsible for costs incurred.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of
April 1, 1998.
ASSIGNOR:
GRILL CONCEPTS, INC.
By:/s/ Mike Weinstock
------------------------
Name: Mike Weinstock
----------------------
Title: Vice President
---------------------
ASSIGNEE:
AIR TERMINAL SERVICES, INC.
By:/s/ Nicholas D. Liberto
------------------------
Name: Nicholas D. Liberto
----------------------
Title: Vice President
---------------------
LICENSE AGREEMENT
This Agreement dated as of April 1, 1998 is by and between Grill Concepts,
Inc. ("Licensor") of 11661 San Vicente Boulevard, Los Angeles, CA 90049 and the
Airport Grill, LLC (the "Operator") with offices at 438 Main Street, Buffalo,
New York 14202.
WHEREAS, Licensor and CAl formed an LLC under the name of the Airport
Grill, LLC on February 15, 1995 and executed an Operating Agreement in
connection therewith dated March 15, 1995;
WHEREAS, under the terms of such Operating Agreement, the Operator operated
a full service restaurant in Thomas Bradley International Airport under the name
the "Airport Grill" (the "Restaurant) using proprietary recipes, logos and
systems developed by Licensor;
WHEREAS, Licensor has this date transferred and assigned all of its
Membership and Economic Interest in the Operator to Air Terminal Services, Inc.,
a wholly owned subsidiary of CAl;
WHEREAS, Licensor has developed and continues to develop certain
proprietary recipes and food products described on Exhibit A (the "Proprietary
Products");
WHEREAS, in connection with the sale of such Proprietary Products, Licensor
has developed and owns certain designs, logos, names and trademarks (the "Name
and Marks"). See Exhibit B for description of the Name and Marks;
WHEREAS, the Operator wishes to continue using certain Proprietary Products
and Names and Marks of Licensor in connection with the operation of the
Restaurant, all as hereinafter described;
WHEREAS, Licensor have agreed to permit such use.
NOW THEREFORE, in consideration for the premises hereto and the mutual
covenants and agreements hereinafter contained the parties agree as follows:
1. Grant of Rights
---------------
Licensor represents that it is the absolute owner of the Name and the Marks
as shown on Exhibit B. Licensor hereby grants Operator the exclusive right to
use the Name and Marks in connection with the Restaurant in the Thomas Bradley
International Airport (the "Airport") Licensor covenants not to license the use
of its Name and Marks to any third party for use at the Airport. Licensor agrees
to indemnify, defend, and hold Operator harmless from and against any losses,
damages, claims or costs (including attorney's fees incurred by Operator in its
enforcing this provision) for trademark or servicemark infringement commenced by
any third party against Operator with respect to the use of its Name or the
Marks by Operator in accordance with this Agreement. In the event that Operator
receives notice of any claims, suit or demand against it on account of any
alleged infringement, unfair competition or similar matter relating to its use
of its Name or the Marks in accordance with the terms of this License Agreement,
Operator shall promptly notify Licensor of such event whereupon Licensor shall
take all action necessary to protect and defend Operator and hold Operator
harmless as described above.
1
<PAGE>
2. Term
-----
This Agreement shall be in effect for a term coterminous with the term of a
certain Concession Agreement by and between CA I and the City of Los Angeles
dated March 24, 1995 which grants CAl and the LLC as CAl's subtenant, the right
to operate the Restaurant (the "Contract") and any extension or novation of
same.
3. Design Approval
---------------
Licensor hereby approves the design of the Restaurant, as constructed. No
material changes will be made without Licensor's prior approval which shall not
be unreasonably withheld.
4. Sale of Proprietary Products and Fees
-------------------------------------
4.1 In consideration for the foregoing Operator agrees to feature the Names
and Marks in the Restaurant and sell certain Proprietary Products throughout the
Term of this Agreement.
4.2 In connection with the preparation and sale of Proprietary Products,
Operator covenants to:
(a) strictly abide by all recipe formulations related to such products,
including specifications for production, cooking, temperature and
holding times;
b) insure that wholesome and unadulterated ingredients are used in the
production of the Proprietary Products and that such ingredients meet
the grade levels prescribed by Licensor in its recipes;
(c) maintain quality standards described in Licensor's Manuals, copies of
which have been delivered to and received by Operator. Means and
methods of production shall be maintained using the existing system at
the Airport Grill.
(d) to use proprietary ingredients purchased from approved suppliers where
use of such items is specified by Licensor and to abide by established
shelf life set for such items;
(e) to use approved and/or specified packaging for the Proprietary
Products;
(f) obtain prior approval from Licensor for all uses of Licensor's Marks;
2
<PAGE>
(g) use all reasonable efforts to obtain Department of Aviation ("DOA")
approval from time to time as necessary, for recipe alterations and
the sale of new Proprietary Products that may be introduced elsewhere
by Licensor with the understanding that no such changes may be
implemented without the prior approval of DOA.
4.3 Operator shall pay Licensor a royalty for the use of its Name and Marks
equal to 2 1/2% of the first $5MM in annual Gross Revenues, as defined below,
derived from the sale of food and beverages in the Restaurant, plus 4% of all
annual Gross Revenues in excess of $5MM derived from the sale of food and
beverages in the Restaurant. As used herein, Gross Revenues shall be defined in
accordance with Section 4.8 of the Contract, a copy of which is attached as
Exhibit C. Payment shall be made on a monthly basis, with each such payment due
and payable on the 2Oth day of the following month.
4.4 Licensor shall have the right to audit (at its sole cost and expense)
all records relating to Operator's Gross Revenue at the Restaurant and the
calculation of fees payable hereunder for a period of one year following each
payment period.
5. Methods and Standards of Operation
----------------------------------
5.1 Maintenance and Repair. Operator shall at all times maintain the
Restaurant in good condition and repair and shall be solely responsible for
maintenance, cleanliness, repair and replacement (where necessary to maintain it
in good operating condition), and any liabilities arising therefrom, including
but not limited to all signs, furniture, fixture, equipment and any other
tangible property on and about the Restaurant.
5.2 Compliance with Laws. Operator shall operate the Restaurant in strict
compliance with all applicable laws, rules, and regulations, of governmental
authorities, including, but not limited to, any and all alcoholic beverage
control laws and regulations. Operator shall procure and continuously maintain
thereafter all necessary permits and licenses required for the operation of the
Restaurant.
5.3 Inspection. Upon reasonable advance notice, Licensor, or their
employees may, but shall not be obligated to inspect the Restaurant during
regular operating hours and interview Operator's managers at any reasonable time
to determine that the Restaurant is being operated in accordance with the terms
of this Agreement and to ensure the protection of the Names and Marks, and the
goodwill associated therewith.
5.4 Operator acknowledges that changes to the menu offerings at the
Restaurant must be approved by Licensor in advance.
5.5 Operator covenants that the Restaurant will be managed by a manager who
has been properly trained with respect to Licensor's system and the preparation
and sale of the Proprietary Products. At least one of Operator's managers shall
have satisfactorily completed Licensor's formal training program at all times
thereafter during the term of this Agreement.
3
<PAGE>
6. Termination
-----------
6.1 In the event either party fails to fulfill, in any material and
substantial respect, its obligations hereunder and such failure continues
unremedied for twenty (20) days after receipt of written notice of the
particular failure (except where such failure or refusal is due to a "Force
Majeure" as described in Section 8 hereof), the other party may terminate this
Agreement by furnishing the first party with written notice of its intent to do
so.
6.2 If the particular failure to perform described above cannot be cured
within the applicable curative periods provided above, the breaching party shall
have a reasonable time thereafter in which to remedy the problem provided that
it is diligently and continuously making any and all reasonable efforts required
to correct the problem.
6.3 Upon termination of this Agreement, by lapse of time or otherwise, all
matters, rights and liabilities existing on the date of termination between the
parties hereto shall be determined by the parties hereto as of such termination
date, and discharged as promptly as possible thereafter. No termination shall be
effective until all matters rights and liabilities between the parties are
resolved.
6.4 Operator acknowledges that upon and after the expiration or termination
of this Agreement, all rights granted by Licensor hereunder shall forthwith
revert to Licensor, and Operator will remove from its signage at the Airport any
reference to the Marks or the Name.
7. Indemnification
---------------
Each party (the "First Party") agrees to indemnify, defend and save and
hold harmless the other (the "Second Party") from and against all suits and
claims that may be based on any injury or alleged injury to any person
(including death) or to the property of any person not a party hereto, that may
arise, or that may be alleged to have arisen out of the negligence or
intentional action or omission of the First Party or that of its employees,
servants or agents. In any such event, the First Party, at its own cost and
expense, shall pay all reasonable charges of attorneys and all costs and other
expenses arising therefrom or incurred by the Second Party in connection
therewith. The foregoing indemnity shall not apply with respect to any injuries
which may be alleged to have arisen out of the negligence or intentional action
of the First Party if and to the extent the same shall be ultimately determined
to have arisen out of the negligence or intentional action or omission of the
Second Party.
8. Operator's Insurance
--------------------
8.1 Operator shall carry: (a) Worker's Compensation insurance in such
amount as is required by the laws of the State of California) Comprehensive
general liability insurance (commercial, dram shop and automobile liability
coverages) with limits of not less than $1,000,000 covering each person and
$5,000,000 covering each occurrence and property damage liability insurance,
with limits of not less than $1,000,000 covering each occurrence and $3,000,000
in the aggregate (with no exclusion for liability assumed by contract) and (c)
blanket crime insurance covering its employees in a minimum amount of $500,000.
Operator shall deliver to Licensor prior to commencing operations hereunder and
then on or prior to, the expiration date of any then existing policies in the
future during the Term hereof, a certificate or certificates evidencing that
such insurance coverages are in effect for a period of not less than one year
from the date of such certificate. All policies shall contain a clause providing
in substance that such policies shall not be canceled or any material provisions
thereof amended adversely to the Licensor unless it shall have been first given
at least thirty (30) days advance notice of such termination or of any such
proposed amendment. Operator shall cause the Licensor to be named as an
additional insured on its liability insurance policies for liability arising out
of Operator's responsibilities under this Agreement, including but not limited
to Section 7 above.
4
<PAGE>
8.2 All such policies may be provided under blanket and/or umbrella
policies carried by the Operator.
8.3 The insurance required by Section 8.l shall be primary insurance and
the insurer shall be liable for the full amount of any loss up to the total
limit of liability required without the right of contribution of any other
insurance coverage held by the Licensor.
8.4 This Section 8 is subject to all limitations identified in Section 7,
respecting Indemnification. Nothing in this Section 8 shall be construed as
requiring liability coverage and/or indemnification of the Licensor for
Licensor's negligence or willful action or omission.
9. Force Majeure
-------------
It is expressly understood and agreed that failure or delay on the part of
either party hereto in the performance in whole, or in part, of the terms and
conditions of this Agreement shall not constitute a breach hereof, nor a default
hereunder, if such failure or delay is attributable to acts of God, fire,
floods, inevitable accident, or riots, insurrection, public commotion, strikes
or labor disturbances, embargo, emergency or governmental orders, regulations,
actions, priority or other limitations or restrictions, or unforeseen causes
interfering with personnel, sales, source of supplies, production,
transportation and delivery, or for any cause beyond the control of either party
("Forces Majeure").
10. Consents and Approvals
----------------------
Where consent or approval of or authorization (the "Consent") from the
Licensor is required hereunder, such Consent shall mean the Consent of a Vice
President of Licensor. Where Consent of Operator is required hereunder such
Consent shall mean that of the President of a member of Operator. Each party
agrees that whenever prior Consent of a proposed action is required, it will not
unreasonably withhold or delay such Consent. Failure to provide an explanation
for disapproval shall be considered "unreasonable" per se. Each party also
agrees that if it fails to either approve or disapprove a request for a period
of ten days or longer, the other party shall have the right to construe such
silence as Consent.
5
<PAGE>
11. Arbitration
-----------
Except as otherwise therein provided, if any controversy should arise
between the parties in the performance, interpretation or application of this
Agreement, either may serve upon the other a written notice stating that such
party desires to have such controversy adjudicated by a board of three
arbitrators and naming the person whom such party has designated to act as an
arbitrator. Within fifteen (15) days after receipt of such notice, the other
party shall designate a person to act as arbitrator and shall notify the party
requesting arbitration of such designation and the name of the person so
designated. The two arbitrators designated as aforesaid shall promptly select a
third arbitrator, and if they are not able to agree on such third arbitrator,
then either arbitrator, on five (5) days notice in writing to the other, or both
arbitrators shall apply to JAMS/ENDISPUTE to designate and appoint such third
arbitrator with same to be selected by the "strike-off method". If the party
upon whom such written request for arbitration is served shall fail to designate
its arbitrator within fifteen (15) days after receipt of such notice, then the
arbitrator designated by the party requesting arbitration shall act as the sole
arbitrator and shall be deemed to be the single, mutually approved arbitrator to
resolve such controversy. The decision and award of a majority of the
arbitrators or of such sole arbitrator shall be binding upon all parties hereto
and shall be enforceable in any court of competent jurisdiction. Such decision
and award may allocate the costs of such arbitration to the parties equally or
disproportionately between the parties. Any arbitration pursuant to this
paragraph shall take place in Los Angeles, Califorma.
Notwithstanding the foregoing, for all disputes in which the amount in
controversy is less than $250,000, the parties agree that one arbitrator shall
be chosen from a list provided by JAMS/ENDISPUTE, using the strike-off method.
The nonprevailing party in any such action agrees to pay the prevailing
party's costs and reasonable attorneys' fees incurred in connection therewith.
Except as otherwise provided herein, any arbitration pursuant to this Agreement
shall be in accordance with the rules and procedures of JAMS/ENDISPUTE.
12. Assignment
----------
This Agreement and all rights hereunder are personal to Licensor and
Operator, and neither party shall, without the prior written consent of the
other, assign, mortgage, sublicense, or otherwise encumber this Agreement and
its rights hereunder, by operation of law or otherwise. Notwithstanding the
foregoing, Operator shall have the unilateral right to assign its rights and
obligations hereunder to CA One Services, Inc., which such assignment being
effective upon delivery of notice of same.
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13. Notices
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Whenever provision is made in this Agreement for the giving, service or
delivery of any notice, statement or other instrument, such notice shall be in
writing and shall be deemed to have been duly given, served and delivered either
upon personal delivery, by facsimile, or, if mailed, when deposited in the
United States mail, proper postage paid, registered or certified mail, addressed
to the party entitled to receive the same at its address first set forth above,
or to such other mailing address as the parties may be written notice designate.
14. Miscellaneous
-------------
14.1 Nothing contained in this Agreement shall be construed in any manner
whatsoever to constitute or appoint Operator as the agent or legal
representative of Licensor, or to place the parties in the relationship of
partners or joint venturers. Neither party shall have any right or authority
hereunder to obligate or bind the other in any manner whatsoever.
14.2 The parties agree to comply with all laws, statutes and ordinances
relating to the operation conducted hereunder and to each party's rights,
obligations and duties hereunder. Each party agrees to indemnify and hold
harmless the other party, including its officers, directors, principals,
employees, agents and successors, from and against any and all claims,
liabilities, losses, damages, costs, expenses, obligations or deficiencies
arising out of or by reason of such party's failure to comply with any such
laws.
14.3 Subject to the provisions of Section 12 above, this Agreement shall be
binding upon and inure to the benefit of the respective parties and their
successors, assigns and transferees.
14.4 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision.
14.5 This Agreement shall be construed in accordance with and governed by
the laws of the State of California.
14.6 This Agreement contains the sole and entire agreement between the
parties with respect to the subject matter hereof, and shall supersede any and
all other agreements between them. The parties acknowledge and agree that
neither of them has made any representations with respect to the subject matter
of this Agreement, or any representation including the execution and delivery
hereof, except such representations as are specifically set forth herein, and
each of the parties acknowledges that it has relied on its own judgment in
entering into the same.
14.7 No waiver or modification of this Agreement or of any covenant,
condition, or limitation herein contained shall be valid unless the same is
made in writing and duly executed by the party to be charged therewith. No
evidence of any waiver or modification shall be offered or received in evidence
in any proceeding, arbitration, or litigation between the parties arising out of
or affecting this Agreement, or the rights or obligations of any party
hereunder, unless such waiver or modification is in writing, duly executed as
aforesaid.
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14.8 This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one agreement.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
GRILL CONCEPTS, INC.
By:
------------------------------
AIRPORT GRILL, LLC
By: CA ONE SERVICES, INC.,
Its Member
By:
------------------------------
By: AIR TERMINAL SERVICES, INC.
Its Members
By:
------------------------------
AGREEMENT
1. Identification and Parties.
--------------------------
This Agreement ("Agreement") is entered into by and between HOTEL
RESTAURANT PROPERTIES, INC., a California corporation ("Owner"), and GRILL
CONCEPTS, INC., a Delaware corporation ("Manager"), as of this 27th day of
August 1998.
2. Recitals.
---------
2.1. Owner is a newly-formed company whose shareholders are Keith Wolff and
Adam Keller. Wolff and Keller have substantial experience in the operation of
hotels and have formed Owner for the purpose of obtaining locations in hotels in
which a Grill or Daily Grill can be located as a restaurant. Owner may also
obtain non-hotel Grill and Daily Grill locations from time to time subject to
Manager's prior approval. Owner is knowledgeable about the unique requirements
for the operation of the food service in a hotel and a restaurant in a hotel.
2.2. Manager owns and operates, among other restaurants, the Grill
("Grill") and Daily Grill ("Daily Grill") restaurant chains and has substantial
experience in the management and operation of such restaurants.
2.3. Manager owns the uniform restaurant operating system necessary for the
establishment and operation of the Grill and Daily Grill restaurants with
distinctive features, equipment, equipment design, menus, food formulas,
inventories, manuals, training Systems, and accounting Systems (collectively,
the "Operating System") which restaurant and Operating Systems are identified by
the service and trademarks "Grill" and "Daily Grill" and related words and
symbols (collectively, "Existing Marks") identifying the Grill and Daily Grill
restaurants and their goods and services.
2.4. Owner and Manager desire to enter into this Agreement to provide for
the obtaining of locations for the Grill and Daily Grill restaurants by Owner,
and the management of those locations acquired by Manager as Grill or Daily
Grill restaurants, as the case may be, including a license of the Operating
System and Existing Marks for such locations, all on the terms and conditions
hereinafter set forth.
3. Certain Definitions.
--------------------
In addition to the definitions set forth elsewhere herein, the terms set
forth in this Article 3 will have the meanings set forth herein:
3.1. License Rights. License Rights mean collectively the Operating System
(defined in Section 2.3), the Existing Marks (also defined in Section 2.3), and
the Marks.
3.2. Marks. Marks includes the Existing Marks and such other tradenames,
service marks, logo types, trade symbols, emblems, signs, logos, insignias,
trademarks, designs, patents and copyrights as Manager owns or may hereafter
acquire, develop, or adopt or designate for use in conjunction with the
Operating System.
3.3. Managed Outlet. Managed Outlet means each hotel's or approved
location's restaurant, bar, room service, and/or banquet operations, which Owner
and Manager agree to lease or manage pursuant to this Agreement.
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3.4. Owner Tax Deficiency. Owner Tax Deficiency means the extent that
federal, state and local income taxes due by Owner or its shareholders on
Owner's income if it is an S Corporation, are greater than Net Income After
Manager Loan Payback before Owner Tax Deficiency and after Incentive Fee in each
quarterly period, payable on a quarterly basis.
3.5. Manager Loan Manager Loan shall mean the amounts loaned to Owner
pursuant to this Agreement. The Manager Loan shall bear an interest rate of nine
percent (9%) per year, simple interest The principal balance of the Manager Loan
shall be repaid in full out of Net Income prior to any payment of Incentive Fee
(defined in Section 9.2) or retention of cash by Owner. The Manager Loan
principal balance shall be payable in full on the fifteenth (l5th) anniversary
of this Agreement unless paid sooner at the election of Owner.
3.6. Manager Loan Debt Service. Manager Loan Debt Service shall be
calculated monthly as follows: the Manager Loan amount outstanding at the
beginning of the month times nine percent (9%) interest divided by twelve (12).
3.7. Required Capital Contribution. Required Capital Contribution for the
purpose of this Agreement shall mean any Owner and/or Manager expenditure
required by the agreement with the hotel, but not funded by the hotel, to (i)
acquire such lease or management agreement, or (ii) for the expenditure of any
sums for capital improvements to the Managed Outlet. The Required Capital
Contribution shall not include Operating Expenses, Pre-opening Costs, or the
Overhead Base Fee as defined herein. To the extent not paid for by the hotel,
Manager shall be solely obligated to obtain the funds for the Required Capital
Contribution through Manager Loans or loans or other financial arrangements to
Owner by others ('Third Party Loan"). Third Party Loan interest payments shall
be called "Third Party Loan Debt Service" for the purpose of this Agreement
Third Party Loan principal payments shall be called "Third Party Loan Principal
Payments" for the purpose of this Agreement. The Manager shall be obligated to
guarantee Third Party Loans if required by the Lender.
3.8. Start-up Period. Start-up Period means the period commencing with the
investigation of any proposed Managed Outlet and ending with either the
termination of such proposal or the date two (2) months after the opening to the
public of such Managed Outlet.
3.9. Pre-opening Costs. For the purpose of this Agreement, Pre-opening
Costs shall include all Manager's and/or Owner's actual expenses, not including
the Required Capital Contribution, incurred by Owner and/or Manager and not
funded by the hotel, during the Start-up Period for any Managed Outlet. These
Pre-opening Costs shall be accounted for in a manner consistent with Manager's
non-hotel locations and consistent with generally accepted restaurant accounting
principles except as otherwise specified herein. Preopening Costs shall not
include allocations for overhead or home office expenes of Manager or the
compensation of corporate salaried employees of the Owner or Manager.
Pre-opening Costs shall not be included as Operating Expenses or in determining
the amount of the Actual Monthly Overhead defined herein.
3.10. Gross Receipts. Gross Receipts means for any time period all
revenues, fees, and payments received by Owner and/or Manager in connection with
or resulting from the Operations at all Managed Outlets, not including items
specifically excluded from Gross Receipts as specified within each of the
individual Managed Outlet Agreements with a hotel.
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3.11. Operating Expenses. Operating Expenses means the sum of the Managed
Outlet Operating Expenses, Owner Operating Expenses, and Manager's Base Overhead
Fee as defined herein. Managed Outlet Operating Expenses shall mean all expenses
incurred in connection with the operation of all Managed Outlets as defined
within the Managed Outlet Agreements, or if not defined within the Managed
Outlet Agreements, then as is customary with Manager's non-hotel locations and
consistent with generally accepted restaurant accounting procedures except as
otherwise specified herein ("Managed Outlet Operating Expenses"). In addition,
Operating Expenses shall include all bonafide expenses incurred by Owner in
performing Owners obligations under this Agreement other than Pre-opening Costs
("Owner Operating Expenses"). However, no Owner shareholder salaries and or
Owner shareholder distributions shall be deemed as Owner Operating Expenses for
the purpose of this Agreement. The Manager Base Overhead Fee pursuant to this
Agreement shall be deemed as Operating Expenses for the purpose of this
Agreement but no other overhead or administrative allocation of Manager shall be
allowed. For the purpose of this Agreement, Operating Expenses shall not
include, Pre-opening Costs, Manager Loan Debt Service, Manager Loan Principal
Payments, Third Party Debt Service, Third Party Loan Principal Payments,
Required Capital Contribution, depreciation, amortization, goodwill, and Owner
income taxes or Shareholder's of Owner income taxes.
3.12 Operating Income. Operating Income means for any time period Gross
Receipts less Operating Expenses.
3.13. Net Income. Net Income for the purpose of this Agreement shall mean
Operating Income less (i) Third Party Loan Debt Service and Third Party Loan
Principal Payments due (including any final principal balance) and (ii) Manager
Loan Debt Service due and (iii) Owner Tax Deficiency, if any.
3.14. Operating Losses. Operating Losses shall mean if Net Income is less
than zero in any month.
3.15 Net Income After Manager Loan Payback. Net Income After Manager Loan
Payback shall mean the remaining Net Income after the principal balance of the
Manager Loan is repaid in full from Net Income.
4. Owner Duties.
------------
4.1. Owner shall seek locations in hotels (or elsewhere if approved by
Manager) which require restaurants of the nature and quality of the Daily Grill
or Grill and shall attempt to arrange with such hotels for the lease or
management of the restaurant space in such hotels, which will normally include
operating the food service for the hotel, including its restaurant, bar, room
service, and, in some instances, banquet operations. Owner shall be responsible
for negotiating such arrangement with the hotel and presenting such arrangement
to Manager for its approval.
5. Manager's Duties.
----------------
5.1. Manager shall be obligated to consult with Owner with respect to
potential locations with respect to the design and operation of a restaurant in
such location and to approve or disapprove the terms and conditions of the
agreement with respect to any location in its sole and absolute discretion. In
the event Owner and Manager agree on the terms and conditions of an arrangement
with a hotel, Owner will enter into a lease or management agreement with respect
to such Managed Outlet, and Manager will enter into a management agreement with
respect to such Managed Outlet with Owner and hotel, if required, on the terms
and conditions set forth herein. At the execution of the agreement for each
Managed Outlet, Manager and Owner shall execute an exhibit hereto agreeing to
perform all the terms and conditions with respect to such agreement.
3
<PAGE>
5.2. In connection with all Managed Outlets, Manager shall manage and
supervise all day to day operations of the Managed Outlet so that the Managed
Outlets are operated to the same standards as Manager owned Grill's and Daily
Grills. Manager shall provide, at its own expense, supervisory personnel as it
deems necessary at its corporate offices to oversee management of the Managed
Outlet. This shall include, but not be limited to, supervision of all of the
following functions pertinent to the Managed Outlet: purchasing, facility
maintenance, advertising and public relations, risk management, payroll
processing, human resources, training of personnel, and all accounting functions
such as accounts payable, cash management, sales tax returns, and periodic
financial statements for each Managed Outlet as set forth herein. Manager shall
be responsible for supervising all Managed Outlet design and construction and
the retraining of all Managed Outlet employees and staff. Except for the Base
Overhead Fee and Pre-opening Costs of home office personnel at the Managed
Outlet as set forth herein, Manager shall be solely responsible for paying its
own corporate overhead without further compensation, including its office
expenses and wages and salaries and fringe benefits of its corporate personnel.
5.3. During the Term, Manager shall be obligated to loan Owner any and all
Pre-opening Costs and Operating Losses (including Owner Tax Deficiency) in the
form of a Manager Loan as specified herein. In addition, Manager shall be
obligated to loan any and all Required Capital Contribution in the form of a
Manager Loan or Third Party Loan as specified herein. There can be no default by
Owner under this Agreement for the failure to pay the Manager Loan until its
final due date as it is the obligation of Manager to fund all Operating Losses.
5.4. During the Term, Manager shall retain such employees and other
personnel as are required in Manager's sole judgment for the Managed Outlet
operations. All such on-site employees will be employees of Manager. Manager
shall prepare the payroll for all employees of the Managed Outlet, and shall be
solely responsible for all salaries, fringe benefits, bonuses (including store
management bonuses), health insurance and disability insurance programs,
employee taxes and worker's compensation insurance of the employees of the
Managed Outlets. Manager shall be solely responsible for the determination of
the employees' salaries, benefits and bonuses, which shall be reasonably set.
Manager shall have the sole responsibility to supervise, hire, fire and
discipline, if necessary, all on-site employees.
5.5. Manager shall have control and signature power over the bank accounts
of the Managed Outlets and the full power and authority to disburse the funds
necessary to operate the Managed Outlets. Manager shall promptly deposit in a
bank or banks designated by Manager and approved by Owner in accounts
established in Manager's name, any and all Gross Receipts received by Manager
from the operations of the Managed Outlets. In no event will any moneys received
from the operation of the Managed Outlets be commingled with any other funds. To
the extent that Net Income After Manager Loan Payback is greater than zero (in
accordance with sections 3.5 and 3.6 herein), Manager shall disburse the Net
Income After Manager Loan Payback twenty-five percent (25%) to Owner and
seventy-five percent (75%) to Manager for the Incentive Fee hereinafter defined)
after maintaining reasonable reserves for the operation of the Managed Outlets.
5.6. Manager shall, within fifteen (15) days of the end of each of its
accounting periods, and thirty (30) days of the end of each calendar year,
prepare a Statement of Operations for the Managed Outlets indicating the fiscal
status of the Managed Outlets. Such Statement shall be consistent with the
Statements provided by Manager for its other restaurant locations. Owner shall
have the rights, at its expense, to audit all such Statements. Manager shall
maintain complete books and records of all costs and expenses incurred and all
income and receipts received in connection with the operation of the Managed
Outlets at its office at 11611 San Vicente Boulevard, Los Angeles, California
90049. The books and records regarding the Managed Outlets shall be kept in a
manner consistent with that maintained for its other restaurants unless
otherwise specified herein. All such books and records, as well as all other
books and records of Manager which relate to the Managed Outlets shall be
available for inspection and audit by Owner or any of its officers, employees or
agents at all reasonable times during normal business hours.
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<PAGE>
5.7. During the term of the Agreement, Manager shall obtain, as an
Operating Expense, insurance for the Managed Outlets of the same type and amount
as it maintains for its own restaurant locations and as required by Owner's
leases.
6. Omitted
7. Grant of License.
----------------
7.1. Upon the terms and conditions set forth herein, Manager grants to
Owner, and Owner accepts from Manager, the right, license, and privilege of
utilizing the License Rights during the Term, solely and only in connection with
operation of the Managed Outlets and only in such manner as Manager approves in
writing. The License Rights extend only to the Managed Outlet. Owner will not
make or authorize any direct or indirect use of any of the License Rights other
than directly in connection with operation of the Managed Outlet, and only in
such manner as Manager approves in writing. The license granted hereby shall be
effective only during the Term of this Agreement and shall automatically end on
the expiration or earlier termination of this Agreement. Manager may, from time
to time, institute promotional and advertising material in connection with the
Managed Outlets. All such promotion and advertising expenditures will be deemed
Operating Expenses only to the extent such advertising is exclusively for the
Managed Outlet unless otherwise approved by Owner in writing.
7.2. Owner acknowledges and agrees that the License Rights shall at all
times during the Term be the sole and exclusive property of Manager. Manager
expressly retains and reserves all rights in and to each of the License Rights,
subject only to the rights specifically granted to Owner herein. Owner further
acknowledges and agrees that Owner has been granted the use of the License
Rights solely for the duration of the Term and only in conjunction with the
Managed Outlets, and that this Agreement is not intended as Manager's transfer
or sale to Owner of any of the License Rights. Nothing contained in this
Agreement shall be construed to prevent Manager from granting any other licenses
for the use of any or all of the License Rights at any other location or from
utilizing any of the License Rights in any manner whatsoever except as otherwise
specified herein. Owner acknowledges that it will not acquire any rights
whatsoever in any of Manager's goodwill and/or proprietary marks, including any
of the License Rights, as a result of Owner's use thereof. Owner agrees that it
shall not, during the Term or thereafter, take any actions which affect
Manager's ownership of its proprietary marks, including License Rights or the
validity thereof.
8. Exclusivity.
-----------
8.1. During the term hereof, Manager shall directly or indirectly pursue
the location of its Grill and Daily Grill restaurants in any hotel only through
the arrangement with Owner as set forth herein, except as follows. In the event
that Manager desires to locate a Grill or Daily Grill restaurant in a hotel and
the Manager's capital investrnent, excluding any improvement allowance provided
to Manager by the hotel or other third- party entity directly affiliated with
the hotel, in that location will exceed the sum of One Million Dollars
($1,000,000) adjusted by the cost of living from January 1, 1998, using the Cost
of Living Index of the Department of Labor for the area in which the hotel is
located, then Manager may arrange for the location of the Grill or Daily Grill
in such hotel free of any obligation under this Agreement. In the event anyone
approaches Manager to locate a restaurant in a hotel and the Manager's capital
investment, excluding any improvement allowance provided to Manager by the hotel
and/or other third-party entity directly affiliated with the hotel, is less than
the sum of One Million Dollars ($1,000,000) adjusted by the cost of living from
January 1, 1998, using the Cost of Living Index of the Department of Labor for
the area in which the hotel is located, Manager shall refer such party to Owner
and such location may only be obtained through the arrangement set forth herein
with Owner so long as Owner desires to acquire the lease or management agreement
with respect to such location. In the event Manager presents a location for
management agreement or lease to Owner, and Owner determines that it does not
want to enter into a mangagement agreement or lease for such location, Manager
may enter into a management agreement or lease for such location only if the
management agreement or lease which Manager enters into for such location is on
the same terms and conditions which have been rejected by Owner. Notwithstanding
anything herein to the contrary, Manager may, as its sole discretion, reject any
proposed location for an outlet of the Grill and/or Daily Grill.
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8.2. Owner and its shareholders shall not engage in the business of finding
locations in hotels other than for Manager, except as set forth herein. In the
event that Owner presents a location to Manager for an outlet of the Grill or
Daily Grill, and Manager determines that it does not want to locate a Grill or
Daily Grill at such location, then Owner's shareholders in another entity, may
attempt to locate a restaurant in such location. Owner hereby agrees that it
shall not own, lease or manage any assets except Managed Outlets for the Grill
or Daily Grill due to the potential future combination of Manager and Owner as
set forth herein.
8.3. Wherever in Article 8 a proposal is made by Manager or Owner, it shall
be made in writing, and a response shall be required within fifteen (15) days.
The failure to respond shall be deemed a disapproval.
9. Fees and Royalties.
------------------
9.1. Base Overhead Fee. In consideration of Manager's agreement to perform
its duties set forth herein, and in consideration of the license granted herein,
Owner shall pay to Manager a Base Overhead Fee per outlet eqnal to $4,167
($50,000 divided by 12) per monthly period.
9.2. Owner shall pay to Manager, in addition to the Base Overhead Fee, an
Incentive Fee equal to 75% of Net Income After Manager Loan Payback (as provided
for in Sections 3.5 and 3.6 herein) for any period. The Incentive Fee shall be
payable, on a monthly basis, upon the submission of the Statement of Operations.
10. Corporate Acquisition.
---------------------
10.1. At any time from and after five (5) years and nine (9) months from
the date hereof, and subject to the Owner's prior rights pursuant to Section
10.2, the Owner shall have the right to cause the Manager to acquire all but not
less than all, of the stock or assets of the Owner for the Agreed Purchase Price
as defined below (such reorganization shall be referred to as an "Owner
Reorganization"), and the Manager shall have the right to acquire all, but not
less than all, of the stock or assets of the Owner for the Agreed Purchase
Price (such reorganization being referred to as a "Manager Reorganization")
(collectively, an Owner Reorganization and a Manager Reorganization are referred
to as a "Reorganization"), on the terms and subject to the conditions set forth
in this Section 10.
10.1(a) In the event of a Reorganiation, Manager shall have the option of
determining the form of Reorganization so long as the Manager uses commercially
reasonable efforts to cause such Reorganization to qualify as a tax free
reorganization under Section 368 of the Internal Revenue Code. Notwithstsnding
the foregoing, the Owner, or Owner's shareholders shall be solely responsible
for any tax liability payable by the Owner or Owner's Shareholders which may
arise from the Reorganization should Manager be unable, for any reason, to
structure the Reorganization as a tax free Reorganization.
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l0.l (b) (i) For purposes hereof, the Agreed Purchase Price shall be
determined according to the following formula:
AOP=25%x[(OIx 10)-L]
AGP Agreed Purchase Price
OI Operating Income of Owner for the twelve (12) month period ending on
the Manager Reorganization Date, if the Reorganization is a Manager
Reorganization, or the Owner Reorganization Date if the Reorganization
is an Owner Reorganization.
L The principal balance of any Manager Loans or Third Party Loans on the
Manager Reorganization Date, if the Reorganization is a Manager
Reorganization, or the Owner Reorganization Date if the Reorganization
is an Owner Reorganization.
(ii) For the purposes of determining the Agreed Purchase Price all
Operating Income and any principal balance of Manager Loans and Third Party
Loans relating to the Excluded Outlets, as defined herein, shall be excluded
from the calculation of the Agreed Purchase Price. "Excluded Outlets" shall
include the Burbank Airport Hilton Daily Grill and San Jose Hilton Daily and/or
City Grill. If the San Jose Managed Outlet Agreement is renegotiated into a
twenty (20) year agreement (including Owner option periods), the San Jose
Managed Outlet will no longer be considered an Excluded Outlet and shall be
included in the calculation of the Agreed Purchase Price at the time of
Reorganization.
(iii) For the purposes of determining the Operating Income, annual Owner
Operating Expenses shall be averaged over the five (5) year period prior to the
Reorganization by taking the sum of all Owners Operating Expenses over the five
(5) year period ending on the Manager Reorganization Date or Owner
Reorganization Date, as appropriate, and dividing by five (5).
(iv) As an example only, assuning that at the time of Reorganization,
Operating Income for the prior twelve (12) month period, excluding the Operating
Income of the Excluded Outlets, is $1,000,000, and the principal balance of all
Manager Loans and Third Party Loans, excluding any outstanding loan balance for
the Excluded Outlets, is $500,000, the Agreed Purchase Price shall be $2,375,000
[{($1,000,000 x 10) - $500,000} x 25%].
10.1(c) Owner's right to cause an Owner Reorganizafion may be exercised by
giving written notice ("Owner Reorganization Notice") to the Manager of such
election effective on the last day of any month ("Owner Reorganization Date"),
provided however, that if at the time of such notice Manager's common stock is
traded on an established exchange or on Nasdaq or is quoted on the OTC Bulletin
Board or the National Ouotation Bureau's "pink sheets" (collectively, an
exchange"), (i) notice of the exercise of such option may only be given within
thirty (30) days after the release of earnings by Manager for the latest fiscal
quarter, and (ii) the closing price of Manager's common stock on such Exchange
shall not be less than ten times (lOx) cash flow per share for the five
consecutive trading days ending on the date of notice from the Owner.
Notwithstanding the existence of a trading market in Manager's common stock on
an Exchange, in the event of a "change of control", as defined hereinafter, the
provisions of Section 10. l(c)(i) and (ji) shall not apply. For the purposes
hereof; "cash flow per share" shall be defined as Manager's reported net income
over last four completed fiscal quarters before all non-cash and non-recurring
items including, but not limited to, such items as depreciation, amortization,
new restaurant start-up costs and extraordinary items, divided by the weighted
average of shares outstanding over such period.
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10.1(d) Manager's right to cause a Manager Reorganization may be exercised
by giving written notice ("Manager Reorganization Notice") to the Owner of such
election effective on the last day of any month, provided however, that such
notice shall not become effective until the last business day of the fifteenth
(15th) calendar month after all Managed Outlets contracted on or before the
Manager Reorganization Notice have been open for business to the public
("Manager Reorganization Date") and provided, further, that Manager may only
cause a Manager Reorganization if (i) the Manager has received an opinion of
counsel that the Manager Reorganization qualifies as a tax free transaction to
the Owner, and/or its shareholders, under the Internal Revenue Code, or (ii) at
the time of closing, there is a Liquid Market in the Manager's common stock, or
(iii) Manager agrees to adjust the Agreed Purchase Price in the manner described
in Section l0.l(h)(ii) whereby the number of shares of common stock issuable by
the Manager is reduced and cash is paid in lieu of such shares in an amount
sufficient to pay the amount of federal, state and local income taxes on the
Agreed Purchase Price. For purposes of this Section 10.1(d), a "Liquid Market"
shall be deemed to exist if; and only it, there is adequate trading volume in
the common stock of the Manager (based on the closing bid price of the Manager's
common stock at Closing and the average daily trading volume of the Manager's
common stock over the ten trading days immediately preceding the Closing, as
reported by an Exchange) such that a sufficient number of shares may be sold
over a thirty trading day period to pay the estimated federal, state and local
income tax liability of the Owner, or the Owner's shareholders. Upon the giving
of the Manager Reorganization Notice, Owner will no longer be allowed to enter
into any new Managed Outlet agreements without the prior written consent of the
Manager.
10.1(e) Notwithstanding the receipt of a Manager Reorganization Notice
exercising Manager's right to cause a Manager Reorganization, Owner may provide
an Owner reorganization Notice exercising Owner's right to cause an Owner
Reorganization in which case the Manager's Reorganization Notice shall be of no
force or effect provided that the Owner Reorganization Date occurs prior to the
Manager Reorganization Date.
10.1(f) Upon receipt of a notice of Reorganization, the auditors for Owner
shall compute the Agreed Purchase Price within thirty (30) days following
delivery of an Owner Reorganization Notice or within thirty (30) days following
the Manager Reorganization Date, as appropriate.
10.1(g) Closing of the Reorganization ("Closing") shall occur within thirty
(30) calendar days after determination of the Agreed Purchase Price pursuant to
section 10.1(f).
10.1(h) At Closing:
(i) Owner, and/or Owner's shareholders, shall transfer to Manager all
of the Outstanding securities, or all of the assets of Owner, as
appropriate based on the structure of the Reorganization as determined
pursuant to Section 10.1(a).
(ii) Manager shall issue to Owner or Owner's shareholders, as
appropriate, common stock of Manager ("Acquisition Stock") equal in value
to the Agreed Purchase Price based on the average closing price of
Manager's common stock for the ten (10) trading days prior to closing;
provided however, that should Manager's stock not be listed on an Exchange
at Closing, Manager shall pay the Agreed Purchase Price in common stock of
the Manager based on the appraised value per share of the Manager's common
stock as determined by an independent appraiser mutually acceptable to both
Owner and Manager, provided that (other than in a Change of Control) the
appraised value per share shall be no less than ten times (lOx) cash flow
per share as determined in accordance with Section 10.1(c), and, provided
further, that if the reorganization is not tax free to Owner's
stockholders, the amount of Common Stock of the Manager shall be reduced
and cash shall be substituted therefor in the amount of the federal, state,
and local income taxes on the Agreed Purchase Price. For example, if the
Agreed Purchase Price is $1,000,000, and the combined effective tax rate is
30%, $700,000 shall be in stock and $300,000 in cash.
(iii) Manager shall assume all of the liabilities of the Owner,
including the then outstanding principal amounts of any Manager Loans and
Third Party Loans at the time of Closing.
10.2. The following provisions regulate a change in control:
10.2 (a) If at any time during the term of this Agreement, a Change in
Control of Manager (as hereinalter defined in this Article 10), is contemplated
or occurs, the provisions of this Article 10 shall become effective to allow
Owner within thirty days after Manager notifies owner in writing of the Change
in Control, to exercise its option to cause a corporate reorganization on, or
after, the date on which such Change in Control occurs (the "Change in Control
Date").
10.2.(b) For the purpose of this Agreement, a "Change in Control" shall
mean:
(i) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of the lesser of the
aggregate percentage holders of Robert Spivak, Michael Weinstock, Richard
Shapiro, and Lewis Wolff or fifty percent (50%), but not less than twenty-five
percent (25%) or more of either (A) the then outstanding shares of common stock
of Manager (the "Outstanding Manager Common Stock") or (B) the combined voting
power of the then outstanding voting securities of Manager entitled to vote
generally in the election of directors (the "Outstanding Manager Voting
Securities"); provided, however, that for purposes of this clause (i), the
following acquisition shall not constitute a Change in Control: any acquisition
by any corporation puruant to a transaction of which complies with clauses (A)
and (B) of clause (iii) of this Section l0.4.(b); or
(ii) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Manager
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than tile Board; or
(iii) consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of Manager (a
"Business Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the Persons who were the beneficial
owners, respectively, of the outstanding Manager Common Stock and Outstanding
Manager Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50%, respectively, of the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns Manager or all or substantially all of Manager's assets
either directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business Combination
of the Outstanding Manager Common Stock and Outstanding Manager Voting
Securities, as the case may be, and (B) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
8
<PAGE>
(iv) approval by the stockholders of Manager of a complete liquidation
or dissolution of Manager.
10.3. Acquisition Stock shall be issued as follows:
10.3.(a) Shareholders acknowledge that the Acquisition Stock delivered to
the Shareholders at Closing will not be registered, but will be issued pursuant
to appropriate exemptions from the Securities Act of 1933. Shareholders
represent and warrant that they will be acquiring the Acquisition Stock for
investment and not for distribution. The Shareholders will execute such
documents and provide such information as may be required to enable the issuance
of such stock by Manager to qualify for the applicable exemptions. Shareholders
further acknowledge that the Acquisition Stock may be sold only pursuant to an
effective registration statement under the Securities Act or an exemption
therefrom.
10.3 (b) Each certificate for the Restricted Securities shall be stamped
or otherwise imprinted with a legend substantially in the following manner:
The securities represented by this Certificate have not been
registered under the Securities Act of 1933, nor under applicable
State Securities Laws and may not be sold, transferred, or otherwise
disposed of unless they have been registered under such laws or such
disposition is in compliance with an available exemption from
registration.
10.3 .(c) Manager agrees, pursuant to the specific terms of the
Registration Rights Agreement attached hereto as Exhibit to file a registration
statement for the Acquisition Stock as soon as practical afler Closing on a Form
S-3 Registration Statement, and to use its best efforts to cause such
registration statement to become effective as soon as possible.
10.4. Notwithstanding anything else in this Section 10, in the event the
Manager or its shareholders sell substantially all of their assets or stock, as
the case may be, causing a Change in Control and an exercise by Owner of its
rights under Article 10, to a hotel or restaurant operator introduced to Manager
by Owner, specifically including but not limited to Hilton Hotels Corporation,
Starwood Hotels, Sunstone Hotels, CapStar Hotels, and Promus Hotels
(collectively, the "Existing Introductions") then the minimum purchase price for
Owner under this Article 10 which shall be paid to Owner's shareholders in stock
of Manager or the acquiring company in the reorganization or for cash shall be
the greater of: (i) Three Million Dollars ($3,000,000) and (ii) the Agreed
Purchase Price. For the purpose of this section, any hotel and/or restaurant
operators other than the Existing Introductions, shall be deemed introduced to
Manager by Owner only upon the written acknowledgement for Manager to Owner to
confirm same not to be unreasonably withheld.
11. Termination.
-----------
Manager and Owner acknowledge that the decision to acquire and manage a
Managed Outlet requires the commitment of both parties which may be given or
refused in their sole and absolute discretion. However, it is their agreement
that the terms and conditions of this agreement, specifically the exclusivity
provisions, shall not terminate until fifteen (15) years from and after the date
hereof (the "Term"). After fifteen (15) years from and after the date hereof,
the terms and provisions of this agreement shall be terminated with respect to
any future actions of either of the parties except as to any Managed Outlet
which the parties have agreed to acquire and manage prior to the end of such
fifteen (15) year period. For such Managed Outlets this agreement shall continue
until such time as the lease or management agreement with respect to such
Managed Outlet terminates, and each party shall be obligated to perform all of
its obligations hereunder and under any such lease and management agreement for
a Managed Outlet until the termination date of such lease or management
agreement with respect to such Managed Outlet.
9
<PAGE>
12. Assignment.
----------
Neither Manager nor Owner shall assign its rights or obligations under this
Agreement without the prior written approval of the other party which approval
may be granted or withheld in the sole and absolute discretion of the other
party. Notwithstanding the foregoing, in the event that Manager disposes of all
or substantially all of its assets in a sale or reorganization transaction, the
transferee who continues to operate the company owned Daily Grill and Grill
operations must assume the rights and obligations of Manager hereunder without
releasing the Manager therefrom.
13. Miscellaneous
-------------
13.1. The following indemnification provisions will apply:
13.1 .(a) Manager agrees to defend, protect, indemnify, and hold harmless
Owner and its Affiliates, and all of their respective officers, directors,
employees, attorneys, consultants, and agents (collectively called the "Owner
Indemnitees" and individually an "Owner Indemnitee") from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, expenses and disbursements arising out of any act, event,
transaction, or occurrence which occurred in or about the Managed Outlets
arising or alleged to have arisen out of the acts, omissions or negligence of
Manager or Manager's officers, directors, employee's consultants, consultants,
or agents (collectively, the "Manager Indemnified Matters"), provided that
Manager shall have no obligation to an Owner Indemnitee hereunder with respect
to Manager Indemnified Matters directly caused by or a directly resulting from
the negligence or criminal or willfull misconduct of Owner or any Owner
Indemnitee or from Owner's violation of its obligations under this Agreement. To
the extent that the undertaking to indemnify, pay, and hold harmless set forth
in the preceding sentence may be unenforceable because it violates any law or
public policy, Manager shall contribute the maximum portion that it is permitted
to pay and satisfy under applicable law, to the payment and satisfaction of all
Indemnified Matters incurred by the Owner Indemnitee,
13.l(b)If any claim is asserted against a Person which, if meritorious,
would be fully or partially covered by any indemnity provided above, the
indemnified party shall immediately notify Owner and Manager of such claim in
writing. The indemnified party agrees not to settle, compromise, or take any
other action in respect of such claim without the prior written approval of the
indemnitor. To the extent that any claim is covered by any indemnity provided
for above, the indemnitor will cause any claim asserted to be defended at the
indemnitor's expense by counsel chosen by Owner who is reasonably acceptable to
the indemnified party. Each indemnified party shall cooperate with the
indemnitor and its counsel in the defense of any such claim.
13. l.(c) Section 13 and all other indemnification provisions of this
Agreement shall survive the expiration or termination of this Agreement and
shall be binding upon, and inure to the benefit of, Owner, Manager, and their
Affiliates, successors and assigns.
10
<PAGE>
13.1 .(d)The Owner and the Manager hereby covenant and agree that, except
as required by law, they will not disclose the terms and conditions of this
Agreement obtained in connection with exercising their rights under, or
performing their obligations under, this Agreement, to any other person or
entity without obtaining the prior written consent of the other party hereto to
such a disclosure. Notwithstanding the foregoing, the Owner and the Manager
acknowledge and agree that certain disclosures to their counsel, consultants,
financing sources, partners, governmental authorities and certain other of their
agents will be necessary in order to perform their respective obligations under
this Agreement. The obligations set forth in this Section shall survive the
expiration or termination of this Agreement.
13.2. This Agreement shall inure to the benefit of; and be binding upon,
the parties hereto, their respective permitted heirs, legal representatives,
successors and assigns.
13.3. This document contains the entire agreement between Manager and Owner
with respect to the management of the Managed Outlets and supersedes any and all
prior or contemporaneous agreements or understandings, whether written or oral.
13.4. This Agreement shall be governed by, and construed in accordance with
the internal laws of the State of Califomia.
13.5. This Agreement may be amended or modified only by written instrument
duly executed by Manager and Owner.
13.6. Any notice, demand or request provided for or permitted to be given
pursuant to this Agreement shall be in writing and shall be deemed to have been
properly given: (a) upon receipt, if hand delivered; (b) five (5) days after
deposit thereof at any main or branch United States Post Office, if sent by
United States registered or certified mail, return receipt requested; (c) on the
first business day following deposit thereof at the office of a nationally
recognized overnight delivery service, if sent by such service; or (d) upon
confirmation of receipt, if sent by facsimile, addressed as follows:
To Manager: Grill Concepts, Inc.
11661 San Vicente Boulevard
Suite 404
Los Angeles, California 90049
With copies to: Herzog Fisher Grayson and Wolfe, L.C.
9460 Wilshire Boulevard
Fifth Floor
Beverly Hills, California 90212
To Owner: Hotel Restaurant Properties, Inc.
c/o Wolff DiNapoli
11828 La Grange Avenue
Suite 200
Los Angeles, California 90025
With a copy to: Greenberg Glusker Fields Claman & Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, California 90067
11
<PAGE>
or at such other address as the party to be served with notice may have
furnished in writing to the party seeking or desiring to serve notice as a place
for the service of notice.
13.7. In the event that any one or more of the provisions, paragraphs,
words, clauses, phrases or sentences contained in this Agreement, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity; legality and
enforceability of any such provision, paragraph, word, clause, phrase or
sentence in every other respect, and of the remaining provisions, paragraphs,
words, clauses, phrases or sentences of this Agreement, shall not be in any way
impaired, it being the intention of the parties that this Agreement shall be
enforceable to the fullest extent permitted by law.
13.8. Time is of the essence of this Agreement and each and every provision
hereof. If the performance of any obligation required hereunder or the last day
of any time period as determined in accordance with the terms and provisions
hereof is to occur on a Saturday, Sunday or legal holiday under the laws of the
United States or of the State of California, then the day on which the
performance of any such obligation is to occur or the last day of any such time
period, as the case may be, shall be extended to the next succeeding business
day.
13.9. This Agreement man be executed in any number of counterparts, any or
all of which may contain the signature of any one of the parties and all of
which shall be construed together as a single instrument. A facsimile copy or
photocopy of this Agreement containing a facsimile copy or photocopy of the
signatures or initials of any party shall be deemed to be sufficient evidence of
that party's action or intent
13.10. In connection with any litigation or dispute arising out of this
Agreement, the prevailing party shall be entitled to recover all costs incurred,
including reasonable attorneys' fees and costs.
13.11. The Section headings contained herein are for convenience of
reference only and are not intended to define, limit or describe the scope or
intent of any provision of this Agreement.
13.12. None of the obligations hereunder of either party shall run to, or
be enforceable by, any party other than the other party to this Agreement or by
a party deriving rights hereunder as a result of an assignment permitted
pursuant to the terms hereof.
13.13. Manager shall in all respects be deemed to be an agent, whose agency
is coupled with an interest, and nothing contained herein shall be deemed or
construed by the parties hereto nor by any third party, as creating the
relationship of partnership or of joint venture between the parties hereto, it
being understood and agreed that neither the method of computation of Management
Fees nor any other provision contained herein nor any acts of the parties
hereto, shall be deemed to create any relationship between the parties hereto
other than the relationship of Owner and Manager. The agents or employees of
Owner shall not be considered or held out to be agents or employees of Manager,
and Owner may not negotiate or enter into any agreement that purports to bind
Manager or incur any liability in the name of, or on behalf of, Manager.
Manager, as agent of Owner, shall only be allowed to act as such agent to carry
out the purposes of this Agreement and for no other purpose.
13.14. Any controversy, claim or dispute arising out of or in any way
relating to this Agreement or the alleged breach thereof shall be determined by
binding arbitration by a retired California Superior Court or Court of Appeal
Judge selected by the American Arbitration Association under its commercial
arbitration rules ("Rules") which are in effect at the time of the arbitration
or the demand therefor. The Rules are hereby incorporated by reference.
California Code of Civil Procedure Sec. 1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference. In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement. The arbitration shall be commenced and heard in Los Angeles
County, California. The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted. Judgment on the award may be entered in any
court of competent jurisdiction, even if a party who received notice under the
Rules fails to appear at the arbitration hearing(s). The parties may seek, from
a court of competent jurisdiction, provisional remedies or injunctive relief in
support of their respective rights and remedies hereunder without waiving any
right to arbitration. However, the merits of any action that involves such
provisional remedies or injunctive relief, including, without limitation, the
terms of any permanent injunction, shall be determined by arbitration under this
Section 13.14.
12
<PAGE>
13.15. The shareholders of Owner shall have no personal liability under any
theory for the Manager Loan or Third Party Loans, unless such shareholders
specifically guarantee such loans in writing.
13.16. The parties acknowledge that Manager has been represented by Herzog
Fisher Grayson & Wolfe, Law Corporation ("HFG&W") in connection with this
Agreement and that Greenberg Glusker Fields Claman & Machtinger LLP has
represented Owner in connection with this Agreement In view of the fact that
HFG&W (and/or one or more of its individual members) has in the past rendered
legal services to and represented and will continue to render legal services to,
represent and/or be involved with the Owner and Manager and/or with their
representative shareholders, directors and officers in connection with other
matters, there is a potential for conflicts of interest. The parties acknowledge
that they are aware of such conflicts of interest and the potential adverse
effects to them which may result therefrom, and, notwithstanding same, hereby
consent to HFG&W's representation of Manager in conjunction with preparation of
this Agreement and waive any potential conflicts of interest with respect to or
against HFG&W in connection therewith.
IN WlTNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"OWNER"
HOTEL RESTAURANT PROPERTIES, INC.,
a California corporation
By: /s/ Keith M. Wolff
-------------------------------------
Keith M. Wolff
Its:President
"MANAGER"
GRILL CONCEPTS, INC.,
a Delaware corporation
By:/s/ Bob Spivak
-------------------------------------
Bob Spivak
Its: President
13
<PAGE>
August 10, 1998
Grill Concepts, Inc.
Suite 404
11661 San Vicente Boulevard
Los Angeles, CA 90049
Re: Excluded Outlets
Gentlemen:
Grill Concepts, Inc. ("Manager") and Hotel Restaurant Properties, Inc.
("Owner") are parties to that Certain Agreement dated concurrently herewith (the
"Agreement"). All defined terms herein are as defined in the Agreement. Pursuant
to the Agreement, in the event an acquisition of Owner by Manager occurs
pursuant to Section 10 of the Agreement, there are certain Excluded Outlets
which are not included for purposes of the calculation of the Agreed Purchase
Price.
This letter will set forth our agreement that in the event such an
acquisition occurs, Manager shall continue to pay to the former shareholders of
Owner 25% of the Net Income After Manager Loan Payback for the Excluded Outlets
for the remaining term of the Manager's occupancy and operation of a restaurant
in those Excluded Outlets. For purposes of computing the Net Income Afier
Manager Loan Payback, the parties will assume that the Agreement applies. Please
indicate your agreement to the foregoing by executing the enclosed copy of this
letter and returning it to the undersigned.
Very truly yours,
HOTEL RESTAURANT PROPERTIES, INC.
By:
---------------------------------
By:
---------------------------------
AGREED AND ACCEPTED:
GRILL CONCEPTS, INC.
By:
-----------------
By: President
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 $230,000.00(1), 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>
2.3 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 will advise in the areas 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:/s/
------------------------
Its: General Manager
GRILL CONCEPTS, INC.
By:/s/
------------------------
Its: President
DAILY GRILL RESTAURANT MANAGEMENT AGREEMENT
DAILY GRILL RESTAURANT MANAGEMENT AGREEMENT (this "Agreement") made as of
the 30th day of July, 1998 between Hotel Restaurants Properties, Inc.
("Operator"), a California corporation, Grill Concepts, Inc. ("Affiliate"), a
Delaware corporation, and CapStar Georgetown Company, L.L.C. ("Owner"), a
Delaware limited liability company. Owner and Operator acknowledge that Operator
is affiliated with Affiliate.
RECITALS
A. Owner is the owner of a full-service hotel (the "Hotel") known as the
Georgetown Inn located at 1310 Wisconsin Avenue, N.W., Washington, D.C. 20007;
B. Operator and/or Affiliate own and operate, among other restaurants, The
Daily Grill restaurant chain ("Daily Grill"), and have substantial experience in
the management and operation of such restaurants;
D. Operator and/or Affiliate own the uniform restaurant operating system,
necessary for the establishment and operation of Daily Grill restaurants with
distinctive features, equipment, equipment design, menus, food formulas,
inventories, manuals, training Systems, and accounting systems (collectively,
the "Operating System") which restaurant and Operating System are identified by
the service and trademarks "Daily Grill" and related words and symbols
(collectively, "Existing Marks") identifying the Daily Grill restaurants and
their goods and services;
E. Subject to the terms and conditions set forth in this Agreement, (i)
Owner wishes to retain Operator (either directly and/or indirectly through
Affiliate) to act as manager in connection with certain of Hotel's restaurant,
bar, room service, and limited banquet food service operations as more
specifically described herein (the "Managed Outlet") and (ii) Operator desires
to accept such retention; and
F. Owner and Operator desire to evidence their agreement with respect to
the operation, direction, management, and supervision of the Managed Outlet as
more particularly set forth below.
NOW, THEREFORE, for and in consideration of the premises, and other good
and valuable consideration, Owner and Operator agree as follows:
ARTICLE I
THE MANAGED OUTLET
1.1. Owner and Operator acknowledge that the Managed Outlet means
collectively the Hotel's restaurant, bar, room service operation, and associated
kitchen area that are approximately 5,000 square feet and more fully described
in Exhibit "A" hereto including, without limitation:
A. The non-structural portions of the restaurant in the Hotel, including
the interior walls, ceiling and floor (the "Restaurant");
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B. Mechanical systems and built-in installations (the "Installations")
serving the Restaurant exclusively or primarily, including, but not limited to,
heating, ventilation, air conditioning, electrical and plumbing systems,
elevators and lifts, and built-in refrigeration and kitchen equipment;
C. Restaurant furniture, furnishings, wall coverings, floor coverings,
window treatments, fixtures and other equipment (the "FF&E");
D. Chinaware, glassware, silverware, linens, and other items of a similar
nature used in the operation of the Managed Outlet (the "Operating Equipment");
and
E. Stock and inventories of paper supplies, cleaning materials and similar
consumable items and food and beverage used in the operation of the Managed
Outlet (the "Operating Supplies").
ARTICLE II
OPERATING TERM
2.1. This Agreement shall have a term consisting of (i) a start-up period
("Start-up Period") commencmg on July 1, 1998 (the "Effective Date") and
ternninating on the later to occur of (x) December 31, 1998 and (y) the date on
which the Managed Outlet opens for business to the public, and (b) an operating
term (the "Operating Term"; the "Start-up Period and the Operating Term being
sometimes collectively referred to as the "Term") commencing upon the
termination of the Start-up Period and expiring on December 31, 2020, unless
sooner terminated in accordance with the provisions of this Agreement or unless
extended by the written agreement of Owner and Operator. During the Start-up
Period, all the terms and conditions of this Agreement other than as set forth
in Section 10.2 shall apply.
ARTICLE III
GENERAL SERVICES BY OPERATOR
3.1. During the Operating Term (and, as applicable, the Start-up Period),
Operator, as agent and for the account of Owner, shall in accordance with the
Budgets (as defined in Section 9.4) and the other applicable provisions of this
Agreement and subject to the availability of funds:
A. Provide first class breakfast, lunch and dinner to the Managed Outlet
comparable to other Daily Grill operations from 6:30am to at least 11 :0Opm,
seven (7) days each week, three hundred sixty-five (365) days a year. The menu
and pricing for the Managed Outlet and banquets shall be at a price comparable
to other Daily Grill locations and subject to the prior reasonable approval of
Hotel Operator.
B. Provide first class food and beverage service for banquet and catering
events at Operator's standard menu pricing, subject to the reasonable prior
approval of Hotel Operator, for any events scheduled by the Hotel. Operator
shall add a fixed fifteen percent (15%) service charge to all banquet checks.
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C. Provide first class room service operations for breakfast, lunch and
dinner during the hours when the Restaurant is open for business, seven (7) days
each week, three hundred sixty-five (365) days a year. Room service menu prices
shall not be greater than fifteen percent (15%) above the prices on the dining
room menu without the prior written consent of Owner. A fixed gratuity of
fifteen percent (15%) or a reasonable delivery charge (at Operator's discretion,
subject to the approval of Owner, such approval not to be unreasonably withheld)
may be charged on all room service orders and will be clearly indicated on the
Hotel guest check.
D. Recruit, train, direct, supervise, employ and dismiss on-site staff
("Managed Outlet Employees") for the operation of the Managed Outlet, and at
Operator's expense provide such corporate supervisory personnel as it deems
necessary at its corporate offices to oversee management of the Managed Outlet.
E. Develop and implement advertising, marketing, promotion, publicity and
other similar programs for the Managed Outlet, in accordance with this
Agreement and the Budgets or as otherwise approved by Owner.
F. Negotiate and enter into contracts for the provision of services to the
Managed Outlet; provided, however, that any contract for an amount in excess of
$25,000 per year; which has a term in excess of two years, with any affiliate of
Operator or affiliate, which would result in a lien or encumbrance on the
Restaurant or Hotel or which is not terminable on thirty days' or less notice
without payment of penalty or premium shall require the prior written approval
of Owner.
G. Apply for, process and take all necessary steps to procure and keep in
effect in Owner's name (and/or, if required by the applicable licensing
authority, in Owner's and/or Operator's name) all licenses and permits required
for the operation of the Managed Outlet.
H. Purchase all FF&E, Operating Equipment and Operating Supplies necessary
for the operation of the Managed Outlet.
I. Provide routine accounting and purchasing services as required in the
ordinary course of business of the Managed Outlet.
J. Maintain the Restaurant in first class condition and state of repair
comparable with other Daily Grills as of the date hereof and in compliance with
all applicable laws, ordinances, regulations, rulings and orders of governmental
authorities and the requirements of all permits and licenses, including without
limitation liquor licenses.
K. Represent Owner in connection with the making of any capital
improvements to the Restaurant or the renovation, refurbishment, refixturing and
reequipping of the Restaurant, including without limitation the Initial Remodel
(as defined in Exhibit C to this Agreement), and to that end and subject to the
prior written approval of Owner in each instance negotiate and enter into
agreements for architectural, engineering. testing, consulting and construction
services.
L. Provide such other services as are required under the terms of this
Agreement or as are customarily performed by restaurant management companies of
similar restaurants in the area of the Hotel.
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3.2. The parties acknowledge and agree that to in order to position the
Managed Outlet to function in an orderly and appropriate manner from and after
the commencement of the Operating Term, Operator shall during the Start-Up
Period perform the services set forth in Sections 3.1 A through 3.1 L to the
extent necessary or desirable to prepare and organize the Managed Outlet for its
opening (collectively, "Pre-Opening Services"), including without limitation
preparing for Owner's approval an operating budget and a capital budget for the
Managed Outlet during the Start-Up Period (the "Initial Budgets"), including but
not limited to FF&E expenditures and the Initial Remodel, which Initial Budgets
shall be initially prepared and delivered to Owner for Owner's review on or
prior to the Effective Date. The Initial Budgets and plans and specifications
for the Initial Remodel shall be prepared by Operator and delivered to Owner no
later than August 15, 1998.
3.3 Operator will discharge its duties under this Agreement using a
standard of diligence customary for operators of similar properties with the
objective of maximizing Total Revenues (as hereinafter defined) and Net
Operating Income (as hereinafter defined) consistent with the requirements of
the Budgets.
ARTICLE IV
GENERAL OPERATION OF THE MANAGED OUTLET
4.1. Owner hereby engages Operator as the operator of the Managed Outlet
during the Start-Up Period and the Operating Tenn, and Operator hereby accepts
such engagement. Subject to the terms of this Agreement and the applicable
Budgets, Operator shall have control and discretion in the operation, direction,
management and supervision of the Managed Outlet.
4.2. Operator shall operate the Managed Outlet in the same manner as is
customary and usual in Operator's other Daily Grill restaurants as of the date
hereof and otherwise in confonmity with the operation of the Hotel.
4.3 Operator will be available to consult with and advise Owner, at Owner's
reasonable request, concerning all policies and procedures affecting all phases
of the conduct of business at the Managed Outlet. Operator shall in all events
consult with and obtain the approval of Owner before implementing any material
changes in policies and procedures relating to the Managed Outlet.
4.4 Subject to the availability of parking spaces at the Hotel, Owner shall
provide Operator with up to two (2) hour valet parking per Restaurant guest at a
discounted monthly rate equal to the lesser of: (a) $1.50 per hour utilized by
Operator, and (b) $2500 per month. Restaurant guests will pay posted parking
rates for any excess parking time over the two (2) hour discounted period. These
rates shall increase each year by an amount equal to the annual increase (not to
exceed three percent (3%) in any calendar year) in the Consunier Price Index
(CPI) for urban consumers in the Washington. D.C. metropolitan area throughout
the Term of this Agreement. The foregoing parking expenditures made by Operator
shall be included as Operating Expenses.
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ARTICLE V
AGENCY; HOTEL EMPLOYEES
5. 1. In the performance of its duties as operator of the Managed Outlet,
Operator shall act solely as agent of Owner. Nothing in this Agreement shall
constitute or be construed to be or create a partnership or joint venture
between Owner and Operator. Except as otherwise provided in this Agreement, (a)
all debts and liabilities to third persons incurred by Operator in the course of
its operation and management of the Managed Outlet in accordance with the
provisions of this Agreement shall be the debts and liabilities of Owner only
and (b) Operator shall not be liable for any such obligations by reason of its
management, supervision, direction and operation of the Managed Outlet as agent
for Owner. Operator may so inform third parties with whom it deals on behalf of
Owner and may take any other reasonable steps to carry out the intent of this
paragraph.
5.2. Notwithstanding anything contained in Section 5.1 to the contrary, all
Managed Outlet Employees other than salaried employees such as the General
Manager, Assistant Managers, Chef and Sous Chefs (such salaried employees being
hereinafter referred to as "Operator's Employees") shall be employees of Owner
("Owner's Employees"), and all Operator's Employees shall be employees of
Operator. Owner shall pay all wages and benefits of Owner's Employees directly
and Operator shall reimburse Owner for such amounts from the Agency Account
within three (3) days after receipt of an invoice with respect thereto from
Owner. All compensation of both Owner's Employees and Operator's Employees shall
be an Operating Expense (as defined in Section 11.2).
5.3. (a) Operator, with Owner's prior approval, may enroll the Operator's
Employees in pension, medical and health, life insurance and similar employee
benefit plans substantially similar to corresponding plans implemented in other
Daily Grills and first class restaurants in the area of the Hotel. Such plans
may, with Owner's prior approval, be joint plans for the benefit of employees at
more than one facility owned, leased or managed by Operator, Affiliate or their
respective affiliates. Employer contributions to such plans (including any
withdrawal liability incurred upon termination of this Agreement) and reasonable
administrative fees which Operator may expend in connection therewith shall be
the responsibility of Owner and shall be an Operating Expense. The
administrative expenses of any joint plans will be equitably apportioned by
Operator among properties covered by such plan.
(b) Owner may enroll the Owner's Employees in pension, medical and health,
life insurance and similar employee benefit plans substantially similar to
corresponding plans implemented in the Hotel and other hotels owned or managed
by Owner or its affiliates. Such plans may be joint plans for the benefit of
emplovees at more than one facility owned, leased or managed by Owner or its
affiliates. Employer contributions to such plans (including any withdrawal
liability incurred upon termination of this Agreement) and reasonable
administrative fees which Owner may expend in connection therewith shall be an
Operating Expense and reimbursed to Owner by Operator out of the Agency Account
within three (3) days after receipt of an invoice with respect thereto from
Owner. The administrative expenses of any joint plans will be equitably
apportioned by Owner among properties covered by such plan.
5.4. Owner shall provide Operator with a ma\imum of sixty (60) room nights
(including only room, tax and parking charges, and which may be either at the
Hotel, another hotel in the Washington D.C. area managed by affiliates of Owner
and reasonably convenient to the Hotel, or another hotel in the Washington. D.C.
area similar to any of the foregoing and reasonably convenient to the Hotel)
during the first 12 months of the Term, for the purpose of housing Operator's
representatives who are responsible for supervising the construction, opening,
and training of employees of the Managed Outlet. After the end of such period,
Hotel shall provide twenty (20) room nights (including only room, tax and
parking charges, and which may be either at the Hotel, another hotel in the
Washington D.C. area managed by affiliates of Owner and reasonably convenient to
the Hotel, or another hotel in the Washington, D.C. area similar to any of the
foregoing and reasonably convenient to the Hotel) during each twelve (12) month
period for the purpose of enabling such representatives to monitor continuing
employee training and supervision.
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5.5. Operator shall not be liable for any failure of the Managed Outlet to
comply prior to the Effective Date with all federal, state, local and foreign
statutes, laws, ordinances, regulations, rules, permits, judgments, orders and
decrees affecting labor union activities, civil rights or employment in the
United States, including, without limitation, the Civil Rights Act of 1870, 42
U.S.C. Sec. 1981, the Civil Rights Acts of 1871, 42 U.S.C. Sec. 1983 the Fair
Labor Standards Act, 29 U.S.C. Sec. 201, et. seq., the Civil Rights Act of 1964,
42 U.S.C. Sec. 2000e, et. seq., as amended, the Age Discrimination in Employment
Act of 1967, 29 U.S.C. Sec. 621, the Rehabilitation Act, 29 U.S.C. Sec. 701, et.
seq., the Americans With Disabilities Act of 1990, 29 U.S.C. Sec. 706,42 U.S.C.
Sec. 12101, the Employee Retirement Income Security Act of 1974,29 U.S.C. Sec.
301, et. seg. , the Equal Pay Act, 29 U.S.C. Sec. 201, et seq., the National
Labor Relations Act, 29 U.S.C. Sec. 151, et. seq., and any regulations
promulgated pursuant to such statutes (collectively, as amended from time to
time, and together with any similar laws now or hereafter enacted, the
"Employment Laws").
5.6. Operator shall from time to time develop and implement policies,
procedures and programs for the Managed Outlet (collectively, the "Employment
Policies") reasonably designed to effect compliance with the Employment Laws.
The Employment Policies shall be consistent with industry standards from time to
time for reputable hotel management companies.
5.7. At Owner's request, Operator shall periodically make recommendations
to Owner with respect to the desirability of maintaining Employment Practices
Liability Insurance ("Employment Insurance") for the benefit of Owner and
Operator. If Owner shall purchase, or shall approve the purchase of Employment
Insurance, the premium for such insurance (or an allocable amount in the event
that more than one hotel is covered by such policy) shall be an Operating
Expense.
ARTICLE VI
PROVISION OF FUNDS
6.1. In performing its services under this Agreement, Operator shall act
solely as agent and for the account of Owner. Operator shall not be deemed to be
in default of its obligations under this Agreement to the extent it is unable to
perform any obligation due to the lack of available funds from the operation of
the Managed Outlet or as otherwise provided by Owner.
6.2. Operator shall in no event be required to advance any of its funds
(whether by waiver or deferral of its management fees or otherwise) for the
operation of the Managed Outlet.
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ARTICLE VII
DAILY GRILL LICENSE
7.1 In addition to the definitions set forth elsewhere herein, the terms
set forth in this Article VII will have the meanings set forth herein:
A. "License Rights" mean, collectively, the Operating System, the
Existing Marks, and the Marks defined below.
B. "Marks" mean, collectively, the Existing Marks and such other
tradenames, service marks, logo types, trade symbols, emblems, signs,
logos, insignias, trademarks, designs, patents and copyrights as Operator
or Affiliate owns or may hereafter acquire, develop, or adopt or designate
for use in conjunction with the Operating System.
7.2. Upon the terms and conditions set forth herein, Operator grants to
Owner, and Owner accepts from Operator, the right, license, and privilege of
utilizing the License Rights during the Term, solely and only in connection with
operation of the Managed Outlet and the Hotel and (with reference to any use of
the License Rights not in the ordinary course of business of the Hotel) only in
such manner as Operator approves in writing. Owner will not make or authorize
any direct or indirect use of any of the License Rights other than directly in
connection with operation of the Managed Outlet and the Hotel, and (with
reference to any use of the License Rights not in the ordinary course of
business of the Hotel) only in such manner as Operator approves in writing. The
Operator hereby approves the use by Owner in the Hotel of signs, pictures and
posters advertising the presence of the Managed Outlet in the Hotel, and the
inclusion in Hotel advertising and promotional materials of reference to the
Managed Outlet, provided such advertising and promotional material is in keeping
with the quality of a Daily Grill and has been approved in advance by Operator,
which approval shall not be unreasonably withheld or delayed. The license
granted hereby shall be effective only during the Tenn of this Agreement and
shall automatieally end on the expiration or earlier termination of this
Agreement.
7.3. Owner acknowledges and agrees that the License Rights shall at all
times during the Term be the sole and exclusive property of Operator. Operator
expressly retains and reserves all rights in and to each of the License Rights,
subject only to the rights specifically granted to Owner in this Agreement.
Owner further acknowledges and agrees that it has been granted the use of the
License Rights solely for the duration of the Term and only in conjunction with
the Managed Outlet and the Hotel, and that this Agreement is not intended as
Operator's transfer or sale to Hotel of any of the License Rights. Nothing
contained in this Agreement shall be construed to prevent Operator from granting
any other licenses for the use of any or all of the License Rights at any other
location, except Operator shall not license or operate any new Daily Grill
restaurant within two (2) miles of the Hotel, or from utilizing any of the
License Rights in any manner whatsoever, provided, however, that Operator shall
not use the License Rights in such a way as could materially and adversely
affect Owner or the Hotel. Owner acknowledges that it will not acquire any
rights whatsoever in any of Operator's goodwill and/or proprietary marks,
including any of the License Rights. as a result of the Hotel's use thereof,
except as specifically set forth herein. Owner agrees that it shall not, during
the Term or thereafter, take any actions that encumber the Operator's ownership
of its proprietary marks, including the License Rights or the validity thereof.
7.4 Owner agrees at all times during the Term to use the License Rights
only in conjunction with the Hotel and in the manner provided herein.
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ARTICLE VIII
WORKING CAPITAL AND BANK ACCOUNTS
8.1. Owner will provide Operator with a sufficient amount of initial
working capital for the Managed Outlet, as determined in the reasonable
discretion of Owner (the "Initial Working Capital"). Thereafter, funds
sufficient in amount to constitute normal working capital for the uninterrupted
and efficient operation of the Managed Outlet shall be maintained from Total
Revenues or otherwise provided by Owner in an amount at least equal to the
working capital specified in the most recent Cash Flow Forecast (as defined in
Section 9.4).
8.2. All funds received by Operator in the operation of the Managed Outlet,
including working capital furnished by Owner, shall be deposited in a special
account or accounts bearing the name of the Managed Outlet (the "Agency
Account") in such federally insured bank, savings and loan or trust company as
may be selected by Operator and reasonably approved by Owner. Any successor or
substitute bank, savings and loan or trust company shall be selected in the same
manner. From the Agency Account, Operator shall pay all Operating Expenses,
Fixed Charges, the Hotel Priority Return (as hereinafter defined) and other
amounts required to be paid by Operator on Owner's behalf under this Agreement.
In addition to the Agency Account, an account shall be established at the same
institution for a reserve for replacements, substitutions and additions to the
FF&E (the "FF&E Reserve Account").
8.3. The Agency Account and the FF&E Reserve Account shall be in the name
of Operator as agent for Owner and shall be under the control of Operator.
Checks or other documents of withdrawal shall be signed only by representatives
of Operator, provided that such representatives shall be bonded or otherwise
insured in a manner reasonably satisfactory to Owner. The premiums for bonding
or other insurance shall be an Operating Expense except for premiums for bonding
off-site executive employees of Operator. Upon the expiration or termination of
this Agreement all remaining amounts in the Agency Account and the FF&E Reserve
Account shall be transferred to Owner.
ARTICLE IX
BOOKS, RECORDS AND STATEMENTS; BUDGETS
9.1. Operator shall keep full and accurate books of account and other
records reflecting the results of the operation of the Managed Outlet in
accordance with GAAP, or in such other format proposed by Operator as Owner
shall approve in its sole discretion. Except for the books and records which may
be kept in Operator's home office or other suitable location pursuant to the
adoption of a central billing system or other centralized service, the books of
account and all other records relating to or reflecting the operation of the
Managed Outlet shall be kept at the Managed Outlet and shall be available to
Owner and its representatives at all reasonable times for examination. audit,
inspection and transcription. All of such books and records shall be the
property of Owner. Upon any termination of this Agreement, all of such books and
records shall thereafter be available to Operator at all reasonable times for
inspection, audit, examination and transcription for a period of three (3)
years.
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9.2. Operator shall deliver to Owner within twenty (20) days after the end
of each month the following iterns (collectively, the "Monthly Reports"):
A. An executive summary noting highlights of operations for such
month;
B. A source and use of funds statement (which statement shall be
required within twenty (20) days after the end of each calendar quarter
only);
C. An income and expense statement for such month;
D. A twelve-month summary and forecast of operations for the current
fiscal year utilizing (i) actual year-to-date figures, (ii) forecasts for
the next 30, 60 and 90 day periods and (iii) budgeted amounts for the
balance of the fiscal year;
E. A twelve-month summary and forecast of cash flow for the current
fiscal year utilizing (i) actual year-to-date figures, (ii) forecasts for
the next 30, 60 and 90 day periods and (iii) budgeted amounts for the
balance of the fiscal year;
F. A summary of year-to-date capital expenditures and budgeted amounts
for the balance of the year; and
G. Such other monthly reports as Owner may reasonably request and as
are customarily provided by managers of similar restaurant facilities in
the area of the Hotel.
The Monthly Reports shall be prepared in accordance with the GAAP and shall
otherwise be prepared in accordance with Operator's standard financial reporting
and budgeting practices. Owner agrees that the Monthly Reports may be prepared
on a consistent basis for periods other than one month (an "Operator's Reporting
Period"), but only on the condition that the end of each calendar quarter
coincides with the end of an Operator's Reporting Period.
9.3. Year-end financial statements for the Managed Outlet (including a
balance sheet, income statement and statement of sources and uses of funds)
shall be prepared and certified by an independent certified public accountant
selected by Operator and approved by Owner. Operator shall cooperate in all
respects with such accountant in the preparation of such statements.
9.4. On or before each December 1 during the Operating Term, Operator shall
submit to Owner for the next fiscal year the following items (collectively, the
"Budgets"):
A. An operating budget (the "Operating Budget") setting forth in
reasonable line-item detail the projected income from and expenses of all
aspects of the operations of the Managed Outlet;
B. A capital budget (the "Capital Budget") setting forth in reasonable
line-item detail proposed capital projects and expenditures for the Managed
Outlet including but not limited to FF&E expenditures;
C. A cash flow forecast (the "Cash Flow Forecast") on a monthly
basis; and
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D. Such other reports or projections as Owner may reasonably request
and as are customarily provided by managers of similar restaurant
facilities in the area of the Hotel.
The Budgets shall be prepared in accordance with the Operator's standard
financial reporting and budgeting practices consistent with other Daily Grill
operations; provided, however, that Operator shall from time to time upon
Owner's request make such reasonable modifications thereto as may be necessary
to allow Owner (i) to satisfy mortgagee requirements, if any, (ii) to satisfy
reporting requirements imposed on Owner by applicable law or (iii) to prepare
Owner's own financial statements in accordance with the "Uniform System of
Accounts" (Eighth Revised Edition 1986, as further revised from time to time) as
adopted by the American Hotel and Motel Association of the United States and
Canada ("Uniform System").
9.5. Upon approval of the Budgets by Owner, Operator shall cause the
Managed Outlet to be operated substantially in accordance with the Budgets.
Operator shall not, without Owner's prior approval:
A. Incur any expense for any line-item in the Operating Budget which
causes the aggregate expenditures for such line-item to exceed the budgeted
amount by the greater of (i) 10% or (ii) $5,000 or more for the applicable
fiscal period set forth in the Operating Budget, provided that Operator
may, without Owner's approval, (i) pay any expenses (the "Necessary
Expenses") regardless of amount, which are necessary for the continued
operation of the Managed Outlet and which are not within the reasonable
control of Operator (including, but not limited to, those for taxes,
utility charges and debt service) and (ii) pay any expenses (the "Emergency
Expenses") regardless of amount which, in Operator's good faith judgment,
are immediately necessary to protect the physical integrity or lawful
operation of the Managed Outlet or the health or safety of its occupants;
or
B. Incur any expense for any line-item in the Capital Budget which
causes the aggregate expenditures for such line-item to exceed the budgeted
amount by the greater of (i) 10% or (ii) $5,000 more provided that Operator
may, without Owner's approval, pay any Emergency Expenses which are capital
in nature.
Nothing in this Section 9.5 shall be deemed in any way to limit the provisions
of Article VI above.
9.6. If the Budgets (or any component of the Budgets), have not been
approved by Owner prior to any applicable fiscal year, then, until approval of
the Budgets (or such components) by Owner, Operator shall cause the Managed
Outlet to be operated substantially in accordance with the such prior year's
Budgets except for, or as modified by, (a) those components of such Budgets for
the applicable fiscal year approved by Owner, b) the Necessary Expenses which
shall be paid as required and (c) the Emergency Expenses which shall be paid as
required.
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ARTICLE X
MANAGEMENT FEES
AND PAYMENTS TO OPERATOR AND OWNER
10.1. Operator shall pay to Owner, in consideration of the Hotel Capital
Contribution (as defined in Exhibit C) and in consideration of the loss to Owner
caused by the period of time the existing restaurant is to be closed for
business with the public while it is being converted to a "Daily Grill" outlet,
on a monthly basis on or prior to the tenth (10th day of each month from and
after the Effective Date through the end of the Start-up Period, a fee equal to
$10,000 per month (the "Start-Up Fee"), which fee shall in no event be less than
$60,000.
10.2. Owner shall pay to Operator, on a monthly basis from and after the
commencement of the Operating Term, for services rendered under this Agreement
during the Operating Term, but only with respect to periods with respect to
which Owner has received its full Hotel Priority Return, a management fee (the
"Basic Fee") equal to the lesser of (i) an amount equal to Total Revenues with
respect to such period multiplied by eight percent (8%) and (ii) an amount equal
to Net Operating Thcome Before Basic Fee (as hereinafter defined) for the
applicable period. If there is not sufficient cash flow from operations of the
Managed Outlet for Operator to be paid the Basic Fee at the end of any month,
the amount of the deficiency shall accrue without interest and, subject to the
provisions of Section 3 of Exhibit B of this Agreement, be repaid in the first
period or periods when there is available cash flow after payment of the then
current Operating Expenses and Fixed Charges. As part of the adjustment to be
made pursuant to Section 10.6 below, if Net Operating Income Before Basic Fee
with respect to any calendar year during the Term is greater than or equal to
eight percent (8%) of Total Revenues with respect to such calendar year, then
Owner shall pay to Operator the amount, if any, by which eight percent (8%) of
Total Revenues with respect to such calendar year exceeds the aggregate Basic
Fee otherwise paid or payable to Operator with respect to such calendar year,
which amount, if any, shall from and after its payment be part of Operator's
Basic Fee and further provided that Owner may offset against any such amount any
Second Tier Payback (as hereinafter defined) then due and owing from Operator.
10.3. In addition to the Basic Fee, Owner shall pay to Operator on an
annual basis an incentive management fee (the "Incentive Fee") determined in
accordance with Exhibit B to this Agreement.
10.4. In each month during the Operating Term, Operator shall be paid out
of the Agency Account the Basic Fee for the preceding month, as determined from
the monthly income and expense statement, such payment to be made upon delivery
of the income and expense statement for such month showing the computation of
Total Revenues and the Basic Fee for such month.
10.5. On or before the twentieth (2Oth) day following the last day of each
calendar quarter (or such other fiscal period as Owner and Operator may
determine) of each fiscal year during the Operating Term, after (a) payment of
Operating Expenses and other amounts required to be paid under this Agreement,
(b) deposits to the FF&E Reserve Account in accordance with the Budget and (c)
retention of working capital sufficient to assure the uninterrupted and
efficient operation of the Managed Outlet, in accordance with the most recently
approved Cash Flow Forecast, all funds in the Agency Account shall be paid to
Owner.
10.6. At the end of each fiscal year and following receipt by Owner of the
annual audit set forth in Section 9.3, an adjustment will be made, if necessary,
based on the audit so that Operator shall have received the accurate Basic Fee
and Incentive Fee for such fiscal year. Within thirty (30) days of receipt by
Owner and Operator of such audit, Operator shall either (a) place in the Agency
Account or remit to Owner, as appropriate, any excess amounts Operator may have
received for such fees during such calendar year or (b) be paid out of the
Agency Account or by Owner, as appropriate, any deficiency in the amounts due
Operator for the Basic Fee and the Incentive Fee.
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10.7 With respect to any month in which there is outstanding any Additional
Hotel Capital Contribution (as defined in Exhibit C) which has not been fully
repaid to Owner, Operator shall pay to Owner (i) out of any aggregate Basic Fee
and/or Incentive Fee otherwise due to Operator hereunder but only for so long as
any Second Tier Additional Hotel Capital Contribution (as defined in Exhibit C)
shall remain outstanding, in whole or partial repayment, as the case may be, of
the Second Tier Additional Hotel Capital Contribution, an amount (the "Second
Tier Payback"), if any, equal to the lesser of (x) the total Second Tier
Additional Hotel Capital Contribution then outstanding and (y) the aggregate
Basic Fee and Incentive Fee due to Operator with respect to such month and (ii)
after the Second Tier Additional Hotel Capital Contribution has been repaid in
full, in whole or partial repayment, as the case may be, of the First Tier
Additional Hotel Capital Contribution (as defined in Exhibit C), and prior to
the payment of the Basic Fee or any Incentive Fee due Operator but after Owner
has received the Hotel Priority Return, an amount (the "First Tier Payback"; the
First Tier Payback and the Second Tier Payback being hereinafter sometimes
individually or collectively referred to as a "Capital Payback"), if any, equal
to (i) the lesser of (x) the total First Tier Additional Hotel Capital
Contribution then outstanding and (y) Net Operating Income Before Basic Fee with
respect to such month, which First Tier Payback shall be paid out of the Agency
Account. Any Capital Payback shall be paid to Owner by Operator within ten (10)
days after the delivery to Operator by Owner of a reasonably detailed statement
setting forth the Capital Payback payable with respect to such month. At the end
of each fiscal year and following receipt by Owner of the annual audit set forth
in Section 9.3, an adjustment will be made, if necessary, based on the audit so
that Owner shall have received the accurate Capital Payback for such fiscal
year. Within thirty (30) days of receipt by Owner and Operator of such audit,
Operator shall either (a) place in the Agency Account or remit to Owner, as
appropriate, any excess amounts Operator may have received on account of its
Fees during such calendar year or (b) be paid out of the Agency Account or by
Owner, as appropriate, any deficiency in the amounts due Operator for the Basic
Fee and the Incentive Fee.
ARTICLE XI
CERTAIN DEFINITIONS
11.1. A. The term "Total Revenues" shall mean all income, revenue and
proceeds resulting from the operation of the Managed Outlet and all of its
facilities (net of rebates, refunds and overcharges of revenues not known at
the time of sale but adjusted at a later date) which are properly attributable
under the Uniform System to the period in question. Subject to Section 11. lB,
Total Revenues shall include, without limitation, all amounts derived from.
(i) The rentals of banquet or other facilities of the Managed Outlet;
(ii) The sale of food and beverage whether sold in a bar, lounge or
restaurant, delivered to a guest room, sold through an in-room facility or
vending machines, provided in meeting or banquet rooms or sold through
catering operations;
(iii) Charges for other Managed Outlet services or amenities; and
12
<PAGE>
(iv) The gross income upon which the proceeds of business interruption
or similar insurance are calculated.
B. Total Revenues shall not include:
(i) Sales or use taxes or similar governmental impositions collected by
Owner or Operator;
(ii) Tips, service charges and other gratuities received by Managed Outlet
Employees;
(iii) Proceeds of insurance except as set forth in Section 11.0 lA;
(iv) Proceeds of the sale or condemnation of the Hotel, any interest
therein or any other asset, or the proceeds of any loans or financings;
(v) Capital contributed to Owner or the Managed Outlet;
(vi) The repayment of any loans or interest thereon made by Owner other
than in the ordinary course of Hotel operations;
(vii) amounts attributed to complimentary meals served or provided to
employees of the Managed Outlet; and
(viii) the amount of any Capital Payback.
11.2. A. The term "Operating Expenses" shall mean all costs and expenses of
maintaining, conducting and supervising the operation of the Managed Outlet and
all of its facilities which are properly attributable under the Uniform System
to the period in question. Operating Expenses shall include, without limitation:
(i) The cost of all Operating Equipment and Operating Supplies;
(ii) Salaries and wages of Managed Outlet Employees, including costs of
payroll taxes and employee benefits. The salaries or wages of off-site employees
or executives of Operator shall not be Operating Expenses, provided that if it
becomes necessary for an off-site employee or executive of Operator to
temporarily perform services at the Managed Outlet of a nature normally
performed by Managed Outlet Employees, his salary (including payroll taxes and
employee benefits) for such period only as well as his traveling expenses shall
be Operating Expenses;
(iii) The cost of all other goods and services obtained in connection with
the operation of the Managed Outlet including, without limitation heat and
utilities, laundry, landscaping and exterminating services and office supplies:
(iv) The cost of all repairs to and maintenance of the Managed Outlet;
13
<PAGE>
(v) Insurance premiums (or the allocable portion thereof in the case of
blanket policies) for all insurance maintained under Article XIII (other than
insurance against physical damage to the Hotel) and losses incurred on any
self-insured risks (including deductibles);
(vi) All taxes, assessments, permit fees, inspection fees, and water and
sewer charges and other charges (other than income or franchise taxes) payable
by or assessed against Owner with respect to the operation of the Managed
Outlet, excluding Property Taxes (as defined in Section 11.4);
(vii) Legal fees and fees of any independent certified public accountant
for services directly related to the operation of the Managed Outlet and its
facilities;
(viii) All actual expenses for advertising the Managed Outlet and all
expenses of sales promotion and public relations activities;
(ix) All out-of-pocket expenses and disbursements reasonably incurred by
Operator, pursuant to, in the course of; and directly related to, the management
and operation of the Managed Outlet under this Agreement. Without limiting the
generality of the foregoing, such charges may include all reasonable travel,
telephone, telegram, facsimile, air express and other incidental expenses, but,
except as otherwise provided in this Agreement, shall not include any of the
regular expenses of the central offices maintained by Operator, other than
offices maintained at the Managed Outlet for the management of the Managed
Outlet. Operator shall maintain and make available to Owner invoices or other
evidence supporting such charges;
(x) The Basic Fee;
(xi) Payments under any applicable franchise agreement;
(xii) Any other item specified as an Operating Expense in this Agreement;
and
(xiii) Any other cost or charge classified as an Operating Expense or an
Administrative and General Expense under the Uniform System unless specifically
excluded under the provisions of this Agreement.
B. Operating Expenses shall not include:
(i) Amortization and depreciation;
(ii) the making of or the repayment of any loans or any interest thereon;
(iii) The costs of any alterations. additions or improvements which for
Federal income tax purposes must be capitalized and amortized over the life of
such alteration addition or improvement:
(iv) Payments into the FF&E Reserve Account;
(v) Any item defined as a Fixed Charge in Section 11.4; or
(vi) the amount of any Second Tier Payback.
14
<PAGE>
11.3 "Hotel Priority Return" shall mean an imputed annual return to Owner
prorated on a monthly basis equal to the (A) the Initial Hotel Capital
Contribution (as defined in Exhibit C) plus the then current outstanding balance
of the Additional Hotel Capital Contribution multiplied by (B) eight percent
(8%). The Hotel Priority Return shall be paid to Owner on a monthly basis out of
Net Operating Income Before Priority Return.
11.4 "Fixed Charges" shall mean the cost of the following items relating to
the Hotel or the Managed Outlet which are properly attributable under the
Uniform System to the period in question:
(i) 5.5% of the real estate taxes on the Building, an amount Owner
represents to Operator would currently equal $8,000, assessments, personal
property taxes and any other ad valorem taxes imposed on or levied in
connection with the Managed Outlet (collectively, "Property Taxes");
(ii) Insurance against physical damage to the Hotel; and
(iii) Rental payments or payments for purchase options under leases of
equipment which are capital leases under the Uniform System;
(iv) the Hotel Priority Return; and
(v) any First Tier Payback.
11.5. "Net Operating Income" for any period shall mean the amount, if any,
by which Total Revenues for such period exceed the sum of (a) Operating Expenses
and (b) Fixed Charges for such period.
11.6. "Net Operating Income Before Basic Fee" for any period shall mean the
amount, if any, by which Total Revenues for such period exceed the sum of (a)
Operating Expenses for such period (excluding the Basic Fee payable with respect
to such period) and (b) Fixed Charges for such period.
11.7. "Net Operating Income Before Priority Return" for any period shall
mean the amount, if any, by which Total Revenues for such period exceed the sum
of (a) Operating Expenses for such period (excluding the Basic Fee payable with
respect to such period) and (b) Fixed Charges for such period (excluding any
amounts referenced in clauses 11.4 (iv) and (v) above).
11.8. "Fiscal year" shall mean each calendar year or partial calendar year
within the Operating Term unless Owner and Operator otherwise agree.
ARTICLE XII
FF&E RESERVE
12.1. During each fiscal year there shall be allocated and paid on a
monthly basis to the FF&E Reserve Account from Total Revenues or other funds
provided by Owner such amount as is reflected in the applicable Budget for such
fiscal year.
15
<PAGE>
12.2. All funds in the FF&E Reserve Account, together with any interest
earned thereon and the proceeds of any sale of FF&E (which proceeds shall be
deposited in the FF&E Reserve Account) shall be used solely for purposes of
replacing or refurbishing the FF&E in accordance with the applicable Capital
Budget.
ARTICLE XIII
INSURANCE
13.1. Operator shall arrange for and maintain the following insurance in
connection with the Managed Outlet, the cost of which shall be an Operating
Expense:
A. Insurance covering the Restaurant, the Installations and the FF&E
on an all-risk, broad form basis, against such risks as are customarily
covered by such insurance (including, without limitation, boiler and
machinery insurance, but excluding damage resulting from earthquake, war,
and nuclear energy), in aggregate amounts which shall be not less than the
full replacement cost of the Restaurant, the Installations and the FF&E;
B. Commercial general liability insurance (including broad form
endorsement and coverage against liability arising out of the ownership or
operation of motor vehicles) with a combined single limit of not less than
$25,000,000 for each occurrence for liability for (i) bodily injury, (ii)
death, (iii) property damage, (iv) assault and battery, (v) false arrest,
detention or imprisonment or malicious prosecution, (vi) libel, slander,
defamation or violation of the right of privacy, (vii) wrongful entry or
eviction, or (viii) liquor law or dram shop liability;
C. Worker's compensation insurance or insurance required by similar
employee benefit acts having a minimum per occurrence limit as Owner may
deem advisable against all claims which may be brought for personal injury
or death of Managed Outlet Employees, but in any event not less than
amounts prescribed by applicable state law;
D. Fidelity bonds, in such amounts and with such deductibles as Owner
may require, covering Operator's employees at the Managed Outlet (other
than executive employees of Operator) or in job classifications normally
bonded in other restaurants it manages in the United States or otherwise
required by law;
E. Business interruption insurance covering loss of income for a
minimum period of six (6) months resulting ftom interruption of business
caused by the occurrence of any of the risks insured against under
"all-risk" policy referred to in Section 15.1A;
F. If elected by Owner pursuant to Section 5.5 of this Agreement,
Employment Insurance with reasonable limits and deductibles to be
determined by Owner;
G. If the Hotel is located within an area designated "flood prone"
pursuant to the National Flood Insurance Act of 1968 and the Flood Disaster
Protection Act of 1973, as the same mav be amended from time to time flood
insurance in such amount as Owner may reasonably require; and
16
<PAGE>
H. Such other or additional insurance as may be (i) required under the
provisions of any applicable mortgage, deed of trust, ground lease or
franchise agreement (collectively, "Major Agreements") or (ii) customarily
carried by prudent operators of first-class restaurants in the geographic
area of the Managed Outlet.
13.2. All insurance policies shall name Owner as the insured party and
shall name as additional insureds Operator and such other parties as may be
required by the terms of the Major Agreements as appropriate.
13.3. All insurance policies shall be in such form and with such companies
as shall be reasonably satisfactory to Owner and shall comply with the
requirements of any Major Agreement. Insurance may (at Owner's election or with
Owner's prior approval) be provided under blanket or master policies covering
one or more other restaurants operated by Operator or owned by Owner. The
portion of the premium for any blanket or master po1icy which is allocated to
the Managed Outlet as an Operating Expense or Fixed Charge shall be determined
in an equitable manner by Operator and reasonably approved by Owner.
13.4. All insurance policies shall specify that they cannot be canceled or
modified on less than twenty (20) days prior written notice to both Owner and
Operator and any additional insureds (or such longer period as may be required
under a Major Agreement) and shall provide that claims shall be paid
notwithstanding any act or negligence of Owner or Operator or their respective
agents or employees.
13.5. All insurance policies shall provide that the insurance company will
have no right of subrogation against Owner, Operator any party to a Major
Agreement or any of their respective agents, employees, partners, members,
officers, directors or beneficial owners.
13.6. Owner and Operator hereby release one another from any and all
liability associated with any damage, loss or liability with respect to which
property insurance coverage is provided pursuant to this Article or otherwise.
13.7. The proceeds of any insurance claim (other than proceeds payable to
third parties under the terms of the applicable policy) shall be paid into the
Agency Account unless otherwise required by the terms of a Major Agreement.
ARTICLE XIV
PROPERTY TAXES
14.1. Owner shall pay all Property Taxes with respect to the Hotel,
including the Managed Outlet, a percentage of which as agreed in each Budget
shall be allocated to the Managed Outlet and shall be a Fixed Charge as set
forth in Section 11.4(ii).
14.2. Owner may contest the validity or amount of any Property Tax (a "Tax
Contest"), and Operator agrees to cooperate with Owner in a Tax Contest and
execute any documents or pleadings required for such purpose, provided that the
facts set forth in such documents or pleadings are accurate and that such
cooperation or execution does not impose any liability on Operator. All costs
and expenses incurred by Owner and Operator in connection with a Tax Contest
shall be Operating Expenses.
17
<PAGE>
ARTICLE XV
DAMAGE OR DESTRUCTION; CONDEMNATION
15.1. If the Managed Outlet is damaged by fire or other casualty, Operator
shall promptly notify Owner. This Agreement shall remain in full force and
effect subsequent to such casualty provided that either party may terminate this
Agreement upon thirty days prior notice to the other party if (a) Owner shall
elect to close the Managed Outlet as a result of such casualty (except on a
temporary basis for repairs or restoration) or (b) Owner shall determine in good
faith not to proceed with the restoration of the Managed Outlet and provided
further that Operator may terminate this Agreement upon thirty days prior notice
to Owner if the Managed Outlet cannot be opened for business with the public for
a period of six months or more as a result of such casualty.
15.2. If all or any portion of the Managed Outlet becomes the subject of a
condemnation proceeding or if Operator learns that any such proceeding may be
commenced, Operator shall promptly notify Owner. Either party may terminate this
Agreement on thirty (30) days notice to the other party if (a) all or
substantially all of the Managed Outlet is taken through condemnation or (b)
less than all or substantially all of the Managed Outlet is taken, but, in the
reasonable judgment of the party giving the termination notice, the Managed
Outlet cannot, after giving effect to any restoration as might be reasonably
accomplished through available funds from the condemnation award, be profitably
operated as a first-class restaurant.
15.3. Any condemnation award or similar compensation shall be the property
of Owner, provided that Operator shall have the right to bring a separate
proceeding against the condemning authority for any damages and expenses
specifically incurred by Operator as a result of such condemnation.
ARTICLE XVI
EVENTS OF DEFAULT
16.1. The following shall constitute events of default:
A. If either party shall be in default in the payment of any amount
required to be paid under the terms of this Agreement, and such default
continues for a period often (10) after written notice from the other
party;
B. If either party shall be in material default in the performance of
its other obligations under this Agreement, and such default continues for
a period of thirty (30) days after written notice from the other party,
provided that if such default cannot by its nature reasonably be cured
within such thirty day period. an event of default shall not occur if and
so long as the defatilting party promptly commences and diligently pursues
the curing of such default;
C. If either party shall (i) make an assignment for the benefit of
creditors, (ii) institute any proeding seeking relief under any federal or
state bankruptcy or insolvency laws, (iii) institute any proceeding seek
ing the appointment of a receiver, trustee, custodian or similar official
for its business or assets or (iv) consent to the institution against it of
any such proceeding by any other person or entity (an "Involuntary
Proceeding"); or
18
<PAGE>
D. If an Involuntary Proceeding shall be commenced against either
party and shall remain undismissed for a period of sixty (60) days.
16.2. If any event of default shall occur, the non-defaulting party may
terminate this Agreement on five (5) days prior notice to the defaulting party.
16.3. The right of termination set forth in Section 16.2 shall not be in
substitution for, but shall be in addition to, any and all rights and remedies
for breach of contract available in law or at equity.
16.4. Neither party shall be deemed to be in default of its obligations
under this Agreement if and to the extent that such party is unable to perform
such obligation as a result of fire or other casualty, act of God, strike or
other labor unrest, unavailability of materials, war, riot or other civil
cornmotion or any other cause beyond the control of such party (which shall not
include the inability of such party to meet its financial obligations).
ARTICLE XVII
TERMINATION
17.1. Operator shall have the right to terminate this Agreement as of (i)
January 1, 2004, (ii) provided that Operator did not previously terminate this
Agreement, January 1, 2009 and (iii) provided that Operator did not previously
terminate this Agreement, January 1, 2014, subject to providing Owner with
irrevocable written notice thereof delivered not more than one hundred eighty
(180) days' and not less than ninety (90) days' prior to the applicable
termination date, time being of the essence.
17.2. Operator shall have the right, but not the obligation, to terminate
this Agreement upon sixty (60) days' prior written notice to Owner, such notice
to be delivered within ten (10) after the delivery of the annual report for such
Reference Year (as hereinafter defined) prepared pursuant to Section 9.3 above,
if as of December 31st of any year durrng the Operating Term subsequent to the
first year of the Operating Term (a "Reference Year"), Total Revenues for the
Managed Outlet are less than $2,000,000 for the preceding twelve months.
17.3 Owner shall have the right, but not the obligation, to terminate this
Agreement upon sixty (60) days' prior written notice to Operator (a "Termination
Notice'), such Termination Notice to be delivered within ten (10) days after the
delivery of the annual report for such Reference Year (as hereinafter defined)
prepared pursuant to Section 9.3 above, if Owner did not receive the full
Hotel Priority, Return with respect to such Reference Year; provided, however,
that such Termination Notice shall be of no force or effect if (i) prior to the
expiration of such ten day period Operator delivers to Owner a written notice
stating that Operator will pay to Owner within thirty (30) days an amount (the
"Shortfall Payment",) equal to the full Hotel Prioritv Return for such
Reference Year less any amounts received by Owner on account of such Hotel
Priority Return with respect to such Reference Year and (ii) within thirty (30)
days thereafter Operator actually pays the Shortfall Payment to Owner.
19
<PAGE>
ARTICLE XVIII
ASSIGNMENT
18.1 Operator shall not assign, pledge or encumber this Agreement or its
interest in this Agreement, voluntarily or by operation of law, without the
prior consent of Owner, provided that Operator may, without the consent of
Owner, assign this Agreement to Affiliate if Affiliate agrees in writing to be
bound by all of the obligations of Operator under this Agreement and to assume
all of Operator's obligations under this Agreement from and after the effective
date of such assignment.
18.2. Owner shall not assign this Agreement without the prior consent of
Operator, provided that Owner may assign this Agreement without Operator's
consent to any person or entity (i) acquiring Owner's fee interest in the Hotel
or (ii) to whom Owner leases the Hotel, including without limitation the Managed
Outlet, provided that in either case such assignee agrees in writing to be bound
by this Agreement and to assume all of Owner's obligations under this Agreement
(other than any obligation Owner may specifically agree to retain in connection
with such assignment) from and after the effective date of such assignment.
18.3. Upon any permitted assignment of this Agreement and the assumption of
this Agreement by the assignee, the assignor shall be relieved of any obligation
or liability under this Agreement arising after the effective date of the
assignment.
ARTICLE XIX
NOTICES
19.1. Any notice, statement or demand required to be given under this
Agreement shall be in writing, sent by certified mail, postage prepaid, return
receipt requested, or by facsimile transmission, receipt electronically or
verbally confirmed, or by nationally-recognized overnight courier, receipt
confirmed, addressed if to:
Owner: 1010 Wisconsin Avenue
Washington, D.C. 20007
Attention: Mr. Paul Whetsell
Facsimile No.: (202)965-4445
and Operator: Hotel Restaurant Properties, Inc.
11661 San Vicente Boulevard
Suite 404
Los Angeles, California 90049
Attn: Keith M. Wolff President
or to such other addresses as Operator and Owner shall designate in the manner
provided in this Section 19.1. Any notice or other communication shall be deemed
given (a) on the date three (3) business days after it shall have been mailed if
sent by certified mail, (b) on the business dav it shall have been sent by
facsimile transmission (unless sent on a non-business day or after business
hours in which event it shall be deemed given on the following business day), or
(c) on the date received if it shall have been given to a nationally-recognized
overnight courier service.
20
<PAGE>
ARTICLE XX
ESTOPPELS
20.1. Owner and Operator agree that from time to time upon the request of
the other party or a party to a Major Agreement, it shall execute and deliver
within ten (10) days after the request a certificate confirming that this
Agreement is in full force and effect, stating whether this Agreement has been
modified and supplying such other information as the requesting party may
reasonably require.
ARTICLE XXI
INDEMNIFICATION
21.1. Operator shall indemnify and hold Owner (and Owner's agents,
principals, shareholders, partners, members, officers, directors and employees)
harmless from and against all liabilities, losses, claims, damages, costs and
expenses (including, but not limited to, reasonable attorneys' fees and
expenses) that may be incurred by or asserted against any such party and that
arise from (a) the fraud, wilful misconduct or gross negligence of the
executive, managerial or off-site employees of Operator, (b) the breach by
Operator of any provision of this Agreement or (c) any action taken by Operator
which is beyond the scope of Operator's authority under this Agreement. Owner
shall promptly provide Operator with written notice of any claim or suit brought
against it by a third party which might result in such indemnification and
Operator shall have the option of defending any claim or suit brought against
the Owner with counsel selected by Operator and reasonably approved by Owner.
Owner shall cooperate with the Operator or its counsel in the preparation and
conduct of any defense to any such claim or suit.
21.2. Except as provided in Section 21.1, Owner shall indemnify and hold
Operator (and Operators agents, principals, shareholders, partners, members,
officers, directors and employees) harmless from and against all liabilities,
losses, claims, damages, costs and expenses (including, but not limited to,
reasonable attonleys' fees and expenses) that may be incurred by or asserted
against such party and that arise from or in connection with (a) the performance
of Operator's services under this Agreement, (b) any act or omission (whether or
not wilful, tortious, or negligent) of Owner or any third party or (c) or any
other occurrence related to the Managed Outlet whether arising before, during or
after the Term. Operator shall promptly provide Owner with written notice of any
claim or suit brought against it by a third party which might result in such
indemnification and Owner shall have the option of defending any claim or suit
brought against Operator with counsel selected by Owner and reasonably
satisfactory to Operator. Operator shall cooperate with the Owner or its counsel
in the preparation and conduct of any defense to any such claim or suit.
21.3. Supplementing the provisions of Sections 21.1 and 21.2, if any claim
shall be made against Owner and/or Operator which is based upon a violation or
alleged violation of the Employment Laws (an "Employment Claim"), the Employment
Claim shall fall within Operator's indemnification obligations under Section
21.1 only if it is based upon (a) the wilful misconduct or gross negligence of
Operator's executive or managerial employees (including such wilfril misconduct
or gross negligence as may arise in the hiring, supervision or dismissal of any
Hotel Employee) or (b) Operator's breach of its obligations under Section 5.6.
21
<PAGE>
21.4. The provisions of this Article shall survive the termination of this
Agreement with respect to acts, omissions and occurrences arising during the
Term.
ARTICLE XXII
MISCELLANEOUS
22.1. Owner and Operator shall execute and deliver all other appropriate
supplemental agreements and other instruments, and take any other action
necessary to make this Agreement fully and legally effective, binding, and
enforceable as between them and as against third parties.
22.2. This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof, superseding all prior agreements or
undertaldngs, oral or written. Owner acknowledges that in entering into this
Agreement Owner has not relied on any projection of earnings, statements as to
the possibility of future success or other similar matter which may have been
prepared by Operator.
22.3. The headings of the titles to the several articles of this Agreement
are inserted for convenience only and are not intended to affect the meaning of
any of the provisions hereof.
22.4. A waiver of any of the terms and conditions of this Agreement may be
made only in writing and shall not be deemed a waiver of such terms and
conditions on any future occasion.
22.5. This Agreement shall be binding upon and inure to the benefit of
Owner and Operator and their respective successors and permitted assigns.
22.6. This Agreement shall be construed, both as to its validity and as to
the performance of the parties, in accordance with the laws of the District of
Columbia. All disputes among the parties hereto shall be resolved by binding
arbitration pursuant to the then existing rules of the American Arbitration
Association applicable to such dispute. The prevailing party in any such
arbitration shall be entitled to reimbursement from the losing party of its
reasonable attorneys' fees and expenses incurred in connection therewith.
IN WITNESS WIIERE OF, Operator and Owner have duly executed this Agreement
the day and year first above written.
CAPSTAR GEORGETOWN COMPANY, L.L.C.
By:CapStar Management Company II, L.P., member
By:CapStar General Corp. general partner
By:/s/ Larry Shupnick
-----------------------------------
Name: Larry Shupnick
Title: Senior
HOTEL RESTAURANT PROPERTIES, INC.
By: /s/ Keith M. Wolff
------------------------------
Name: Keith M. Wolff
Title: President
GRILL CONCEPTS, INC.
By: /s/ Robert L. Spivak
------------------------------
Name: Robert L. Spivak
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 448,011
<SECURITIES> 0
<RECEIVABLES> 454,811
<ALLOWANCES> 0
<INVENTORY> 356,744
<CURRENT-ASSETS> 2,480,148
<PP&E> 13,393,863
<DEPRECIATION> 5,042,734
<TOTAL-ASSETS> 11,934,134
<CURRENT-LIABILITIES> 4,159,108
<BONDS> 2,221,646
0
2
<COMMON> 160
<OTHER-SE> 5,284,952
<TOTAL-LIABILITY-AND-EQUITY> 11,934,134
<SALES> 25,094,244
<TOTAL-REVENUES> 25,452,959
<CGS> 6,950,367
<TOTAL-COSTS> 6,950,367
<OTHER-EXPENSES> 18,340,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,015
<INCOME-PRETAX> 24,124
<INCOME-TAX> 3,600
<INCOME-CONTINUING> 101,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,908
<EPS-PRIMARY> .01
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</TABLE>
