SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 28, 1997
[ ] 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.
------------------------------
(Name of small business issuer in its charter)
Delaware 13-3319172
- --------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
---------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Include Area Code: (310) 820-5559
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on
--------------------- Which Registered
-------------------------------
None None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
-------------------------------
(Title of Class)
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 twelve (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 ninety (90)
days. Yes X No
---- ----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $28,900,657.
15,790,128 shares of common stock of the Registrant were outstanding as of
March 20, 1998. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the average bid and
asked price on the NASDAQ Small-Cap Market, was approximately $10,760,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 28, 1997 are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................ 1
ITEM 2. DESCRIPTION OF PROPERTIES.......................... 9
ITEM 3. LEGAL PROCEEDINGS ................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................ 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS......................... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................ 11
ITEM 7. FINANCIAL STATEMENTS................................ 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT................... 17
ITEM 10. EXECUTIVE
COMPENSATION........................................ 17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................ 17
ITEM 13. EXHIBITS AND REPORTS OF FORM
8-K................................................. 17
SIGNATURES
<PAGE>
PART I
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 15 of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
General and Development of Business
Grill Concepts, Inc. (the "Company") was incorporated under the laws of the
State of Delaware in November of 1985. The Company was originally incorporated
under the name "Uno Concepts, Inc." In December of 1992, the Company changed its
name to "Magellan Restaurant Systems, Inc." and, in May of 1993, the Company
"went public" pursuant to a merger with MRS Funding, Inc.
In March of 1995, the Company consummated an exchange (the "Exchange")
pursuant to which the Company issued 8,500,000 shares of Common Stock in
exchange for 100% of the outstanding stock of Grill Concepts, Inc., a California
corporation ("GCI"). Following the Exchange, the Company changed its name to
"Grill Concepts, Inc.," management of GCI assumed effective management and
control of the Company and the Company effectively altered its future operating
plans to emphasize the expansion of the "Daily Grill" restaurant format of GCI.
The Company, prior to the Exchange, is sometimes referred to herein as
"Magellan."
The Company presently operates fourteen restaurants, consisting of nine
Daily Grill restaurants, three Pizzeria Uno Restaurants, The Grill on the Alley,
and a Rhino Chasers brew pub/restaurant. With the exception of Rhino Chasers and
one Daily Grill, both of which are operated at Los Angeles International Airport
("LAX") pursuant to a venture with CA One Services, Inc. ("CA One"), and the
three Pizzeria Uno Restaurants which are operated pursuant to franchise
agreements, each of the Company's restaurants is owned and operated on a
non-franchise basis solely by the Company. The Company plans to open "The Grill"
in San Jose, California, and one additional Daily Grill restaurant during 1998.
Daily Grill Restaurants
Background. The Company, through its subsidiary, GCI, and through The
Airport Grill LLC (the "Airport LLC"), owns and operates eight existing Daily
Grill restaurants in Southern California and one in Washington, D.C.. Daily
Grill restaurants are patterned after "The Grill on the Alley" in Beverly Hills,
a fine dining American-style grill restaurant which was acquired by the Company
during 1996. See "The Grill on the Alley." The Grill on the Alley was founded by
Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for a
number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants.
Restaurant Sites. The Company presently operates nine Daily Grill
restaurants which opened in the following months and years:
1
<PAGE>
Location Opened
------------- ------------
Brentwood, California September 1988
Los Angeles, California April 1990
Newport Beach, California April 1991
Encino, California April 1992
Studio City, California August 1993
Palm Desert, California January 1994
Irvine, California September 1996
Los Angeles International Airport 1 January 1997
Washington, D.C. March 1997
All Daily Grill restaurants are presently open for lunch and dinner seven
days a week with the LAX Daily Grill also open for breakfast.
Each Daily Grill restaurant is located in leased facilities. Site selection
is viewed as critical to the success of the Company and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.
The site selection process focuses on local demographics and household income
levels, as well as specific site characteristics such as visibility,
accessibility, parking availability and traffic volume. Each site must have
sufficient traffic such that management believes the site can support at least
twelve strong meal periods a week (i.e., five lunches and seven dinners).
Preferred Daily Grill sites, which characterize the existing restaurants (other
than the LAX Daily Grill), are high-end, mid-size retail shopping malls in large
residential areas with significant daytime office populations and some
entertainment facilities. Historically, Daily Grill restaurants have been anchor
tenants at high profile malls and, therefore, have received significant tenant
improvement allowances.
Existing Daily Grill restaurants (other than the LAX Daily Grill) range in
size from 3,750 to 6,000 square feet, of which approximately 2,000 square feet
is devoted to kitchen and service areas, and seat between 100 and 250 persons.
Opening costs of existing restaurants, including leasehold improvements,
furniture, fixtures and equipment and pre-opening expenses, have averaged $1.1
million per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items (the LAX Daily Grill also offers a
breakfast menu). The menu was designed to be reminiscent of the selection
available at American-style grill restaurants of the 1930's and 1940's, in
contrast to the "nouvelle cuisine" and diet meal fads of the 1980's. Daily Grill
offers such "signature" items as Cobb salad, Caesar salad, chicken hash,
meatloaf with mashed potatoes, chicken pot pie, chicken burgers, hamburgers,
rice pudding and fresh fruit cobbler. The emphasis at the Daily Grill is on
freshly prepared American food served in generous portions.
Entrees range in price from $8.25 for an "original" beef dip sandwich to
$19.95 for a char-broiled 16 oz. T-bone steak with all the trimmings. The
average lunch check is $13.00 per person and the average dinner check is $17.00
per person, including beverage. Daily Grill restaurants also offer a children's
menu with reduced portions of selected items at reduced prices. All of the
existing Daily Grill restaurants offer a full range of beverages, including
beer, wine and full bar service.
Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the Daily
Grill are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
- --------------------
1 The Daily Grill restaurant at Los Angeles International Airport is
operated by The Airport Grill LLC, a limited liability company in
which the Company owns a 51% interest. See "The Airport Grill LLC -
LAX Daily Grill.
2
<PAGE>
Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.
Atmosphere and Service. Each Daily Grill location is designed to provide
the sense and feel of comfort. In the tradition of an old-time American-style
grill, the setting is an open kitchen adjacent to tables, booths and/or
counters. The open kitchen setting emphasizes the quality and freshness of Daily
Grill food dishes in addition to the cleanliness of operations. The dining area
is well-lit and is characterized by a "high energy level".
The feeling of comfort and tradition is enhanced by the restaurant policy
of not requiring reservations except for groups of six or more. As a result,
patrons are served on a first-come-first-served basis and never have to wait for
a table while a vacant table is being held for patrons with reservations.
The attention to detail and quality of the decor is carried through to the
professional service. All Daily Grill employees are trained to treat each person
who visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with the
traditions of the past, each Daily Grill employee is taught that at the Daily
Grill "the guest is always right." The Daily Grill's policy is to accommodate
all guest requests, ranging from substitutions of menu items to take-out orders.
In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.
The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 70% of the guests at the Daily Grills which
have been open for over a year represent repeat business, and many guests have
become "regulars" in the tradition of the neighborhood restaurant.
The Airport Grill LLC
Operating Agreement. In March of 1995, the Company entered into an
operating agreement (the "Operating Agreement") with CA One Services, Inc., a
major national airport concessionaire and division of Delaware North Companies,
Inc. Pursuant to the Operating Agreement, the Company and CA One Services formed
The Airport Grill LLC (the "Airport LLC") to own and operate restaurants within
Los Angeles International Airport ("LAX"). Under the Operating Agreement, CA One
Services advanced all required capital to open and operate one or more
restaurants, other than certain minimum capital ($10,200) which the Company
contributed, and the Company provides certain managerial oversight and
assistance. Profits of the Airport LLC are shared 51% by the Company and 49% by
CA One Services after the payment of a management fee equal to 4% of gross
revenues to each of the Company and CA One Services and after the repayment of
CA One Services' advances to the Airport LLC, with interest. The Company is
currently negotiating to change its operating structure with CA One Services,
the result of which may potentially amend the existing operating agreement.
Rhino Chasers. In October of 1995, the Airport LLC opened its first
restaurant in LAX, "Rhino Chasers" brew pub restaurant/bar. Rhino Chasers
features hand-crafted beer and a selection of foods developed by the Company
specifically for such restaurant.
Rhino Chasers occupies approximately 1,756 square feet in Terminal One of
LAX and seats up to 60 persons. Rhino Chasers is designed to offer a casual,
friendly and entertaining atmosphere for travelers to enjoy a casual meal and
drinks at moderate prices. Entree selections currently range in price from
approximately $4.95 to $7.95, with an average cost per person per meal,
including beverage, of approximately $9.00. Based on operating results to date,
approximately 50% of Rhino Chasers' revenues have been attributable to alcohol
sales with the remaining sales being attributable to food and non-alcoholic
beverages.
3
<PAGE>
Rhino Chasers employs two full time managers and approximately 24 part-time
and full-time employees. Rhino Chasers is open from 5:30 a.m. to 11:00 p.m.,
seven days per week.
LAX Daily Grill. In January of 1997, the Airport LLC opened a Daily Grill
restaurant in the International Terminal of LAX ("LAX Daily Grill"). The LAX
Daily Grill is an 8,300 square foot full-service restaurant seating
approximately 300 persons.
The Grill on the Alley
In April of 1996, the Company acquired, for 850,000 shares of common stock,
The Grill on the Alley ("The Grill") from a partnership the managing partner of
which was controlled by the Company's principal shareholders and directors
(Robert Spivak, Michael Weinstock and Richard Shapiro). From 1995 until the
acquisition of The Grill, the Company provided management services for The Grill
for a management fee equal to 5% of the revenues of The Grill.
The Grill is an upscale Beverly Hills restaurant which opened in 1984 and
served as the model for the Daily Grill restaurants. The Grill is set in the
traditional style of the old-time grills of New York and San Francisco, with
black-and-white marbled floors, polished wooden booths and deep green
upholstery. In 1995, The Grill was inducted into Nation's Restaurant News' Fine
Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere. See
"Daily Grill Restaurants."
The Pizza Restaurants
Restaurants. Through its wholly-owned subsidiaries, the Company presently
operates three "Pizzeria Uno Restaurant & Bar" locations. The Company's present
Pizza Restaurants are located in the following cities and were opened in the
months and years indicated:
Location Opened
---------- ---------
South Plainfield, New Jersey January, 1987
Media, Pennsylvania February, 1987
Cherry Hill, New Jersey March, 1990
The Company's Pizza Restaurants are operated in accordance with certain
guidelines established, and managerial assistance and training provided, by the
Franchisor. See "- The Franchise Agreements" below.
The Pizza Restaurants offer a diverse menu in accordance with guidelines
established by the Franchisor, featuring gourmet, Chicago-style deep-dish
pizzas, filled with ingredients such as fresh meats, spices, vegetables and
cheese and baked to order based on proprietary recipes of the Franchisor. The
Pizza Restaurants also offer a variety of sandwiches, hamburgers, appetizers,
salads, desserts and beverages, including a full liquor selection. All of the
menu items offered by the Pizza Restaurants are also available for delivery or
carry-out. Delivery service is provided by third parties pursuant to contractual
arrangements.
The Pizza Restaurants are characterized by a casual, friendly and
entertaining atmosphere, full and efficient service, and high-quality menu items
at moderate prices. Entree selections currently range in price from
approximately $4.95 to $8.95, with an average cost per person per meal,
including beverage, of approximately $6.25 for lunch and $9.25 for dinner.
The Pizza Restaurants are located in suburban areas in leased premises. The
Pizza Restaurants range in size from approximately 5,300 square feet to
approximately 7,900 square feet, including a bar and lounge area, and have
seating capacities ranging from 180 to 200 customers. Each of the Pizza
Restaurants employs between three and four full time managers and assistant
managers and between 45 and 85 part-time and full-time employees. The Pizza
Restaurants are generally open from 11:00 a.m. to midnight, seven days per week,
except on Friday and Saturday when the Pizza Restaurants remain open until 1:00
a.m.
4
<PAGE>
The Franchise Agreements. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreements, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurants' designated
locations. The Franchise Agreements each have a term of 20 years with three
successive ten-year renewal periods at the option of the Company, provided that
the agreements have not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts, an advertising fee (1% of gross revenues) and the
expenditure of certain minimum amounts on local advertising and promotion (2% of
gross revenues).
Business Expansion
The Company's expansion plans focus on the addition of Daily Grill
restaurants with selected expansion of "The Grill" restaurant concept also
planned.
Management continually reviews possible expansion into new markets. Such
review will entail careful analysis of potential locations to assure that the
demographic make-up and general setting of new restaurants is consistent with
the patterns which have proven successful at the existing Daily Grills and "The
Grill". While the general appearance and operations of future Daily Grills and
"The Grill" restaurants are expected to conform generally to those of existing
facilities, the Company intends to monitor the results of any modifications to
its existing restaurants and to incorporate any successful modifications into
future restaurants. All future restaurants are expected to feature full bar
service.
In March of 1997, the Company opened its first East Coast Daily Grill in
Washington, D.C. at a cost of $2.0 million. In order to establish market
presence and economies of scale, the Company plans to open its second Daily
Grill restaurant in the greater-Washington, D.C. market, in Tyson's Corner,
Virginia, during 1998 and intends to evaluate the opening of additional
restaurants in such market. To that end, in December of 1997, the Company
entered into a lease of a site in Tysons Corner, Virginia where the Company
plans to open a 6,400 square foot Daily Grill in or about the Summer of 1998.
Other than the lease in Tysons Corner, no definitive sites have been identified
for Daily Grill openings as of March 1, 1998. The Company will continue to
evaluate sites for future restaurants and has targeted Chicago, New York and Las
Vegas as markets for future expansion. Management anticipates that the cost to
open additional Daily Grill restaurants will range from $1.0 to $2.0 million per
restaurant, with each restaurant expected to be approximately 6,000 to 7,000
square feet in size. Actual costs may vary significantly depending upon the
tenant improvements, market conditions, rental rates, labor costs and other
economic factors prevailing in each market in which the Company pursues
expansion. There can be no assurance, however, that the Company will be
successful in opening additional Daily Grill restaurants in the cities or at the
costs indicated, or, even if such restaurants can be opened at such costs, that
such restaurants can be operated on a profitable basis.
5
<PAGE>
In June of 1997, the Company entered into a partnership to construct, own
and operate "The Grill," patterned after The Grill on the Alley, at the San Jose
Fairmont Hotel, a 5-star luxury hotel. Presently scheduled to open during the
second quarter of 1998, "The Grill" at the San Jose Fairmont will mark the
Company's first entry into a hotel venue as well as its first restaurant in
Northern California. Pursuant to the terms of the partnership, the investment
group which owns the San Jose Fairmont Hotel will invest at least $1 million
toward the opening of the restaurant, of which $800,000 will be in the form of
subordinated debt, and the Company will contribute at least $200,000 toward such
costs. The Company will manage the restaurant and will be entitled to a
management fee equal to 5% of restaurant revenues and 50.05% of the profits or
losses generated by the restaurant.
The Company will evaluate the opening of additional "The Grill" restaurants
in selected markets, both inside and outside of hotel venues and may consider
including partners in any such ventures. As of March 1, 1998, the Company had
not identified any additional locations in which it plans to open new "The
Grill" restaurants.
Restaurant Management
The Company strives to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
adherence to standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has experienced a relatively low
turnover at every level at its Daily Grill restaurants. See "- Daily Grill
Restaurants" above.
Daily Grill. Each Daily Grill restaurant is managed by one general manager
and one or two managers or assistant managers. Each restaurant also has one head
chef and one or two sous chefs, depending on volume. On average, general
managers have approximately seven years experience in the restaurant industry
and three years with the Company. The general manager has primary responsibility
for the operation of the restaurant and reports directly to the Company's Vice
President - Western Operations. In addition to ensuring that food is prepared
properly, the head chef is responsible for product quality, food costs and
kitchen labor costs. Each restaurant has approximately 85 employees. Restaurant
operations are standardized, and a comprehensive management manual exists to
ensure operational quality and consistency.
The Company maintains financial and accounting controls for each Daily
Grill restaurant through the use of a "point-of-sale" computer system integrated
with centralized accounting and management information systems. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue and
cash control.
All managers participate in a comprehensive seven week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports and third
party quality control reviews. Two or three times every month, an independent
service is paid to go to each location and prepare a report on every aspect of
the meal, the service and the ambiance.
Servers at each restaurant participate in approximately three weeks of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.
6
<PAGE>
LAX Restaurants. The LAX Daily Grill is operated under the direction of a
general manager designated and employed by the Company. Management and operation
of the LAX Daily Grill is similar to the other Daily Grill restaurants with a
larger staff to accommodate the larger size of the LAX Daily Grill, including
one general manager, four managers, a chef and two sous chefs.
CA One has primary responsibility for the operations of Rhino Chasers. The
staff of Rhino Chasers consists of two managers and approximately 24 hourly
employees, most of whom are part-time employees.
Pizza Restaurants. The staff of the Company's Pizza Restaurants consists of
between three and four managers and between 40 and 85 hourly employees, most of
whom are part-time employees, per location.
All managers of the Pizza Restaurants participate in an onsite training
program and are provided with the Franchisor's Operating Manual. Additionally,
selected management personnel participate in periodic meetings conducted by the
Franchisor focusing on marketing, new products and other aspects of business
management.
The Company has a director of operations who oversees and supervises the
operations of each of the Company's Pizza Restaurants, providing ongoing
guidance and assistance to managers as necessary. Additionally, field-service
supervisors of the Franchisor periodically visit and inspect the operations of
the Pizza Restaurants to assure compliance with the quality, service and other
standards imposed by the Franchisor.
Purchasing
Daily Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill restaurants. In order to
assure quality and consistency at each of the Daily Grill restaurants,
ingredients approved for the recipes are ordered on a unit basis by each
restaurant's head chef from a supplier designated by the Company's Food and
Beverage Director. Because of the Daily Grill's emphasis on cooking from
scratch, virtually all food items are purchased "fresh" rather than frozen or
pre-cooked, with the exception being bread, which is ordered from a central
supplier which prepares the bread according to a Daily Grill recipe and delivers
twice daily to assure freshness. In order to reduce food preparation time and
labor costs while maintaining consistency, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings and seasoning combinations.
The Company utilizes its point-of-sale computer system to monitor inventory
levels and sales, then orders food ingredients daily based on such levels. The
Company employs contract purchasing in order to lock in food prices and reduce
short term exposure to price increases. The Company's Vice President - Executive
Chef establishes general purchasing policies and is responsible for controlling
the price and quality of all ingredients. The Vice President - Executive Chef,
in conjunction with the Company's team of chefs, constantly monitors the
quality, freshness and cost of all food ingredients. All essential food and
beverage products are available, or upon short notice can be made available,
from alternative qualified suppliers.
Pizza Restaurants. The Company has no contracts governing purchases of food
and beverage supplies but negotiates purchases for its Pizza Restaurants
directly with suppliers, often with the assistance of the Franchisor. Such
purchases cover all primary food ingredients and beverage products to ensure
adequate supplies and to obtain competitive prices.
Advertising and Marketing
Daily Grill. The Company has historically relied primarily on reputation,
local reviews and word of mouth to promote its Daily Grill restaurants. Daily
Grill restaurants have been featured in articles and reviews in numerous local
as well as national publications. The Company supplements its reputation with a
program of marketing and public relations activities designed to keep the Daily
Grill name before the public. Such activities include media advertising,
participating in local charity events and providing a location and refreshments
for meetings of charity organizations. During 1997, expenditures for advertising
and promotion were approximately 2% of gross revenues.
7
<PAGE>
In 1996, the Company expanded and formalized its marketing efforts with the
hiring of an in-house marketing director and the retention of a national
consumer research firm to coordinate the Company's future advertising and
marketing efforts and to facilitate expansion into new markets. The Company's
marketing director is responsible for advertising, public relations and a wide
range of marketing-related activities. The Company also retained Pulse
Marketing, a nationally known consumer research firm, during 1996 to undertake
research designed to facilitate successful expansion into new markets.
Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."
The Company budgets an average of 3% of Pizza Restaurant sales annually for
advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers.
Competition
The Daily Grill restaurants compete within the rapidly growing mid-price,
full-service casual dining segment. The Daily Grill's competitors include
national and regional chains, as well as local owner-operated restaurants. The
primary competitors to the Company's Pizza Restaurants are casual theme
restaurant chains including Friday's and the Olive Garden. Rhino Chasers'
competition is limited to restaurants and bars within the commuter terminal of
LAX and the LAX Daily Grill's competition is limited to restaurants in the
international terminal of LAX.
The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. However,
many of its competitors have been in existence longer than the Company, have a
more established market presence and have substantially greater financial,
marketing and other resources, which may give them certain competitive
advantages. The Company believes that its ability to compete effectively will
continue to depend in large measure on its ability to offer a diverse selection
of high quality, fresh food products with an attractive price/value relationship
served in a friendly atmosphere.
Management believes that its affiliation with, and operation under the name
of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enables the Company to compete effectively with other local and national-chain
restaurants.
Employees
The Company and its subsidiaries employ approximately 800 people, 18 of
whom are corporate personnel and 56 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 400 are full-time employees, with the
remainder being part-time employees.
None of the Company's employees are represented by labor unions or are
subject to collective bargaining or other similar agreements. Management
believes that its employee relations are good at the present time.
Trademarks and Service Marks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "Satisfaction Served Daily,"
"Think Daily," "Daily Grind" and other marks with the United States Patent and
Trademark Office as service marks for restaurant service, and has secured
California state registration of such marks. The Company's policy is to pursue
registration of its marks and to oppose strenuously any infringement.
8
<PAGE>
Pursuant to the Franchise Agreements, the Company's Pizza Restaurants
operate under the "Pizzeria Uno" trademark and service marks. The Franchisor has
undertaken to keep in place and renew, as necessary, its trademark registrations
and to vigorously oppose any infringements of its marks.
Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurants are located. Difficulties or failures in
obtaining or renewing the required licenses or approvals could result in
temporary or permanent closure of the Company's restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leaves of absence and mandated health benefits, or increased
tax reporting requirements for employees who receive gratuities, could be
detrimental to the economic viability of the Company's restaurants. Management
is not aware of any environmental regulations that have had a material effect on
the Company to date.
ITEM 2. DESCRIPTION OF PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant, all of
the Company's restaurants are located in space leased from parties unaffiliated
with the Company. The leases have initial terms ranging from 10 to 25 years,
with varying renewal options on all but one of such leases. Each of the leases
provides for a base rent plus payment of real estate taxes, insurance and other
expenses, plus additional percentage rents based on revenues of the restaurant.
See "Description of Business."
The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by the Company's chairman, Robert
L. Wechsler.
The Company's executive offices are located in 3,300 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party on a month-to-month basis.
The Company also maintains east coast offices in a building located in
Cherry Hill, New Jersey. Such offices are rented on a month-to-month basis for
$400 per month from the same affiliated company from which the Company leases,
and are located in the same complex as, the Cherry Hill restaurant.
Management believes that the Company's existing restaurant and executive
office space is adequate to support current operations. The Company intends to
lease, from time to time, such additional office space and restaurant sites as
management deems necessary to support its future growth plans.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Restuarants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of which the Company expects to be
covered by its general liability insurance. However, punitive damages awards are
not covered by general liability insurance. Punitive damages are routinely
claimed in litigation actions against the Company. No causes of action are
presently pending against the Company. However, there can be no assurance that
punitive damages will not be given with respect to any actions which may arise
in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 28, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The following table sets forth the high and low bid price per share for
the Company's common stock for each quarterly period during the last two fiscal
years:
High Low
------ ------
1996 - First Quarter 1-1/2 1-3/16
Second Quarter 1-21/32 1-3/16
Third Quarter 3-3/8 1-17/32
Fourth Quarter 3-7/16 1-5/16
1997 - First Quarter 1-9/16 1-1/8
Second Quarter 1-21/32 59/64
Third Quarter 1-15/32 1-7/32
Fourth Quarter 1-3/8 1
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 20, 1998, the bid price of the Common Stock was $1-1/8.
As of March 20, 1998, there were approximately 437 holders of record of the
Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 15 of this Form 10-KSB.
General
During the fiscal year ended December 28, 1997, the Company owned and
operated a total of fourteen restaurants, consisting of nine Daily Grill
restaurants, three Pizzeria Uno restaurants, The Grill and Rhino Chasers. During
the first quarter of 1997 the Company opened its Washington, D.C. Daily Grill
and its LAX Daily Grill. Fiscal 1997 operating results include 42 weeks of
operations at the Company's Washington, D.C. Daily Grill. The LAX Daily Grill is
operated pursuant to a joint operating arrangement and operating results are not
included in the consolidated results of operations of the Company. During fiscal
1996, the Company owned and operated a total of twelve restaurants, consisting
of seven Daily Grill restaurants, three Pizza Uno restaurants, The Grill and
Rhino Chasers. The Company acquired The Grill during the second quarter of
fiscal 1996 and opened its Irvine Daily Grill during the third quarter of 1996.
Fiscal 1996 operating results include 39 weeks of operations of The Grill and 15
weeks of operations at the Company's Irvine Daily Grill. See "Description of
Business."
Revenues of the Company are derived from sales of food, beer, wine, liquor
and non-alcoholic beverages. Approximately 79% of combined 1997 sales were food
and 21% were beverage. Revenues from restaurant operations are primarily
influenced by the number of restaurants in operation at any time, the timing of
the opening of such restaurants and the sales volumes of each restaurant.
The Company's expenses are comprised primarily of cost of food and
beverages, payroll and restaurant operating expenses, including rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. Restaurant operating expenses consist primarily of wages
paid to part-time and full-time employees, rent, utilities, insurance and taxes.
In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreements, the Company pays a continuing license fee
with respect to each of its Pizza Restaurants, an advertising fee and is
required to expend certain minimum amounts on local advertising and promotion.
See "Description of Business - The Pizza Restaurants -- The Franchise
Agreements."
The Company's balance sheet and results of operations at and for the year
ended December 28, 1997 reflect the capitalization and amortization of costs of
acquiring liquor licenses. The Company at December 28, 1997 had capitalized and
amortized costs of obtaining its various liquor licenses totaling
approximately $614,000. Such costs consist primarily of amounts paid to purchase
such licenses. The Company is amortizing the capitalized cost of its liquor
licenses over a forty year period. Additionally, the Company capitalizes and
amortizes pre-opening expenses incurred prior to the opening of each of its
restaurants. Such pre-opening expenses are amortized ratably over a twelve month
period commencing when each restaurant opens. The Company had $70,000 of
capitalized and unamortized pre-opening expenses remaining on its balance sheet
at December 28, 1997. In connection with acquisition of The Grill during 1996,
the Company capitalized $246,000 of goodwill which is being amortized over a
thirty year period. As each of the foregoing items involves the payment of
certain amounts in advance and the expensing of such amounts in subsequent
years, the Company's operating results reflect significant amortization expense
which does not affect the Company's operating cash flows. Prior to 1996, the
Company had capitalized and was amortizing goodwill arising in connection with
the Exchange. During the fourth quarter of 1996, the Company wrote-off the
remaining unamortized goodwill, in the approximate amount of $1,952,000, arising
in connection with the Exchange.
11
<PAGE>
In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers and clerical personnel, rent,
legal and accounting costs, travel, insurance and various office expenses.
Results of Operations -- Fiscal Year 1997 Compared to Fiscal Year 1996
The following table sets forth certain items from the Company's Statements
of Operations during 1997 and 1996:
<TABLE>
1997 1996
----------------------- ---------------------
Amount % Amount %
------ ---- ------ ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Sales $ 28,901 100.0 % $ 22,744 100.0 %
Cost of sales 7,920 27.4 6,210 27.3
------- ------- ------- -------
Gross profit 20,981 72.6 16,534 72.7
------- ------- ------- -------
Restaurant operating expense 17,446 60.4 13,970 61.4
General and administrative expense 2,648 9.2 2,172 9.6
Depreciation and amortization 1,285 4.4 867 3.8
Unusual charges - - 2,052 9.0
------- ------- ------- -------
Total operating expenses 21,380 74.0 19,061 83.8
------- ------- ------- -------
Operating income (loss) (399) (1.4) (2,528) (11.1)
Non-recurring acquisition costs (credit) (93) (0.3) 231 1.0
Interest expense, net 166 0.6 86 0.4
------- ------- ------- -------
Loss before income tax (472) (1.7) (2,845) (12.5)
Provision for taxes 5 0.0 8 0.0
------- ------- ------- -------
Net loss $ (477) (1.7) % $(2,853) (12.5) %
======= ======= ======= =======
</TABLE>
Sales. The Company's revenues for 1997 increased 27.1% to $28.9 million
from $22.7 million in 1996. The increase in revenues was primarily attributable
to (1) the opening and operation of the Washington, D.C. Daily Grill for 42
weeks for 1997 ($2.8 million), (2) the operation of The Grill for 52 weeks
during 1997 ($3.3 million) as compared to 39 weeks during 1996 ($2.4 million),
and (3) operation of the Irvine Daily Grill for 52 weeks during 1997 ($2.2
million) as compared to 15 weeks during 1996 ($0.6 million). The six Daily Grill
locations which were open during all of fiscal 1997 and 1996 reported an
aggregate 4% increase in same store sales from 1996 to 1997.
On a pro forma basis, assuming the consummation of the acquisition of The
Grill at December 31, 1995, the combined operations of the Company and The Grill
produced revenues of $23.6 million in 1996.
Cost of Sales and Gross Profit. While revenues increased by 27.1% ($6.2
million) in 1997 as compared to 1996, cost of sales increased by 27.5% ($1.7
million) and increased as a percentage of sales from 27.3% to 27.4%. The slight
increase in cost of sales as a percentage of revenues was attributable to the
acquisition of The Grill which has historically experienced a 31% cost of sales
as compared to approximately 27% cost of sales for Daily Grill. The higher cost
of sales at The Grill is offset by lower labor costs.
Gross profit increased 26.9% from $16.5 million (72.7% of sales) in 1996 to
$21.0 million (72.6% of sales) in 1997.
Operating Expenses and Operating Results. Total operating expenses rose
12.2% to $21.4 million in 1997 (representing 74.0% of sales) from $19.1 million
in 1996 (representing 83.8% of sales). This decrease in operating expense
percentages was primarily attributable to a one-time unusual charge of $2.0
million during 1996 reflecting the write-off of goodwill capitalized in
connection with the Exchange and other costs.
12
<PAGE>
Restaurant operating expenses increased 24.9% to $17.4 million in 1997 from
$14.0 million in 1996. As a percentage of sales, restaurant operating expenses
represented 60.4% and 61.4%, respectively, in 1997 and 1996.
General and administrative expenses increased 21.9% to represent 9.2% of
sales in 1997 as compared to 9.6% of sales in 1996. The percentage decrease in
this category reflects the spreading of certain fixed costs over greater sales
and can be expected to continue decreasing as a percentage as sales increase
with the opening of additional restaurants.
Other Income and Expenses and Net Income. Net interest expense increased by
approximately $80,000 reflecting higher average borrowing during the year.
The Company also reported a one-time charge during 1996 of $231,000 for the
costs associated with the attempted acquisition of certain assets of Hamburger
Hamlet Restaurants, Inc., which acquisition was abandoned during the third
quarter of 1996. During 1997, a non-recurring credit of $93,000 was reported
reflecting an overaccrual of the charge in 1996.
The Company reported a net loss of $477,000 during 1997 as compared to a
net loss of $2.9 million for 1996. In accordance with the recent 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
$211,000 during 1997. The "deemed dividend", which relates to the Company's
issuance of convertible preferred stock during 1997, is a non-cash,
non-recurring accounting entry for determining income (loss) applicable to
common stock. After giving effect to preferred stock dividends ($69,000) and the
"deemed dividend", the net loss attributable to common stock for fiscal 1997 was
$757,000.
Liquidity and Capital Resources
At December 28, 1997, the Company had a working capital deficit of $1.2
million and a cash balance of $0.3 million as compared to a working capital
deficit of $1.2 million and a cash balance of $0.4 million at December 29, 1996.
The variance in the Company's working capital and cash was primarily
attributable to the payment of costs associated with the opening of the
Washington, D.C. Daily Grill during the first quarter of 1997 and The Grill at
the San Jose Fairmont Hotel which is expected to open in the second quarter of
1998, which costs were partially offset by the sale of $1.5 million of common
stock, convertible preferred stock and warrants during 1997.
Historically, the Company has funded its day-to-day operations through its
operating cash flow, while funding growth through a combination of bank
borrowing, loans from stockholders/officers, the sale of debentures and
preferred stock and the issuance of warrants and loans and tenant allowances
from certain of its landlords. At December 28, 1997, the Company had existing
bank borrowing of $1.2 million, an SBA loan of $0.1 million, loans from
stockholders/officers of $0.1 million and loans/advances from landlords and
others of $0.2 million. Included in the Company's bank borrowings at December
28, 1997 was a term loan payable in monthly installments of $26,667 plus
interest payable monthly at a variable rate equal to the lender's reference rate
plus 0.625% (9.125% at December 28, 1997). The Company has an additional
$1,000,000 line of credit which has been extended through May, 1998. At December
28, 1997, the Company had utilized $480,000 of its available line of credit.
In April of 1995, the Company received $178,000 of proceeds from a Small
Business Administration loan in connection with earthquake damage sustained
during the first quarter of 1994. The SBA loan is repayable with interest at 4%
in monthly installments of $1,648.
During 1997, the Company and its subsidiaries were obligated under 15
leases covering the premises in which the Company's Daily Grill, Pizza
Restaurants and airport restaurants are located as well as leases on its
executive offices and an office in Cherry Hill, New Jersey. Such restaurant
leases, other than the airport restaurant lease, and the executive office lease
contain minimum rent provisions which provided for the payment of minimum
aggregate annual rental payments of approximately $1.75 million in 1997, with
varying escalation and percentage rent clauses in each of the restaurant leases.
Additionally, Airport LLC, which operates Rhino Chasers and the LAX Daily Grill
at LAX with CA One, is obligated under a lease for minimum rents of $2.4
million. Minimum rental payments during 1998 on existing leases, other than
leases with respect to the airport restaurants, total $2.0 million.
13
<PAGE>
During 1997, the Company entered into a settlement agreement pursuant to
which the Company paid $125,000 and was released from all obligations under its
prior lease covering the Tailgators site.
The Company presently anticipates opening 2 new restaurants during 1998,
including the The Grill at the San Jose Fairmont Hotel which is scheduled to
open in the second quarter of 1998. The Company has entered into a lease
covering a 6,400 square foot site in Tysons Corner, Virginia in which the
Company expects to open its second Washington, D.C. area Daily Grill restaurant
during the Summer of 1998. No other leases have been entered into with respect
to additional Daily Grill locations. The cost to build new Daily Grill
restaurants is anticipated to be between $1,000,000 and $2,000,000 per site
depending upon the location and available tenant allowances.
In order to finance restaurant openings during 1996 and 1997, the Company
conducted two offerings of convertible preferred stock during 1996 and an
offering of common stock, convertible preferred stock and warrants during 1997.
The offerings provided net proceeds to the Company of approximately $1.97
million during 1996 and $1.5 million during 1997.
In June of 1996, the Company completed an offering of $1.5 million of
Series A 10% Convertible Preferred Stock. As of December 29, 1996, $800,000 in
face amount of Series A Preferred Stock had been converted resulting in the
issuance of 433,288 shares of common stock. The remaining $700,000 in face
amount of Series A Preferred Stock was converted during 1997 resulting in the
issuance of 801,896 shares of common stock.
In connection with the placement of the Series A 10% Convertible Preferred
Shares, the Company issued warrants to acquire an aggregate of 250,000 shares of
the Company's common stock at a price of $3.00 per share for a period expiring
June 17, 2001. The warrants are redeemable at the Company's option commencing
June 17, 1999 at a price of $.01 per warrant provided that the closing bid price
of the Company's common stock has equaled or exceeded $4.50 per share for 20
trading days.
In December of 1996, the Company completed an offering of $650,000 of
Series B 8% Convertible Preferred Stock. The conversion price of the preferred
shares is equal to the lesser of $2.50 per share or the average closing bid
price of the common stock for the five trading days preceding notice of
conversion multiplied by 80% to 85%, depending on the period of conversion. Any
conversions for which the conversion price is less than $1.00 per share shall be
subject to the right of the Company to redeem the preferred shares at $11,000
per share. The preferred shares are entitled to receive an 8% cumulative
dividend payable on conversion or redemption. As of December 28, 1997, $330,000
in face amount of Series B 8% Convertible Preferred Stock had been converted
resulting in the issuance of 388,067 shares of common stock and $320,000 in face
amount of Series B 8% Convertible Preferred Stock remained outstanding.
In connection with the placement of the Series B 8% Convertible Preferred
Shares, the Company issued warrants to acquire an aggregate of 46,222 shares of
the Company's common stock at a price of $3.00 per share for a period expiring
December 13, 1999.
In June of 1997, the Company completed a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred Stock,
500 shares of Series II 10% Convertible Preferred Stock, 750,000 five year $2.00
Warrants and 750,000 five year $3.00 Warrants. The aggregate sales price of
those securities was $1,500,000.
The Series I Convertible Preferred Stock is convertible into common stock
at $1.25 per share.
The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $1.00
per share, or (ii) 75% of the average closing price of the Company's common
stock for the five trading days immediately prior to the date of conversion;
provided, however, that the conversion price shall in no event exceed $2.50 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or redemption in
cash or, at the Company's option, in common stock at the then applicable
conversion price. The Series II 10% Convertible Preferred Stock is subject to
redemption, in whole or in part, at the option of the Company on or after the
second anniversary of issuance at $1,000 per share.
14
<PAGE>
The $2.00 Warrants are exercisable to purchase common stock at a price of
$2.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The $2.00 Warrants are subject to cancellation
in the event the holders of Series I Preferred Stock, or common stock issued
upon conversion of such preferred stock, sell, assign or transfer such preferred
stock or underlying common stock, other than transfers to permitted persons,
within three years of the initial sale of the warrants.
The $3.00 Warrants are exercisable to purchase common stock at a price of
$3.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The $3.00 Warrants are subject to cancellation
in the event the holders of Series I Preferred Stock, or common stock issued
upon conversion of such preferred stock, sell, assign or transfer such preferred
stock or underlying common stock, other than transfers to permitted persons,
within three years of the initial sale of the warrants.
As of December 28, 1997, none of the shares of Series I or Series II
Preferred Stock had been converted.
Management believes that the Company has adequate resources on hand,
operating cash flow and available line of credit to sustain operations for at
least the following 12 months. In order to fund the opening of additional
restaurants, the Company will require, and intends to raise, additional capital
through the issuance of debt or equity securities. Opening of the San Jose Grill
is expected to require additional capital contributions of up to $150,000 by the
Company during 1998. The anticipated cost of building new restaurants is
expected to range from $1,000,000 to $2,000,000 per restaurant. The Company
presently has no commitments in that regard. See "Description of Business --
Business Expansion" and "Management's Discussion and Analysis -- Certain Factors
Affecting Future Operating Results."
In addition to the warrants described above, at December 28, 1997, the
Company had outstanding 190,793 warrants previously issued by Magellan and
exercisable at a price of $2.00 per share and 100,000 warrants issued in
connection with the Exchange and a private placement and exercisable at $3.00
per share. The exercise of all warrants outstanding at December 28, 1997,
including the warrants issued in connection with the placement of the Series A,
Series B, Series I and Series II preferred stock discussed above, would provide
an additional $5,320,252 of capital to the Company. There is no assurance,
however, that any of such warrants will be exercised.
Certain Factors Affecting Future Operating Results
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: adverse weather conditions and
other conditions affecting agricultural output which may cause shortages of key
food ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at the Company's
restaurants; the dependence on key personnel and ability to attract and retain
qualified management and restaurant personnel to support existing operations and
future growth; regulatory developments, particularly relating to labor matters
(i.e., minimum wage, health insurance and other benefit requirements), health
and safety conditions, service of alcoholic beverages and taxation, which could
increase the cost of restaurant operations; establishment of market position and
consumer acceptance in new markets in light of intense competition in the
restaurant industry and the geographic separation of senior management from such
markets; potential delays in securing sites for new restaurants and delays in
opening restaurants which may entail additional costs and lower revenues than
would otherwise exist in the absence of such delays; and the availability of
capital to fund future restaurant openings. In addition to the foregoing, the
following specific factors may affect the Company's future operating results.
The anticipated opening of additional Daily Grill locations is expected to
result in the incurrence of various pre-opening expenses and high initial
operating costs which may adversely impact earnings during the first year of
operations of such restaurants. However, management anticipates that each of
such operations can be operated profitably within the first year of operations
and that the opening of each of the restaurants presently contemplated will
improve revenues and profitability.
15
<PAGE>
During the first quarter of 1998, the Company began formal efforts to sell
its Pizza Restaurants. If a buyer can be identified and an agreement reached to
sell the Pizza Restaurants on terms deemed acceptable to the Company, the
Company's Pizza Restaurants will be sold. In the event of such a sale, the
Company's revenues and operating profits will be reduced in future periods. The
Company intends to utilize the proceeds from the sale of the Pizza Restaurants
to fund the opening of additional Daily Grill restaurants.
Year 2000 Compliance
The year 2000 issue is a result of computer programs being written using
two digits, e.g. "98", to define a year. Date-sensitive software may recognize
the year "00" as the year 1900 rather than the year 2000. This would result in
errors and miscalculations or even system failure causing disruptions in
everyday business activities and transactions. Software is termed "Year 2000
compliant" when it is capable of performing transactions correctly in the year
2000.
Based upon a recent assessment of the Company's computer systems, it has
been determined that most of the Company's hardware and software systems are
either currently Year 2000 compliant or have existing upgrades available from
the software vendor that is Year 2000 compliant.
In-store POS systems recently purchased are Year 2000 compliant, and the
older POS systems will be either upgraded or replaced within the next year.
The Company's financial systems in its main office for accounting and
payroll is being replaced during 1998 with new, Year 2000 compliant, hardware
and software. This had been previously planned for operational upgrading
purposes, regardless of the Year 2000 problem, and the cost should not exceed
$50,000.
It is not expected that achieving Year 2000 compliance will have a material
impact on the Company's financial condition or results of operations.
Proposed New Accounting Standard
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The standard establishes guidelines
for the reporting and display of comprehensive income and its components in
financial statements. Disclosure of comprehensive income and its components will
be required beginning with the Company's fiscal year ending 1998. For the year
ended December 28, 1997, the Company had no comprehensive income components as
defined in SFAS No. 130.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the Company for making internal operating decisions. The new rules
will be effective for the Company's 1998 fiscal year-end. Management believes
that the adoption of this standard will not have any material impact on the
Company's reporting of its segments.
As is currently the practice of many restaurant entities, the Company
defers its restaurant preopening costs and amortizes them over a one year period
following the opening of each respective restaurant. In April 1997, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants issued a draft Statement of Position ("SOP") entitled
"Reporting on the Costs of Start-Up Activities." The proposed SOP would require
entities to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. In February 1998, the FASB adopted
the SOP for final issuance, subject to certain changes. The Company believes the
final SOP will be issued during the second quarter of fiscal 1998 and will be
effective for fiscal years beginning after December 15, 1998. Restatement of
previously issued financial statements is not permitted by the draft SOP, and
entities are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard.
The Company's adoption of the new accounting standard proposed by the SOP
will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of the fiscal
year of adoption. Total deferred preopening costs was $70,281 at December 28,
1997.
16
<PAGE>
Impact of Inflation
To date, inflation has not been a major factor in the Company's business.
There can be no assurances, however, that this will continue to be the case. To
the extent that it is commercially feasible, menu prices will be adjusted for
increases in food and labor costs when appropriate.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent accountants report thereon of Coopers & Lybrand LLP, appears on
pages F-2 through F-23 of this report. See Index to Financial Statements on F-1
of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
17
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
---------- ----------------------
3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc.(8)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. (9)
3.3 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.4 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated
December 29, 1994 (2)
4.1 Certificate of Designation fixing terms of Series B Preferred Stock(4)
4.2 Certificate of Designation fixing terms of Series I Preferred Stock(9)
4.3 Certificate of Designation fixing terms of Series II Preferred Stock(9)
4.4 Specimen Common Stock Certificate (1)
4.5 Form of Privately Issued Warrant (1)
4.6 Form of Offshore Warrant (3)
4.7 Warrant Agreement dated December 13, 1996 (4)
4.8 Form of $2.00 Warrant (9)
4.9 Form of $3.00 Warrant (9)
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and Denbob
Corp. dated June 29, 1989 for premises in Cherry Hill, New Jersey (1)
++10.3 Employment Agreement with Robert Wechsler (2)
10.4 Operating Agreement for The Airport Grill LLC between Grill Concepts
and CA One Services, Inc. dated March 15, 1995 (5)
++10.5 Grill Concepts, Inc. 1995 Stock Option Plan (7)
++10.6 Employment Agreement with Robert Spivak (6)
10.7* Operating Agreement for San Jose Grill LLC, dated June 1997
10.8* Amendment, dated December 1997, to Operating Agreement for San Jose
Grill LLC
10.9* Subordinated Note, dated December 1997, relating to San
Jose Grill LLC
21.1* Subsidiaries of Registrant
23.1* Consent of Coopers & Lybrand
27.1* Financial Data Schedules
- --------------
++ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange
Commission on May 11, 1993.
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No.
33-85730) declared effective by the Securities and Exchange Commission
on February 3, 1995.
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996.
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated December 13, 1996.
(5) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December
25, 1994.
(6) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995.
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 25, 1995.
(8) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange
Commission on May 11, 1993 and the exhibits filed with the
Registrant's Current Report on Form 8-K dated March 3, 1995.
(9) Incorporated by reference to the respective exhibits filed with the
Company's Form 10-QSB for the quarter ended June 29, 1997.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 28, 1997.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak
---------------------------------
Robert Spivak
President
Dated: March 27, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
Signature Title Date
------------ ------------------------ ---------------
<S> <C> <C>
/s/ Robert Spivak President, Chief Executive Officer March 27, 1998
- ------------------- and Director (Principal Executive
Robert Spivak Officer)
/s/ Robert Wechsler Chairman of the Board of Directors March 27, 1998
- -------------------
Robert Wechsler
/s/ Michael Weinstock Executive Vice President, Vice March 27, 1998
- -------------------- Chairman and Director
Michael Weinstock
/s/ Richard Shapiro Vice President and Director March 27, 1998
- --------------------
Richard Shapiro
/s/ Ben Sumner Chief Financial Officer (Principal March 27, 1998
- -------------------- Accounting and Financial Officer)
Ben Sumner
/s/ Charles Frank Director March 27, 1998
- --------------------
Charles Frank
/s/ Glenn Golenberg Director March 27, 1998
- --------------------
Glenn Golenberg
/s/ Peter Balas Director March 27, 1998
- --------------------
Peter Balas
19
</TABLE>
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
Report of Independent Accountants............................... F-2
Consolidated Balance Sheet as of December 28, 1997
and December 29, 1996.......................................... F-3
Consolidated Statements of Operation for the years
ended December 28, 1997 and December 29, 1996.................. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 28, 1997 and December 29, 1996.................. F-5
Consolidated Statements of Cash Flows for the years ended
December 28, 1997 and December 29, 1996........................ F-6
Notes to Consolidated Financial Statements...................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
__________
To the Board of Directors
Grill Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Grill Concepts,
Inc. and Subsidiaries as of December 28, 1997 and December 29, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Grill Concepts,
Inc. and Subsidiaries at December 28, 1997 and December 29, 1996 and their
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1996, the
Company adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1998
F-2
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
__________
<TABLE>
December 28, December 29,
1997 1996
----------- -----------
A S S E T S:
<S> <C> <C>
Current assets:
Cash and cash equivalents
$272,567 $372,317
Inventories
302,631 239,237
Receivables
375,117 64,194
Prepaid expenses and other current assets
955,329 973,842
-------- --------
Total current assets
1,905,644 1,649,590
Furniture, equipment and improvements, net
6,063,132 5,225,111
Goodwill, net
237,636 245,829
Liquor licenses, net
613,686 720,091
Other assets
190,757 241,393
------- -------
Total assets
$9,010,855 $8,082,014
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank line of credit
$480,000 -
Accounts payable
1,359,529 $1,143,484
Accrued expenses
858,050 1,283,805
Current portion of long-term debt
346,208 421,317
Note payable - related parties
84,500 -
-------- --------
Total current liabilities
3,128,287 2,848,606
Long-term debt
699,364 946,427
Note payable - related parties - 84,500
-------- --------
Total liabilities
3,827,651 3,879,533
Commitments and contingencies (Note 10) --------- ---------
Stockholders' equity:
Series A, 10% Convertible Preferred Stock, $.001 par value;
1,000,000 shares authorized, none issued and outstanding in 1997, 700
issued and outstanding in 1996 - 1
Series B, 8% Convertible Preferred Stock, $.001 par value; 1,000,000
shares authorized, 32 issued and outstanding in 1997, 65 issued
and outstanding in 1996 1 1
Series I, Convertible Preferred Stock, $.001 par value; 1,000,000
shares authorized, 1,000 shares issued and outstanding in 1997,
none in 1996 1 -
Series II, 10% Convertible Preferred Stock, $.001 par value;
1,000,000 shares authorized, 500 shares issued and outstanding in
1997, none in 1996 1 -
Common Stock, $.00001 par value; 30,000,000 shares authorized,
15,672,481 and 14,282,518 issued and outstanding in 1997
and 1996, respectively 157 143
Additional paid-in capital 11,053,913 9,552,453
Accumulated deficit (5,870,869) (5,350,117)
---------- ----------
Total stockholders' equity 5,183,204 4,202,481
--------- ----------
Total liabilities and stockholders' equity $9,010,855 $8,082,014
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
__________
<TABLE>
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Sales $28,900,657 $22,743,867
Cost of sales 7,919,959 6,210,226
---------- ----------
Gross profit 20,980,698 16,533,641
---------- ----------
Operating expenses:
Restaurant operating expenses 17,446,072 13,969,911
General and administration 2,648,014 2,172,271
Depreciation and amortization 948,361 826,761
Amortization of preopening costs 337,124 40,306
Unusual charges - 2,052,141
---------- ----------
Total operating expenses 21,379,571 19,061,390
---------- ----------
Loss from operations (398,873) (2,527,749)
Interest expense, net (123,125) (80,573)
Interest expense - related parties (43,281) (5,915)
Nonrecurring acquisition costs - (230,671)
Nonrecurring gain 93,000 -
---------- -----------
Loss before provision for income taxes (472,279) (2,844,908)
Provision for income taxes 5,000 7,800
---------- -----------
Net loss ($477,279) ($2,852,708)
========== ===========
Preferred stock:
Preferred dividends accrued or paid ($69,168) -
Accounting deemed dividends (210,655) -
---------- -----------
($279,823) -
========== ===========
Net loss applicable to common stock ($757,102) ($2,852,708)
========== ===========
Net loss per share:
Basic net loss ($0.03) ($0.21)
Preferred stock:
Dividends - -
Accounting deemed dividends (0.02) -
---------- -----------
(0.02) -
---------- -----------
Basic net loss applicable to common stock ($0.05) ($0.21)
========== ===========
Average-weighted shares outstanding 15,094,240 13,705,886
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
__________
<TABLE>
Series A Series B Series I Series II Additional
Preferred Preferred Preferred Preferred Common Paid-In Accumulated
Stock Stock Stock Stock Stock Capital Deficit Total
-------- --------- --------- --------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - - - - $130 $6,726,081 $(2,497,409) $4,228,802
Issuance of common stock
purusant to acquisition
of The Grill - - - - 8 849,992 - 850,000
Issuance of Series A, 10%
Convertible Preferred Stock $2 - - - - 1,427,039 - 1,427,041
Conversion of Series A, 10%
Convertible Preferred Stock
to common stock (1) - - - 5 (4) - -
Issuance of Series B, 8%
Convertible Preferred Stock - $1 - - - 549,345 - 549,346
Net loss - - - - - - (2,852,708) (2,852,708)
------- --------- --------- --------- -------- ---------- ----------- -----------
Balance, December 29, 1996 1 1 - - 143 9,552,453 (5,350,117) 4,202,481
Issuance of common and
convertible Series I and II
preferred stocks pursuant
to private placement - - $1 $1 2 1,457,998 - 1,458,002
Dividends of Series A, 10%
Convertible Preferred Stock,
paid by issuance of
common stock - - - - 1 34,999 (35,000) -
Conversion of Series A, 10%
Convertible Preferred Stock,
to common stock (1) - - - 7 (6) - -
Dividends of Series B, 8%
Convertible Preferred Stock
paid in cash - - - - - 8,473 (8,473) -
Conversion of Series B, 8%
Convertible Preferred Stock,
to common stock - - - - 4 (4) - -
Net loss - - - - - - (477,279) (477,279)
-------- ------- -------- -------- -------- ------------ ------------ -----------
Balance, December 28, 1997 $- $1 $1 $1 $157 $11,053,913 $(5,870,869) $5,183,204
======== ======= ======== ======== ======== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-5
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
December 28, December 29,
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($477,279) ($2,852,708)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 948,361 826,761
Amortization of preopening costs 337,124 40,306
Unusual charges - 2,052,141
Changes in operating assets and liabilities:
Inventories (63,394) (43,366)
Receivables
(310,923) (64,194)
Prepaid expenses and other current assets (3,148) (175,495)
Liquor licenses and other assets (171,890) (143,006)
Accounts payable 216,045 24,528
Accrued expenses
(425,755) 190,115
---------- -----------
Net cash provided by (used in) operating
activities 49,141 (144,918)
---------- -----------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (1,764,721) (2,019,431)
Net cash acquired through purchase of business - 253,231
---------- -----------
Net cash used in investing activities (1,764,721) (1,766,200)
---------- ------------
Cash flows from financing activities:
Proceeds from bank line of credit 480,000 -
Proceeds from issuance of preferred stock 1,500,000 2,150,000
Payments on stock issuance costs (41,998) (173,613)
Payments on long-term debt (322,172) (324,068)
---------- ------------
Net cash provided by financing activities 1,615,830 1,652,319
---------- ------------
Net decrease in cash and cash equivalents (99,750) (258,799)
Cash and cash equivalents, beginning of year 372,317 631,116
----------- -------------
Cash and cash equivalents, end of year $272,567 $372,317
=========== =============
Business acquisition, net of cash acquired:
Working capital, other than cash $26,716
Furniture, equipment and improvements (321,880)
Cost in excess of net assets acquired (245,829)
Other assets (55,776)
Long-term debt -
Fair value of stock exchanged 850,000
-------------
Net cash acquired
$253,231
=============
Supplemental cash flows information:
Cash paid during the year for:
Interest $180,455 $82,600
Income taxes $5,400 $800
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. Business, Organization And Basis Of Presentation:
General
Grill Concepts, Inc. (the "Company") was incorporated under the laws
of the State of Delaware in November 1985. The Company was originally
incorporated under the name "Uno Concepts, Inc." In December 1992, the
Company changed its name to "Magellan Restaurant Systems, Inc."
("Magellan") and, in connection with an exchange agreement (the
"Exchange") with Grill Concepts, Inc., a California corporation
("GCI"), changed its name to "Grill Concepts, Inc." in February 1995.
The Company operates exclusively in the restaurant industry in the
United States. As of December 28, 1997, the Company operates fourteen
restaurants, consisting of eight Daily Grill restaurants, The Grill on
the Alley ("The Grill"), and a Rhino Chasers brew pub/restaurant in
Southern California; one Daily Grill in Washington, D.C.; and three
Pizzeria Uno Restaurants located in the eastern part of the United
States. With the exception of Rhino Chasers and one Daily Grill, both
of which are operated at Los Angeles International Airport ("LAX")
pursuant to a venture with CA One Services, Inc. ("CA One"), and the
three Pizzeria Uno Restaurants which are operated pursuant to
franchise agreements, each of the Company's restaurants is owned and
operated on a non-franchise basis solely by the Company. The Company
plans to open "The Grill" in San Jose, California, and one additional
Daily Grill restaurant during 1998.
On March 3, 1995, pursuant to the Exchange agreement previously
entered into by Magellan and GCI, the Company became a wholly owned
subsidiary of Magellan. Immediately following the Exchange, the name
of Magellan was changed to Grill Concepts, Inc., a Delaware
corporation.
All of GCI's common stock was exchanged for 8,500,000 shares of
Magellan common stock. As a result, following the Exchange, holders of
GCI common stock controlled 63% of the outstanding common stock of the
Company, and, for accounting purposes, the acquisition has been
treated as a recapitalization of GCI with GCI as the acquirer. The
transaction was therefore accounted for as a purchase under the
"reverse acquisition" method.
On April 1, 1996, the Company acquired 100% of the common stock of The
Grill, an upscale Beverly Hills restaurant which opened in 1984 in
exchange for $850,000 of common stock of the Company. The acquisition
was accounted for under the purchase method of accounting.
F-7
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Business, Organization And Basis Of Presentation, Continued:
As a result of the above, these statements include the accounts of The
Grill on a consolidated basis for fiscal year 1996. The Consolidated
Statements of Operations for fiscal year 1996 include the operations
of The Grill for the period between April 1, 1996 and December 29,
1996.
The unaudited pro forma financial information set forth below is
presented as if the acquisition had been consummated as of
December 25, 1994.
The pro forma financial information is not necessarily indicative of
what actual results of operations of the Company would have been if
the acquisitions consummated as of December 25, 1994, nor does it
purport to represent the results of operations for future periods.
1996
------
Sales $23,599,162
Net loss ($2,767,350)
Basic net loss per share ($0.20)
Weighted-average shares outstanding 13,705,866
2. Summary Of Significant Accounting Policies:
Principles Of Consolidation
The consolidated financial statements include the accounts of Grill
Concepts, Inc. and its wholly owned subsidiaries which include the
three Pizzeria Uno Restaurants and The Grill. All significant
intercompany accounts and transactions for the periods presented have
been eliminated in consolidation. The equity method of accounting is
used for the investment in the joint venture with CA One relating to
Rhino Chasers and the one Daily Grill operated at LAX.
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending the Sunday
closest to December 31. The fiscal years 1997 and 1996 both consisted
of 52 weeks ended December 28, 1997 and December 29, 1996,
respectively.
F-8
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary Of Significant Accounting Policies, Continued:
Cash And Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.
Concentration Of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The
Company currently maintains substantially all of its day-to-day
operating cash balances with major financial institutions. At times,
cash balances may be in excess of Federal Depository Insurance
Corporation ("FDIC") insurance limits. Cash equivalents principally
consist of an investment account with a major brokerage house.
Inventories
-----------
Inventories consist of food, wine and liquor and are stated at the
lower of cost or market, cost generally being determined on a
first-in, first-out basis.
Furniture, Equipment And Improvements
-------------------------------------
Furniture, equipment and improvements are stated at the Company's
allocated acquisition cost for assets acquired from the merger and at
cost for all new additions.
Depreciation of furniture and equipment is computed by use of the
straight-line method based on the estimated useful lives of 5 to 10
years of the respective assets. Leasehold improvements are amortized
using the straight-line method over the life of the improvement or the
remaining life of the lease, whichever is shorter. Interest costs
incurred during construction were capitalized and are being amortized
over the related assets' estimated useful lives. When properties are
retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and the resulting gain or
loss is credited or charged to current-year operations. The policy of
the Company is to charge amounts expended for maintenance and repairs
to current-year expense and to capitalize expenditures for major
replacements and betterments.
Goodwill
--------
Goodwill relates to the excess of cost over the fair value of the net
assets of The Grill acquired in April 1996. Goodwill is being
amortized on a straight-line basis over 30 years. Accumulated
amortization at December 8, 1997 was $8,194.
F-9
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary Of Significant Accounting Policies, Continued:
Expendables
------------
Initial amounts spent for china, glassware and flatware in connection
with the opening of a new restaurant are capitalized. Subsequent
purchases are expensed as incurred.
Liquor Licenses
---------------
Liquor licenses are capitalized and are being amortized on a
straight-line basis over 40 years.
Preopening Costs
----------------
Costs related to the opening of new restaurants, payroll and other
costs incurred in the training and introduction period, are deferred
and then amortized over a one-year period commencing with the opening
of each respective restaurant.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," which prescribes an asset and liability approach. Under
the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying
enacted statutory rates applicable to future years to the difference
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that
includes the enactment date.
Advertising And Promotion Costs
-------------------------------
All costs associated with advertising and promoting products are
expensed in the year incurred. Advertising and promotion expense for
the years ended December 8, 1997 and December 9, 1996 was $486,615
and $409,651, respectively.
Reclassifications
-----------------
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
F-10
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary Of Significant Accounting Policies, Continued:
Long-Lived Assets
------------------
In fiscal year 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." As a result, in 1996, the Company recorded a charge to
earnings of approximately $1,952,000 for the write-off of the goodwill
related to the merger with Magellan in February 1995. The carrying
value of the goodwill was completely written off due to negative
projected future cash flows pertaining to the Pizzeria Uno
Restaurants. The charge was recorded in the Consolidated Statements of
Operations under Unusual Charges for fiscal year 1996.
In accordance with SFAS No. 21, long-lived assets held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of
long-lived assets, the recoverability test is performed using
undiscounted net cash flows of the individual restaurants and
consolidated undiscounted net cash flows for long-lived assets not
identifiable to individual restaurants.
Stock-Based Compensation
------------------------
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." As such, no compensation
expense is recognized since the Company's stock option grants are
generally priced at fair market value on the date of grant. SFAS
No. 23, "Accounting for Stock-Based Compensation" established a fair
value based methodology for the financial accounting and reporting for
stock-based employee compensation plans. The Company has adopted the
disclosure-only provisions of SFAS No. 123.
F-11
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary Of Significant Accounting Policies, Continued:
Net Income Per Share
--------------------
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 supersedes and
simplifies the previous computational guidelines under APB Opinion
No. 15, "Earnings Per Share." Among other changes, SFAS No. 128
eliminates the presentation of primary EPS and replaces it with basic
EPS for which common stock equivalents are not considered in the
computation. It also revises the computation of diluted EPS.
Basic net income per share is computed by dividing the net income
attributable to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net income per
share is computed by dividing the net income attributable to common
shareholders by the weighted average number of common and common
equivalent shares outstanding during the period. Common share
equivalents included in the diluted computation represent shares
issuable upon assumed exercise of stock options, warrants and
convertible preferred stocks using the Treasury Stock method. Dilutive
net income (loss) per share is not presented since all of the dilutive
shares are antidilutive for the periods presented. Net income (loss)
per share and weighted-average shares outstanding for all prior
periods have been restated in accordance with SFAS No. 128. Net income
(loss) per share has also been adjusted to give effect to the deemed
dividends.
Use Of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions for the reporting period and as of the
financial statement date. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent liabilities, and the reported amounts of revenue and
expenses. Actual results could differ from those estimates.
Fair Value Of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosure About Fair Value of Financial Instrument,"
requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to
estimate. SFAS No. 107 excludes certain financial instruments, such as
certain insurance contracts, and all nonfinancial instruments from its
disclosure requirements. A financial instrument is defined as
contractual obligation that ultimately ends with the delivery of cash
or an ownership interest in an entity. Disclosures regarding the fair
value of financial instruments have been derived using external market
sources, estimates using present value or other valuation techniques.
F-12
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2.Summary Of Significant Accounting Policies, Continued:
Fair Value Of Financial Instruments, Continued
-----------------------------------
Cash, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity
of these instruments. The fair value of long-term debt closely
approximates its carrying value.
Recent Accounting Pronouncements
--------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The standard establishes guidelines for the reporting and
display of comprehensive income and its components in financial
statements. Disclosure of comprehensive income and its components will
be required beginning with the Company's fiscal year ending 1998. For
the years ended December 28, 1997 and December 29, 1996, the Company
had no comprehensive income components as defined in SFAS No. 130.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The standard
requires that companies disclose "operating segments" based on the way
management disaggregates the Company for making internal operating
decisions. The new rules will be effective for the Company's 1998
fiscal year-end. Management believes that the adoption of this
standard will not have any material impact on the Company's reporting
of its segments.
As is currently the practice of many restaurant entities, the Company
defers its restaurant preopening costs and amortizes them over a
one-year period following the opening of each respective restaurant.
In April 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a draft
Statement of Position ("SOP") entitled "Reporting on the Costs of
Start-Up Activities." The proposed SOP would require entities to
expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. In February 1998, the
FASB adopted the SOP for final issuance, subject to certain changes.
The Company believes the final SOP will be issued during the second
quarter of fiscal 1998 and will be effective for fiscal years
beginning after December 15, 1998. Restatement of previously issued
financial statements is not permitted by the draft SOP, and entities
are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard. The Company's adoption of
the new accounting standard proposed by the SOP will involve the
recognition of the cumulative effect of the change in accounting
principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of
the fiscal year of adoption. The Company's total deferred preopening
costs was $70,281 at December 28, 1997.
F-13
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Closure Of Jo Jo Players:
During the quarter ended September 28, 1997, the Company executed a
Mutual Release and Lease Termination Agreement covering the property
which operated as Jo Jo Players. The Company also assigned its
interest in a liquor license for such property. As a result, the
Company has no further liability under the lease and suffered no
current charges since the loss totalling $261,000 on this closure was
previously reserved.
4. Business Operations:
The Company incurred a net loss of approximately $477,000 for the
fiscal year ended December 28, 1997. Although the Company incurred a
net loss in the current year, the Company generated positive cash
flows from operations and management believes that such cash flow
trend is expected to continue. Management's plans for profitable
operations include increasing sales at its existing restaurants and
through the openings of additional restaurants including San Jose and
Tyson's Corner. In addition, management is negotiating potential joint
venture arrangements and licensing agreements.
While there can be no assurance that management's plans, if executed,
will achieve profitability, management believes their plans provide
the Company with a strong base to accomplish their goals.
5. Furniture, Equipment And Improvements, Net:
Furniture, equipment and improvements at December 28, 1997 and
December 29, 1996 consisted of:
<TABLE>
1997 1996
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment $4,239,213 $3,598,596
Leasehold improvements 5,744,800 4,196,749
Motor vehicle 22,577 14,256
Expendables 115,186 59,631
Construction-in-progress 218,902 720,365
---------- ----------
Furniture, equipment and improvements 10,340,678 8,589,597
Less, Accumulated depreciation (4,277,546) (3,364,486)
----------- -----------
Furniture, equipment and improvements, net $6,063,132 $5,225,111
=========== ===========
</TABLE>
Continued
F-14
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Debt:
Debt at December 28, 1997 and December 29, 1996 is summarized as follows:
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Note payable to bank under revolving credit
agreement, expiring March 31, 2000, payable
in sixty equal monthly installments starting
April 30, 1995, plus interest. Also available
is $1,000,000 under a revolving line of credit
expiring May 31, 1998 ($480,000 outstanding at
December 28, 1997). Management is expecting
the bank to grant an extension. Interest is
payable monthly at the Bank's Reference Rate
(8.5% at December 28, 1997) plus 0.625%.
The Company has the option of fixing the
interest rate. The note is collateralized
by an interest in the assets of the Company.
In addition, two of the Company's principal
stockholders have guaranteed the credit facility.
In connection with this line of credit, the Company
is required to comply with a number of restrictive
covenants, including meeting certain interest cover
requirements and dividend restrictions. $1,226,688 $1,066,679
Note payable to Small Business Administration
collateralized by property, payable monthly, $1,648,
including interest at 4.0% due September 23, 2006. 145,047 158,807
Note payable to lessor, uncollateralized, payable
monthly, $1,435, including interest at 10.0%. 139,119 142,258
Note payable for automobile, payable monthly,
$755, including interest at 2.9% due June 18, 1999. 14,718 -
---------- ---------
1,525,572 1,367,744
Less, Current portion of long-term debt 346,208 421,317
Less, Bank line of credit 480,000 -
----------- ----------
Long-term portion $699,364 $946,427
=========== ==========
</TABLE>
F-15
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Debt, Continued:
Principal maturities of long-term debt are as follows:
Year Ending
December 31,
--------------
1998 $826,208
1999 344,640
2000 126,139
2001 20,412
2002 21,444
Thereafter 186,729
----------
Total $1,525,572
==========
Throughout fiscal year 1997, the Company was not in compliance with
certain bank covenants and has received a waiver from the lender with
respect to those instances of noncompliance. As of December 28, 1997,
the Company was in compliance with all of its bank covenants.
7. Related Parties:
Debt with related parties at December 28, 1997 and December 29, 1996
consisted of:
1997 1996
------ ------
Uncollateralized subordinated note
payable to shareholders, with interest
payable monthly at a rate of 7.0%
per annum. The note payable and interest
is due on December 27, 1998. $84,500 $84,500
======== ========
In 1997, the Company agreed to pay to each of two stockholders
interest at a rate of 2% per annum of the average annual balance of
the note payable to the bank for collateralizing the note with their
personal assets. Interest expense totalled $37,366 for fiscal year
1997.
A stockholder of the Company is the lessor for property leased by one
of the Pizzeria Uno Restaurants. Rent expense related to this
operating lease was $246,787 and $232,686 for the fiscal years 1997
and 1996, respectively.
F-16
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stockholders' Equity:
In June 1996, the Board of Directors authorized and the Company
completed an offering of $1.5 million of 1,500 shares of Series A, 10%
Convertible Preferred Stock to an offshore investor. The preferred
shares are convertible at the option of the holder in 25% increments
commencing 60, 90, 120 and 150 days after June 17, 1996. The
conversion price of the preferred shares is equal to the lesser of
$2.25 per share or 85% of the average closing bid price of the common
stock for the five trading days preceding notice of conversion. The
Company may, at its option, redeem the preferred shares at their
initial offering price or force conversion of the preferred shares at
the then applicable conversion price commencing June 17, 1998. The
holder of the preferred shares may, at its option, cause any preferred
shares remaining outstanding at June 17, 2000 to be redeemed at their
initial offering price. During fiscal year 1996, 800 shares of
Series A Convertible Preferred Stock were converted, resulting in the
issuance of an aggregate of 433,288 shares of common stock at an
average price of $1.84 per share. During fiscal year 1997, all of the
remaining 700 shares of Series A Convertible Preferred Stock were
converted, resulting in the issuance of an aggregate of 801,896 shares
of common stock at an average price of $0.87 per share. The Company
paid $35,000 in dividends by issuing common stock, calculated based on
the market rate at the issuance date, to the preferred shareholder.
There were no accumulated dividends in arrears at December 28, 1997.
In December 1996, the Board of Directors authorized and the Company
completed an offering of $650,000 of 65 shares of Series B, 8%
Convertible Preferred Stock. The preferred shares are convertible at
the option of the holder in one-third increments commencing 60, 75 and
90 days after December 13, 1996. The conversion price of the preferred
shares is equal to the lesser of $2.50 per share or the average
closing bid price of the common stock for the five trading days
preceding notice of conversion multiplied by the following percentages
when converted during the period after the issuance of the preferred
shares indicated: 61 to 90 days - 85%; 91 to 130 days - 83.5%; 131 to
180 days - 82%; and 181 or more days - 80%. The preferred shares are
entitled to receive an 8% cumulative dividend payable on conversion or
redemption; provided, however, that with respect to any preferred
shares converted prior to 180 days after issuance, the dividend shall
be reduced to 4%. During fiscal year 1997, 33 shares of Series B
Convertible Preferred Stock were converted, resulting in the issuance
of an aggregate of 388,067 shares of common stock at an average price
of $0.85 per share. The Company paid $8,473 in dividends during fiscal
year 1997. There were no accumulated dividends in arrears at
December 28, 1997.
F-17
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stockholders' Equity, Continued:
In June 1997, the Company completed a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred
Stock, 500 shares of Series II, 10% Convertible Preferred Stock,
750,000 five-year $2.00 warrants and 750,000 five-year $3.00 warrants.
The aggregate sales price of those securities was $1,500,000.
The Series I Convertible Preferred Stock is convertible into common
stock at $1.25 per share. There were no conversions as of December 28,
1997.
The Series II 10% Convertible Preferred Stock is convertible into
common stock commencing one year from the date of issuance at the
greater of (i) $1.00 per share, or (ii) 75% of the average closing
price of the Company's common stock for the five trading days
immediately prior to the date of conversion; provided, however, that
the conversion price shall in no event exceed $2.50 per share. The
Series II, 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or
redemption in cash or, at the Company's option, in common stock at the
then-applicable conversion price. The Series II, 10% Convertible
Preferred Stock is subject to redemption, in whole or in part, at the
option of the Company on or after the second anniversary of issuance
at $1,000 per share. There were no conversions as of December 28,
1997. Accumulated dividends in arrears totalled $25,695 as of
December 28, 1997
Warrants
--------
At December 31, 1995, the Company had outstanding 190,793 warrants
previously issued by Magellan and exercisable at a price of $2.00 per
share. Additionally, in connection with the Exchange and a private
placement during 1995, the Company issued an additional 100,000
warrants, which are exercisable at $3.00 per share.
In connection with the offshore placement of the Series A, 10%
Convertible Preferred Stock, the Company issued warrants to acquire an
aggregate of 250,000 shares of the Company's common stock at a price
of $3.00 per share for a period expiring June 17, 2001. The warrants
are redeemable at the Company's option commencing June 17, 1999 at a
price of $.01 per warrant providing that the closing bid price of the
Company's common stock has equalled or exceeded $4.50 per share for 20
trading days.
In December 1996, 46,222 warrants exercisable at $3.00 per share were
issued in connection with the sale of the Company's Series B, 8%
Convertible Preferred Stock. The warrants are scheduled to expire
December 13, 1999.
F-18
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stockholders' Equity, Continued:
Warrants, Continued
--------
In June 1997, 750,000 warrants exercisable at $2.00 per share and
750,000 warrants exercisable at $3.00 per share were issued in
connection with the offering of the Series I Convertible Preferred
Stock which is scheduled to expire June 26, 2002. These warrants are
subject to cancellation in the event the holders of the Series I
Convertible Preferred Stock, or common stock issued upon conversion of
such preferred stock, sell, assign or transfer such preferred stock or
underlying common stock, other than transfers to permitted persons,
within three years of the initial sale of the warrants.
Deemed Dividend
---------------
In accordance with the recent 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, for purposes of presenting net income (loss)
per share, an accounting "deemed dividend." This deemed dividend,
which relates to the issuance of the preferred stock, is a noncash,
nonrecurring amount for the purpose of presenting income (loss)
applicable to common stock and income (loss) per share. This deemed
dividend was calculated at the date of issue of the preferred stock as
the difference between the conversion price and the fair value of the
common stock into which the preferred stock is convertible, multiplied
by the number of shares into which the preferred stock is convertible.
Options
-------
On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "Plan"). The Plan provides
for options to be issued to the Company's employees. The exercise
price of the shares under option shall be equal to or exceed 100% of
the fair market value of the shares at the date of grant. The options
generally vest over a five- to ten-year period.
F-19
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stockholders' Equity, Continued:
Options, Continued
-------
A total of 1,500,000 common shares are reserved for issuance pursuant
to the Plan. During the year, upon recommendation of the Compensation
Committee, a total of 432,000 options were granted under the Plan
ranging in price from $1.00 to $1.17. The Plan was approved at the
1996 annual stockholders' meeting. Transactions during the fiscal
years 1997 and 1996 under the Plan were as follows (included in the
following options are 40,000 shares from a discontinued plan):
<TABLE>
1997 1996
--------------------------- -----------------------------
Weighted Weighted
Number Average Option Number Average Option
Of Shares Exercise Price Of Shares Exercise Price
------------ ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,110,100 $1.37 573,000 $1.30
Options granted - price less
than fair value 15,000 1.00 379,100 1.39
Options granted - price equals
fair value 383,500 1.06
-
Options granted - price greater
than fair value 33,500 1.17 266,000 1.50
Options exercised - - - -
Options cancelled (116,000) 1.10 (108,000) 1.26
--------- ------ -------- ------
Options outstanding at end
of year 1,426,100 $1.34 1,110,100 $1.37
========== ====== ========= =====
Options exercisable at end
of year 665,520 481,000
Options available for grant
at end of year 113,900 429,900
</TABLE>
The following table summarizes information about stock options outstanding at
December 28, 1997 (shares in thousands)
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Number Weighted Number
Outstanding At Average Weighted Outstanding At Weighted
Range Of December 28, Remaining Average December 28, Average
Exercise Price 1997 Contractual Life Exercise Price 1997 Exercise Price
---------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to $1.17 372,000 8.8 $1.06 169,520 $1.08
$1.34 to $1.53 1,054,100 7.2 $1.44 496,000 $1.43
--------- -------
1,426,100 665,520
========= =======
</TABLE>
Continued
F-20
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stockholders' Equity, Continued:
Options, Continued
-------
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," and will continue
to use the intrinsic value-based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's stock option
plans been determined based on the fair value at the grant date for
awards in fiscal year 1997 and 1996 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
1997 1996
------ ------
<S> <C> <C>
Net loss, as reported ($757,102) ($2,852,708)
Net loss, pro forma ($803,869) ($3,126,221)
Net loss per share, as reported ($0.05) ($0.21)
Net loss per share, pro forma ($0.05) ($0.23)
</TABLE>
The fair value of each option grant issued in fiscal year 1997 and
1996 is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
(a) no dividend yield on the Company's stock, (b) expected volatility
using the average of three peer groups of 54.11%, (c) risk-free
interest rates ranging from 5.80% to 6.45%, and (d) expected option
lives of five years.
9. Pension Plan:
Effective January 1, 1996, the Company established the Grill Concepts,
Inc. 401(k) Plan (the "Plan"), a defined contribution savings plan,
which is open to all employees of the Company who have completed one
year (1,000 hours in that year) of service and have attained the age
of 21. The Plan allows employees of the Company to contribute up to
the lesser of the Internal Revenue Code-prescribed maximum amount or
20% of their income on a pre-tax basis, through contribution to the
Plan. The Company's contributions are discretionary. For the years
ended December 28, 1997 and December 29, 1996, the Company made no
contributions to the Plan.
Continued
F-21
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Commitments And Contingencies:
The Company leases most of its restaurant facilities and
corporate offices under noncancellable operating leases. The
restaurant leases generally include land and building, require
various expenses incidental to the use of the property, and
certain leases require contingent rent above the minimum lease
payments based on a percentage of sales. Certain leases also
contain renewal options and escalation clauses.
Aggregate minimum lease payments under noncancellable operating
leases are as follows:
Fiscal Year Ending
------------------
1998 $2,015,812
1999 2,121,446
2000 2,015,709
2001 2,037,529
2002 1,976,371
Thereafter 10,905,732
----------
Total $21,072,599
===========
Rent expense was $2,325,263 and $2,217,734 for fiscal years 1997
and 1996, respectively, including $139,087 and $74,530 for 1997
and 1996, respectively, for contingent rentals which are payable
on the basis of a percentage of sales in excess of stipulated
amounts.
In connection with the building of a new restaurant, the Company
has signed an agreement to form an LLC for the operation of a
"The Grill" restaurant in San Jose, California. The Company has
contributed $200,000 toward the expected cost of this restaurant
of approximately $1,200,000. In addition, the Company may be
expected to contribute an additional $150,000 in 1998.
Restaurants such as those operated by the Company are subject to
litigation in the ordinary course of business, most of which the
Company expects to be covered by its general liability insurance.
However, punitive damages awards are not covered by general
liability insurance. Punitive damages are routinely claimed in
litigation actions against the Company. No causes of action are
presently pending against the Company. However, there can be no
assurance that punitive damages will not be given with respect to
any actions which may arise in the future.
F-22
Continued
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Income Taxes:
The provisions for income taxes for the fiscal years ended December
28, 1997 and December 29, 1996 are as follows:
1997 1996
------ -------
Current - federal - -
Current - state $5,000 $7,800
------ -------
$5,000 $7,800
====== ========
The following is a reconciliation between the U.S. federal statutory
rate and the effective tax rate:
1997 1996
------ ------
Federal tax rate (34.0%) (34.0%)
Goodwill expensed for book - 25.0%
Net operating loss for which no tax
benefit was realized 23.0% 8.0%
Other 12.0% 1.0%
----- -----
Effective tax rate 1.0% 0.0%
===== =====
Continued
F-23
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Income Taxes, Continued:
Deferred tax assets and liabilities consist of the following as of
December 28, 1997 and December 29, 1996:
1997 1996
------ ------
Deferred tax assets:
Net operating loss $1,201,724 $1,327,066
Fixed assets 219,105 88,400
Intangible assets - 53,203
State taxes 198,376 206,475
General business credit 251,347 102,000
Alternative minimum tax credit 8,058 8,058
Charitable contribution carryover 4,977 2,409
------- ---------
Total gross deferred tax assets 1,883,587 1,787,611
Less, Valuation allowance (1,859,692) (1,787,611)
------------ -----------
Net deferred tax assets 23,895 -
Deferred tax liabilities:
Intangible assets (23,895) -
------------ -----------
Net deferred tax assets
and liabilities $- $-
============ ===========
At December 28, 1997, the Company has available federal and state net
operating loss carryforwards of $3,534,482 and $2,431,557,
respectively, that may be utilized to offset future federal and state
taxable earnings. These net operating losses begin to expire in 2006
and 1998, respectively. A full valuation allowance has been
established to reduce net deferred tax assets to the amount expected
to be realized.
Continued
F-24
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Unusual Charges And Nonrecurring Acquisition Costs:
As discussed in Note 2, during fiscal year 1996, the Company
implemented SFAS No. 121. As a result, the Company recorded a charge
to earnings of approximately $1,952,000 for the write-off of the
goodwill related to the merger with Magellan in February 1995. The
carrying value of the goodwill was completely written off due to
negative projected future cash flows pertaining to the Pizzeria Uno
Restaurants. The charge was recorded in the Consolidated Statements of
Operations under Unusual Charges for fiscal year 1996.
In addition, the Company has expensed certain restaurant closing costs
in fiscal year 1996 of $100,000, which has been recorded in the
Consolidated Statements of Operations under Unusual Charges for fiscal
year 1996.
The nonrecurring acquisition costs written off in fiscal year 1996
relate to the Company's abandonment of a potential acquisition of a
chain of restaurants.
13. Subsequent Events:
In February 1998, the Company formally listed the three Pizzeria Uno
Restaurants for sale. The Company does not anticipate any material
gains or losses as a result of the sale.
In connection with the building of a new restaurant, in January 1998,
the LLC formed for the operation of a "The Grill" restaurant in San
Jose, California, entered into a subordinated $800,000 note agreement
with a related party at a rate of 10.0% per annum, with no defined
payment terms. The note will mature in January 2018.
Continued
F-25
<PAGE>
GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Quarterly Financial Data (Unaudited):
Summarized unaudited quarterly financial data for fiscal years 1997
and 1996 is as follows:
<TABLE>
March 30, June 29, September 28, December 28,
Quarter Ended 1997 1997 1997 1997
--------------- ----------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Total revenues $7,140,720 $7,306,781 $7,066,991 $7,386,165
Income (loss) from operations 70,174 (66,008) (149,346) (253,693)
Net income (loss) 74,613 (51,861) (171,416) (328,615)
Basic net income (loss) per share $0.00 ($0.01) ($0.01) ($0.02)
March 31, June 30, September 29, December 29,
Quarter Ended 1996 1996 1996 1996
--------------- --------- ---------- -------------- --------------
Total revenues $5,245,779 $5,691,606 $5,542,120 $6,264,362
Income (loss) from operations 50,482 (61,447) (140,408) (2,376,376)
Net income (loss) 11,785 (94,008) (373,284) (2,397,201)
Basic net income (loss) per share $0.00 ($0.01) ($0.03) ($0.17)
</TABLE>
Exhibit 10.7
OPERATING AGREEMENT
FOR
SAN JOSE GRILL LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
THIS OPERATING AGREEMENT is made as of June ___, 1997, by and among the parties
listed on the signature pages hereof, with reference to the following facts:
A. HOTEL EQUITY FUND III, L.P. has an ownership interest in the San Jose
Fairmont Hotel located in San Jose, California. Grill Concepts, Inc. operates
The Grill Restaurant in Beverly Hills, California and owns the uniform
restaurant operating system necessary for the establishment and operation of
distinctive restaurants with distinctive features, equipment, equipment designs,
food formulas, inventory, manuals, training systems and accounting systems (the
"Operating System") which restaurant and operating systems are identified by the
service and trademarks "The Grill" and related words and symbols (the "Existing
Marks") identifying these restaurants and their goods and services. The term
"Marks" shall include the Existing Marks and such other tradenames, service
marks, logo types, trade symbols, emblems, signs, slogans, insignias,
trademarks, designs, patents and copyrights as Grill Concepts, Inc. now owns or
may hereafter acquire, develop or adopt or designate for use in connection with
the Operating System.
B. HOTEL EQUITY FUND III, L.P. and Grill Concepts, Inc. desire to form this
Company to own and operate a "Grill" restaurant ("Restaurant") on the Premises
in the San Jose Fairmont pursuant to the lease agreement executed concurrently
herewith between this Company and the San Jose Fairmont (the "Lease"). The
parties desire to adopt and approve an operating agreement for the Company to
own and operate the Restaurant.
NOW, THEREFORE, the parties (hereinafter sometimes collectively referred to as
the "Members," or individually as the "Member") by this Agreement set forth the
operating agreement for the Company under the laws of the State of California
upon the terms and subject to the conditions of this Agreement.
ARTICLE 1.
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
set forth below (all terms used in this Agreement that are not defined in this
Article 1 shall have the meanings set forth elsewhere in this Agreement):
9512900003-629491.7
1.
<PAGE>
1.1 "Act" means the California Limited Liability Company Act, Calif. Corps.
Code Section 17000 et seq., as the same may be amended from time to time.
1.2 "Adjusted Capital Account Deficit" means, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant fiscal year, after giving effect to the following adjustments:
1.2(a) Credit to such Capital Account any amounts which such Member is
obligated to restore pursuant to this Agreement or is deemed to be
obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(C)
after taking into account any changes during such year in Company minimum
gain and in minimum gain attributable to any Company nonrecourse debt under
Regulations Section 1.704-2(d)(2) and (3); and
1.2(b) Debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), (5), and (6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704- 1(b)(2)(ii)(d) of the Regulations
and shall be interpreted con- sistently therewith.
1.3 "Affiliate" means any individual, partnership, corporation, trust or
other entity or association, directly or indirectly controlled by, or under
common control with the Member. The term "control," as used in the immediately
preceding sentence, means, with respect to a corporation or limited liability
company the right to exercise, directly or indirectly, more than fifty percent
(50%) of the voting rights attributable to the controlled corporation or limited
liability company, and, with respect to any individual, partnership, trust,
other entity or association, the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of the
controlled entity.
1.4 "Agreement" means this Operating Agreement, as originally executed and
as amended from time to time, which shall constitute "regulations" for purposes
of the Act.
1.5 "Articles" means the Articles of Organization for the Company
originally filed with the California Secretary of State and as amended from time
to time.
1.6 "Assignee" means a person who has acquired an Economic Interest in the
Company but who has not been admitted as a Substituted Member.
9512900003-629491.7
2.
<PAGE>
1.7 "Bankruptcy" means: (a) the filing of an application by a Member for,
or his or her consent to, the appointment of a trustee, receiver, or custodian
of his or her other assets; (b) the entry of an order for relief with respect to
a Member in proceedings under the United States Bankruptcy Code, as amended or
superseded from time to time; (c) the making by a Member of a general assignment
for the benefit of creditors; (d) the entry of an order, judgment, or decree by
any court of competent jurisdiction appointing a trustee, receiver, or custodian
of the assets of a Member unless the proceedings and the person appointed are
dismissed within ninety (90) days; or (e) the failure by a Member generally to
pay his or her debts as the debts become due within the meaning of Section
303(h)(1) of the United States Bankruptcy Code, as determined by the Bankruptcy
Court, or the admission in writing of his or her inability to pay his or her
debts as they become due.
1.8 "Capital Account" means with respect to any Member the capital account
which the Company establishes and maintains for such Member pursuant to Section
3.3.
1.9 "Capital Contributions" means the total value of cash and fair market
value of property (including promissory notes) contributed and/or services
rendered or to be rendered to the Company by Members.
1.10 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, the provisions of succeeding law, and to the extent applicable, the
Regulations.
1.11 "Company" means SAN JOSE GRILL LLC.
1.12 "Company Minimum Gain" shall have the meaning ascribed to the term
"Partnership Minimum Gain" in Regulations Section 1.704- 2(d)(1).
1.13 "Dissolution Event" means with respect to any Manager one or more of
the following: the death, insanity, bankruptcy, dissolution or withdrawal,
retirement, resignation, or expulsion as a Member, or occurrence of any other
event which terminates the continued membership of any Manager unless the
non-Manager Members consent to continue the business of the Company pursuant to
Section 8.1. The occurrence of any of the foregoing events with respect to a
Member other than the Manager shall not be a Dissolution Event.
1.14 "Distributable Cash" means the amount of cash which the Manager deems
available for distribution to the Members, taking into account all Company
debts, liabilities and obligations of the Company then due and amounts which the
Manager deems necessary to place into reserves for customary and usual claims
with respect to the Company's business. Payment of the Management Fee pursuant
to
9512900003-629491.7
3.
<PAGE>
the Management Agreement is an expense of the Company and is not a distribution
of Distributable Cash.
1.15 "Distribution" means any money or other property transferred without
consideration to Members with respect to their Membership Interests in the
Company, but shall not include any payments to the Manager pursuant to Section
5.
1.16 "Economic Interest" means a Member's or Economic Interest Owner's
share of one or more of the Company's taxable income, taxable losses, and
distributions of the Company's assets pursuant to this Agreement and the Act,
but shall not include any other rights of a Member, including, without
limitation, the right to vote or participate in the management, or any right to
information concerning the business and affairs of Company.
1.17 "Economic Interest Owner" means the owner of an Economic Interest who
is not a Member.
1.18 "Fiscal Year" means the Company's fiscal year, which shall be the
calendar year.
1.19 "Former Member" shall have the meaning ascribed to it in Section 8.1.
1.20 "Former Member's Interest" shall have the meaning ascribed to it in
Section 8.1.
1.21 "Gross Asset Value" means, with respect to any asset of the Company,
the asset's adjusted basis for federal income tax purposes; provided, however,
that (i) the Gross Asset Value of any asset contributed by a Member to the
Company or distributed to a Member by the Company shall be the gross fair market
value of such asset (without taking into account Section 7701(g) of the Code),
as reasonably determined by the contributing or distributee Member, as the case
may be, and the Company; (ii) the Gross Asset Values of all Company assets shall
be adjusted to equal their respective gross fair market values (without taking
into account Section 7701(g) of the Code), upon the termination of the Company
for federal income tax purposes pursuant to Section 708(b)(1)(B) of the Code;
and (iii) the Gross Asset Values of all Company assets may be adjusted in the
sole and absolute discretion of the Manager to equal their respective gross fair
market values (taking into account Section 7701(g) of the Code), as reasonably
determined by the Member, as of (A) the date of the acquisition of an additional
interest in the Company by any new or existing Member in exchange for more than
a de minimis contribution to the capital of the Company or (B) upon the
distribution by the Company to a retiring or continuing Member of more than a de
minimis amount of Company property including money in reduction of such Member's
interest in the Company.
9512900003-629491.7
4.
<PAGE>
1.22 "Liquidation" means in respect to the Company the earlier of the date
upon which the Company is terminated under Section 708(b)(1) of the Code or the
date upon which the Company ceases to be a going concern (even though it may
exist for purposes of winding up its affairs, paying its debts and distributing
any remaining balance to its Members), and in respect to a Member where the
Company is not in Liquidation means the date upon which occurs the termination
of the Member's entire interest in the Company by means of a Distribution or the
making of the last of a series of Distributions (in one or more years) to the
Member by the Company.
1.23 "Majority Interest" means Members holding more than 50% of the
Percentage Interests.
1.24 "Management Agreement"means the agreement attached hereto as Exhibit
"A".
1.25 "Manager" means Grill Concepts, Inc. or any successor Manager
designated herein elected pursuant to Section 5.2. Each Manager shall serve
until his, her or its successor has been elected and qualified.
1.26 "Member" means each Person who (a) is an initial signatory to this
Agreement, has been admitted to the Company as a Member in accordance with the
Articles or this Agreement or an assignee who has become a Member in accordance
with Article 7 and (b) has not resigned, withdrawn, been expelled or, if other
than an individual, dissolved.
1.27 "Member Nonrecourse Debt" shall have the meaning ascribed to the term
"partner nonrecourse debt" in Regulations Section 1.704-2(b)(4).
1.28 "Member Nonrecourse Debt Minimum Gain" means an amount with respect to
each Member Nonrecourse Debt, equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(2).
1.29 "Member Nonrecourse Deductions" shall have the meaning ascribed to the
term "partner nonrecourse deductions" in Regulations Section 1.704-2(i).
1.30 "Membership Interest" means a Member's entire interest in the Company
including the Member's Economic Interest, the right to vote on or participate in
the management, and the right to receive information concerning the business and
affairs, of the Company.
1.31 "Minimum Return Event" shall mean the receipt by the Members of all
amounts due them under the Subordinated Debt and Section 6.12(a), (b) and (c)
prior to July 1, 2002. If such amount is not paid by such time, the Minimum
Return Event will not have occurred.
9512900003-629491.7
5.
<PAGE>
1.32 "Nonrecourse Debt" shall have the meaning set forth in Regulations
Section 1.704-2(b)(3).
1.33 "Nonrecourse Deductions" shall have the meaning, and the amount
thereof shall be, as set forth in Regulations Section 1.704- 2(c).
1.34 "Nonrecourse Liability" shall have the meaning set forth in
Regulations Section 1.704-2(b)(3).
1.35 "Percentage Interest" means the percentage interest of a Member in the
Company as set forth opposite the name of such Member under the column "Member's
Percentage Interest" on the Schedule.
1.36 "Person" means an individual, general partnership, limited
partnership, limited liability company, corporation, trust, estate, real estate
investment trust association or any other entity.
1.37 "Preferred Return" means, for each Member, a cumulative return
compounded annually of ten percent (10%) per annum (pro rated for periods of
less than 365 days) on the unpaid balance of such Member's Adjusted Capital
Contribution. For this purpose, a Member's Adjusted Capital Contribution shall
mean the excess of (1) the Member's Initial Capital Contribution to the Company,
over (2) Distributions to such Member under Section 6.12(a)(ii) of this
Agreement.
1.38 "Premises"means the property described in the Lease.
1.39 "Pro Rata Share" is defined in Section 7.9(b).
1.40 "Profits" and "Losses" means for each fiscal year or other period, an
amount equal to the Company's taxable income or loss, as the case may be, for
such year or period, determined in accordance with Section 703(a) of the Code
(for this purpose, all items of income, gain, loss and deduction required to be
stated separately pursuant to Section 703(a)(1) of the Code shall be included in
taxable income or loss); provided, however, for purposes of computing such
taxable income or loss: (i) any deductions for depreciation, cost recovery or
amortization attributable to any assets of the Company shall be determined by
reference to their Gross Asset Value, except that if the Gross Asset Value of an
asset differs from its adjusted tax basis for federal income tax purposes at any
time during such year or other period, the deductions for depreciation, cost
recovery or amortization attributable to such asset from and after the date
during such year or period in which such difference first occurs shall bear the
same ratio to the Gross Asset Value as of such date as the federal income tax
depreciation, amortization or other cost recovery deduction for such year or
other period from and after such date bears to the adjusted tax basis as of such
date; (ii) any
9512900003-629491.7
6.
<PAGE>
gain or loss attributable to the taxable disposition of any property shall be
determined by the Company as if the adjusted tax basis of such property as of
such date of disposition was such Gross Asset Value reduced by all amortization,
depreciation and cost recovery deductions (determined in accordance with clause
(i) above) which are attributable to said property; (iii) the computation of all
items of income, gain, loss and deduction shall be made without regard to any
basis adjustment under Section 743 of the Code, which may be made by the
Company; (iv) any receipts of the Company that are exempt from federal income
tax and are not otherwise included in taxable income or loss shall be added to
such taxable income or loss; and (v) any expenditures of the Company described
in Section 705(a)(2)(B) of the Code or treated as expenditures described in
Section 705(a)(2)(B) of the Code pursuant to Regulations Section 1.704-1(b)
shall be subtracted from such taxable income or loss.
1.41 "Regulations" means, unless the context clearly indicates otherwise,
the regulations currently in force as final or temporary that have been issued
by the U.S. Department of Treasury pursuant to its authority under the Code, and
the corresponding provisions of any successor regulations.
1.42 "Remaining Members" shall have the meaning ascribed to it in Section
8.1.
1.43 "Schedule" means the attachment hereto identifying the Members, their
residential or business addresses, their Percentage Interests, and the Capital
Contributions.
1.44 "Special Fee" shall have the meaning ascribed to it in Section 5.5.
1.45 "Subordinated Debt" means the debt in the sum of $800,000 which bears
interest at the rate of 10% per annum on the unpaid balance of the debt at the
end of each year of the debt, which interest shall be added to principal for the
following year, which is payable prior to the payment of any Distributions
hereunder, but subordinated to the other creditors of the Company and to a Tax
Draw all as set forth in the Subordinated Note instrument. The Subordinated Note
is a Member Nonrecourse Debt.
1.46 "Supermajority Interest" means the vote of Members holding more than
80% of the Percentage Interest.
ARTICLE 2.
ORGANIZATIONAL MATTERS
2.1 Formation. Pursuant to the Act, the Members have formed a California
limited liability company under the laws of the State of California by filing
the Articles with the California Secretary of State on June 6, 1997.
9512900003-629491.7
7.
<PAGE>
The rights and liabilities of the Members shall be determined pursuant to the
Act and this Agreement. To the extent that the rights or obligations of any
Member are different by reason of any provision of this Agreement than they
would be in the absence of such provision, this Agreement shall, to the extent
permitted by the Act, control.
2.2 Name. The name of the Company shall be "SAN JOSE GRILL LLC." The
business of the Company may be conducted under the name "The Grill". The Manager
shall file or cause to be filed any fictitious name certificates and similar
filings, and any amendments thereto, that the Manager considers appropriate or
advisable.
2.3 Term. The term of this Agreement shall be co-terminus with the period
of duration of the Company provided in the Articles, unless extended or sooner
terminated as hereinafter provided.
2.4 Office and Agent. The Company shall continuously maintain an office and
registered agent in the State of California as required by the Act. The
principal office of the Company shall be as the Manager may determine. The
Company also may have such offices, anywhere within and without the State of
California, as the Manager from time to time may determine, or the business of
the Company may require. The registered agent shall be as stated in the Articles
or as otherwise determined by the Manager.
2.5 Purposes of Company. The purpose of the Company is to engage in any
lawful activity for which a limited liability company may be organized under the
Act. Notwithstanding the foregoing, the Company shall not engage in any business
other than the business of owning and operating The Grill restaurant located in
the San Jose Fairmont Hotel, San Jose, California without the consent of all
Members.
ARTICLE 3.
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contributions. Subject to Section 9.11, the Members
have agreed to contribute to the capital of the Company, in cash, in the ratio
of the Percentage Interests within 5 days of receipt of a written request
therefor from the Manager, the aggregate amount of $400,000 as set forth on the
Schedule (the "Initial Capital Contribution"). The Manager is the owner of all
right, title and interest, together with all goodwill connected therewith, in
and to the Operating System, "Existing Marks" and Marks (collectively, the
"License Rights") and shall grant to the Company, during the term of this
Agreement, the exclusive rights to use the License Rights at the location
covered by the Lease pursuant to the Management Agreement. The Manager shall
receive no credit to its Capital Account for such contribution, nor shall the
Manager receive any compensation for such contribution except as set forth
herein.
9512900003-629491.7
8.
<PAGE>
3.2 Additional Capital Contributions. Except as provided in this Section
3.2 and Section 6.6, the Members shall not be required to contribute additional
capital to the Company. If, however, the Manager determines that additional
capital is necessary, the Manager may, from time to time, cause the Company to
attempt to borrow all or a portion of the necessary amount, or, by written
notice, call for the Members to make Additional Capital Contributions up to the
sum of $300,000. Such Additional Capital Contributions up to $300,000 shall be
contributed by the Members in the ratio of their Percentage Interests. The
obligation to make Additional Capital Contributions set forth in this
Section 3.2 shall be a personal liability of the Members which may be enforced
by any legal remedy.
3.3 Capital Accounts. The Company shall maintain on its books a Capital
Account for each Member. For this purpose, "Capital Account" means with respect
to each Member the amount of money contributed by such Member to the capital of
the Company, increased by the Gross Asset Value of any property contributed by
such Member to the capital of the Company (net of Liabilities securing such
contributed property that the Company is considered to assume or take subject to
under Section 752 of the Code), and the amount of any Profits allocated to such
Member, and decreased by the amount of money distributed to such Member by the
Company (exclusive of a guaranteed payment within the meaning of Section 707(c)
of the Code paid to such Member), the Gross Asset Value of any property
distributed to such Member by the Company (net of Liabilities securing such
distributed property that such Member is considered to assume or take subject to
under Section 752 of the Code), and the amount of any Losses charged to such
Member. To the extent an adjustment to the tax basis of any Company asset is
made pursuant to Code Sections 734(b) or 743(b), and such adjustment is required
by Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the Capital Accounts of the Members shall be
adjusted to reflect an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis), which is specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations. In the event the Gross Asset Values of Company assets are otherwise
adjusted pursuant to the terms of this Agreement, the Capital Accounts of the
Members shall be adjusted simultaneously to reflect the aggregate net adjustment
as if the Company recognized gain or loss equal to the amount of such aggregate
net adjustment and such gain or loss was allocated to the Members pursuant to
the appropriate provisions of this Agreement. The foregoing Capital Account
definition and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Regulations Section
1.704-1(b), and shall be interpreted and applied in a manner consistent with
such Regulations. The transferee of all or a portion of an Economic Interest
shall succeed to that portion of the transferor's Capital Account which is
allocable to the portion of the Economic Interest transferred. A Member who has
more than one Economic Interest in the Company shall have a single Capital
Account that reflects all such Economic Interests, regardless of the class of
Economic Interests owned by such Member and of the time or manner in which the
Economic Interests were acquired.
9512900003-629491.7
9.
<PAGE>
3.4 Treatment of Capital Contributions. Except as otherwise specifically
set forth in this Agreement, no Member shall:
3.4(a) receive any interest on its Capital Contributions or on the
balance in its Capital Account;
3.4(b) have the right to withdraw or reduce its Capital Contributions
or to receive any Distributions from the Company except for the
Distributions to be made in accordance with this Agreement;
3.4(c) have the right to demand or receive property other than cash in
return for its Capital Contributions or as Distributions;
3.4(d) be compelled to accept a Distribution of any asset in kind from
the Company in lieu of a proportionate Distribution of cash being made to
other Members; or
3.4(e) have priority over any other Member with respect to a return of
Capital Contributions or the allocations of Profits, Losses or
Distributions of Distributable Cash, except as set forth in this Agreement.
3.5 No Obligation to Fund Capital Account Deficit. Except as set forth in
this Article 3, if, after the Liquidation, allocations and Distributions
described in Section 10.5, a Member has a deficit balance in its Capital
Account, such Member shall not be required to fund any such deficit balance in
its Capital Account.
ARTICLE 4.
MEMBERS
4.1 Limited Liability. Except as required under the Act or as expressly set
forth in this Agreement, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.
4.2 Admission of Additional Members. The Manager may admit to the Company
additional Members, from time to time, subject to the following:
9512900003-629491.7
10.
<PAGE>
4.2(a) The Manager and Members holding a Supermajority Interest must
consent to the admission; and
4.2(b) The additional Member shall make a Capital Contribution in such
amount and on such terms as the Manager and the Members holding a
Supermajority Interest determine to be appropriate based upon the needs of
the Company, the net value of the Company's assets, the Company's financial
condition, and the benefits anticipated to be realized by the additional
Member.
4.3 Withdrawals or Resignations. A Member other than the Manager may
withdraw or resign from the Company, but such withdrawal will only result in the
conversion to an Economic Interest Owner and will not entitle the Member to any
distribution from the Company under Chapter 6 of the Act prior to the time he
would have received such distribution from the Company as a Member, nor shall
the withdrawing Member be relieved of any liabilities to the Company or its
creditors. The Manager may not withdraw as a Member.
4.4 Termination of Membership Interest. Upon the transfer of a Member's
Membership Interest in violation of this Agreement, the withdrawal of a Member
in accordance with Section 4.3, or the occurrence of an Event described in
Section 1.16 as to such Member which does not result in the dissolution of the
Company, unless the Company consents to the admission of a successor as a
Member, the Membership Interest of a Member shall be terminated by the Manager
and Articles 7 and 8 shall apply.
4.5 Transactions with the Company. Subject to Section 5.5 and any
limitations set forth in this Agreement and with the prior approval of the
Supermajority Interest after full disclosure of the Member's involvement, a
Member or its affiliate may lend money to and transact other business with the
Company. Subject to other applicable law, such Member has the same rights and
obligations with respect thereto as a Person who is not a Member.
4.6 Remuneration to Members. Except as specifically authorized in this
Agreement, no Member is entitled to remuneration for acting in the Company
business.
4.7 Voting Rights. Except as expressly provided in this Agreement or the
Articles, Members shall have no voting, approval or consent rights. The
following matters shall require the vote, approval or consent of a Supermajority
Interest of the Members in order to authorize or approve such act:
4.7(a) A decision to dissolve the Company;
4.7(b) Any amendment of the Articles or this Agreement;
9512900003-629491.7
11.
<PAGE>
4.7(c) A decision to merge the Company with or into another entity;
4.7(d) The continuation or election of a Manager under Section 5.2(c)
and (d) (which shall only require the vote set forth in those Sections);
4.7(e) A decision to compromise the obligation of a Member to make a
Capital Contribution or return money or property paid or distributed in
violation of the Act;
4.7(f) A sale or other disposition of all or a substantial part of the
Company's assets;
4.7(g) The refinancing of the property of the Company if secured by
such property and any borrowing of the Company if in excess of $10,000
other than the Subordinated Debt; or
4.7(h) Approval of the Construction Budget and annual operating and
capital budget of the Company as presented by the Manager.
4.7(i) Approval of a material deviation in the operation of the
business from the Construction Budget and annual operating and capital
budgets;
4.7(j) A decision to change the nature of the business or any other
fundamental decisions covering the business operations or structural
organization of the Company;
4.7(k) Approval of transactions between the Company and any Member or
Manager, except as otherwise expressly set forth herein;
4.7(l) The admission of additional Members to the Company; and
4.7(m) The lending of any money of the Company or the guarantying or
becoming liable for, directly or indirectly, the debts, obligations or
liabilities of anyone other than the Company.
4.8 Meetings of Members. Meetings of Members may be held in accordance
with the Act.
ARTICLE 5.
MANAGEMENT AND CONTROL OF THE COMPANY
5.1 Management of the Company by Manager.
5.1(a) Exclusive Management by Manager. Except as otherwise provided
herein, the business, property and affairs of the Company shall be managed
exclusively by the Manager. Except for situations in which the approval of
the Members is expressly required by the Articles or this Agreement, the
Manager shall have full, complete and exclusive authority, power, and
discretion to manage and control the business, property and affairs of the
Company, to make all decisions regarding those matters and to, perform or
cause to be performed any and all other acts or activities customary or
incident to the management of the Company's business, property and affairs.
9512900003-629491.7
12.
<PAGE>
5.1(b) Agency Authority of Manager. The Manager is authorized to
endorse checks, drafts, and other evidences of indebtedness made payable to
the order of the Company, and to sign contracts and obligations on behalf
of the Company. Notwithstanding the foregoing, during the construction of
the Restaurant, the expenditure of the funds set forth on the Construction
Budget submitted pursuant to Section 9.11 hereof shall require the
signature of the Manager and one representative of the Members other than
the Manager.
5.2 Appointment of Manager.
5.2(a) Number and Qualifications. The Company shall have one (1)
Manager which initially shall be Grill Concepts, Inc. The Manager must be a
Member.
5.2(b) Resignation. A Manager may resign in connection with the
Dissolution described in Section 8.1, and such resignation shall also be as
a Member.
5.2(c) Removal. The Members shall not have the right to remove a
Manager except for the Good Cause set forth in the Management Agreement by
a vote of the Majority Interest of the non- Manager Members. The removal of
a Member as a Manager is a Dissolution Event and shall affect the Manager's
rights as a Member and shall constitute a withdrawal of the Manager as a
Member.
5.2(d) Vacancies. Any vacancy occurring for any reason in the position
of Manager may be filled by the Majority Interest of the Members other than
the Manager as set forth in Section 4.7.
5.2(e) Members Have No Managerial Authority. The Members shall have no
power to participate in the management of the Company except as expressly
authorized by this Agreement or the Articles and except as expressly
required by the Act. No Member, acting solely in such capacity, is an agent
of the Company. Unless expressly and duly authorized in writing to do so by
a Manager or Managers, no Member shall have any power or authority to bind
or act on behalf of the Company in any way, to pledge its credit, to
execute any instrument on its behalf, or to render it liable for any
purpose.
9512900003-629491.7
13.
<PAGE>
5.3 Performance of Duties: Liability of Managers. The Manager shall perform
his managerial duties in good faith, in a manner it reasonably believes to be in
the best interests of the Company and its Members, and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances. In performing its duties, the Manager shall be
entitled to rely on information, opinions, reports, or statements, including
financial statements and other financial data, of the following persons or
groups unless they have knowledge concerning the matter in question that would
cause such reliance to be unwarranted and provided that the Manager acts in good
faith and after reasonable inquiry when the need therefor is indicated by the
circumstances:
5.3(a) one or more officers, employees or other agents of the Company
whom the Manager reasonably believes to be reliable and competent in the
matters presented; or
5.3(b) any attorney, independent accountant, or other person as to
matters which the Manager reasonably believes to be within such person's
professional or expert competence.
A Manager who so performs the duties of Manager shall not have any liability by
reason of being or having been a Manager of the Company. A Manager shall not be
liable to the Company or to any Member for any loss or damage sustained by the
Company or any Member, unless the loss or damage shall have been the result of
fraud, deceit, gross negligence, reckless or intentional misconduct, or a
knowing violation of law by the Manager.
5.4 Devotion of Time. The Manager is not obligated to devote all of his
time or business efforts to the affairs of the Company. The Manager shall devote
whatever time, effort, and skill as is necessary and appropriate for the
operation of a first-class, fine dining restaurant in the same manner as the
Grill in Beverly Hills, California.
5.5 Transactions between the Company and the Manager. Notwithstanding that
it may constitute a conflict of interest, the Manager may, and may cause his
Affiliates to, engage in any transaction (including, without limitation, the
purchase, sale, lease, or exchange of any property or the rendering of any
service, or the establishment of any salary, other compensation, or other terms
of employment) with the Company so long as such transaction is approved by the
Supermajority Interest. The Members acknowledge and by their execution hereof
approve the management fee to the Manager, in addition to Distributions to the
Manager under Article 6, as a guaranteed payment of the Company equal to 5% of
the gross receipts from the operation of the business, excluding the sale of the
business and any extraordinary events, such as condemnation, insurance proceeds
pursuant to the Management Agreement, plus as a Special Fee, a payment of one
dollar ($1) for each nine dollars ($9) of principal and interest paid on the
Subordinated Debt as such amounts are paid. This Management Fee and Special Fee
(in addition to the share of Profits and Distributions under Article 6) shall be
the sole and entire payment to the Manager for its services hereunder, and there
shall be no other charge for overhead, administration, organization, accounting,
salaries or any other expenses which are not direct on- site expenses of the
Company at the Premises without the consent of a Supermajority Interest of the
Members or as is provided in the Management Agreement.
9512900003-629491.7
14.
<PAGE>
5.6 Noncompetition.
5.6(a) The Lease in Section 57.b. contains a noncompetition clause
which applies to the Company in its relationship with Lessor. The Manager
and its Affiliates hereby agree that the provisions of such noncompetition
clause apply to Manager and its Affiliates as well as to the Company, so
the Manager and its Affiliates cannot open any restaurant without the
consent of the Supermajority Interest at the locations and during the
periods forbidden in the Lease.
5.6(b) Any Member (other than the Manager) and its officers,
directors, shareholders, partners, members, managers, agents, trustees,
employees or affiliates may engage or invest in, independently or with
others, any business activity of any type or description, including without
limitation, those that might be the same as or similar to the Company's
business and might be in direct or indirect competition with the Company.
Neither the Company nor any Member shall have any right in or to such other
ventures or activities, or to the income or proceeds derived therefrom. The
Members (other than the Manager) and their officers, directors,
shareholders, partners, members, managers, agents, trustees employees and
Affiliates may engage or invest in, independently or with others, any
business activity of any type or description, including without limitation
those that might be the same as or similar to the Company's business and
that might be in direct or indirect competition with the Company. Neither
the Company nor any Member shall have any right in or to such other
ventures or activities or to the income or proceeds derived therefrom. THE
MEMBERS ACKNOWLEDGE THAT LEWIS WOLFF IS A SUBSTANTIAL INVESTOR IN GRILL
CONCEPTS, INC., THE MANAGER AND IS A PARTNER WITH GRILL CONCEPTS, INC. AT
OTHER RESTAURANT LOCATIONS AND THAT THIS SECTION 5.6(b) APPLIES TO SUCH
INVESTMENTS.
5.6(c) The Members shall not be obligated to present any investment
opportunity or prospective economic advantage to the Company, even if the
opportunity is of the character that, if presented to the Company, could be
taken by the Company. The Members shall have the right to hold any
investment opportunity or prospective economic advantage for their own
account or to recommend such opportunity to Persons other than the Company.
The Members acknowledge that the Members and their Affiliates own and/or
manage other businesses, including businesses that may compete with the
Company and for the Members' time. Except as set forth herein, the Members
hereby waive any and all rights and claims which they may otherwise have
against the Members and their officers, directors, shareholders, partners,
trustees, members, managers, agents, employees and Affiliates as a result
of any of such activities.
9512900003-629491.7
15.
<PAGE>
5.7 Expenses. The Company shall reimburse the Manager and its Affiliates
only for the actual cost of goods and materials used for or by the Company if
acquired from Manager.
5.8 Acts of Managers as Conclusive Evidence of Authority. Any note,
mortgage, evidence of indebtedness, contract, certificate, statement,
conveyance, or other instrument in writing, and any assignment or endorsement
thereof, executed or entered into between the Company and any other person, when
signed by the Manager is not invalidated as to the Company by any lack of
authority of the signing Manager in the absence of actual knowledge on the part
of the other person that the signing Manager had no authority to execute the
same.
5.9 Officers.
5.9(a) Appointment of Officers. The Manager may appoint employees of
the Company as officers at any time as necessary for the operation of the
Company. The officers shall serve at the pleasure of the Manager, subject
to all rights, if any, of an officer under any contract of employment. Any
individual may hold any number of offices. No officer need be a resident of
the State of California or citizen of the United States. The officers shall
exercise such powers and perform such duties as shall be determined from
time to time by the Manager.
5.9(b) Removal, Resignation and Filling of Vacancy of Officers.
Subject to the rights, if any, of an officer under a contract of
employment, any officer may be removed, either with or without cause, by
the Manager at any time. Any officer may resign at any time by giving
written notice to the Manager. Any resignation shall take effect at the
date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of
the resignation shall not be necessary to make it effective. Any
resignation is without prejudice to the rights, if any, of the Company
under any contract to which the officer is a party.
5.9(c) Salaries of Officers. Subject to Sections 5.5 and 5.7, the
salaries of all on-site employees of the Company shall be fixed by the
Manager.
9512900003-629491.7
16.
<PAGE>
5.9(d) Acts of Officers as Conclusive Evidence of Authority. Any
contract, certificate, statement, or other instrument in writing which is
incurred in the ordinary course of business and the daily operation of the
Company, and any assignment or endorsement thereof, executed or entered
into between the Company and any other person, when signed by any officer
of the Company, is not invalidated as to the Company by any lack of
authority of the signing officers in the absence of actual knowledge on the
part of the other person that the signing officers had no authority to
execute the same.
5.10 Limited Liability. No person who is a Manager or officer or both a
Manager and officer of the Company shall be personally liable under any judgment
of a court, or in any other manner, for any debt, obligation, or liability of
the Company, whether that liability or obligation arises in contract, tort, or
otherwise, solely by reason of being a Manager or officer or both a Manager and
officer of the Company.
ARTICLE 6.
ALLOCATIONS OF PROFIT AND LOSS
AND DISTRIBUTIONS
6.1 Time of Allocations and Distributions. Distributions of Distributable
Cash and the determination of Profit and Loss allocations shall be made as soon
as practicable after the end of each fiscal year of the Company. The Manager
may, in its sole discretion, make distributions of Distributable Cash at
intervals during a fiscal year, and prior to the final determination of Profit
and Loss allocations and distributions to be made for that fiscal year. However,
any distributions prior to the end of a fiscal year shall be deemed only an
advance against the Distributions to be made at the end of that fiscal year and
shall be subject to a final determination of the actual amount to be distributed
for that fiscal year.
6.2 Allocations of Profits and Losses.
6.2(a) Except as set forth in 6.2(c) and (d) below, in each fiscal
year of the Company, Losses shall be allocated (i) to the Members in the
ratio and amount of the Additional Capital Contributions, if any, and
thereafter (ii) in the ratio of the Percentage Interests.
6.2(b) In each fiscal year of the Company, Profits shall be allocated
as follows:
(i) First, in the ratio and amount of Losses previously allocated
under Section 6.2(a)(ii) and next in the ratio and amount of Losses
previously allocated under Section 6.2(a)(i);
9512900003-629491.7
17.
<PAGE>
(ii) Second, to the Manager in an amount equal to the cash
distributed to the Manager under Section 6.12(a)(i);
(iii) Third, to Members in the amount of the Preferred Return
accrued to the Members in proportion to such accrued Preferred Return;
and
(iv) Fourth, 831/3% to the Members in the ratio of their
Percentage Interests and 162/3% to the Manager;
6.2(c) In the event Profits have been allocated pursuant to
Section 6.2(b)(iii) and (iv) for any prior year, Losses shall be allocated
(i) first to offset any Profits allocated pursuant to Section 6.2(b)(iv),
and (ii) next to offset any Profits allocated pursuant to
Section 6.2(b)(iii) in each case pro rata among the Members in proportion
to their respective shares of the Profits being offset. To the extent any
allocation of Profits is offset pursuant to this Section 6.2(c), such
Profits shall be disregarded in computing subsequent allocations pursuant
to this Article 6.
6.2(d) Losses allocated pursuant to Section 6.2(a) hereof shall not
exceed the maximum amount of Losses that can be so allocated without
causing any Member to have an Adjusted Capital Account Deficit at the end
of any fiscal year. In the event some, but not all, of the Members would
have Adjusted Capital Account Deficits as a consequence of an allocation of
Losses pursuant to Section 6.2(a), the limitation set forth in this Section
6.2(d) shall be applied on a Member-by-Member basis so as to allocate the
maximum permissible Loss to each Member under Regulations Section
1.704-1(b)(2)(ii)(d). In the event Losses are allocated to any Member(s)
under this Section 6.2(d), Profits shall first be allocated to those
Members in proportion and up to the amount of such Losses, before any other
allocation of Profits under this Section 6.2.
6.3 Nonrecourse Deductions; Minimum Gain Chargeback.
6.3(a) Nonrecourse Deductions of the Company (other than Member
Nonrecourse Deductions) shall be aggregated with all other items of Company
income, gain, loss and deduction in determining Profits and Losses of the
Company.
6.3(b) Except as provided in Regulations Section 1.704-2(f)(2) and
(3), if there is a net decrease in Company Minimum Gain for a Company
taxable year, each Member shall be allocated items of Company income and
gain for that year equal to that Member's share of the net decrease in
Company Minimum Gain, as determined under Regulations Section
1.704-2(g)(2). Any Company Minimum Gain required to be charged back
pursuant to the preceding sentence shall consist first of gain recognized
from the disposition of Company property subject to one or more nonrecourse
9512900003-629491.7
18.
<PAGE>
liabilities of the Company (other than any Member Nonrecourse Debt), and
then if necessary of a pro rata portion of the Company's other items of
income and gain for that year. If the amount of Company Minimum Gain
required to be recognized pursuant to the first sentence of this Section
6.3(b) exceeds the Company's income and gains for that year, such excess
shall carry over and be recognized under this Section 6.3(b) in each
succeeding year until such excess is eliminated.
6.4 Member Nonrecourse Deductions.
6.4(a) Member Nonrecourse Deductions for any fiscal year shall,
notwithstanding any other provision of this Article 6, be allocated to the
Member or Members who bear the economic risk of loss for the Member
Nonrecourse Debt to which the Member Nonrecourse Deductions are
attributable under Regulations Section 1.704-2(c). Economic risk of loss
shall be determined under the rules of Regulations Section 1.752-2. If more
than one Member bears the economic risk of loss for a Member Nonrecourse
Debt, any Member Nonrecourse Deduction attributable thereto shall be
allocated to the Members in accordance with the ratios in which they share
such risk of loss.
6.4(b) Except as provided in Regulations Section 1.704-2(i)(4), if
there is a net decrease in the minimum gain attributable to a Member
Nonrecourse Debt of the Company during a taxable year, then each Member
with a share of minimum gain attributable to Member Nonrecourse Debt at the
beginning of such taxable year shall be allocated income and gain for the
taxable year (and, if necessary, subsequent years) in proportion to, and to
the extent of the portion of the Member's share of the net decrease in
minimum gain attributable to such Member Nonrecourse Debt. Any minimum gain
required to be charged back pursuant to the preceding sentence shall
consist first of gains recognized from the disposition of Company property
subject to Member Nonrecourse Debt, and then if necessary of a pro rata
portion of the Company's other items of income and gain for that year.
6.5 Qualified Income Offset. Notwithstanding Section 6.2, after the
application of Sections 6.3 and 6.4, and in the event any Members unexpectedly
receive any adjustments, allocations, or distributions described in Regulations
Section 1.704-1(b)(2)(ii)- (d)(4), (5), or (6), items of Company profits shall
be specially allocated to such Members in an amount and manner sufficient to
eliminate the deficit balances in their Capital Accounts (excluding from such
deficit balance amounts Members are obligated to restore under this Agreement)
created by such adjustments, allocations, or distributions as quickly as
possible and in a manner which complies with Regulations Section
1.704-1(b)(2)(ii)(d).
6.6 Treatment of Special Allocations. Any special allocations of items of
Company income and gain pursuant to Sections 6.3, 6.4 and 6.5 are intended to
comply with the requirements of Regulations Section 1.704-2 and shall be
construed and applied consistent therewith. For so long as Revenue Procedure
95-10 is in effect, notwithstanding anything else herein, the Manager shall be
allocated the minimum amounts of Profits and Losses and shall make the minimum
amount of Capital Contributions, if any, required by such Revenue Procedure.
9512900003-629491.7
19.
<PAGE>
6.7 Tax Credits. All tax credits shall, subject to the applicable
provisions of the Code and Regulations Section 1.704- 1(b), be allocated to the
Members in accordance with their respective Percentage Interests in the Company
as of the time the tax credit arises. Each Member's allocable share of any tax
credit recapture shall bear the same ratio to the total credit recapture as such
Member's share of the original tax credit subject to recapture.
6.8 Depreciation Recapture. To the extent possible, each Member's allocable
share of Company Profits which is characterized as ordinary income pursuant to
Sections 1245 or 1250 of the Code, with respect to the disposition of an item of
Company property shall bear the same ratio to the total Profits of the Company
so characterized as such Member's share of the past depreciation and/or cost
recovery deductions taken with respect to the item of property bears to all the
Member's past depreciation and/or cost recovery deductions with respect to that
property.
6.9 Differing Tax Basis; Tax Allocation. The Members shall cause
depreciation and/or cost recovery deductions and gain or loss with respect to
each item of property to be allocated among the Members for federal income tax
purposes in accordance with the principles of Section 704(c) of the Code and
Regulations promulgated thereunder, so as to take into account the variation, if
any, between the adjusted tax basis of such property and its Gross Asset Value.
Any elections or other decisions relating to such allocations shall be made by
the Manager in any manner that reasonably reflects the purpose and intention of
this Agreement. Allocations pursuant to this Section 6.9 are solely for purposes
of federal and state income taxes and shall not affect, or in any way be taken
into account in computing, any Member's Capital Account or share of Profits,
Losses, other items, or distributions pursuant to any provisions of this
Agreement.
6.10 Sharing Between Transferor and Transferee.
6.10(a) Upon the transfer of all or any part of the Interest of a
Member, Profits and Losses shall be allocated between the transferor and
transferee on the basis of the computation method which in the reasonable
discretion of the Manager is in the best interests of the partnership,
provided such method is in conformity with the methods prescribed by
Section 706 of the Code and Regulations Section 1.706-1(c)(2)(ii).
Distributions of Distributable Cash shall be made to the holder of record
of an Economic Interest on the date of distribution. Any transferee of an
Economic Interest shall succeed to the Capital Account of the transferor
Member to the extent it relates to the transferred Economic Interest;
provided, however, that if such transfer causes a termination of the
Company pursuant to Section 708(b)(1)(B) of the Code, the Capital Accounts
of all Members, including the transferee, shall be redetermined as of the
date of such termination in accordance with Regulations Section 1.704-1(b).
9512900003-629491.7
20.
<PAGE>
6.10(b) Subject to the provisions of the Regulations Section
1.704-1(b), adjustments to the adjusted tax basis of Company property under
Section 743 and 732(d) of the Code shall not be reflected in the Capital
Account of the transferee Member or on the books of the Company, and
subsequent Capital Account adjustments for distributions, depreciation,
amortization, and gain or loss with respect to such property shall
disregard the effect of such basis adjustment.
6.11 Excess Nonrecourse Liability Safe Harbor. Pursuant to Regulations
Section 1.752-3(a)(3), solely for purposes of determining each Member's
proportionate share of the "excess nonrecourse liabilities" of the Company (as
defined in Regulations Section 1.752-3(a)(3)), the Members' respective interests
in Company profits shall be their Member Percentage Interests.
6.12 Distribution of Distributable Cash. In each fiscal year of the
Company, Distributions of Distributable Cash shall be made to the Members as
follows:
6.12(a) (i) First, 10% to the Manager and (ii) 90% to the Members in
the ratio of their Percentage Interests until the Members have received
under this 6.12(a)(ii) the amount of their Initial Capital Contributions of
$400,000;
6.12(b) Second, to the payment of the Preferred Return until the
entire accrued but unpaid Preferred Return has been paid pursuant to this
Section 6.12(b) in the proportion that the Preferred Return has accrued;
6.12(c) Third, to the Members in the ratio of their Percentage
Interests until the Additional Capital Contributions have been repaid under
this Section 6.12(c);
6.12(d) Thereafter, 162/3% to the Manager and 831/3% to the Members in
the ratio of their Percentage Interests.
6.12A Tax Draw. Notwithstanding Section 6.12, the Company shall make,
as a loan to the Manager, if Distributable Cash is available for such
purpose, prior to Distributions under Section 6.12 above and to payments on
the Subordinated Debt, an amount equal to (a) the maximum applicable
combined federal and state income tax rate times the cumulative net Profit
(net Profit in excess of net Losses) allocated to Manager pursuant to
Section 6.2 over the life of the Partnership, reduced by (b) the amount of
cash distributed to Manager as the Special Fee in Section 5.5 and the
Distributable Cash distributed to Manager as a Manager or Member under
Section 6.12 over the life of the Partnership. Such tax draw shall be a
loan which is a personal liability of the Manager to be repaid without
interest from the next Distributions due Manager under Section 6.12 as a
Manager or a Member, when Manager is no longer entitled to a tax draw under
this Section 6.12A. In any and all events, such tax draw shall be a
liability of the Manager to the Company upon the dissolution of the
Company.
9512900003-629491.7
21.
<PAGE>
6.13 In-Kind Distributions. Assets of the Company (other than cash) shall
not be distributed in kind to the Members without the prior approval of all
Members. If any assets of the Company are distributed to the Members in kind for
purposes of this Agreement, such assets shall be valued on the basis of the
Gross Asset Values thereof (without taking into account Section 7701(g) of the
Code) on the date of distribution. Any Member entitled to any interest in such
assets shall receive such interest as a tenant-in-common with the other
Member(s) so entitled with an undivided interest in such assets in the amount
agreed to by such Members. Upon such distribution, the Capital Accounts of the
Members shall be adjusted to reflect the amount of gain or loss that would have
been allocated to the Members pursuant to the appropriate provisions of this
Agreement had the Company sold the assets being distributed for their Gross
Asset Values (taking into account Section 7701(g) of the Code) immediately prior
to their distribution.
6.14 Restriction on Distributions.
6.14(a) No Distribution shall be made if, after giving effect to the
Distribution:
(i) The Company would not be able to pay its debts as they become
due in the usual course of business; or
(ii) The Company's total assets would be less than the sum of its
total liabilities plus, unless this Agreement provides otherwise, the
amount that would be needed, if the Company were to be dissolved at
the time of the Distribution, to satisfy the preferential rights of
other Members, if any, upon dissolution that are superior to the
rights of the Member receiving the Distribution.
6.14(b) The Manager may base a determination that a Distribution is
not prohibited hereunder on any of the following:
(i) Financial statements prepared on the basis of accounting
practices and principles that are reasonable in the circumstances;
9512900003-629491.7
22.
<PAGE>
(ii) A fair valuation; or
(iii) Any other method that is reasonable in the circumstances.
The effect of a Distribution is measured as of the date the Distribution is
authorized if the payment occurs within 120 days after the date of
authorization, or the date payment is made if it occurs more than 120 days of
the date of authorization.
6.14(c) A Member or Manager who votes for a Distribution in violation
of this Agreement or the Act is personally liable to the Company for the
amount of the Distribution that exceeds what could have been distributed
without violating this Agreement or the Act if it is established that the
Member or Manager did not act in compliance with Section 6.14(b) or Section
10.5. Any Member or Manager who is so liable shall be entitled to compel
contribution from (i) each other Member or Manager who also is so liable
and (ii) each Member for the amount the Member received with knowledge of
facts indicating that the distribution was made in violation of the
Agreement or the Act.
6.15 Return of Distributions. Except for Distributions made in violation of
the Act or this Agreement, no Member or Economic Interest Owner shall be
obligated to return any Distribution to the Company or pay the amount of any
Distribution for the account of the Company or to any creditor of the Company.
The amount of any Distribution returned to the Company by a Member or Economic
Interest Owner or paid by a Member or Economic Interest Owner for the account of
the Company or to a creditor of the Company shall be added to the account or
accounts from which it was subtracted when it was distributed to the Member or
Economic Interest Owner.
ARTICLE 7.
TRANSFER AND ASSIGNMENT OF INTERESTS
7.1 Transfer and Assignment of Interests. No Member shall be entitled to
transfer, assign, convey, sell, encumber or in any way alienate all or any part
of its, his or her Membership Interest except with the prior written consent of
the Supermajority Interest, which consent may be given or withheld, conditioned
or delayed (as allowed by this Agreement or the Act), as the Supermajority
Interest may determine. Transfers in violation of this Article 7 shall only be
effective to the extent set forth in Section 7.7. After the consummation of any
transfer of any part of a Membership Interest, the Membership Interest so
transferred shall continue to be subject to the terms and provisions of this
Agreement and any further transfers shall be required to comply with all the
terms and provisions of this Agreement.
7.2 Further Restrictions on Transfer of Interests. In addition to other
restrictions found in this Agreement, no Member
9512900003-629491.7
23.
<PAGE>
shall transfer, assign, convey, sell, encumber or in any way alienate all or any
part of its, his or her Membership Interest: (i) without registration under
applicable federal and state securities laws, or if requested by the Manager,
unless the Member delivers an opinion of counsel satisfactory to the Manager
that registration under such laws is not required; and (ii) if the Membership
Interest to be transferred, assigned, sold or exchanged, when added to the total
of all other Membership Interests sold or exchanged in the preceding twelve (12)
consecutive months prior thereto, would cause the termination of the Company
under the Code, as determined by the Manager.
7.3 Substitution of Members. A transferee of a Membership Interest shall
have the right to become a substitute Member only if (i) the requirements of
Sections 7.1 and 7.2 relating to consent of Members, securities and tax
requirements hereof are met, (ii) such Person executes an instrument reasonably
satisfactory to the Manager accepting and adopting the terms and provisions of
this Agreement, and (iii) such person pays any reasonable expenses in connection
with his or her admission as a new Member. The admission of a substitute Member
shall not result in the release of the Member who assigned the Membership
Interest from any liability that such Member may have to the Company.
7.4 Intentionally Omitted.
7.5 Effective Date of Permitted Transfers. Any permitted transfer of all or
any portion of a Membership Interest shall be effective on the first day of the
month following the date upon which the requirements of Sections 7.1, 7.2 and/or
7.3 have been met. The Manager shall provide the Members with written notice of
such transfer as promptly as possible after the requirements of Sections 7.1,
7.2 and/or 7.3 have been met. Any transferee of a Membership Interest shall take
subject to the restrictions on transfer imposed by this Agreement.
7.6 Rights of Legal Representatives. If a Member who is an individual dies
or is adjudged by a court of competent jurisdiction to be incompetent to manage
the Member's person or property, the Member's executor, administrator, guardian,
conservator, or other legal representative may exercise all of the Member's
rights for the purpose of settling the Member's estate or administering the
Member's property, including any power the Member has under the Articles or this
Agreement to give an assignee the right to become a Member. If a Member is a
corporation, trust, or other entity and is dissolved or terminated, the powers
of that Member may be exercised by his or her legal representative or successor.
7.7 No Effect to Transfers in Violation of Agreement. Upon any transfer of
a Membership Interest in violation of this Article 7, the transferee shall have
no right to vote or participate in the management of the business, property and
affairs of the Company or to exercise any rights of a Member. Such transferee
shall only be entitled to become an Economic Interest Owner and thereafter shall
only receive the share of the Company's taxable income, taxable loss and
Distributions of the Company's assets to which the transferor of such Economic
Interest would otherwise be entitled. Notwithstanding the immediately preceding
sentences, if, in the determination of the Manager, a transfer in violation of
this Article 7 would cause the termination of the Company under Section 708(b)
of the Code, in the sole discretion of the Manager, the transfer shall be null
and void and the purported transferee shall not become either a Member or an
Economic Interest Owner.
9512900003-629491.7
24.
<PAGE>
7.8 Right to Purchase Non-Economic Interest. Upon and contemporaneously
with any transfer, assignment, conveyance or sale (whether arising out of an
attempted charge upon that Member's Economic Interest by judicial process, a
foreclosure by creditor of the Member or otherwise) of all or any portion of a
Member's Economic Interest which does not at the same time transfer the balance
of the rights associated with the Membership Interest transferred by the Member
(including, without limitation, the rights of the Member to vote or participate
in the management of the business, property and affairs of the Company), the
Company shall purchase from the Member, and the Member shall sell to Company for
a purchase price of $1 for each Percentage Interest transferred, all remaining
rights and interests retained by the Member that immediately before the
transfer, assignment, conveyance or sale were associated with the transferred
Economic Interest. Such purchase and sale shall not, however, result in the
release of the Member from any liability to the Company as a Member. Each Member
acknowledges and agrees that the right of the Company to purchase such remaining
rights and interests from a Member who transfers a Membership Interest in
violation of this Article 7 is not unreasonable under the circumstances existing
as of the date hereof.
7.9 Right of First Refusal. Each time a Member proposes to transfer,
assign, convey, sell, encumber or in any way alienate all or any part of its,
his or her Membership Interest (or as required by operation of law or other
involuntary transfer to do so), such Member shall first offer such Membership
Interest to the Company and the non-transferring Members in accordance with the
following provisions:
7.9(a) Such Member shall deliver a written notice to the Company and
the other Members stating (i) such Member's bona fide intention to transfer
such Membership Interest, (ii) the name and address of the proposed
transferee, (iii) the Membership Interest to be transferred, and (iv) the
purchase price and terms of payment for which the Member proposes to
transfer such Membership Interest.
9512900003-629491.7
25.
<PAGE>
7.9(b) Within thirty (30) days after receipt of the notice described
in Section 7.9(a), each non-transferring Member shall notify the Manager in
writing of its, his or her desire to purchase a portion of the Membership
Interest being so transferred. The failure of any Member to submit a notice
within the applicable period shall constitute an election on the part of
that Member not to purchase any of the Membership Interest which may be so
transferred. Each Member so electing to purchase shall be entitled to
purchase a portion of such Membership Interest in the same proportion that
such Member's Percentage Interest bears to the aggregate of the Percentage
Interests of all of the Members electing to so purchase the Membership
Interest being transferred (the "Pro Rata Share"). In the event any Member
elects to purchase less than all of its, his or her Pro Rata Share, then
the other Members can elect to purchase more than their Pro Rata Share. If
such Members fail to purchase the entire Membership Interest being
transferred, the Company may purchase any remaining share of such
Membership Interest.
7.9(c) Within ninety (90) days after receipt of the notice described
in Section 7.9(a) the Company and the Members electing to purchase such
Membership Interest shall have the first right to purchase or obtain such
Membership Interest upon the price and terms of payment designated in such
notice. If such notice provides for the payment of non-cash consideration,
the Company and such purchasing Members each may elect to pay the
consideration in cash equal to the good faith estimate of the present fair
market value of the non-cash consideration offered.
7.9(d) If the Company and/or the other Members elect not to purchase
all of the Membership Interest designated in such notice, then the
transferring Member may transfer the Membership Interest described in the
notice to the proposed transferee, providing such transfer (i) is completed
within thirty (30) days after the expiration of the Company's and the other
Members' right to purchase such Membership Interest, (ii) is made at the
price and terms designated in such notice, and (iii) the requirements of
Sections 7.1 and 7.2 relating to consent of the Members, securities and tax
requirements hereof are met. If such Membership Interest is not so
transferred, the transferring Member must give notice in accordance with
this Section prior to any other or subsequent transfer of such Membership
Interest.
ARTICLE 8.
CONSEQUENCES OF DEATH, DISSOLUTION,
RETIREMENT OR BANKRUPTCY
8.1 Dissolution Event. Upon the occurrence of any Dissolution Event, the
Company shall dissolve unless the remaining members ("Remaining Members")
holding a Majority Interest of the remaining Membership Interests consent within
ninety (90) days of the Dissolution Event to the continuation of the business of
the Company. In the event of a Dissolution Event with respect to the Manager or
the termination of the Management Agreement due to the fault of Manager, the
Manager hereby agrees that it shall sell its entire Membership Interest in the
Company back to the Company for the sum of One Dollar ($1), it being the
agreement of the Members that any voluntary withdrawal, retirement, resignation
of the Manager or removal of the Manager for Good Cause as set forth in the
Management Agreement and Section 5.2(c), which shall be an expulsion, or the
bankruptcy or dissolution of the Manager or the termination of the Management
Agreement due to the fault of Manager, so that the Manager no longer performs
its obligations hereunder and under the Management Agreement, is an event which
would cause such harm to the Company that such purchase is a fair payment to the
Manager for its Membership Interest and not a penalty or forfeiture. In the
event that the Remaining Members vote by a Majority Interest to continue the
Company, the Remaining Members voting by a Majority Interest shall elect a new
Manager.
9512900003-629491.7
26.
<PAGE>
8.2 Withdrawal. A Member shall not have the right to withdraw from the
Company except as provided in Section 4.3. If a Member withdraws as provided in
Section 4.3, it, he or she will be treated as a Former Member. In the event of
the occurrence of an event described in Section 1.13 to a Member who is not a
Manager, the Member or his successor-in-interest shall become a Former Member
and shall only have an Economic Interest and not a Membership Interest as
described in Sections 7.6 and 7.7 unless the Members consent to the admission of
a successor-in-interest pursuant to Article 7.
8.3 Buyout Right.
8.3(a) In the event that the Minimum Return Event has occurred, the
Manager has the option exercisable for the five-year period commencing on
the first day of the fiscal year after the Minimum Return Event was
achieved to purchase the Membership Interests of the Members other than the
Manager for the sum of $2,000,000 (the "Purchase Price") which shall be
paid to such Members in the ratio of their Percentage Interests. The
Purchase Price will be reduced during the Option Period by an amount equal
to 20.833% of the Distributions under Section 6.12(d) during the Option
Period. The option will expire in the event that fifty percent (50%) of the
Distributions under Section 6.12(d) in any two years of the Option Period
are less than the sum of $200,000 per year. In the event fifty percent
(50%) of the Distributions under Section 6.12(d) are less than $200,000 in
a single year during the Option Period, and the option is thereafter
exercised, the Purchase Price will be increased by the amount by which the
sum of $200,000 exceeds fifty percent (50%) of the Distributions under
Section 6.12(d) for such year.
8.3(b) In the event the Manager determines to exercise the option, the
Manager shall send a written notice to each of the Members specifying a
closing date of not more than 60 days from the exercise of the option and
setting forth the computation of the Purchase Price. At the closing, the
Manager shall pay the Purchase Price in cash, and the Members shall perform
all such acts and execute all such documents and assurances as reasonably
may be required by Manager, to convey to Manager the Membership Interests
in the Company free and clear of all liens, claims or encumbrances.
9512900003-629491.7
27.
<PAGE>
ARTICLE 9.
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
9.1 Books and Records. The books and records of the Company shall be kept,
and the financial position and the results of its operations recorded, in
accordance with Generally Accepted Accounting Principles. The books and records
of the Company shall reflect all the Company transactions and shall be
appropriate and adequate for the Company's business. The Company shall maintain
at its principal office all of the following:
9.1(a) A current list of the full name and last known business or
residence address of each Member and Economic Interest Owner set forth in
alphabetical order, together with the Capital Contributions, Capital
Account and Percentage Interest of each Member and Economic Interest Owner;
9.1(b) A current list of the full name and business or residence
address of each Manager;
9.1(c) A copy of the Articles and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which
the Articles or any amendments thereto have been executed;
9.1(d) Copies of the Company's federal, state, and local income tax or
information returns and reports, if any, for the six most recent taxable
years;
9.1(e) A copy of this Agreement and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which
this Agreement or any amendments thereto have been executed;
9.1(f) Copies of the financial statements of the Company, if any, for
the six most recent Fiscal Years; and
9.1(g) The Company's books and records as they relate to the internal
affairs of the Company for at least the current and past four Fiscal Years.
9.2 Delivery to Members and Inspection.
9512900003-629491.7
28.
<PAGE>
9.2(a) (i) Upon the request of any Member or Economic Interest Owner
for purposes reasonably related to the interest of that Person as a Member
or Economic Interest Owner, the Manager shall promptly deliver to the
requesting Member or Economic Interest Owner, at the expense of the
Company, a copy of the information required to be maintained by Sections
9.1(a), (b) and (d).
(ii) The Manager shall deliver to the Members at least quarterly
copies of the financial statements of the Company for the most recent
quarter and the year to date, containing at least a balance sheet,
profit and loss statement, and Manager's narrative explanation.
9.2(b) Each Member, Manager and Economic Interest Owner has the right,
upon reasonable request for purposes reasonably related to the interest of
the Person as Member, Manager or Economic Interest Owner, to:
(i) inspect and copy during normal business hours any of the
Company records described in Sections 9.1(a) through (g); and
(ii) obtain from the Manager, promptly after their becoming
available, a copy of the Company's federal, state, and local income
tax or information returns for each Fiscal Year.
9.2(c) Any request, inspection or copying by a Member or Economic
Interest Owner under this Section 9.2 may be made by that Person or that
Person's agent or attorney.
9.3 Annual Statements.
9.3(a) The Manager shall cause to be prepared at least annually, at
Company expense, information necessary for the preparation of the Members'
federal and state income tax returns. The Manager shall send or cause to be
sent to each Member or Economic Interest Owner as soon as practicable after
the end of each fiscal year such information as is necessary to complete
federal and state income tax or information returns, and, a copy of the
Company's federal, state, and local income tax or information returns for
that year.
9.3(b) The Manager shall cause to be filed at least annually with the
California Secretary of State the report required under Section 17060 of
the Act.
9.4 Financial and Other Information. The Manager shall provide such
financial and other information relating to the Company or any other Person in
which the Company owns, directly or indirectly, an equity interest, as a Member
may reasonably request. The Manager shall distribute to the Members, promptly
after the preparation or receipt thereof by the Manager, any financial or
other information relating to any Person in which the Company owns,
directly or indirectly, an equity interest, including any filings
by such Person under the Securities Exchange Act of 1934, as
amended, that is received by the Company with respect to any equity
interest of the Company in such Person.
9512900003-629491.7
29.
<PAGE>
9.5 Filings. The Manager, at Company,expense, shall cause the income tax
returns for the Company to be prepared and timely filed with the appropriate
authorities. The Manager, at Company expense, shall also cause to be prepared
and timely filed, with appropriate federal and state regulatory and
administrative bodies, amendments to, or restatements of, the Articles and all
reports required to be filed by the Company with those entities under the Act or
other then current applicable laws, rules, and regulations. If a Manager
required by the Act to execute or file any document fails, after demand, to do
so within a reasonable period of time or refuses to do so, any other Manager or
Member may prepare, execute and file that document with the California Secretary
of State.
9.6 Bank Accounts. The Manager shall maintain the funds of the Company in
one or more separate bank accounts in the name of the Company, and shall not
permit the funds of the Company to be commingled in any fashion with the funds
of any other Person.
9.7 Accounting Decisions and Reliance on Others. All decisions as to
accounting matters, except as otherwise specifically set forth herein, shall be
made by the Manager. The Manager may rely upon the advice of his accountants as
to whether such decisions are in accordance with accounting methods followed for
federal income tax purposes.
9.8 Tax Matters for the Company Handled by HOTEL EQUITY FUND III, L.P..
HOTEL EQUITY FUND III, L.P. shall from time to time cause the Company to make
such tax elections as it deems to be in the best interests of the Company and
the Members. HOTEL EQUITY FUND III, L.P. shall be designated as "Tax Matters
Partner" (as defined in Code Section 6231), to represent the Company (at the
Company's expense) in connection with all examinations of the Company's affairs
by tax authorities, including resulting judicial and administrative proceedings,
and to expend the Company funds for professional services and costs associated
therewith. In its capacity as "Tax Matters Partner", HOTEL EQUITY FUND III, L.P.
shall oversee the Company tax affairs in the overall best interests of the
Company.
9.9 Tax Status and Returns.
9.9(a) Accountants. The Company's accountant shall be selected by the
Manager.
9512900003-629491.7
30.
<PAGE>
9.9(b) Status as Company for Tax Purposes. Any provision hereof to the
contrary notwithstanding, solely for United States federal income tax
purposes, each of the Members hereby confirms that the Company will be
subject to all provisions of Subchapter K of Chapter 1 of Subtitle A of the
Code; provided, however, the filing of U.S. Partnership Returns of Income
shall not be construed to extend the purposes of the Company or expand the
obligations or liabilities of the Members.
9.10 Tax Withholding.
9.10(a) The Manager is authorized and directed to cause the Company to
withhold from or pay on behalf of any Member the amount of federal, state,
local or foreign taxes that the Manager, after consultation with such
Member, reasonably believes the Company is required to withhold or pay with
respect to any amount distributable or allocable to such Member pursuant to
this Agreement, including, without limitation, any taxes required to be
paid by the Company pursuant to Code Sections 1441, 1442, 1445 or 1446 and
any taxes imposed by any state or other taxing jurisdiction on the Company
as an entity. Without limiting the foregoing, the Manager shall cause the
Company to withhold (and remit to the appropriate governmental authority),
from amounts otherwise distributable to a Member, any taxes that such
Member notifies the Manager in writing should be withheld, which notice
shall be given by any Member who becomes aware of any withholding
obligation to which it is subject and shall specifically set forth, inter
alia, the rate at which tax should be withheld and the name and address to
which any amounts withheld should be remitted.
9.10(b) If the Company is required to withhold and pay over to taxing
authorities amounts on behalf of a Member exceeding available amounts then
remaining to be distributed to such Member, such payment by the Company
shall constitute a loan to such Member that is repayable by the Member on
demand, together with interest at the applicable federal rate determined
from time to time under Code Section 7872(f)(2) or the maximum rate
permitted under applicable law, whichever is less, calculated upon the
outstanding principal balance of such loan as of the first day of each
month. Any such loan shall be repaid to the Company, in whole or in part,
as determined by the Manager in its sole discretion, either (i) out of any
distributions from the Company which the Member is (or becomes) entitled to
receive, or (ii) by the Member in cash upon demand by the Member (said
Member bearing all of the Company's costs of collection, including
reasonable attorneys' fees, if payment is not remitted promptly by the
Member after such a demand for payment).
9.10(c) Each Member agrees to cooperate fully with all efforts of the
Company to comply with its tax withholding and information reporting
obligations and agrees to provide the Company with such information as the
Manager may reasonably request from time to time in connection with such
obligations.
9512900003-629491.7
31.
<PAGE>
9.11 The Manager shall prepare a Construction Budget for the opening of the
restaurant and deliver such Construction Budget to the Members at least
concurrently with the delivery of the detailed preliminary plans and
specifications required under paragraph 3 of the Lease. The Majority Interest of
the Members must approve such Construction Budget concurrently with the approval
of the Landlord of the Tenant's Plans under paragraph 3 of the Lease. The
Manager may not call for Initial Capital Contributions from the Members in
excess of $50,000 prior to the approval by the Supermajority Interest of the
Construction Budget and approval by the Landlord under paragraph 3 of the Lease.
In the event that Landlord does not approve of the Company's plans and
specifications or the Supermajority Interest does not approve of the
Construction Budget, the Company shall dissolve with no further obligations on
behalf of the Members or the Manager. In such event, any remaining assets of
the Company shall be distributed to the Members in the ratio of their Percentage
Interests.
9.12 The Manager shall present an annual operating budget and annual
capital improvements budget in December of each year for the following year
which must be approved by the Majority Interest pursuant to Section 4.7.
ARTICLE 10.
DISSOLUTION AND WINDING UP
10.1 Dissolution. The Company shall be dissolved, its assets shall be
disposed of, and its affairs wound up on the first to occur of the following:
10.1(a) Upon the happening of any event of dissolution specified in
the Articles;
10.1(b) Upon the entry of a decree of judicial dissolution pursuant to
the Act;
10.1(c) Upon the vote of the Members holding the Percentage Interests
set forth in Section 4.7;
10.1(d) The occurrence of a Dissolution Event and the failure of the
Remaining Members to consent in accordance with Section 8.1 to continue the
business of the Company within ninety (90) days after the occurrence of
such event; or
10.1(e) The sale of all or substantially all of the assets of the
Company.
10.2 Certificate of Dissolution. As soon as possible following the
occurrence of any of the events specified in Section 10.1, the Manager if he has
not wrongfully dissolved the Company or the Members, if he has shall execute a
Certificate of Dissolution in such form as shall be prescribed by the California
Secretary of State and file the Certificate as required by the Act.
9512900003-629491.7
32.
<PAGE>
10.3 Winding Up. Upon the occurrence of any event specified in Section
10.1, the Company shall continue solely for the purpose of winding up its
affairs in an orderly manner, liquidating its assets, and satisfying the claims
of its creditors. The Manager if he has not wrongfully dissolved the Company, or
if he has, then the Members, shall be responsible for overseeing the winding up
and liquidation of Company, shall take full account of the liabilities and
assets of the Company, shall either cause its assets to be sold or distributed,
and if sold (as promptly as is consistent with obtaining the fair market value
thereof) shall cause the proceeds therefrom, to the extent sufficient therefor,
to be applied and distributed as provided in Section 10.5. The Persons winding
up the affairs of the Company shall give written notice of the commencement of
winding up by mail to all known creditors and claimants whose addresses appear
on the records of the Company.
10.4 Distributions in Kind. Any non-cash asset distributed to one or more
Members shall first be valued at its fair market value to determine the taxable
income or taxable loss that would have resulted if such asset were sold for such
value, such taxable income or taxable loss shall then be allocated pursuant to
Article 6, and the Members' Capital Accounts shall be adjusted to reflect such
allocations. The amount distributed and charged to the Capital Account of each
Member receiving an interest in such distributed asset shall be the fair market
value of such interest (net of any liability secured by such asset that such
Member assumes or takes subject to). The fair market value of such asset shall
be determined by the Manager or by the Members or if any Member objects by an
independent appraiser (any such appraiser must be recognized as an expert in
valuing the type of asset involved) selected by the Manager or liquidating
trustee and approved by the Members.
10.5 Order of Payment and Distribution Upon Dissolution. Upon a dissolution
of the Company, the Members shall take or cause to be taken a full account of
the Company's assets and liabilities as of the date of such dissolution and
shall proceed with reasonable promptness to liquidate the Company's assets and
to terminate its business. The cash proceeds from the liquidation, as and when
available therefor, shall be applied in the following order of priority:
10.5(a) to the payment of all taxes, debts and other obligations and
liabilities of the Company and the necessary expenses of liquidation;
provided, however, that all debts, obligations and other liabilities of the
Company as to which personal liability exists with respect to any Member
shall be satisfied, or a reserve shall be established therefor, prior to
the satisfaction of any debt, obligation or other liability of the Company
as to which no such personal liability exists; and provided, further, that
where a contingent debt, obligation or liability exists, a reserve, in such
amount as the Manager deems reasonable and appropriate, shall be
established to satisfy such contingent debt, obligation or liability, which
reserve shall be distributed as provided in this subsection (a) only upon
the termination of such contingency;
9512900003-629491.7
33.
<PAGE>
10.5(b) the balance, if any, shall be distributed to the Members in
accordance with the Capital Accounts.
10.6 Limitations on Payments Made in Dissolution. Except as otherwise
specifically provided in this Agreement, each Member shall only be entitled to
look solely at the assets of Company for the return of its, his or her positive
Capital Account balance and shall have no recourse for its, his or her Capital
Contribution and/or share of taxable income (upon dissolution or otherwise)
against the Manager or any other Member except as provided in Article 11.
10.7 Certificate of Cancellation. The Manager or Members who filed the
Certificate of Dissolution shall cause to be filed in the office of, and on a
form prescribed by, the California Secretary of State, a certificate of
cancellation of the Articles upon the completion of the winding up of the
affairs of the Company.
10.8 No Action for Dissolution. Except as expressly permitted in this
Agreement, a Member shall not take any voluntary action that directly causes a
Dissolution Event. The Members acknowledge that irreparable damage would be done
to the goodwill and reputation of the Company if any Member should bring an
action in court to dissolve the Company under circumstances where dissolution is
not required by Section 10.1. This Agreement has been drawn carefully to provide
fair treatment of all parties and equitable payment in liquidation of the
Economic Interests. Accordingly, except where the Manager has failed to
liquidate the Company as required by this Article 10, each Member hereby waives
and renounces his or her right to initiate legal action to seek the appointment
of a receiver or trustee to liquidate the Company or to seek a decree of
judicial dissolution of the Company on the ground that (a) it is not reasonably
practicable to carry on the business of the Company in conformity with the
Article or this Agreement, or (b) dissolution is reasonably necessary for the
protection of the rights or interests of the complaining Member. Damages for
breach of this Section 10.8 shall be in monetary damages only (and not specific
performance) and the damages may be offset against distributions by the Company
to which such Member would otherwise be entitled.
9512900003-629491.7
34.
<PAGE>
ARTICLE 11.
INDEMNIFICATION AND INSURANCE
11.1 Indemnification of Agents. The Company shall indemnify any Person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he or she is
or was a Member, Manager, officer, employee or other agent of the Company or
that, being or having been such a Member, Manager, officer, employee or agent,
he or she is or was serving at the request of the Company as a manager,
director, officer, employee or other agent of another limited liability company,
corporation, partnership, joint venture, trust or other enterprise (all such
persons being referred to hereinafter as an "agent"), to the fullest extent
permitted by applicable law in effect on the date hereof and to such greater
extent as applicable law may hereafter from time to time permit.
11.2 Insurance. The Company shall have the power to purchase and maintain
insurance on behalf of any Person who is or was an agent of the Company against
any liability asserted against such Person and incurred by such Person in any
such capacity, or arising out of such Person's status as an agent, whether or
not the Company would have the power to indemnify such Person against such
liability under the provisions of Section 11.1 or under applicable law.
11.3 Type of Insurance. Manager shall at all times during the term of this
Agreement, procure and maintain insurance as required by the Lease.
11.4 Policies and Endorsements.
11.4(a) The reasonable cost of all such insurance policies shall be an
expense chargeable to the Company. If any such policy of insurance covers
properties other than, or afford protection in connection with activities
occurring other than in connection with, the Premises, only an allocable
portion, reasonably determined by Manager, of the cost of such insurance
shall be an expense chargeable to the Premises.
11.4(b) All insurance provided for under Section 11 of this Agreement
shall be effected by policies issued by insurance companies of good
national reputation and adequate financial responsibility, licensed to do
business in the State.
11.4(c) Where permitted, all policies of insurance required under
Section 11 shall be carried in the name of Company and shall name Manager
as additional named insured.
9512900003-629491.7
35.
<PAGE>
ARTICLE 12.
MISCELLANEOUS
12.1 Counsel to the Company. Counsel to the Company may also be counsel to
any Manager or any Affiliate of a Manager. The Manager may execute, on behalf of
the Company and the Members, any consent to the representation of the Company
that counsel may request pursuant to the California Rules of Professional
Conduct or similar rules in any other jurisdiction. By his execution hereof,
each Member specifically acknowledges that Greenberg Glusker Fields Claman &
Machtinger LLP has represented Lewis Wolff on an ongoing and continuous basis,
and that Herzog, Fisher and Grayson has represented Manager on an ongoing and
continuous basis. Since there are actual and potential conflicts of interest
among the Members due to their differing classes and differing economic and
management interests in the Company, each Member should have separate
representation to avoid the possibility that Greenberg Glusker Fields Claman &
Machtinger LLP may be influenced in its representation of the Company by its
representation of Wolff and his Affiliates and that Herzog, Fisher and Grayson
may be influenced in its representation of the Company by its representation of
the Manager. It is possible that if each Member had separate counsel, such
counsel might structure the formation of the Company and the transaction in a
fashion different than the structure contemplated by the Company. By his
execution hereof, each Member confirms that either he has consulted with
separate counsel or has determined not to obtain such separate representation
and agrees to waive any conflict which is created by the representation of
Greenberg Glusker Fields Claman & Machtinger LLP of both Wolff and his
Affiliates and the Company and the representation of Herzog, Fisher and Grayson
of both Manager and its affiliates and the Company.
12.2 Complete Agreement. This Agreement and the Articles constitute the
complete and exclusive statement of agreement among the Members and Manager with
respect to the subject matter herein and therein and replace and supersede all
prior written and oral agreements or statements by and among the Members and
Manager or any of them. No representation, statement, condition or warranty not
contained in this Agreement or the Articles will be binding on the Members or
Manager or have any force or effect whatsoever. To the extent that any provision
of the Articles conflict with any provision of this Agreement, the Articles
shall control.
12.3 Binding Effect. Subject to the provisions of this Agreement relating
to transferability, this Agreement will be binding upon and inure to the benefit
of the Members, and their respective successors and assigns.
12.4 Parties in Interest. Except as expressly provided in the Act, nothing
in this Agreement shall confer any rights or remedies under or by reason of this
Agreement on any Persons other than the Members and Manager and their respective
successors and assigns nor shall anything in this Agreement relieve or discharge
the obligation or liability of any third person to any party to this Agreement,
nor shall any provision give any third person any right of subrogation or action
over or against any party to this Agreement.
9512900003-629491.7
36.
<PAGE>
12.5 Pronouns; Statutory References. All pronouns and all variations
thereof shall be deemed to refer to the masculine, feminine, or neuter, singular
or plural, as the context in which they are used may require. Any reference to
the Code, the Regulations, the Act, Corporations Code or other statutes or laws
will include all amendments, modifications, or replacements of the specific
sections and provisions concerned.
12.6 Headings. All headings herein are inserted only for convenience and
ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
12.7 Interpretation. In the event any claim is made by any Member relating
to any conflict, omission or ambiguity in this Agreement, no presumption or
burden of proof or persuasion shall be implied by virtue of the fact that this
Agreement was prepared by or at the request of a particular Member or his or her
counsel.
12.8 References to this Agreement. Numbered or lettered articles, sections
and subsections herein contained refer to articles, sections and subsections of
this Agreement unless otherwise expressly stated.
12.9 Power of Attorney. To the extent not inconsistent with the terms of
this Agreement, each Member hereby irrevocably constitutes and appoints the
Manager his true and lawful attorney- in-fact, with full power and authority, in
his name, place and stead, to make, execute, consent to, swear to, seal,
acknowledge, record and file:
12.9(a) any certificate or other instruments which may be required to
be filed by the Company or the Member under the laws of the State of
California or any jurisdiction in which the Company is conducting, or
proposes to conduct, business;
12.9(b) any and all amendments or modifications of the instruments
described in subsection (a);
12.9(c) all certificates and other instruments which may be required
to effect the dissolution and termination of the Company pursuant to the
provisions of this Agreement;
12.9(d) subject to the provisions of Section 4.7 hereof, any deed,
promissory note, deed to secure debt, bill of sale and other instruments
necessary or appropriate in connection with the sale, leasing, development,
operation or financing of the Company's property or any part thereof; and
9512900003-629491.7
37.
<PAGE>
12.9(e) all such other instruments and agreements as such
attorney-in-fact may deem necessary or desirable in order to carry out the
provisions of this Agreement in accordance with its terms.
Each member hereby acknowledges and agrees that the power of attorney hereby
given is a power coupled with an interest and is irrevocable.
12.10 Disputed Matters; Arbitration. Except as otherwise provided in this
Agreement, any controversy or dispute arising out of this Agreement, the
interpretation of any of the provisions hereof, or the action or inaction of any
Member or Manager hereunder shall be submitted to arbitration in Los Angeles,
California before a retired California Superior Court or Court of Appeal judge
selected by the American Arbitration Association under the commercial
arbitration rules then obtaining of said Association. Any award or decision
obtained from any such arbitration proceeding shall be final and binding on the
parties, and judgment upon any award thus obtained may be entered in any court
having jurisdiction thereof. No action at law or in equity based upon any claim
arising out of or related to this Agreement shall be instituted in any court by
any Member or Manager except (a) an action to compel arbitration pursuant to
this Section 12.10 or (b) an action to enforce an award obtained in an
arbitration proceeding in accordance with this Section 12.10.
12.11 Exhibits. All Exhibits attached to this Agreement. are incorporated
and shall be treated as if set forth herein.
12.12 Severability. If any provision of this Agreement or the application
of such provision to any person or circumstance shall be held invalid, the
remainder of this Agreement or the application of such provision to persons or
circumstances other than those to which it is held invalid shall not be affected
thereby.
12.13 Additional Documents and Acts. Each Member agrees to execute and
deliver such additional documents and instruments and to perform such additional
acts as may be necessary or appropriate to effectuate, carry out and perform all
of the terms, provisions, and conditions of this Agreement and the transactions
contemplated hereby. In particular, each Member agrees that to the extent
required by any licensing authorities or any other public authority, such Member
shall cooperate and make available all reasonably necessary information and
execute all necessary documents to enable the Company to qualify for and obtain
all required licenses.
9512900003-629491.7
38.
<PAGE>
12.14 Notices. Any notice to be given or to be served upon the Company or
any party hereto in connection with this Agreement must be in writing (which may
include facsimile) and will be deemed to have been given and received when
delivered to the address specified by the party to receive the notice. Such
notices will be given to a Member or Manager at the address specified in
Schedule A hereto. Any party may, at any time by giving five (5) days prior
written notice to the other parties, designate any other Address in substitution
of the foregoing address to which such notice will be given.
12.15 Amendments. All amendments to this Agreement will be in writing and
approved as set forth in Section 4.7.
12.16 Reliance on Authority of Person Signing Agreement. If a Member is not
a natural person, neither the Company nor any Member will (a) be required to
determine the authority of the individual signing this Agreement to make any
commitment or undertaking on behalf of such entity or to determine any fact or
circumstance bearing upon the existence of the authority of such individual or
(b) be responsible for the application or distribution of proceeds paid or
credited to individuals signing this Agreement on behalf of such entity.
12.17 No Interest in Company Property; Waiver of Action for Partition. No
Member or Economic Interest Owner has any interest in specific property of the
Company. Without limiting the foregoing, each Member and Economic Interest Owner
irrevocably waives during the term of the Company any right that he or she may
have to maintain any action for partition with respect to the property of the
Company.
12.18 Multiple Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
12.19 Attorney Fees. In the event that any dispute between the Company and
the Members or among the Members should result in litigation or arbitration, the
prevailing party in such dispute shall be entitled to recover from the other
party all reasonable fees, costs and expenses of enforcing any right of the
prevailing party, including without limitation, reasonable attorneys' fees and
expenses.
12.20 Time is of the Essence. All dates and times in this Agreement are of
the essence.
12.21 Remedies Cumulative. The remedies under this Agreement are cumulative
and shall not exclude any other remedies to which any person may be lawfully
entitled.
9512900003-629491.7
39.
<PAGE>
12.22 Governing Law. The local, internal laws of California govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the Members. The Members agree that any appropriate
state or federal district court located in Los Angeles County, California, shall
have sole and exclusive jurisdiction over any case or controversy arising
hereunder and shall be the proper forum in which to adjudicate such case or
controversy. No attorney shall be precluded from representing a Member in
connection with any case, claim, controversy or dispute because of having
represented the Company and/or Manager.
IN WITNESS WHEREOF, all of the Members of SAN JOSE GRILL LLC, a California
limited liability company, have executed this Agreement, effective as of the
date written above.
GRILL CONCEPTS, INC.
By:
-----------------------------
Its:
-----------------------------
HOTEL EQUITY FUND III, L.P.,
a Delaware limited partnership
By Hotel Capital Partners III, L.P.,
a Delaware limited partnership
Its General Partner
By MW Partners III, L.L.C.,
a Delaware limited liability company
Its Administrative General Partner
By:
----------------------------
One of Its Members
9512900003-629491.7
40.
<PAGE>
SCHEDULE A
Member Capital Contribution Member's Percentage Interest
- ----------- -------------------- ----------------------------
Grill Concepts, Inc. $200,200 50.05
11661 San Vicente Blvd.
Suite 404
Los Angeles, CA 90049
HOTEL EQUITY FUND III, L.P. $199,800 49.95
c/o Wolff DiNapoli, L.L.C.
11828 La Grange Avenue
Suite 200
Los Angeles, CA 90025
9512900003-629491.7
41.
<PAGE>
Exhibit 10.8
AMENDMENT OF OPERATING AGREEMENT
AND
ASSIGNMENT, ASSUMPTION AND CONSENT
1. Identification
---------------
This Amendment of Operating Agreement and Assignment, Assumption and
Consent, effective as of December __, 1997, is entered into by Hotel Equity Fund
III, a Delaware limited partnership (the "Assignor"), Light Tower Restaurant
Associates, LLC, a California limited liability company (the "Assignee") and
Grill Concepts, Inc. ("Grill").
2. Recitals
--------
2.1. San Jose Grill LLC (the "Company") is a California limited liability
company whose Articles of Organization were filed on June 6, 1997 with the
Secretary of State of the State of California. The Company is governed by an
Operating Agreement (the "Agreement") made as of June 17, 1997. 2.2. As of the
date hereof, Assignor holds a Membership Interest in the Company with a Member's
Percentage Interest of 49.95%. 2.3. Assignor desires to assign to Assignee and
Assignee desires to accept, all of Assignor's right, title and interest in and
to the Company and any and all appurtenances thereto, including, without
limitation, (i) all of Assignor's voting rights, information rights, inspection
rights, enforcement rights, withdrawal rights, and all rights incidental or
ancillary to the foregoing; and (ii) all of Assignor's rights to the capital,
profits, losses, and distributions of the Company (collectively,
the "Assigned Interest") on the terms and conditions set forth
herein.
<PAGE>
3. Assignment
----------
Subject to the consent of the Member under Section 5 hereof, Assignor
hereby assigns the Assigned Interest to Assignee.
4. Acceptance, Assumption and Substitution
----------------------------------------
Subject to the consent of the Member under Section 5 hereof, Assignee
hereby accepts the foregoing assignment of the Assigned Interest, agrees to be
bound by and assumes (i) each and all of the terms and provisions of the
Operating Agreement, and (ii) all obligations and duties of the Assignor
thereunder. Assignee assumes and agrees to pay, perform and discharge all of
Assignor's past, present and future liabilities as a Member of the Company.
Effective upon consent of the Member under Section 5 hereof, Assignee shall be a
substituted Member of the Company in lieu of Assignor, and Assignor withdraws
from the Company and shall cease to be a Member of the Company.
5. Consent
-------
As required by the Operating Agreement, the consent to Assignor's
assignment of the Assigned Interest to Assignee, Assignee's substitution as a
Member of the Company in place of Assignor, and Assignor's withdrawal as a
Member of the Company shall be deemed effective upon execution and delivery
hereof by Assignor, Assignee and the other Member of the Company.
9512900003-690412.1
2
<PAGE>
6. No Other Changes
----------------
Except as otherwise set forth herein, the Operating Agreement shall remain
unchanged and in full force and effect.
7. Filing of Necessary Documents
-----------------------------
The Manager shall file, publish and record such documents or instruments,
if any, as may be required to reflect the foregoing.
8. Further Acts
-------------
Assignor and Assignee shall execute any additional documents or amendments
of documents, and shall take such further actions, as may be necessary to effect
the transfer of the Assigned Interest from Assignor to Assignee and the
substitution of Assignee in the place and stead of Assignor as a Member of the
Company.
9. Counterparts
------------
This document may be signed in any number of counterparts, each of which
shall be deemed to be an original hereof.
9512900003-690412.1
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment of Operating
Agreement and Assignment, Assumption and Consent.
"ASSIGNOR"
HOTEL EQUITY FUND III, L.P., a Delaware
limited partnership
Dated:
------------ By: Hotel Capital Partners III, L.P., a
Delaware limited Partnership
Its: General Partner
By: MW Partners III, L.L.C., a
Delaware limited liability
company
Its: Administrative General Partner
By:
-----------------------------
One of Its Members
[signatures continued on next page]
9512900003-690412.1
4
<PAGE>
[signatures continued from previous page]
"ASSIGNEE"
LIGHT TOWER RESTAURANT ASSOCIATES LLC, a
California limited liability company
Dated:
------------- By: Hotel Equity Fund III, L.P., a
Delaware limited liability company
Its: Manager
By: Hotel Capital Partners III,
L.P., a Delaware limited
Partnership
Its: General Partner
By: MW Partners III, L.L.C.,
a Delaware limited
liability company
Its: Administrative General
Partner
By:
---------------------------
One of Its Members
"GRILL"
GRILL CONCEPTS, INC.
By:
---------------------------
Its:
---------------------------
9512900003-690412.1
5
Exhibit 10.9
SUBORDINATED NOTE
December __, 1997 $800,000.00
SAN JOSE GRILL LLC, a California limited liability company (herein called
"Company"), for value received, hereby promises to pay to LIGHT TOWER RESTAURANT
ASSOCIATES LLC, a California limited liability company, or its assigns (the
"Holder") the principal sum of $800,000 on or before twenty years from the
opening date of the Grill restaurant at the San Jose Fairmont (the "Start Date")
and the interest thereon as set forth herein. The principal and accrued interest
shall be paid by Company to Holder from all Distributable Cash of Company, as
defined in that certain Operating Agreement of Company in which Holder is a
Member, prior to the payment of any Distribution (as defined in said Operating
Agreement) to the Members of Company.
Payments on this Note made on or before the first anniversary of the Start
Date shall be credited to principal. The principal balance remaining at such
first anniversary, after crediting such principal payments, shall bear interest
in an amount equal to ten percent (10%) of such remaining principal balance and
such accrued interest shall be added to said remaining principal balance.
Payments made on this Note during each annual period commencing with the
first anniversary and continuing to each succeeding anniversary of the Start
Date thereafter shall be credited first to the interest previously added to the
Note which has not been previously paid until an amount equal to such accrued
but unpaid interest has been paid in full and thereafter ayments during each
such period shall be credited to the balance of the principal. The principal
balance remaining at the second anniversary of the Start Date and each
succeeding anniversary thereafter (including as a portion thereof any interest
theretofore added but not paid) shall bear interest in an amount equal to ten
percent (10%) of such remaining principal balance on such anniversary date and
such accrued interest shall be added to said remaining principal balance.
9512900003-660499.3
<PAGE>
For example, assume the Start Date is December 1, 1997. During the period
December 1, 1997 through November 30, 1998 $200,000 is paid on the Note. On
December 1, 1998, the principal balance of the Note shall be increased by
$60,000 of accrued interest to the sum of $660,000. Assume during the period
December 1, 1998 through November 30, 1999 the sum of $40,000 is paid on the
Note. The remaining principal balance at November 30, 1999 shall be $620,000.
$40,000 of accrued but unpaid interest shall be considered to have been paid in
such year. On December 1, 1999, the principal balance of the Note shall increase
by $62,000 to $682,000. Assume $92,000 is paid during the year commencing
December 1, 1999 through November 30, 2000. $82,000 shall be considered accrued
interest and $10,000 shall be considered principal. On December 1, 2000 the
principal balance shall be $649,000.
All available Distributable Cash shall be paid to Holder until all
principal and accrued interest has been paid in full, and in any event the
entire principal balance of the Note plus accrued interest shall be due and
payable on the twentieth anniversary of the Start Date (the "Due Date"). After
the Due Date if the Note is not paid, the unpaid balance shall bear interest at
the maximum rate of interest permitted by law.
9512900003-660499.3
2
<PAGE>
The Holder agrees that the payment of principal and interest or any other
amounts pursuant to this Note is hereby expressly subordinated in right of
payment to the prior payment in full of senior indebtedness, which means (i) all
indebtedness of the Company, present or future, to trade creditors; (ii) all
obligations of the Company for the Management Fee described in Section 5.5 of
the Operating Agreement; for the Special Fee described in Section 5.5 of the
Operating Agreement, for The Tax Draw described in Section 6.12A of the
Operating Agreement; and (iii) any indebtedness approved under Section 4.7(g) of
the Operating Agreement which provides that such indebtedness is senior or
superior in right to the payment of the Subordinated Notes.
In the event of any sale by Company of all or substantially all of its
assets, this Note including all principal and accrued interest hereunder, shall
be immediately due and payable. In such event, accrued interest hereunder shall
include all accrued interest previously added to the principal balance which has
not theretofore been paid, plus interest in an amount equal to 10% (multiplied
by the number of months elapsed since the previous anniversary date and divided
by 12) of the remaining principal balance (including as a portion thereof any
interest theretofore added but not paid) as it existed immediately prior to the
sale by Company of all or substantially all of its assets. The Holder of this
Note shall look only to the assets of the Company and not to the Members of the
Company or the Manager who have no personal liability as this is a non-recourse
note payment of which shall be solely from the assets of the Company.
9512900003-660499.3
3
<PAGE>
The occurrence of any of the following events shall constitute a Default
under this Note:
(a) The breach by Maker or failure of Maker to perform any obligation,
covenant, condition, representation, or warranty contained in this Note,
provided, however, that Maker shall have the right to cure any such breach or
failure by performing in full as required hereunder or under the terms of any
such agreement, instrument or document within thirty (30) days of written notice
of such breach or failure.
(b) The filing by Maker of a petition commencing a voluntary case under the
federal bankruptcy laws, or commencing any proceeding under any other federal or
state bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute, whether now or hereafter in effect;
or the filing by Maker of a petition with or application to any court or
tribunal for the appointment of a custodian, receiver, liquidator, assignee,
trustee, sequestrator, or other similar person for it or any substantial part of
its assets; or the making of a general assignment or general arrangement by
Maker or Endorser for the benefit of creditors; or the admission by Maker or
Endorser in writing of its inability to meet its debts as such debts become due;
or the entry of a decree or order for relief by a court having jurisdiction in
the premises in respect of the Maker in an involuntary case under the federal
bankruptcy laws or any other federal or state bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect, which
order remains unstated and in effect for thirty (30) consecutive days or more;
or the entry of a decree or order for relief by a court having jurisdiction in
the premises appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or other similar person for the Maker or for any substantial part
of its assets which order remains unstayed and in effect for thirty (30)
consecutive days or more; or the taking of or failing to take any act which
indicates Maker's consent to, approval of or acquiescence in any such petition,
application, proceeding or order; or the occurrence of an involuntary sale or
transfer of a substantial part of its assets including, without limitation, a
sale pursuant to an attachment or execution, a pledgee's sale or other sale by
any secured creditor, a tax lien sale, a transfer to or sale by any trustee in
bankruptcy, guardian, conservator, or any other person who may succeed by
operation of law or otherwise to any or of Maker's or Endorser's assets.
9512900003-660499.3
4
<PAGE>
Upon the occurrence of a Default, as defined above, the Holder shall have,
at his option, the right without further notice or demand, which Maker hereby
expressly waives to declare the unpaid principal and all accrued interest
thereon immediately due and payable and to exercise any other rights and
remedies that the Holder may have. Failure to exercise the foregoing option on
the happening of one or more events of Default shall not constitute a waiver of
the right to exercise such option at any subsequent time in respect of the same
event or any other event of Default. The acceptance of the Holder of any payment
hereunder which is less than the payment in full of all amounts due and payable
at the time of such payment shall not constitute a waiver by the Holder of any
right to declare a Default hereunder or to pursue any remedy available at law or
in equity. Maker hereby waives presentment, demand of payment, protest, notice
of protest, notice of dishonor, and notice of non-payment and any or all other
notices whatsoever.
The provisions of this Note shall inure to the benefit of the
successors-in-interest, administrators and assigns of the Holder hereof and
shall be binding upon the heirs, executors, administrators,
successors-in-interest and assigns of Maker.
9512900003-660499.3
5
<PAGE>
If any Default occurs hereunder, the undersigned Maker promises to pay all
costs of enforcement and collection, including, without limitation, attorneys'
fees,
All notices and other communications hereunder shall be given as follows:
To Maker: SAN JOSE GRILL LLC
11661 San Vicente Blvd., Suite 404
Los Angeles, CA 90049
To Holder: c/o Wolff DiNapoli LLC
11828 La Grange Avenue, Suite 200
Los Angeles, CA 90025-5200
Attention: Lewis M. Wolff
All such notices and communications shall be deemed to have been given and made
upon the date of delivery (if delivered personally) or if mailed and sent by
registered or certified mail, return receipt requested, postage prepaid and
addressed as specified in this paragraph, on the third business day after
deposit in a regularly maintained receptacle for the deposit in United States
mail. Any party may change its address by written notice in accordance with this
paragraph.
9512900003-660499.3
6
<PAGE>
The terms and provisions of this Note shall be construed and enforced under
the laws of the State of California. If any term or provision of this Note or
any application of such provision is determined by a court of competent
jurisdiction to be illegal, invalid or unenforceable for any reason whatsoever,
such illegality, invalidity or unenforceability shall not affect the balance of
the terms and provisions of this Note, which terms and provisions shall remain
in full force and effect, to the fullest extent possible. Maker's obligations
under this Note may only be altered or terminated by a written instrument
executed by Maker and the Holder of this Note at the time enforcement of any
discharge is sought.
All amounts payable hereunder shall be denominated and paid in U.S. dollars
and made in any coin and currency of the United States of America which on the
date or respective dates of payment is legal tender for the payment of public
and private debts.
SAN JOSE GRILL LLC
By: Grill Concepts, Inc.
Its: Manager
By:
-------------------------
9512900003-660499.3
7
Exhibit 21.1
List of Subsidiaries
--------------------
GRILL CONCEPTS, INC.
Name State of Incorporation
------ ----------------------
Grill Concepts, Inc. California
Uno Concepts of Cherry Hill, Inc. New Jersey
Uno Concepts of New Jersey, Inc. New Jersey
Uno Concepts, Inc. New Jersey
C.T.S., Inc. Pennsylvania
Alcoli 66, Inc. New Jersey
Grill Concepts D.C., Inc. District of Columbia
Grill on the Alley, Inc. California
Emndee, Inc. California
San Jose Grill LLC California
Grill Concepts Acquisition Corp., Inc. California
b:/ms/subsidia.gci
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
the 1995 Stock Option Plan of Grill Concepts, Inc. (Form S-8, File No.
333-04181) of our report dated March 20, 1998, on our audits of the consolidated
financial statements of Grill Concepts, Inc. and subsidiaries as of December 28,
1997 and December 29, 1996, and for the years then ended, which report is
included in the Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 30, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 272,567
<SECURITIES> 0
<RECEIVABLES> 375,117
<ALLOWANCES> 0
<INVENTORY> 302,631
<CURRENT-ASSETS> 1,905,644
<PP&E> 10,340,678
<DEPRECIATION> 4,277,546
<TOTAL-ASSETS> 9,010,855
<CURRENT-LIABILITIES> 3,128,287
<BONDS> 699,364
0
3
<COMMON> 157
<OTHER-SE> 5,183,047
<TOTAL-LIABILITY-AND-EQUITY> 9,010,855
<SALES> 28,900,657
<TOTAL-REVENUES> 28,900,657
<CGS> 7,919,959
<TOTAL-COSTS> 7,919,959
<OTHER-EXPENSES> 21,379,571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,406
<INCOME-PRETAX> (472,279)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (477,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (477,279)
<EPS-PRIMARY> (0.03
<EPS-DILUTED> 0
</TABLE>
