<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 26, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-23226
GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3319172
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
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(Address of Principal Executive Offices) (Zip Code)
Registrant'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, $.00004 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, 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-K or any amendment to this
Form 10-K. [ X ]
4,003,738 shares of common stock of the Registrant were outstanding as of
March 15, 2000. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the closing price on
the NASDAQ Small-Cap Market, was approximately $5,129,589.
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 26, 1999 are
incorporated by reference into Part III.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
ITEM 1. BUSINESS..................................................... 1
ITEM 2. PROPERTIES................................................... 15
ITEM 3. LEGAL PROCEEDINGS............................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS....................... 16
ITEM 6. SELECTED FINANCIAL DATA...................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK..................................... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 30
ITEM 11. EXECUTIVE COMPENSATION....................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................. 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K............................... 31
</TABLE>
SIGNATURES
<PAGE>
PART I
This Form 10-K 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 31 of this Form 10-K.
ITEM 1. BUSINESS
General
Grill Concepts, Inc. and its subsidiaries (the "Company") develop and
operate casual dining restaurants under the name "Daily Grill" and fine dining
restaurants under the name "The Grill on the Alley." In addition, the Company
owns and operates, or has management or licensing agreements with respect to,
other restaurant properties.
The Company was incorporated under the laws of the State of Delaware in
November of 1985 to acquire and operate franchised Pizzeria Uno restaurants.
Since its acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, the Company has focused principally on the expansion of the
"Daily Grill" restaurant format of GCI.
At December 26, 1999, the Company owned and operated fifteen restaurants
and managed or licensed four additional restaurants, consisting of ten Daily
Grill restaurants, three Pizzeria Uno Restaurants, and two The Grill on the
Alley restaurants which are owned and operated by the Company, two Daily Grill
restaurants and a City Bar & Grill restaurant which are managed by the Company
and one Daily Grill restaurant which is licensed by the Company. With the
exception of (1) The Grill on the Alley restaurant located in the San Jose
Fairmont Hotel, which is operated by a partnership in which the Company has a
50.05% interest, and (2) the Daily Grill at Universal Studios, which is operated
by a partnership in which the Company has a 50% interest, all of the Daily Grill
and The Grill on the Alley restaurants which were owned and operated at December
26, 1999 were solely owned and operated on a non-franchise basis by the Company.
The three Pizzeria Uno Restaurants are operated pursuant to franchise
agreements.
During 1999, the Company (1) opened a new Daily Grill restaurant in
Universal Studios, California, (2) converted a managed restaurant in the Burbank
Hilton Hotel to a Daily Grill format, (3) began management of a Daily Grill
in the Georgetown Inn, and (4) began, and subsequently terminated,
management of a Daily Grill restaurant in the Salt Lake City Hilton.
During 1999, the Company continued to pursue a strategic growth plan
whereby the Company plans to open, and/or convert, and operate, and/or manage,
Daily Grill and The Grill on the Alley restaurants in hotel properties in
strategic markets throughout the United States. Management believes that the
opening of restaurants in hotel properties in strategic markets will help
further establish brand name recognition for the opening of free standing
restaurants in those markets. To facilitate the planned entry into the hotel
restaurant market, the Company entered into an agreement (the "Hotel Property
Agreement") with Hotel Restaurant Properties, Inc. ("HRP") pursuant to which HRP
has agreed to assist the Company in locating suitable hotel locations for the
opening of restaurants and negotiating and entering into leases or management
agreements for those properties.
The Burbank Hilton Hotel Daily Grill, City Bar & Grill and Georgetown Inn
Daily Grill are operated pursuant to the terms of the Hotel Property Agreement.
The Grill on the Alley at the Chicago Westin Hotel is scheduled to open in
June of 2000.
<PAGE>
The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 1999 and 1998 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):
<PAGE>
<TABLE>
<CAPTION>
1998 1999
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<S> <C> <C>
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year.............. 8 9
Restaurant openings............ 1 1
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End of year.................... 9 10
Managed Restaurants:
Beginning of year.............. 0 0
Restaurant openings............ 0 3
Restaurants closed or sold..... 0 (1)
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End of year.................... 0 2
Total Daily Grill restaurants:
Beginning of year.............. 8 9
Restaurant openings............ 1 4
Restaurants closed or sold..... 0 (1)
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End of year.................... 9 12
=============
Grill restaurants:
Company Restaurants:
Beginning of year.............. 1 2
Restaurant openings............ 1 0
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End of year.................... 2 2
Managed Restaurants:
Beginning of year.............. 0 0
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End of year.................... 0 0
Total Grill restaurants:
Beginning of year.............. 1 2
Restaurant openings............ 1 0
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End of year.................... 2 2
=============
Other restaurants/1/:
Company Restaurants:
Beginning of year.............. 3 3
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End of year.................... 3 3
Managed or Licensed Restaurants:
Beginning of year.............. 2 3
Restaurant openings............ 3 0
Restaurants closed or sold..... (2) (1)
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End of year.................... 3 2
Total Other restaurants:
Beginning of year.............. 5 6
Restaurant openings............ 3 0
Restaurants closed or sold..... 2 (1)
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End of year.................... 6 5
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Total restaurants:
Beginning of year.............. 14 17
Restaurant openings............ 5 4
Restaurants closed or sold..... (2) (2)
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End of year.................... 17 19
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</TABLE>
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/1/Includes three Pizza Restaurants operated by the Company pursuant to
franchise agreements; the LAX Daily Grill and Rhino Chasers which were sold
during 1998; and restaurants in two hotel properties for which the Company
assumed management during 1998. Operation of the LAX Daily Grill was licensed
to CA One during 1998 and is reflected as both a Managed Restaurant opening and
sale during 1998. One of the managed hotel restaurants was converted to a Daily
Grill format in January of 1999 and is reflected as both a Managed Daily Grill
restaurant opening and a Managed Other restaurant closed or sold during 1999.
<PAGE>
<TABLE>
<CAPTION>
1998 1999
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<S> <C> <C>
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants........................... $ 54,927 $ 55,545
Managed Restaurants........................... n.a. $ n.a.
Grill restaurants:
Company Restaurants........................... $ 68,913 $ 71,447
Managed Restaurants........................... n.a. n.a.
Other restaurants:
Company Restaurants........................... $ 32,860 $ 32,093
Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants........................... 5.8% 1.1%
Managed Restaurants........................... n.a. n.a.
Grill restaurants
Company Restaurants........................... 4.5% 3.7%
Managed Restaurants........................... n.a. n.a.
Other restaurants:
Company Restaurants........................... 1.9% (2.3)%
Total system sales:
Daily Grill................................... $23,411,536 $25,994,890
Grill......................................... $ 5,926,544 $ 7,430,460
Pizza Restaurants............................. $ 5,126,209 $ 5,006,536
Management and license fees................... $ 443,816 $ 544,090
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Total......................................... $34,908,105 $38,975,976
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</TABLE>
Restaurant Concepts
- -- Daily Grill Restaurants
Background. At December 26, 1999, the Company, through its subsidiary,
GCI, owned and operated or managed nine Daily Grill restaurants in Southern
California and three Daily Grill restaurants in the Washington, D.C./Virginia
market. 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. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, or managed and as either
hotel based or based in shopping malls and other commercial properties. At
December 26, 1999, the Company operated twelve Daily Grill restaurants, nine of
which were 100% owned by the Company and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
Studios, California and two of which were managed by the Company and located in
hotels.
Daily Grill locations opened, or are scheduled to open, in the following
months and years, are owned or managed as indicated and, where indicated, are
located in the referenced hotels:
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<TABLE>
<CAPTION>
Ownership
Interest or
Location Opened Managed Hotel
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<S> <C> <C> <C>
Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Encino, California April 1992 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California January 1999 Managed Hilton Hotel
Washington, D.C. April 1999 Managed Georgetown Inn
Universal Studios, California May 1999 50%
</TABLE>
Each 100% owned 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. For non-hotel based restaurants, 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 100% owned restaurants, are high-end, mid-size retail
shopping malls in large residential areas with significant daytime office
populations and some entertainment facilities. Historically, Daily Grill
restaurants have been anchor tenants at high profile malls and, therefore, have
received significant tenant improvement allowances.
Each hotel based Daily Grill restaurant is, or will be, located on the
premises of a hotel. Hotel based Daily Grill restaurants may be newly
constructed facilities or remodeled facilities. Such facilities may be leased
by the Company, operated pursuant to a partnership or joint venture arrangement
or operated pursuant to a management agreement. As with non-hotel based
restaurants, site selection is viewed as critical and, accordingly, significant
effort is exerted to assure that each site selected is appropriate. The site
selection process is the responsibility of HRP which identifies suitable
locations and negotiates leases or management agreements for those properties.
See "-- Hotel Property Agreement."
Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet, of which approximately 30% 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 $1.2 million per restaurant.
Existing hotel based Daily Grill restaurants range in size from 5,000 to
8,000 square feet, of which approximately 30% is devoted to kitchen and service
areas, and seat between 140 and 250 persons. Management anticipates that
additional hotel based Daily Grill restaurants will require minimal capital
investment on the Company's part. However, each hotel restaurant arrangement
will be negotiated separately and the capital investment by the Company may vary
widely. Opening costs of existing hotel restaurants, including leasehold
improvements, furniture, fixtures and equipment and pre-opening expenses, have
ranged from $150,000 to $600,000 per restaurant.
Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. 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, spaghetti and meatballs, 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 $8.95 for an "original" beef dip sandwich to
$20.95 for a char-broiled 16 oz. T-bone steak with all the trimmings. The
average lunch check is $12.50 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
<PAGE>
beverages, including beer, wine and full bar service. During the year ended
December 26, 1999, food and non-alcoholic beverage sales constituted
approximately 86% of the total restaurant revenues for the Daily Grill
restaurants, with alcoholic beverages accounting for the remaining 14%.
Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the
Daily Grill are cooked from scratch utilizing fresh food ingredients. The
Company's management believes that its standards for ingredients and the
preparation of menu items are among the most stringent in the industry.
Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.
Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week. 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 very open with a mix of booths and tables.
Several of the restaurants have counters for singles to feel comfortable. The
restaurant 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, nor accepting, 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.
<PAGE>
- -- The Grill on the Alley
Background. At December 26, 1999, the Company, through its subsidiary,
GCI, owned and operated two The Grill on the Alley restaurants ("Grill"), one in
Beverly Hills, California and one in San Jose, California.
The original 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.
In April of 1996, the Company acquired the original 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).
Restaurant Sites. At December 26, 1999, the Company operated two Grill
restaurants, one of which is a non-hotel based facility and one of which is a
hotel based facility.
Grill locations opened, or are scheduled to open, in the following months
and years, are owned or managed as indicated and, where indicated, in the
referenced hotels:
<TABLE>
<CAPTION>
Ownership
Interest or
Location Opened Managed Hotel
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<S> <C> <C> <C>
Beverly Hills, California January 1984/2/ 100%
San Jose, California May 1998 50.05% Fairmont Hotel
Chicago, Illinois Scheduled June 2000 60.00% Westin Hotel
</TABLE>
The Company's Grill restaurants are located in leased facilities. As with
the Company's Daily Grill restaurants, 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. For non-hotel based Grill
restaurants, 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. Because of
the upscale nature of Grill restaurants, convenience for business patrons is
considered a key site selection criteria.
Each hotel based Grill restaurant is, or will be, located on the premises
of a hotel. Hotel based Grill restaurants may be newly constructed facilities
or remodeled facilities. Such facilities may be leased by the Company, operated
pursuant to a partnership or joint venture arrangement or operated pursuant to a
management agreement. As with free standing restaurants, 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 existing non-hotel based Grill restaurant is approximately 4,300 square
feet, of which approximately 1,500 square feet is devoted to kitchen and service
areas, and seats 120 persons. Because of the unique nature of Grill
restaurants, the size, seating capacity and opening costs of future sites cannot
be reasonably estimated.
- ---------------------
/2/The original The Grill on the Alley was acquired by the Company in April
1996.
<PAGE>
The existing hotel based Grill restaurant is approximately 8,000 square
feet, of which approximately 30% is devoted to kitchen and service areas, and
seats 280 persons. Management anticipates that additional hotel based Grill
restaurants will require minimal capital investment on the Company's part.
However, each hotel restaurant arrangement will be negotiated separately and the
capital investment by the Company may vary widely. Opening costs of the existing
hotel based restaurant, including leasehold improvements, furniture, fixtures
and equipment and pre-opening expenses, was approximately $2.1 million.
Menu and Food Preparation. Each Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at fine American-style grill restaurants
of the 1930's and 1940's, featuring steaks and seafood and freshly prepared
salads and vegetables served in generous portions
Entrees range in price from $11.75 for a hamburger to $33.75 for a Prime
Porterhouse Steak. The average lunch check is $25 per person and the average
dinner check is $41 per person, including beverage. All of the existing Grill
restaurants offer a full range of beverages, including beer, wine and full bar
service. During the year ended December 26, 1999, food and non-alcoholic
beverage sales constituted approximately 75% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
25%.
Proprietary recipes have been developed for substantially all of the items
offered on the 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 Grill
are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.
Each Grill restaurant has up to 6 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 Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed
to provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level".
Reservations are accepted but are not required.
The attention to detail and quality of the decor is carried through to the
professional service. All 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 Grill employee is taught that "the guest is
always right." The 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 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 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.
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 75% of the guests at the original Grill
represent repeat business, and many guests have become "regulars" in the
tradition of the neighborhood restaurant.
<PAGE>
- -- Pizzeria Uno Restaurants
Restaurant Sites. At December 26, 1999, the Company, through its wholly-
owned subsidiaries, operated three "Pizzeria Uno Restaurant & Bar" locations
(the "Pizza Restaurants"). The Company's Pizza Restaurants are operated in
accordance with certain guidelines established by, and with managerial
assistance from and training provided by, the Franchisor. See "-- The Franchise
Agreements" below. The Company's Pizza Restaurants are located in the following
cities and were opened in the months and years indicated:
<TABLE>
<CAPTION>
Location Opened
-------- ------
<S> <C>
South Plainfield, New Jersey January 1987
Media, Pennsylvania February 1987
Cherry Hill, New Jersey March 1990
</TABLE>
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.
Menu and Food Preparation. 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. 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.
Atmosphere and Service. The Pizza Restaurants are characterized by a
casual, friendly and entertaining atmosphere, full and efficient service, and
high-quality menu items at moderate prices. Each of the Pizza Restaurants
employs between three and four full time managers and assistant managers and
between 45 and 85 part-time and full-time employees. The Pizza Restaurants are
generally open from 11:00 a.m. to midnight, seven days per week, except on
Friday and Saturday when the Pizza Restaurants remain open until 1:00 a.m.
The Franchise Agreements. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.
Pursuant to the Franchise Agreements, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurants' designated
locations. The Franchise Agreements each have a term of 20 years with three
successive ten-year renewal periods at the option of the Company, provided that
the agreements have not previously been terminated.
In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.
The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain
ongoing fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts and advertising fee (approximately 1% of gross
revenues).
<PAGE>
Potential Sale of Pizza Restaurants. During 1998, the Company determined
that the continued ownership and operation of the Pizza Restaurants did not fit
with the Company's strategic growth plan. The Company continues to seek efforts
to sell the Pizza Restaurants. The Company has not found a suitable buyer for
the Pizza Restaurants.
Other Restaurant Activities
In addition to owning and operating Daily Grill, The Grill and the Pizza
Restaurants, the Company, at December 26, 1999, also provided management
services for Daily Grill restaurants at the Burbank Hilton and the Georgetown
Inn and for the City Bar & Grill in the San Jose Hilton and had granted a
license to CA One to operate a Daily Grill at LAX.
- -- Restaurant Management Services
In conjunction with the Company's entry into the hotel restaurant market,
in May 1998, the Company began providing management services at the City Bar &
Grill at the San Jose Hilton. The Company is entitled to a management fee equal
to 4% of the gross receipts of the City Bar & Grill. Additionally, the Company
is entitled to a percentage of the annual profits of the City Bar & Grill in
excess of certain historical profits.
In May 1998, the Company, pursuant to its agreement with Hotel Restaurant
Properties, Inc., began providing management services for a restaurant in the
Burbank Hilton Hotel. The restaurant was converted from its former format to a
Daily Grill in January 1999. Pursuant to its management agreement with the
hotel, the Company invested $500,000 for conversion of the restaurant to a Daily
Grill and is responsible for management and supervision of the restaurant. The
Company is entitled to a management fee equal to 8.5% of the gross receipts of
the restaurant. Additionally, the Company is entitled to a 30% percentage of the
annual profits of the restaurant in excess of a base amount.
In March 1999, the Company, pursuant to the Hotel Property Agreement,
began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to its management agreement with the hotel, the
Company was not required to invest in the restaurant but was responsible for
management and supervision of the restaurant. The Company is entitled to a
management fee equal to 8% of the gross receipts of the restaurant.
Additionally, the Company is entitled to a percentage of the annual profits of
the restaurant in excess of a base amount.
In March 1999, the Company, pursuant to the Hotel Property Agreement, began
providing management services for a Daily Grill restaurant at the Salt Lake City
Hilton. Pursuant to its management agreement with the hotel, the Company was
responsible for management and supervision of the restaurant. The Company was
entitled to a management fee equal to 8% of the gross receipts of the
restaurant. Additionally, the Company was entitled to a percentage of the annual
profits of the restaurant in excess of a base amount. In November 1999, the
Company and the hotel operator mutually agreed to return the management of the
restaurant to the hotel operator as a non Daily Grill restaurant removing all
trade dress and other Daily Grill restaurant markings.
- -- LAX Restaurant Operations
Background. 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 provided certain managerial oversight and
assistance. Profits of the Airport LLC were 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.
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.
<PAGE>
Sale of Interest in Airport LLC and Licensing Agreement. Effective April 1,
1998, the Company sold and assigned its interest in Airport Grill, L.L.C. to Air
Terminal Services, Inc., an affiliate of CA One Services, Inc., which owns the
remaining interest in Airport Grill, L.L.C. Pursuant to the terms of the sale of
such interest, Air Terminal Services, Inc. agreed to pay to the Company
$309,955.71, payable in three equal installments of $103,318.57 with the first
installment being due at closing and subsequent installments being due on April
1, 1999 and April 1, 2000. As a result the Company's ownership interest in
Airport Grill, L.L.C. has terminated.
Simultaneous with the sale of its interest in Airport Grill, L.L.C., the
Company and Airport Grill, L.L.C. entered into a License Agreement pursuant to
which Airport Grill, L.L.C. will continue to have the right to utilize the Daily
Grill" name, logos, recipes and other rights associated with the operation of
the Daily Grill restaurant at Thomas Bradley International Airport. Pursuant to
the terms of the License Agreement, the Company is entitled to receive royalties
in an amount equal to 2.5% of the first $5 million of annual revenues from the
restaurant and 4% of annual revenues in excess of $5 million.
Hotel Property Agreement
In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. HRP is responsible for identifying suitable hotel locations in
which a Grill or Daily Grill can be operated ("Managed Outlets") and negotiating
and entering into leases or management agreements for those properties. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company will advance certain pre-opening costs and
certain required advances ("Manager Loans") and will manage and supervise the
day to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $1,667 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company and 25% to HRP. The Agreement also
provides that both HRP and the Company will have certain rights to cause the
Company to acquire HRP commencing in May of 2004.
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 and
within existing 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 Grills. While the general appearance and operations of
future Daily Grills and 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.
The Company's future expansion efforts are expected to concentrate on (1)
expansion into new markets through the establishment of hotel based restaurants
pursuant to the Hotel Property Agreement, and (2) expansion within existing
markets through the opening of non-hotel based restaurants. With the assistance
of HRP, the Company expects to establish name recognition and market presence
through the opening of Daily Grill and Grill restaurants in fine hotel
properties in strategic markets throughout the United States. Upon establishing
name recognition and a market presence in a market, the Company intends to
construct and operate clusters of free standing restaurants within those
markets. Management intends to limit the construction and operation of Grill
restaurants to one restaurant per market while constructing multiple Daily Grill
restaurants within each market. The exact number of Daily Grill restaurants to
be constructed within any market will vary depending upon population,
demographics and other factors.
At December 26, 1999, the Company operated non-hotel based Daily Grill and
Grill restaurants in Southern California, principally the greater-Los Angeles
market, and Washington, D.C. Within those markets, management anticipates that,
for the foreseeable future, the Company will concentrate its expansion efforts
in the Washington, D.C. market. The Company opened its first Washington, D.C.
Daily Grill, and first East Coast Daily Grill, in March of 1997. A second Daily
Grill in the Washington, D.C. market was opened in Tysons Corner, Virginia in
October of 1998. In order to establish market presence and economies of scale,
the Company plans to evaluate the opening of additional restaurants in the
Washington, D.C. market. As of March 15, 2000, no definitive sites had been
identified for future construction of free standing restaurants within the
Washington, D.C. market. Management anticipates that the cost to open additional
free standing Daily Grill and 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.
<PAGE>
At December 26, 1999, hotel based Daily Grill restaurants were operated
under management agreements in Southern California and Washington, D.C. and a
hotel based Grill restaurant was operated in the Northern California market, San
Jose. A second hotel based Grill restaurant is scheduled to open in Chicago in
June 2000. The Company and HRP are presently evaluating the opening of
additional hotel based Daily Grill restaurants in the Chicago and other markets.
Each hotel restaurant arrangement will be negotiated separately and the size of
the restaurants, ownership and operating arrangements and capital investment by
the Company may vary widely.
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 and Grill restaurants. See "-- Daily
Grill Restaurants" above.
Daily Grill and Grill. Each Daily Grill and Grill restaurant, including
both free standing and hotel based restaurants, 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 an
Area Director who in turn reports to the Company's President. 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 and 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 ten days 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.
<PAGE>
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 an Area Director 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 and Grill. The Company has developed proprietary recipes for
substantially all the items served at its Daily Grill and Grill restaurants. In
order to assure quality and consistency at each of the Daily Grill and 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 Vice
President-Executive Chef. Because of the 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 proprietary 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 and Grill. The Company has historically relied primarily on
reputation, local reviews and word of mouth to promote its Daily Grill and Grill
restaurants. Daily Grill and 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 and 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 1999, expenditures for advertising and promotion were approximately 1.0%
of gross revenues.
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
<PAGE>
The Daily Grill restaurants compete within the rapidly growing mid-price,
full-service casual dining segment. Daily Grill competitors include national
and regional chains, as well as local owner-operated restaurants. Grill
restaurants compete within the fine dining segment. Grill competitors include a
limited number of national fine dining chains as well as selected local owner-
operated fine dining establishments. The primary competitors to the Company's
Pizza Restaurants are casual theme restaurant chains including Friday's and the
Olive Garden. Competition for the Company's hotel based restaurants is
primarily limited to restaurants within the immediate proximity of the hotel.
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 980 people, 26 of
whom are corporate personnel and 80 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.
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.
<PAGE>
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. PROPERTIES
With the exception of the Company's Cherry Hill Pizza Restaurant and
certain properties which may be operated pursuant to management arrangements or
partnership or joint venture arrangements, 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 Grill restaurant in San Jose is located in space leased from
hotel management company which may be deemed to be controlled by Lew Wolff who
may also be deemed to be an affiliate of the Company as a result of his holdings
of common stock and securities convertible into or exercisable to acquire common
stock of the Company.
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. The initial term of the Lease was 3 years.
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.
ITEM 3. LEGAL PROCEEDINGS
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.
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 26, 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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, adjusted to reflect a 1-for-4 reverse stock split effective August 9,
1999:
<TABLE>
<CAPTION>
High Low
---- -----
<S> <C> <C>
1998 - First Quarter 5 4.25
Second Quarter 5.875 4.375
Third Quarter 6.25 3.875
Fourth Quarter 5.75 2.875
1999 - First Quarter 4.375 3.5
Second Quarter 3.875 2.75
Third Quarter 3.125 1.656
Fourth Quarter 2 1.219
</TABLE>
The quotations reflect inter-dealer prices without retail mark-up, mark-
down or commission and may not represent actual transactions.
At March 15, 2000, the bid price of the Common Stock was $1.28.
As of March 15, 2000, there were approximately 415 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended December
--------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales.................................. $ 20,253 $ 22,744 $ 28,901 $ 34,464 $ 38,432
Management and license fees............ - - - 444 544
---------- ---------- ---------- ---------- -----------
Total revenues....................... 20,253 22,744 28,901 34,908 38,976
---------- ---------- ---------- ---------- -----------
Gross profit........................... 14,816 16,534 20,981 25,234 28,090
Operating expenses:
Restaurant operating expenses........ 12,110 13,970 17,446 21,321 23,426
General and administration........... 1,717 2,172 2,648 2,755 3,296
Depreciation and amortization........ 788 827 948 1,137 1,196
Amortization of preopening costs.4... 4 40 337 175 54
Unusual charges...................... - 2,052 - 964 -
---------- ---------- ---------- ---------- -----------
Total................................ 14,618 19,061 21,380 26,352 27,972
---------- ---------- ---------- ---------- -----------
Income (loss) from operations.......... 198 (2,528) (399) (1,118) 118
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest income (expense), net......... (128) (86) (166) (231) (376)
Nonrecurring gain (costs).............. - (231) - 93 -
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes, minority
interest, equity in loss of joint
venture and cumulative effective
of change in accounting principle.... 71 (2,845) (472) (1,349) (258)
Provision for income taxes............. (8) (8) (5) (10) (6)
Equity in loss of joint venture........ - - - - (74)
Minority interests..................... - - - 122 (68)
Cumulative effect of change in
accounting principle................. - - - (70) -
---------- ---------- ---------- ---------- ----------
Net income (loss)...................... $ 63 $ (2,853) $ (477) $ (1,307) (406)
========== ========== ========== ========== ==========
Preferred dividends accrued or paid.... - - (69) (85) (50)
Accounting deemed dividends............ - - (211) (83) -
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
common stock......................... $ 63 $ (2,853) $ (757) $ (1,475) (456)
========== ========== ========== ========== ==========
Net income (loss) per share (1):
Basic................................ $ 0.02 $ (0.83) $ (0.13) $ (0.33) (0.10)
Preferred stock:
Dividends......................... - - (0.02) (0.02) (0.01)
Accounting deemed dividends....... - - (0.05) (0.02) (0.00)
---------- ---------- ---------- ---------- ----------
Basic net income (loss) applicable
to common stock...................... $0.02 $(0.83) $ (0.20) $(0.37) (0.11)
========== ========== ========== ========== ==========
Weighted average shares outstanding.... $3,096,770 3,426,472 3,773,560 3,972,256 4,003,738
========== ========== ========== ========== ==========
Balance Sheet Data:
Working capital (deficit).............. $ (949) $ (1,199) $ (1,223) $ (2,300) $ (3,685)
Total assets........................... 8,032 8,082 9,011 11,387 11,288
Long-term debt, less
current portion....................... 1,326 1,031 699 2,928 2,033
Stockholders' equity................... 4,229 4,202 5,183 3,867 3,461
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All per share amounts and weighted average shares outstanding have been
adjusted to reflect a 1-for-4 reverse stock split effective August 9, 1999.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K 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 31 of this Form 10-K.
General
During the fiscal year ended December 26, 1999, the Company owned and
operated a total of fifteen restaurants and managed or licensed four additional
restaurants, consisting of ten Daily Grill restaurants, three Pizzeria Uno
restaurants and two The Grill on the Alley restaurants which are owned and
operated by the Company, two Daily Grill restaurants and a City Bar & Grill
restaurant which are managed by the Company and one Daily Grill restaurant which
is licensed by the Company. During fiscal 1998, the Company operated a total of
fourteen restaurants, consisting of nine Daily Grill restaurants, three Pizzeria
Uno restaurants, one Grill and Rhino Chasers. During fiscal 1997, the Company
operated a total of fourteen restaurants, consisting of nine Daily Grill
restaurants, three Pizzeria Uno restaurants, one Grill and Rhino Chasers. See
"Description of Business."
Fiscal 1999 operating results include a full year of operations from the
Tysons Corner Daily Grill and the San Jose Fairmont Grill and a full year of
management fees from the Burbank Hilton Daily Grill, each of which opened in
1998, 39 weeks of management fees from the Georgetown Inn Daily Grill, 25 weeks
of management fees from the Universal CityWalk Daily Grill and no management
fees from the Salt Lake City Hilton Daily Grill. The Salt Lake City Daily Grill
was closed in November 1999 and management fees on that restaurant terminated at
that date. Fiscal 1998 operating results include a full year of operations from
the Washington, D.C. Daily Grill, which opened in 1997, eleven weeks of
operations at the Company's Tysons Corner Daily Grill and thirty-four weeks of
operations at the San Jose Fairmont Grill and 32 weeks of management fees from
the restaurant which became the Burbank Hilton Daily Grill. The Company sold its
interest in the LAX Daily Grill and Rhino Chasers in April of 1998. Fiscal 1997
operating results include forty-two weeks of operations at the Company's
Washington, D.C. Daily Grill and the LAX Daily Grill opened in January 1997 and
operated pursuant to a joint operating arrangement. The Company accounts for its
interest in the Universal CityWalk Daily Grill and, prior to their sale,
accounted for its interest in the LAX Daily Grill using the equity method. All
other owned restaurants are consolidated with minority interest being reflected
in the San Jose Fairmont Grill and The Chicago Grill on the Alley.
<PAGE>
Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 76% of combined 1999 sales
were food and 24% were beverage. Sales 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 Franchiser 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."
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 this item 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.
Consistent with practices in the restaurant industry, the Company
historically deferred its restaurant preopening costs and amortized those costs
over a twelve month period following the opening of the respective restaurant.
In April 1998, The American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities." The SOP required entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. The
SOP is effective for the fiscal years beginning after December 15, 1998, with
earlier adoption encouraged. The Company adopted the SOP during 1998 resulting
in a one-time charge against earnings during fiscal 1998 of $70,000. Excluding
the one-time cumulative effect, the adoption of the new accounting standard
impacted the Company's reported results for fiscal 1998 by $513,000, or $ 0.13
per basic share.
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.
<PAGE>
Results of Operations
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended December
----------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C>
Sales revenues 100.0% 98.7% 98.6%
Management and licensing fees - 1.3 1.4
------ ------ -------
Total revenues 100.0 100.0 100.0
Cost of sales 27.4 27.7 27.9
------ ------ -------
Gross profit 72.6 72.3 72.1
------ ------ -------
Restaurant operating expense 60.4 61.1 60.1
General and administrative expense 9.2 7.9 8.5
Depreciation and amortization 4.4 3.8 3.1
Unusual charges - 2.7 .1
------ ------ -------
Total operating expenses 74.0 75.5 71.8
------ ------ -------
Operating income (loss) ( 1.4) ( 3.2) .3
Non-recurring acquisition costs 0.3 0.0 0.0
Interest expense, net ( 0.6) ( 0.6) (0.1)
------ ------ -------
Loss before income tax ( 1.7) ( 3.8) (0.7)
Provision for taxes ( 0.0) ( 0.0) 0.0
Minority interest 0.0 0.3 (0.2)
Equity in loss of joint venture 0.0 0.0 (0.2)
Cumulative effect of change in
accounting principle 0.0 ( 0.2) 0.0
------ ------ -------
Net loss ( 1.7)% ( 3.7)% (1.0)
====== ====== =======
</TABLE>
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenues. The Company's revenues for 1999 increased 11.7% to $39.0 million
from $34.9 million in 1998. Sales revenues increased 11.3% to $ 38.4 million in
1999 from $34.5 million in 1998. Management and license fee revenues increased
to $ 544,000 in 1999 from $444,000 in 1998.
Sales for Daily Grill restaurants increased by 11.1% from $23.4 million in
1998 to $ 26.0 million in 1999. The increase in sales revenues for the Daily
Grill restaurants from 1998 to 1999 was primarily attributable to (1) the
operation of the Tysons Corner Daily for the full year in 1999 as compared to
eleven weeks during 1998 ($0.6 million), and (2) an increase in same store sales
of 1.1% for restaurants open for 12 months in both 1998 and 1999. Weighted
average weekly sales at the Daily Grill restaurants increased 1.1% from $54,900
in 1998 to $55,545 in 1999. Comparable restaurant sales and weighted average
weekly sales at the Daily Grill restaurants in 1999 were positively affected by
a significant increase in sales at the Palm Desert restaurant.
Sales for Grill restaurants increased by 25.4% from $5.9 million in 1998 to
$7.4 million in 1999. The increase in sales revenues for the Grill restaurants
from 1998 to 1999 was primarily attributable to (1) the operation of the San
Jose Fairmont Grill for the full year in 1999 as compared to thirty-four weeks
during 1998 ($2.4 million), and (2) an increase in same store sales of 4.7% at
the one Grill restaurant which was open for 12 months in both 1998 and 1999.
Weighted average weekly sales at the Grill restaurants increased 3.7% from
$68,900 in 1998 to $71,450 in 1999. Comparable restaurant sales and weighted
average weekly sales at the Grill restaurants in 1999 were positively affected
by increased customer counts.
Sales for the Pizza Restaurants decreased by 2.0% from $5.1 million in 1998
to $5.0 million in 1999. The decrease in sales revenues for the Pizza
Restaurants from 1998 to 1999 was attributable to a decrease in same store
sales. Weighted average weekly sales at the Pizza Restaurants decreased 2.1%
from $32,800 in 1998 to $32,100 in 1999. Comparable restaurant sales and
weighted average weekly sales at the Pizza Restaurants in 1999 were negatively
affected by (1) several restaurant days lost because restaurants were closed due
to severe weather and (2) a large decrease at the Media, Pennsylvania
restaurant.
Price increases were last implemented during the second quarter of 1998 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
<PAGE>
Management and license fee revenues during 1999 were attributable to (1)
the commencement of hotel restaurant management services during the second
quarter of 1998 which accounted for $432,000 of management fees in 1999 and
$186,000 of management fees in 1998, and (2) licensing fees from the LAX Daily
Grill which totaled $112,000 in 1999 and gain from the sale of the Company's
interest in the LAX Daily Grill and licensing fees from the LAX Daily Grill
which totaled $258,000 in 1998. The increase in management fees during 1999 was
attributable to (1) management of the Burbank Daily Grill for all of 1999 as
compared to 33 weeks during 1998, (2) management of the Georgetown Inn Daily
Grill for 39 weeks during 1999, (3) management of the Salt Lake City Hilton
Daily Grill for 37 weeks during 1999 (this restaurant was closed and management
fees terminated in November 1999), (4) management fees from operation of the
Universal CityWalk Daily Grill for 25 weeks during 1999, and (5) management of
the City Grill restaurant for all of 1999 as compared to 33 weeks during 1998.
The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues from the Universal CityWalk Daily
Grill were $1,140,000 during 1999.
Cost of Sales and Gross Profit. While sales revenues increased by 11.5%
($3.9 million) in 1999 as compared to 1998, cost of sales increased by 12.5%
($1.2 million) and increased as a percentage of sales from 27.7% in 1998 to
27.9% in 1999. The increase in cost of sales as a percentage of sales revenues
was attributable to the additional Grill restaurant, which typically have a
higher cost of sales than Daily Grills.
Gross profit increased 11.5% from $25.2 million (72.3% of sales) in 1998 to
$28.1 million (72.1% of sales) in 1999.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense and
depreciation and amortization, rose 6.1% to $28.0 million in 1999 (representing
71.8% of revenues) from $26.4 million in 1998 (representing 75.5% of sales).
Restaurant operating expenses increased 9.9% to $23.4 million in 1999 from
$21.3 million in 1998. As a percentage of sales, restaurant operating expenses
represented 60.1% in 1999 as compared to 61.1% in 1998. The increase in
restaurant operating expenses was primarily attributable to (1) an increase in
labor cost and (2) occupancy cost associated with new restaurants during 1998
and 1999. The decrease in restaurant operating expenses as a percentage of
sales was primarily attributable to lower percentage in the Grill restaurants.
Restaurant labor wage rates decreased during 1999, with total restaurant labor
costs representing 32.3% of sales revenues during 1999 as compared to 34.3% of
sales revenues during 1998. The decrease in restaurant labor costs as a
percentage of sales revenues was primarily attributable to lower labor costs in
the Grill restaurants due to higher per customer sales. Occupancy costs,
consisting principally of rent expense, increased by 7.1% from $2.8 million in
1998 to $3.0 million in 1999, or 7.8% of sales revenues in 1999 as compared to
8% of sales revenues in 1998. The decrease in occupancy costs as a percentage
of sales revenues was primarily attributable to a very favorable rental cost at
the San Jose Grill.
General and administrative expenses increased 17.9% to $3.3 million in 1999
from $2.8 million in 1998. General and administrative expenses represented 8.5%
of sales in 1999 as compared to 7.9% of sales in 1998. The increase in total
general and administrative expenses was primarily attributable to the addition
of corporate office personnel and related costs to support expansion. The
increase in this category reflects the higher cost for additional restaurants,
some of which are not included in consolidated sales.
Depreciation and amortization expense, including amortization of pre-
opening expense, was $1.2 during 1999 as compared to $1.3 million during 1998.
The decrease in depreciation and amortization expense reflects the operation of
three additional restaurants during part of 1998 and all of 1999 offset by a
reduction in this expense in the older Daily Grill restaurants. Also,
depreciation and amortization expense during 1998 included the amortization of
pre-opening costs in the amount of $176,000 associated with the opening of the
San Jose Grill during May of 1998 and the Tysons Corner Daily Grill during
October of 1998.
Unusual Charges, Other Income and Expenses, Minority Interest, Equity in
loss of joint venture, Effect of Change in Accounting Principle and Net Income.
The Company reported unusual charges totaling $964,000 during 1998 relating to
the Company's early adoption of SOP 98-5 ($513,000) and the write-off of fixed
assets ($451,000) of two restaurants connect to subsequent text due to negative
<PAGE>
projected cash flows from those restaurants. The Company incurred no similar
charges during 1999.
As noted, in addition to the unusual charge of $513,000 during 1998
relating to the incremental impact of early adoption of SOP 98-5, the Company
reported a $70,000 charge reported as the cumulative effect of a change in
accounting principle as a result of the early adoption of SOP 98-5.
Net interest expense increased by approximately $145,000 reflecting higher
average borrowing during the year attributable to the opening of the San Jose
Fairmont Grill and the Tysons Corner Daily Grill, offset by interest earned on
funds provided to be used in connection with the scheduled opening of the
Chicago Westin Grill during 2000.
The Company reported a minority interest in the earnings of its majority
owned subsidiaries (San Jose Grill on the Alley, LLC and Chicago - The Grill on
the Alley LLC) of $68,000 during 1999. For the year ending December 27, 1998 the
Company recorded a minority interest in the loss of its subsidiary of $121,000
attributable to the minority interest in the San Jose Grill which commenced
operations in May of 1998.
The Company recorded equity in loss of joint venture of $74,000 which is
primarily attributable to the preopening costs incurred related to the Universal
Cilywalk Daily Grill.
The Company reported a net loss of $406,000 during 1999 as compared to a
net loss of $1,307,000 for 1998. In accordance with the position of the
Securities and Exchange Commission relating to accounting for Preferred Stock
which is convertible into common stock at a discount from the market price of
the common stock, the Company reported a "deemed dividend" of approximately
$83,000 during 1998. 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 ($85,000 during 1998)
and the "deemed dividend", the net loss attributable to common stock was
$456,000 for fiscal 1999 and $1,475,000 for fiscal 1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenues. The Company's revenues for 1998 increased 20.8% to $34.9 million
from $28.9 million in 1997. Sales revenues increased 19.3% to $34.5 million in
1998 from $28.9 million in 1997. Management and license fee revenues increased
to $444,000 in 1998 from $0 in 1997.
Sales for Daily Grill restaurants increased by 14% from $20.5 million in
1997 to $23.4 million in 1998. The increase in sales revenues for the Daily
Grill restaurants from 1997 to 1998 was primarily attributable to (1) the
opening and operation of the Tysons Corner Daily for eleven weeks during 1998
($0.6 million), (2) the operation of the Washington, D.C. Daily Grill for the
full 52 week period in fiscal 1998 as compared to 42 weeks during 1997 ($1.3
million), and (3) an increase in same store sales of 5.8% for restaurants open
for 12 months in both 1997 and 1998. Weighted average weekly sales at the Daily
Grill restaurants increased 8% from $50,700 in 1997 to $54,900 in 1998.
Comparable restaurant sales and weighted average weekly sales at the Daily Grill
restaurants in 1998 were positively affected by increased head count, higher
average checks and by menu price increases which averaged 1%.
Sales for Grill restaurants increased by 78% from $3.3 million in 1997 to
$5.9 million in 1998. The increase in sales revenues for the Grill restaurants
from 1997 to 1998 was primarily attributable to (1) the opening and operation of
the San Jose Fairmont Grill for thirty-four weeks during 1998 ($2.4 million),
and (2) an increase in same store sales of 4.5% at the one Grill restaurant
which was open for 12 months in both 1997 and 1998. Weighted average weekly
sales at the Grill restaurants increased 7.4% from $64,200 in 1997 to $68,900 in
1998. Comparable restaurant sales and weighted average weekly sales at the
Grill restaurants in 1998 were positively affected by increased head count and
by menu price increases which averaged 1%.
Sales for the Pizza Restaurants increased by 1.9% from $5 million in 1997
to $5.1 million in 1998. The increase in sales revenues for the Pizza
Restaurants from 1997 to 1998 was attributable to an increase in same store
sales. Weighted average weekly sales at the Pizza Restaurants increased 1.9%
from $32,200 in 1997 to $32,800 in 1998. Comparable restaurant sales and
weighted average weekly sales at the Pizza Restaurants in 1998 were positively
affected by increased head count.
Price increases were implemented during the second quarter of 1998 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and
<PAGE>
high customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.
Management and license fee revenues during 1998 were attributable to (1)
the commencement of hotel restaurant management services during the second
quarter of 1998 which accounted for $186,000 of management fees, and (2) gain
from the sale of the Company's interest in the LAX Daily Grill and licensing
fees from the LAX Daily Grill which totaled $258,000.
<PAGE>
Cost of Sales and Gross Profit. While sales revenues increased by 19.3%
($5.5 million) in 1998 as compared to 1997, cost of sales increased by 22.1%
($1.7 million) and increased as a percentage of sales from 27.4% in 1997 to
27.7% in 1998. The increase in cost of sales as a percentage of sales revenues
was attributable to the higher cost of sales typically associated with The Grill
restaurants which was partially offset by purchasing efficiencies associated
with a new buying program implemented in late 1997 which reduced net food costs
in 1998 at the Daily Grill restaurants from 27.5% in 1997 to 27.1% in 1998
Gross profit increased 20.3% from $21.0 million (72.6% of sales) in 1997 to
$25.2 million (72.3% of sales) in 1998.
Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense and
depreciation and amortization, rose 23.3% to $26.4 million in 1998 (representing
75.5% of revenues) from $21.4 million in 1997 (representing 74.0% of sales).
Restaurant operating expenses increased 22.1% to $21.3 million in 1998 from
$17.4 million in 1997. As a percentage of sales, restaurant operating expenses
represented 61.1% in 1998 as compared to 60.4% in 1997. The increase in
restaurant operating expenses was primarily attributable to an increase in labor
cost and occupancy cost associated with the opening of new restaurants during
1998. The increase in restaurant operating expenses as a percentage of sales
was primarily attributable to increased labor costs. Restaurant labor wage
rates increased during 1998, with total restaurant labor costs representing
34.3% of sales revenues during 1998 as compared to 32.9% of sales revenues
during 1997. The increase in restaurant labor costs as a percentage of sales
revenues was primarily attributable to increased minimum wage requirements.
Occupancy costs, consisting principally of rent expense, increased by 11.2% from
$2.5 million in 1997 to $2.8 million in 1998, or 8% of sales revenues in 1998 as
compared to 8.6% of sales revenues in 1997. The decrease in occupancy costs as
a percentage of sales revenues was primarily attributable to the increase in
same store sales and favorable rental terms at the San Jose Grill.
General and administrative expenses increased 4% to $2.8 million in 1998
from $2.6 million in 1997. General and administrative expenses represented 7.9%
of sales in 1998 as compared to 9.2% of sales in 1997. The increase in total
general and administrative expenses was primarily attributable to the addition
of corporate office personnel and related costs to support expansion. The
percentage decrease in this category reflects the spreading of certain fixed
costs over greater sales for more restaurants and can be expected to continue
decreasing as a percentage as sales increase with the opening of additional
restaurants.
Depreciation and amortization expense, including amortization of pre-
opening expense, was $1.3 million during both 1998 and 1997. Depreciation and
amortization expense reflects the operation of three additional restaurants
during 1998, including the amortization of pre-opening costs in the amount of
$176,000 associated with the opening of the San Jose Grill during May of 1998
and the Tysons Corner Daily Grill during October of 1998. Amortization of pre-
opening costs during 1997 totaled $337,000.
Unusual Charges, Other Income and Expenses, Minority Interest, Effect of
Change in Accounting Principle and Net Income. The Company reported unusual
charges totaling $964,000 during 1998 relating to the Company's early adoption
of SOP 98-5 ($513,000) and the write-off of fixed assets ($451,000) of two
restaurants due to negative projected cash flows from those restaurants.
As noted, in addition to the unusual charge of $513,000 during 1998
relating to the incremental impact of early adoption of SOP 98-5, the Company
reported a $70,000 charge reported as the cumulative effect of a change in
accounting principle as a result of the early adoption of SOP 98-5.
Net interest expense increased by approximately $65,000 reflecting higher
average borrowing during the year.
The Company also reported a one-time non-recurring credit during 1997 of
$93,000 reflecting an overaccrual of a charge in 1996.
The Company reported a minority interest gain of $121,000 during 1998
attributable to the minority interest in the loss of San Jose Grill which
commenced operations in May of 1998.
The Company reported a net loss of $1,307,000 during 1998 as compared to a
net loss of $477,000 for 1997. In accordance with the recent position of the
Securities and Exchange Commission relating to accounting
<PAGE>
for Preferred Stock which is convertible into common stock at a discount from
the market price of the common stock, the Company reported a "deemed dividend"
of approximately $83,000 during 1998 and $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 ($85,000 during 1998 and $69,000 during 1997) and the "deemed
dividend", the net loss attributable to common stock was $1,475,000 for fiscal
1998 and $757,000 for fiscal 1997.
Liquidity and Capital Resources
At December 26, 1999, the Company had a working capital deficit of $3.6
million and a cash balance of $0.4 million as compared to a working capital
deficit of $2.3 million and a cash balance of $0.4 million at December 27, 1998.
The variance in the Company's working capital and cash was primarily
attributable to the repayment of long term debt.
The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new restaurants. 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, loans and
tenant allowances from certain of its landlords, and, beginning in 1998, through
joint venture arrangements. At December 26, 1999, the Company had existing bank
borrowing of $2.0 million, a loan from a member of Chicago - The Grill on the
Alley, LLC of .5 million, a loan from a member of the San Jose Grill L.L.C. of
$0.2 million, an SBA loan of $0.1 million, loans from stockholders/officers of
$0.2 million, equipment loans of $0.75 million, loans/advances from landlords
and others of $0.2 million.
At December 26 1999, the Company had a bank credit facility of $2.1 million
consisting of a $1.0 million line of credit and a $1.1 million term loan payable
in 60 equal monthly installments of $25,000 plus interest. At December 26, 1999,
the Company had utilized $.9 of its available line of credit. The line of credit
matures in June 2000 and the Company anticipates renewing the credit facility
with its current lendor or another bank.
During 1999, the Company and its subsidiaries were obligated under
17 leases covering the premises in which the Company's Daily Grill, Grill
and Pizza Restaurants are located as well as leases on its executive offices.
Such restaurant leases and the executive office lease contain minimum rent
provisions which provided for the payment of minimum aggregate annual rental
payments of approximately $2.3 million in 1999, with varying escalation and
percentage rent clauses in each of the restaurant leases. Minimum rental
payments during 2000 on existing leases as of December 26, 1999, total $2.3
million.
The Company currently expects to open 1 Grill restaurant in 2000, which
will be a hotel based majority owned restaurant. At March 1, 2000, the Company
had entered into a lease and management agreement with respect to this
restaurant. Management anticipates that new non-hotel based restaurants will
cost between $1 million and $2 million per restaurant to build and open
depending upon the location and available tenant allowances. Hotel based
restaurants may involve remodeling existing facilities, substantial capital
contributions from the hotel operators and other factors which will cause the
cost to the Company of opening such restaurants to be less than the Company's
cost to build and open non-hotel based restaurants.
Capital expenditures were $1.75 million in 1997, $3.8 million in 1998 and
$1.1 million in 1999. Capital expenditures in fiscal 2000 are expected to be
between $3.5 million and $4.0 million, primarily for the development of new
restaurants, capital replacements and refurbishing for existing restaurants,
and enhancements to information systems for the Company's restaurants and
corporate office. The amount of actual capital expenditures will be dependent
upon, among other things, the proportion of free standing versus hotel based
properties as hotel based restaurants are expected to generally require lower
capital investment on the Company's part. In addition, if the Company opens
more, or less, restaurants than it currently anticipates, its capital
requirements will increase, or decrease, accordingly.
In order to finance restaurant openings during 1997 and 1998, the Company
conducted an offering of common stock, convertible preferred stock and warrants
during 1997 and entered into a joint operating arrangement and loan in 1998.
The 1997 offering provided net proceeds to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible
<PAGE>
Preferred Stock, 500 shares of Series II 10% Convertible Preferred Stock,
187,500 five year $8.00 Warrants and 187,500 five year $12.00 Warrants. The
aggregate sales price of those securities was $1,500,000.
The Series I Convertible Preferred Stock is convertible into common stock
at $5.00 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) $4.00
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 $10.00 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $400 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 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 $4,000 per share.
The $8.00 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 $8.00 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 $12.00 Warrants are exercisable to purchase common stock at a price of
$12.00 per share commencing three years from the date of issuance and ending
five years from the date of issuance. The $12.00 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 26, 1999, none of the shares of Series I or Series II
Preferred Stock had been converted.
The Grill at the San Jose Fairmont Hotel was built and is owned and
operated by a limited liability company of which the Company owns 50.05%.
Construction of the restaurant was funded primarily by a capital contribution
from the Company of $350,350 and by a capital contribution of $349,650 and a
$800,000 loan from the other member of the limited liability company.
Substantially all operating cash flows from the limited liability company will
be used to pay down the $800,000 loan prior to the distribution of funds to the
members. The Company will, however, receive a management fee of 5% of sales and
10% of cash flows declared for distribution.
In February of 1999, the Company entered into a similar limited liability
company/member loan arrangement to provide financing for the planned opening of
a Grill restaurant at the Chicago Westin Hotel which is scheduled to open during
June of 2000. Pursuant to the financing arrangement for the Chicago Westin Hotel
Grill, investor members of the limited liability company (the "Chicago LLC")
invested $1,000 in the Chicago LLC and loaned an additional $1.699 million to
the Chicago LLC. The Company will manage the Chicago LLC for which it will
receive a management fee of 5% of sales and owns a 60% interest in the Chicago
LLC. The Company guaranteed repayment of the loan to the Chicago LLC and issued
warrants to acquire 203,645 shares of common stock at $1.75 per share.
The Company may enter into investment/loan arrangements in the future on
terms similar to the San Jose Fairmont Grill and Chicago Westin Grill
arrangements to provide for the funding of selected restaurants.
Management believes that the Company has adequate resources on hand and
operating cash flow 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, the issuance of debt or
equity securities, or the formation of additional investment/loan arrangements,
or a combination thereof. 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."
<PAGE>
Certain Factors Affecting Future Operating Results
This Form 10-K 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 and 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.
Future Accounting Requirements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2001 as amended by SFAS No. 137
in June 1999. The Company does not believe that the new standard will have a
material impact on the Company's financial statements.
Year 2000 Issue
To address the year 2000 issue, the Company began to formulate a plan
during fiscal 1998 to assess, remediate and test all mission-critical internal
computer systems and processes. The Company's plan also included an assessment
of the readiness of key suppliers of mission-critical goods and services to its
restaurant. All phases of the Company's year 2000 readiness plan were completed
as scheduled. To date, the Company has not experienced any year 2000 issues with
respect to its internal computer systems and key suppliers, and did not
experience any loss of revenues as a result of the issue. The Company's total
costs to address the year 2000 issues were not material, and any additional
costs are expected to be minimal. Although the Company has not experienced any
year 2000 issues to date and believes that it is unlikely that any such issues
will arise in the future, there can be no assurance that unforeseen year 2000
issues will not arise in the future and adversely affect the Company's results
of operations, liquidity and financial position.
<PAGE>
Impact of Inflation
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past two years.
A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws and various laws that allow for credits to
that wage. An increase in the Federal minimum wage went into effect on October
1, 1996, and a second increase became effective on September 1, 1997. In
addition, increases in the minimum wage are also being discussed by various
state governments. Although the Company has been able to and will continue to
attempt to pass along increases in costs through food and beverage price
increases, there can be no assurance that all such increases can be reflected in
its prices or that increased prices will be absorbed by customers without
diminishing, to some degree, customer spending at its restaurants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
funded debt. This exposure relates to its $2.1 revolving credit and term loan
facility. Borrowings outstanding under the credit facility totaled $2.1 at
December 26, 1999. Borrowings under the credit facility bear interest at the
lender's reference rate plus 0.25%. A hypothetical 1% interest rate change would
not have a material impact on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent accountants report thereon of PricewaterhouseCoopers, LLP, appears
on pages F-2 through F-24 of this report. See Index to Financial Statements on
F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the accountants.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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. 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 12. 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
<PAGE>
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial Statements
on page F-1 of this report for financial statements and supplementary
data filed as part of this report.
(2) Financial Statement Schedules
None
(3) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc. (7)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. (8)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. dated August 1999 (13)
3.4 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.5 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 (8)
4.3 Certificate of Designation fixing terms of Series II Preferred Stock (8)
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 (8)
4.9 Form of $3.00 Warrant (8)
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 (6)
+10.6 Employment Agreement, dated January 1, 1999, with Robert Spivak (12)
10.7 Operating Agreement for San Jose Grill LLC, dated June 1997 (9)
10.8 Amendment, dated December 1997, to Operating Agreement for San Jose
Grill LLC (9)
10.9 Subordinate Note, dated December 1997, relating to San Jose Grill LLC
(9)
10.10 Management Agreement re: San Jose City Bar & Grill (10)
10.11 Blanket Conveyance, Bill of Sale and Assignment between Grill Concepts,
Inc. and Air Terminal Services, Inc. (11)
10.12 License Agreement between Grill Concepts, Inc. and Airport Grill, L.L.C.
(11)
10.13 Agreement, dated August 27, 1998, between Grill Concepts, Inc. and Hotel
Restaurant Properties, Inc. (11)
10.14 Restaurant Management Agreement between Grill Concepts, Inc., Hotel
Restaurant Properties, Inc. and CapStar Georgetown Company, L.L.C. for
the Georgetown Inn (11)
10.15 Loan Agreement between Grill Concepts, Inc. and The Wolff Revocable
Trust of 1993 (12)
10.16 Addendum to Management Agreement re: San Jose City Bar & Grill (12)
<PAGE>
+10.17 Grill Concepts, Inc. 1998 Comprehensive Stock Option and Award Plan(24)
10.18* Bank of America Business Loan Agreement
10.19* Peter Roussak Warrant dated November 1999
10.20* Chicago - Grill on the Alley Warrant
10.21* Chicago - Grill on the Alley First Extension Warrant
10.22* Chicago - Grill on the Alley Second Extension Warrant
10.23* Guaranty - Michigan Avenue Group Note
10.24* Operating Agreement for Chicago - The Grill on the Alley LLC
21.1* Subsidiaries of Registrant
23.1* Consent of PricewaterhouseCoopers LLP
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 Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.
(7) 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.
(8) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended June 29, 1997.
(9) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 28,
1997.
(10) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended March 29, 1998.
(11) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended September 27, 1998.
(12) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 27,
1998.
(13) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended June 27, 1999.
(14) Incorporated by reference to the Company's Definitive Proxy Statement filed
April 28, 1998
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December 26,
1999.
<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: April 10, 2000
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>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert Spivak President, Chief Executive Officer April 10, 2000
- ----------------------
Robert Spivak and Director (Principal Executive
Officer, Principal Financial Officer)
/s/ Robert Wechsler
- ----------------------- Chairman of the Board of Directors April 10, 2000
Robert Wechsler
/s/ Michael Weinstock Executive Vice President, Vice April 10, 2000
- -----------------------
Michael Weinstock Chairman and Director
/s/ Richard Shapiro President and Director April 10, 2000
- -----------------------
Richard Shapiro
/s/ Charles Frank
- ----------------------- Director April 10, 2000
Charles Frank
/s/ Glenn Golenberg Director April 10, 2000
- -----------------------
Glenn Golenberg
/s/ Peter Balas Director April 10, 2000
- -----------------------
Peter Balas
/s/ Margaret L. Debevec Principal Accounting Officer April 10, 2000
- -----------------------
Margaret L. Debevec
</TABLE>
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Index to Consolidated Financial Statements
- ----------------------------------------------------------------------
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets
As of December 26, 1999 and December 27, 1998 F-3
Consolidated Statements of Operations
For the Years Ended December 26, 1999, December 27, 1998 F-4
and December 28, 1997
Consolidated Statements of Stockholders' Equity
For the Years Ended December 26, 1999, December 27, 1998 F-5
and December 28, 1997
Consolidated Statements of Cash Flows
For the Years Ended December 26, 1999, December 27, 1998 F-6
and December 28, 1997
Notes To Consolidated Financial Statements F-7
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
Grill Concepts, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Grill Concepts, Inc. and
Subsidiaries at December 26, 1999 and December 27, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 26, 1999 in conformity with accounting principles
generally accepted in the United States. 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 did not audit the
financial statements of The San Jose Grill, LLC, a majority - owned subsidiary,
which statements reflect total assets as of December 26, 1999 and total revenues
for the year then ended of $1,897,962 and $3,783,430, respectively. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for The San Jose Grill, LLC is based solely on the report of
the other auditors. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for the cost of start-up activities in 1998.
PricewaterhouseCoopers
Los Angeles, California
April 7, 2000
F-2
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 352,453 $ 438,184
Inventories 426,680 385,131
Receivables 738,757 356,358
Prepaid expenses and other current assets 294,251 463,278
----------- -----------
Total current assets 1,812,141 1,642,951
Furniture, equipment and improvements, net 8,272,509 8,342,337
Goodwill, net 221,437 229,441
Liquor licenses 646,647 641,603
Other assets 334,818 301,879
----------- -----------
Total assets $11,287,552 $11,158,211
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
Current liabilities:
Bank line of credit $ 935,000 $ 590,026
Accounts payable 1,881,908 1,419,715
Accrued expenses 1,663,590 1,045,832
Current portion of long-term debt 463,853 455,470
Note payable - related parties 553,058 624,500
----------- -----------
Total current liabilities 5,497,409 4,135,543
Long-term debt 1,537,994 2,001,760
Notes payable - related parties 495,295 926,038
----------- -----------
Total liabilities 7,530,698 7,063,341
----------- -----------
Minority interest 295,478 227,957
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 1999 and 1998 - -
Series B, 8% Convertible Preferred Stock, $.001 par value; 1,000,000 shares
authorized, none issued and outstanding in 1999 and 1998, respectively - -
Series I, Convertible Preferred Stock, $.001 par value; 1,000,000 shares authorized,
1,000 shares issued and outstanding in 1999 and 1998 1 1
Series II, 10% Convertible Preferred Stock, $.001 par value; 1,000,000 shares
authorized, 500 shares issued and outstanding in 1999 and 1998 1 1
Common Stock, $.00004 par value; 7,500,000 shares authorized,
4,003,738 issued and outstanding in 1999 and 1998, respectively 160 160
Additional paid-in capital 11,071,062 11,071,062
Accumulated deficit (7,609,848) (7,204,311)
----------- -----------
Total stockholders' equity 3,461,376 3,866,913
----------- -----------
Total liabilities, minority interest and stockholders' equity $11,287,552 $11,158,211
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated finacial
statements
F-3
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1999 1998 1997
------------- ------------- -------------
Revenues:
<S> <C> <C> <C>
Sales $38,431,886 $ 34,464,289 $28,900,657
Management and license fees 544,090 443,816 -
----------- ------------ -----------
Total revenues 38,975,976 34,908,105 28,900,657
Cost of sales 10,886,476 9,673,787 7,919,959
----------- ------------ -----------
Gross profit 28,089,500 25,234,318 20,980,698
----------- ------------ -----------
Operating expenses:
Restaurant operating expenses 23,426,273 21,320,734 17,446,072
General and administration 3,295,308 2,754,711 2,648,014
Depreciation and amortization 1,195,954 1,137,439 948,361
Preopening costs 54,197 175,305 337,124
Unusual charges - 963,831 -
----------- ------------ -----------
Total operating expenses 27,971,732 26,352,020 21,379,571
----------- ------------ -----------
Income (loss) from operations 117,768 (1,117,702) (398,873)
Interest expense, net (180,266) (115,331) (123,125)
Interest expense - related parties (195,381) (115,481) (43,281)
Nonrecurring gain - - 93,000
----------- ------------ -----------
Loss before provision for income taxes, minority interest, equity in loss
of joint venture and cumulative effect of change in accounting principle
(257,879) (1,348,514) (472,279)
Provision for income taxes (6,000) (9,500) (5,000)
----------- ------------ -----------
Loss before minority interest, equity in loss of joint venture and
cumulative effect of change in accounting principle (263,879) (1,358,014) (477,279)
Minority interest in (earnings) loss of subsidiaries (67,521) 121,693 -
Equity in loss of joint venture (74,137) - -
----------- ------------ -----------
Loss before cumulative effect of change in accounting principle (405,537) (1,236,321) (477,279)
Cumulative effect of change in accounting principle - (70,281) -
----------- ------------ -----------
Net loss ($405,537) ($1,306,602) ($477,279)
=========== ============ ===========
Preferred stock:
Preferred dividends accrued or paid ($50,000) ($85,384) ($69,168)
Accounting deemed dividends - (82,877) (210,655)
----------- ------------ -----------
($50,000) ($168,261) ($279,823)
=========== ============ ===========
Net loss applicable to common stock ($455,537) ($1,474,863) ($757,102)
=========== ============ ===========
Net loss per share:
Basic net loss ($0.10) ($0.33) ($0.13)
Preferred stock:
Dividends (0.01) (0.02) (0.02)
Accounting deemed dividends (0.00) (0.02) (0.05)
------ ------ ------
(0.01) (0.04) (0.07)
------ ------ ------
Basic net loss applicable to common stock ($0.11) ($0.37) ($0.20)
====== ====== ======
Average-weighted shares outstanding 4,003,738 3,972,256 3,773,560
=========== ============ ===========
</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>
<CAPTION>
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 29, 1996 $ 1 $ 1 - - $143 $ 9,552,453 ($5,350,117) $ 4,202,481
Issuance of common of
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, paid in cash - - - - 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
--------- --------- --------- -------- ---- ----------- ----------- -----------
Dividends of Series B,
8% Convertible Preferred
Stock, paid in cash - - - - - (9,689) - (9,689)
Dividends of Series B,
8% Convertible Preferred
Stock, paid by issuance
of common stock - - - - 1 26,839 (26,840)
Conversion of Series B,
8% Convertible Preferred
Stock, to common stock - (1) - - 2 (1) - -
Net loss - - - - - - (1,306,602) (1,306,602)
--------- --------- --------- -------- ---- ----------- ----------- -----------
Balance, December 27, 1998 - - 1 1 160 11,071,062 (7,204,311) 3,866,913
--------- --------- --------- -------- ---- ----------- ----------- -----------
Net loss - - - - - - (405,537) (405,537)
--------- --------- --------- -------- ---- ----------- ----------- -----------
Balance, December 26, 1999 - - $ 1 $ 1 $160 $11,071,062 $(7,609,848) $3,461,376
========= ========= ========= ======== ==== =========== =========== ===========
</TABLE>
F-5
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1999 1998 1997
------------- -------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ($405,537) ($1,306,602) ($477,279)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,195,954 1,137,439 948,631
Cumulative effect of change in accounting principle - 70,281 -
Unusual charges - write-off of fixed assets - 450,513 -
Minority interest in (earnings) loss of subsidiaries 67,521 (121,693) -
Equity in loss of joint venture 74,137 - -
Amortization of preopening costs - - 337,124
Changes in operating assets and liabilities:
Inventories (41,549) (82,500) (63,394)
Receivables (382,399) 18,759 (310,923)
Prepaid expenses and other current assets 169,027 446 (3,148)
Liquor licenses and other assets (28,514) 53,535 (171,890)
Accounts payable 461,813 288,936 216,045
Accrued expenses 617,758 187,782 (425,755)
----------- ------------ -----------
Net cash provided by operating activities 1,728,211 696,896 49,141
----------- ------------ -----------
Cash flows from investing activities:
Additions to furniture, equipment and improvements (1,117,742) (3,858,962) (1,764,721)
Investment in joint venture (83,606) - -
----------- ------------ -----------
Net cash used in investing activities (1,201,348) (3,858,962) (1,764,721)
----------- ------------ -----------
Cash flows from financing activities:
Net increase in bank line of credit 344,974 110,026 480,000
Proceeds from long-term debt 624,452 3,850,313 -
Proceeds from investment in San Jose Grill LLC - 349,650 -
Proceeds from issuance of preferred stock - - 1,500,000
Payments on stock issuance costs - - (41,998)
Payments on long-term debt (455,436) (972,617) (322,172)
Payments on related party debt (1,126,584) - -
Dividends paid - (9,689) -
----------- ------------ -----------
Net cash (used in) provided by financing activities (612,594) 3,327,683 1,615,830
----------- ------------ -----------
Net increase (decrease) in cash and cash (85,731) 165,617 (99,750)
equivalents
Cash and cash equivalents, beginning of year 438,184 272,567 372,317
----------- ------------ -----------
Cash and cash equivalents, end of year $ 352,453 $ 438,184 $ 272,567
=========== ============ ===========
Supplemental cash flows information:
Cash paid during the year for:
Interest $ 378,669 $ 156,989 $ 180,455
Income taxes $ 6,000 $ 9,500 $ 5,400
</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") is incorporated under the laws of the
State of Delaware. The Company operates exclusively in the restaurant
industry in the United States. At December 26, 1999, the Company owned and
operated fifteen restaurants and managed or licensed four additional
restaurants, consisting of ten Daily Grill restaurants, three Pizzeria Uno
Restaurants, and two The Grill on the Alley restaurants which are owned and
operated by the Company, two Daily Grill restaurants and a City Bar & Grill
restaurant which are managed by the Company and one Daily Grill restaurant
which is licensed by the Company. With the exception of (1) The Grill on
the Alley restaurant located in the San Jose Fairmont Hotel, which is
operated by a partnership in which the Company has a 50.05% interest, and
(2) the Daily Grill at Universal Studios, which is operated by a
partnership in which the Company has a 50% interest, all of the Daily Grill
and The Grill on the Alley restaurants which were owned and operated at
December 26, 1999 were solely owned and operated on a non-franchise basis
by the Company. The three pizzeria Uno Restaurants are operated pursuant to
franchise agreements.
Management's Plans
The Company has incurred net losses of $ 405,537, $1,306,602 and $477,279
for the fiscal years 1999, 1998 and 1997, respectively, and has a negative
working capital of $3,685,268 as of December 26, 1999. Although the Company
has recurring losses, the Company generated positive cash flows from
operations of $1,728,211, $696,896 and $49,141 for the fiscal years 1999,
1998 and 1997 respectively.
Management's plans for profitable operations include increasing sales at
its existing restaurants and increased cost controls and efficiency gains
through the implementation of new information systems, procedures, and
management practices. In addition, the Company has shifted some of its
business focus to include hotel-based restaurants. Accordingly, the
Company has initiated a strategic growth plan whereby the Company plans to
operate its restaurants in hotel properties in strategic markets throughout
the United States. The Company believes that the opening of restaurants in
hotel properties in strategic markets will help further establish brand
name recognition. As a result, the Company has shown that it is able to
expand its restaurant base with little to no equity investment in new
locations. Specifically, the new locations to be opened in 2000 are
already fully funded through landlord contributions, joint ventures,
partnerships, or a combination thereof. The Company will earn management
fee income in addition to profit sharing, thereby increasing the
predictability of its income stream and significantly enhancing its return
on assets. The Company believes that these activities will allow the
Company to meet its existing and ongoing obligations, and achieve
profitability and better margins from successfully shifting some of its
focus to hotel-based restaurants.
The Company funds its operations through its operating cash flow, and
various borrowings. At December 26, 1999 the Company had a bank credit
facility of $2.1 million consisting of a line of credit of $1.0 million and
a $1.1 term loan payable in 60 equal monthly installments. The line of
credit matures in June 2000 and the Company anticipates renewing the credit
facility with its current lendor or another bank.
F-7
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
Principles of Consolidation and Minority Interest
The consolidated financial statements include the accounts of Grill
Concepts, Inc., its wholly-owned subsidiaries, which include the three
Pizzeria Uno Restaurants and The Grill; The San Jose Grill LLC (a
California Limited Liability Company), a majority-owned subsidiary,
Chicago-The Grill on the Alley, LLC, a majority-owned subsidiary, and
Universal Grill Concepts, Inc. a wholly owned subsidiary. 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 Services, Inc. ("CA One")
relating to Rhino Chasers and the one Daily Grill operated at Los Angeles
International Airport ("LAX"), and the Universal CityWalk. During 1998, the
Company sold and assigned its interest related to Rhino Chasers and the one
Daily Grill operated at LAX to CA One. As a result, the Company's ownership
interest related to these two restaurants was terminated.
In connection with the building of a new restaurant, in January 1998, a
limited liability company was formed for the operation of "The Grill"
restaurant in San Jose, California, of which the Company owns 50.5%.
Construction of the restaurant has been funded primarily by a capital
contribution from the Company of $350,350 and by a capital contribution of
$349,650 and a $800,000 loan from the other minority interest member of the
limited liability company. The consolidated financial statements include
the accounts of the limited liability company with minority interest
reflected.
In connection with the building of a new restaurant, in February 1999, a
limited liability company was formed for the operation of "The Grill on the
Alley" restaurant in Chicago, Illinois, of which the Company owns 60.0%.
Construction of the restaurant will be funded primarily by a capital
contribution of $1,190,000 and a loan of $510,000 from the other minority
interest member of the limited liability company and $750,000 of equipment
financing. The consolidated financial statements include the accounts of
the limited liability company with minority interest reflected.
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending the Sunday closest
to December 31. The fiscal years 1999, 1998 and 1997 consisted of 52
weeks ended December 26, 1999, December 27, 1998 and December 28, 1997,
respectively.
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
F-8
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
2. Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of food, wine and liquor and are stated at the lower of
cost or market, cost generally being determined on a first-in, first-out
basis.
Furniture, Equipment and Improvements
Furniture, equipment and improvements are stated at cost.
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
26, 1999 was $24,392.
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
The cost of acquiring liquor licenses are capitalized at cost and are
stated at the lower of cost or market.
F-9
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (Continued)
Preopening Costs
Effective with fiscal year 1998, preopening costs are expensed as incurred.
For fiscal year 1997 and prior years, preopening costs were deferred and
amortized over the twelve-month period following restaurant openings.
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 bases 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. The
Company establishes a valuation allowance to reduce net deferred tax assets
to the amount expected to be realized.
Advertising and Promotion Costs
All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense for the fiscal
years 1999, 1998 and 1997 was $804,275, $928,911 and $486,615,
respectively.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Long-Lived Assets
In accordance with SFAS No. 121, 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
compared to the related carrying value.
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
F-10
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
stock option grants are generally priced at fair market value on the date
of grant. SFAS No. 123, "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.
2. Summary of Significant Accounting Policies (Continued)
Net Income Per Share
Pursuant to SFAS No. 128 "Earnings Per Share", basic net income per share
is computed by dividing the net income attributable to common shareholders
by the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income
attributable to common shareholders by the weighted-average number of
common and common equivalent shares outstanding during the period. Common
share equivalents included in the diluted computation represent shares
issuable upon assumed exercise of stock options, warrants and convertible
preferred stocks using the Treasury Stock method. 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 for
fiscal years 1998 and 1997 has also been adjusted to give effect to the
deemed dividends.
On August 9, 1999, the Company effected a 1-for-4 reverse stock split of
the Company's common stock. All shares and per share data have been
restated to reflect the reverse stock split.
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 a
contractual obligation that ultimately ends with the delivery of cash or an
ownership interest in an entity. Disclosures regarding the fair value of
financial instruments have been derived using external market sources,
estimates using present value or other valuation techniques.
Cash, accounts payable 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.
F-11
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. The new rules will be effective the
first quarter of 2001, as amended by SFAS No. 137 in June 1999. The
Company does not believe that the new standard will have a material impact
on the Company's financial statements.
During fiscal 1998, the Company elected early adoption of American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This new
accounting standard requires entities to expense all start-up and
preopening costs as they are incurred. Consistent with the practice of
most casual dining restaurant companies, the Company previously deferred
such costs and then wrote them off over the twelve-month period following
the opening of each restaurant. Restatement of previously issued financial
statements is not permitted by SOP 98-5, and entities are not required to
report the pro forma effects of the retroactive application of the new
accounting standard.
3. Furniture, Equipment and Improvements, Net
Furniture, equipment and improvements at December 26, 1999 and December 27,
1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $ 6,213,473 $ 5,784,730
Leasehold improvements 7,155,076 6,810,264
Motor vehicle 22,577 22,577
Expendables 237,841 237,841
Construction-in-progress 334,048 -
----------- -----------
Furniture, equipment and improvements 13,963,015 12,855,412
Less, Accumulated depreciation (5,690,506) (4,513,075)
----------- -----------
Furniture, equipment and improvements, net $ 8,272,509 $ 8,342,337
=========== ===========
</TABLE>
4. Accrued expenses
Accrued expenses at December 26, 1999 and December 27, 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accrued Payroll $ 311,639 $ 296,796
Accrued Sales Tax 237,855 230,051
Interest 176,595 167,284
Deferred Rent 239,441 88,769
Other 698,060 289,932
---------- ----------
$1,663,590 $1,045,832
========== ==========
</TABLE>
F-12
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Debt
Debt at December 26, 1999 and December 27, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable to bank under revolving credit
agreement, expiring August 1, 2003, payable
in sixty equal monthly installments starting
September 1, 1998, plus interest. Also
available is $1,000,000 under a revolving
line of credit expiring June 30, 2000 ($935,000
outstanding at December 26, 1999). Interest is
payable monthly at the Bank's Reference Rate
(8.75% at December 26, 1999) plus 0.25%. 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 and it is their
intention to continue guaranteeing the credit
facility upon renewal. In connection with this
credit facility, the Company is required to comply
with a number of restrictive covenants, including
meeting certain debt service cover and liquidity
requirements. The credit agreement also contains
a subjective acceleration clause and a
cross-default provision. $2,035,000 $1,990,026
Note payable to Small Business Administration
collateralized by property, payable monthly, $1,648,
including interest at 4.0%, due September 23, 2006. 116,095 130,905
Note payable to lessor, uncollateralized, payable
monthly, $1,435, including interest at 10.0%, due
April 30, 2013. 132,487 136,836
</TABLE>
F-13
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Debt (Continued)
<TABLE>
<CAPTION>
1999 1998
---- -----
<S> <C> <C>
Note payable for equipment, payable monthly, $2,039, due December 8, 2001.
$ 39,975 $ 58,275
Note payable for equipment, payable monthly, $14,597, including interest
at 9.25%, due April 30, 2004. 613,290 726,000
Note payable for automobile, payable monthly, $755, including interest at
2.9% due June 18, 1999. - 5,214
---------- ----------
2,936,847 3,047,256
Less, Current portion of long-term debt 463,853 455,470
Less, Bank line of credit 935,000 590,026
---------- ----------
Long-term portion $1,537,994 $2,001,760
========== ==========
</TABLE>
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $1,398,853
2001 475,444
2002 470,373
2003 385,929
2004 66,918
Thereafter 139,330
----------
Total $2,936,847
==========
</TABLE>
As of December 26, 1999 and during portions of the year, 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.
F-14
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Related Parties
Debt with related parties at December 26, 1999 and December 27, 1998
consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Uncollateralized note payable to shareholder, with interest payable at a
rate of 10% per annum. The note payable and interest is due on July 2000. $ 70,000 $ 300,000
Uncollateralized subordinated note payable to shareholders, with interest
payable at a rate of 7.0% per annum. The note payable and interest is
due July 2000. 84,500 84,500
Uncollateralized note payable to one of the shareholders' revocable trusts
($500,000 original principal amount), with interest payable at a rate of
10.0% per annum. Management fees received by the Company from the
management of the Burbank Daily Grill are remitted as principal and
interest payments. As a result, the current portion at 1999 and
1998 fiscal year-end is calculated based on projected results of
operations of the restaurant. The note payable and interest is due
on December 31, 2003. 198,853 466,038
Uncollateralized subordinated note payable to a member of The San Jose
Grill LLC ($800,000 original principal amount), with interest payable
annually at a rate of 10.0% per annum. The note payable has no defined
payment terms and is due in January 2018. Substantially all operating
cash flows from the limited liability company will be used to pay down
the note prior to the distribution of funds to the members. 185,000 700,000
Collateralized subordinated note payable to a member of Chicago - The
Grill on the Alley LLC ($510,000 original principal amount). The note is
payable monthly, $2,892, including interest at 8%, due April 2010. 510,000 -
---------- ----------
1,048,353 1,550,538
Less, Current portion of notes payable - related parties 553,058 624,500
---------- ----------
Long-term portion $ 495,295 $ 926,038
========== ==========
</TABLE>
Principal maturites of debt with related parties are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $ 553,058
2001 37,216
2002 40,305
2003 43,650
2004 47,273
Thereafter 326,851
----------
Total $1,048,353
==========
</TABLE>
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 $78,734, $66,834 and $37,366 for fiscal years 1999, 1998
and 1997, respectively.
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 $244,000 for each of the fiscal years 1999, 1998 and 1997.
F-15
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Related Parties (Continued)
The holder of all of the Company's preferred stocks is a part owner of the
San Jose Fairmont Hotel, the site of The San Jose Grill LLC. He is also a
part owner of the San Jose Hilton Hotel, the site of The City Bar & Grill,
which is one of the restaurants managed by the Company through management
agreements entered into during 1998. Revenue related to this management
agreement was $78,000 and $73,000 for the fiscal years 1999 and 1998,
respectively.
In August 1998, the Company entered into an agreement with Hotel Restaurant
Properties, Inc. ("HRP") in which HRP will assist the Company in locating
hotel locations for the opening of the Company's restaurants. One of the
two owners of HRP is a family member of the above-referenced preferred
stockholder of the Company. A portion of the management fees received by
the Company as a result of the management agreements entered into with the
assistance of HRP is payable to HRP. There were $80,651 and no fees paid
related to this agreement for fiscal year 1999 and 1998 respectively. The
agreement also provides that the HRP will repay to the Company amount
advanced to managed units on behalf of HRP. As of December 26, 1999 and
December 27, 1998 $129,266 and no amounts were receivable from HRP.
Additionally, the agreement provides that both HRP and the Company will
have certain rights to cause the Company to acquire HRP commencing in May
of 2004.
7. 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 $9.00 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. In 1997, 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 26, 1999 and December 27, 1998.
F-16
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Stockholders' Equity (Continued)
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. During fiscal year 1998, all of the remaining 32 shares of
Series B, 8% Convertible Preferred Stock were converted, resulting in the
issuance of an aggregate of 318,560 shares of common stock at an average
price of $1.00 per share. The Company paid $0, $9,689 and $8473 in cash
dividends during fiscal years 1999 and 1998, respectively. There were no
accumulated dividends in arrears at December 26, 1999 and December 27,
1998.
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 at December 26, 1999 and
December 27, 1998.
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 26, 1999.
Accumulated dividends in arrears totalled $50,000 and $75,695 as of
December 26, 1999 and December 27, 1998, respectively.
F-17
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Stockholders' Equity (Continued)
Warrants
At December 31, 1995, the Company had outstanding 47,698 warrants
previously issued by Magellan and exercisable at a price of $8.00 per
share. Additionally, in connection with the Exchange and a private
placement during 1995, the Company issued an additional 25,000 warrants,
which are exercisable at $12.00 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
62,500 shares of the Company's common stock at a price of $12.00 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 $18.00 per share for 20 trading days.
In June 1997, 187,500 warrants exercisable at $8.00 per share and 187,500
warrants exercisable at $12.00 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.
In February 1999, 17,708 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC,. The exercisability of these
warrants is contingent on the accepting of renewal options with regard to
the restaurant lease for the Chicago - The Grill on the Alley. These
warrants expire June 2010.
In February 1999, 8,854 warrants exercisable at $7.00 per share were issued
in connection with the receipt of a loan from a Member of the Chicago - The
Grill on the Alley, LLC,. The exercisability of these warrants is
contingent on the accepting of renewal options with regard to the
restaurant lease for the Chicago - The Grill on the Alley. These warrants
expire June 2015.
In February 1999, 177,083 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC,. These warrants expire April 1,
2005.
In November 1999, 3,750 warrants exercisable at $2.00 were issued and are
scheduled to expire November 2004.
Deemed Dividend
In accordance with the position of the Securities and Exchange Commission
regarding accounting for preferred stock which is convertible at a discount
from market price for common stock, the Company has reflected, 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 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 convertible.
F-18
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Stockholders' Equity (Continued)
Options
On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12,
1998 the 1998 Stock Option Plan (the "1998 Plan") was adopted. These Plans
provide for options to be issued to the Company's employees and others.
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.
A total of 572,500 common shares are reserved for issuance pursuant to the
these plans. During the year, upon recommendation of the Compensation
Committee, 121,625 options were granted at fair value. The Plans were
approved at the 1996 and 1998 annual stockholders' meetings. Option
quantities and prices have been adjusted for the impact of the 1-for-4
reverse stock-split on August 9, 1999. Transactions during the fiscal years
1999, 1998 and 1997 under the Plans were as follows (included in the
following in 1998 options are 10,000 shares from a discontinued plan, which
expired in 1998):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Shares Option of Shares Option of Shares Option
---------- Exercise ----------- Exercise ----------- Exercise
Price Price Price
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 320,275 $5.24 356,525 $5.20 277,525 $5.48
Options granted - price less
than fair value - - - - 3,750 4.00
Options granted - price equals
fair value 121,625 4.20 5,000 4.24 95,875 4.24
Options granted - price greater
than fair value - - - - 8,375 4.68
Options exercised - - - - - -
Options cancelled (79,088) 4.62 (41,250) 5.24 (29,000) 4.40
------- ----- ------- ----- ------- -----
Options outstanding at end of
year 362,812 5.05 320,275 $5.24 356,525 $5.20
======= ===== ======= ===== ======= =====
Options exercisable at end of
year 227,175 184,985 166,380
Options available for grant at
end of year 209,688 252,225 28,475
</TABLE>
F-19
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Stockholders' Equity (Continued)
The following table summarizes information about stock options outstanding
at December 26, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Number Weighted- Number
Outstanding at Average Weighted- Outstanding at Weighted-
Range of December 26, Remaining Average December 26, Average
Exercise Price 1999 Contractual Life Exercise Price 1999 Exercise Price
- ------------------------ -------------- ----------------- --------------- ------------- --------------
$4.00 to $4.68 164,187 7.7 $4.23 64,750 $4.36
$5.36 to $6.12 198,625 4.0 $5.72 162,425 $5.70
------- -------
362,812 227,175
======= =======
</TABLE>
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 1999
and 1998 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>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss, as reported (405,537) ($1,306,602) ($477,279)
Net loss, pro forma (419,625) ($1,388,600) ($803,869)
Net loss per share, as reported ($0.10) ($0.33) ($0.13)
Net loss per share, pro forma ($0.10) ($0.35) ($0.21)
</TABLE>
The fair value of each option grant issued in fiscal year 1999,1998 and
1997 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 ranging from
54.11% to 66.72%, (c) risk-free interest rates ranging from 4.69% to 6.45%,
and (d) expected option lives of five years.
F-20
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Unusual Charges and Adoption of Statement of Position 98-5, "Reporting On
the Costs of Start-Up Activities"
The Company recorded a charge to earnings of $450,513 for the write-off of
long-lived assets related to a Daily Grill restaurant and one of the
Pizzeria Uno restaurants in 1998 in accordance with SFAS No. 121. The
carrying values of the fixed assets were completely written off due to
negative projected future cash flows pertaining to the two restaurants. The
charge was recorded in the Consolidated Statements of Operations under
Unusual Charges for fiscal year 1998. The write-off of the fixed assets of
the two restaurants impacted the Company's reported results for fiscal 1998
by approximately $0.11 per basic share.
The Company elected early adoption of SOP 98-5, "Reporting on the Costs of
Start-Up Activities," during fiscal 1998. This new accounting standard,
issued in 1998 by the AICPA, requires entities to expense all start-up and
preopening costs as they are incurred. Consistent with the practice of most
casual dining restaurant companies, the Company previously deferred such
costs and then wrote them off over the twelve-month period following the
opening of each restaurant. The early adoption of SOP 98-5 was made
retroactive to the first quarter of fiscal 1998. The cumulative effect of
this change in accounting principle was $70,281. This new accounting
standard will accelerate the Company's recognition of preopening costs but
will benefit the post-opening results of new restaurants. Excluding the
one-time cumulative effect, the adoption of the new accounting standard
impacted the Company's reported results for fiscal 1998 by $513,318 or
$0.13 per basic share. This incremental impact has been included in the
Consolidated Statements of Operations under Unusual Changes for fiscal year
1998.
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 fiscal years 1999, 1998 and 1997,
the Company made no contributions to the Plan.
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.
F-21
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The aggregate minimum lease payments under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
2000 $ 2,234,738
2001 2,335,630
2002 2,266,443
2003 2,212,146
2004 2,138,305
Thereafter 8,362,165
-----------
Total $19,549,426
===========
</TABLE>
Rent expense was $2,938,534, $2,590,021 and $2,325,263 for fiscal years
1999, 1998, and 1997 respectively, including $235,847, $171,955 and
$139,087 for 1999, 1998 and 1997, respectively, for contingent rentals
which are payable on the basis of a percentage of sales in excess of
stipulated amounts.
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.
The Company plans on 1 new restaurant opening during 2000. The restaurant
is structured as an LLC. In connection with the building of the restaurant,
the Company is obligated for a portion of the start-up and/or
construction costs.
11. Income Taxes
The provisions for income taxes for the fiscal years ended 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current - federal - - -
Current - state 6,000 $9,500 $5,000
----- ------ ------
6,000 $9,500 $5,000
===== ====== ======
</TABLE>
The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
</TABLE>
F-22
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Federal tax rate (34.0%) (34.0%) (34.0%)
Net operating loss for which no tax benefit
was realized 23.6% 25.0% 23.0%
Other 12.0% 10.0% 12.0%
----- ----- -----
Effective tax rate 1.6% 1.0% 1.0%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities consist of the following as of December
26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss 1,469,881 $ 1,435,707 $ 1,201,724
Fixed assets 809,958 883,183 219,105
Preopening costs 106,018 148,841 -
State taxes - - 198,376
General business credit 561,563 384,716 251,347
Other 49,358 17,402 13,035
---------- ----------- -----------
Total gross deferred tax assets 2,996,778 2,869,849 1,883,587
Less, Valuation allowance (2,827,325) (2,701,262) (1,859,692)
---------- ----------- -----------
Net deferred tax assets 169,453 168,587 23,895
Deferred tax liabilities:
Intangible assets (169,453) (168,587) (23,895)
---------- ----------- -----------
Net deferred tax assets and
liabilities $ - $ - $ -
========== =========== ===========
</TABLE>
At December 26, 1999, the Company has available federal and state net
operating loss carryforwards of $3,510,000 and $2,763,000 respectively,
that may be utilized to offset future federal and state taxable earnings.
These net operating losses begin to expire in 2006 and 2000, respectively.
A full valuation allowance has been established to reduce net deferred tax
assets to the amount expected to be realized.
12. New Openings
During 1998 the Company signed and executed a joint venture agreement with
Universal Studios, Inc. to open a Daily Grill restaurant at Universal
Studios CityWalk Hollywood, California. This restaurant opened in July
1999.
The Company also converted a managed restaurant in the Burbank Hilton Hotel
to a Daily Grill format and began management of a Daily Grill in the
Georgetown Inn.
In connection with the building of a new restaurant, Chicago - The Grill on
the Alley LLC ("Chicago LLC") was formed in February 1999 for the
operation of a "The Grill" restaurant at the Chicago Westin Hotel in
Chicago, Illinois. The restaurant is scheduled to open in June 2000 and
will be operated pursuant to a management agreement.
F-23
<PAGE>
Grill Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Chicago LLC obtained a $1,699,000 senior convertible promissory note at
a rate of 8% per annum, with quarterly payments to begin on April 1, 2000.
The note will mature on October 1, 2009. The Company guaranteed repayment
of the loan to the Chicago LLC and issued 203,645 warrants to acquire
common stock at $7.00 per share.
Store Closings
In November 1999, the Company ceased to operate the Daily Grill restaurant
in Salt Lake City, Utah.
13. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for fiscal years 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
March 28, June 27, September 26, December 26,
Quarter Ended 1999 1999 1999 1999
- ------------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Total revenues $10,288,042 $9,567,423 $9,101,697 $ 10,018,814
Income (loss) from operations 377,986 233,364 8,210 (501,792)
Net income (loss) 262,258 109,789 (211,468) (566,116)
Basic net loss per share $ 0.07 $ 0.02 $ (0.05) (0.14)
March 29, June 28, September 27, December 27,
Quarter Ended 1998 1998 1998 1998
- ------------- ----------- ----------- -------------- -------------
Total revenues $ 8,361,241 $8,450,280 $8,641,440 $9,455,144
Income (loss) from operations 101,180 (354,890) (196,806) (667,186)
Net income (loss) 60,861 (369,729) (201,880) (795,854)
Basic net loss per share $ 0.02 $ 0.10 $ (0.05) $ (0.20)
</TABLE>
F-24
<PAGE>
EXHIBIT 10.18
Bank of America
Business Loan Agreement
This Agreement dated as of ______________,_____, is among Bank of America,
N.A. (the "Bank"), Grill Concepts, Inc. ("Borrower 1"), Grill Concepts, Inc., a
Delaware Corporation ("Borrower 2") and The Grill On The Alley, Inc. ("Borrower
3") (Borrower 1, Borrower 2 and Borrower 3 are sometimes referred to
collectively as the "Borrowers" and individually as the Borrower).
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrowers. The amount of the line of credit (the "Facility
No.1 Commitment") is equal to the amount indicated for each period specified
below:
Period Amount
. From the date of this Agreement
through March 25, 2000 $1,000,000.00
. From March 26, 2000 and thereafter $500,000.00
(b) This is a revolving line of credit providing for cash advances. During
the availability period, the Borrowers may repay principal amounts and re-borrow
them.
(c) The Borrowers agree not to permit the outstanding principal balance of
advances under the line of credit to exceed the Facility No. 1 Commitment.
1.2 Availability Period. The line of credit is available between the date
of this Agreement and July 31, 2000, or such earlier date as the availability
may terminate as provided in this Agreement (the "Facility No.1 Expiration
Date").
1.3 Interest Rate.
(a) The interest rate is the Bank's Prime Rate plus 0.25 percentage points.
(b) The Prime Rate is the rate of interest publicly announced from time to
time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on
various factors, including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans. The Bank may price loans to its customers at, above, or below the Prime
Rate. Any change in the Prime Rate shall take effect at the opening of business
on the day specified in the public announcement of a change in the Bank's Prime
Rate.
<PAGE>
1.4 Repayment Terms.
(a) The Borrowers will pay interest on November 30, 1999, and then monthly
thereafter until payment in full of any principal outstanding under this line of
credit.
(b) The Borrowers will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than the
Facility No. 1 Expiration Date.
2. FACILITY NO. 2: TERM LOAN AMOUNT AND TERMS
2.1 Outstanding Term Loan. There is outstanding from the Bank to the
Borrowers a term loan in the original principal amount of One Million Five
Hundred Thousand and 00/100 Dollars ($1,500,000.00). This term loan is currently
subject to the terms and conditions of Facility No. 2 of the Business Loan
Agreement dated July 17, 1998. As of the date of this Agreement, the term loan
shall be deemed to be outstanding as Facility No. 2 under this Agreement, and
shall be subject to all the terms and conditions stated in this Agreement. The
present principal balance of this term loan is One Million One Hundred Twenty
Five Thousand Dollars ($1,125,000).
2.2 Interest Rate. Unless the Borrowers elect an optional interest rate as
described below, the interest rate is the Bank's Prime Rate plus 0.25 percentage
points.
2.3 Repayment Terms.
(a) The Borrowers will pay all accrued but unpaid interest on November 1,
1999, and then monthly thereafter and upon payment in full of the principal of
the loan.
(b) The Borrowers will repay principal in forty four (44) successive
monthly installments of Twenty Five Thousand and 00/100 Dollars ($25,000.00)
starting December 1, 1999. On August 1, 2003, the Borrowers will repay the
remaining principal balance plus any interest then due.
(c) The Borrowers may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote payment of principal due under
this Agreement.
2.4 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrowers may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrowers.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement Any principal amount bearing interest at an
optional rate under this Agreement is referred to as a "Portion." The following
optional interest rates are available:
(a) Short Term Base Rate plus 2 percentage points.
(b) the IBOR Rate plus 2 percentage points.
(c) Long Term Rates plus 2 percentage points.
2
<PAGE>
3. OPTIONAL INTEREST RATES
3.1 Optional Rates. Each optional interest rate is a rate per year.
Interest will be paid on the last day of each interest period, and on the first
day of each month during the interest period. At the end of any interest period,
the interest rate will revert to the rate based on the Prime Rate, unless the
Borrowers have designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period Upon the occurrence of an event of default under this Agreement,
the Bank may terminate the availability of optional interest rates for interest
periods commencing after the default occurs.
3.2 Short Term Base Rate. The election of Short Term Base Rates shall be
subject to the following terms and requirements:
(a) The "Short Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest period
for the Portion, as the rate at which the Bank would be able to borrow funds in
the Money Market in the amount of the Portion and with an interest payment
frequency and principal repayment schedule equal to the Portion and for a term
equal to the applicable interest period. The Short Term Base Rate shall include
adjustments for reserve requirements, federal deposit insurance, interest
accrual methods, and any other similar adjustment which the Bank deems
appropriate. The Short Term Base Rate is the Bank's estimate only and the Bank
is under no obligation to actually purchase or match funds for any transaction.
(b) "Money Market" means one or more wholesale funding markets available to
the Bank, including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(c) The interest period during which the Short Term Base Rate will be in
effect will be no shorter than 30 days and no longer than one year.
(d) Each Short Term Base Rate Portion will be for an amount not less than
Five Hundred Thousand Dollars ($500,000).
(e) Each prepayment of a Short Term Base Rate Portion, whether voluntary,
by reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment fee
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the Money Market for a period starting
on the date on which it was prepaid and ending on the last day of the interest
period for such Portion (or the scheduled payment date for the amount prepaid,
if earlier).
3
<PAGE>
3.3 IBOR Rate. The election of IBOR Rates shall be subject to the following
terms and requirements:
(a) The interest period during which the IBOR Rate will be in effect will
be no shorter than 30 days and no longer than one year. The last day of the
interest period will be determined by the Bank using the practices of the
offshore dollar inter-bank market.
(b) Each IBOR Rate Portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The Borrowers may not elect an IBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the applicable
interest period.
(d) The "IBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the
calculation will be determined by the Bank as of the first day of the interest
period.)
IBOR Rate = IBOR Base Rate
(1.00 - Reserve Percentage)
Where,
(i) "IBOR Base Rate" means the interest rate at which the Bank's Grand
Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar
deposits for the applicable interest period to other major banks in the offshore
dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member banks of the
Federal Reserve System for Eurocurrency Liabilities, as defined in Federal
Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent.
The percentage will be expressed as a decimal, and will include, but not be
limited to, marginal, emergency, supplemental, special, and other percentages.
(e) Each prepayment of an IBOR Rate Portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee as described below. A
prepayment is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment fee
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic certificate of deposit
market, the eurodollar deposit market, or other appropriate money market
selected by the Bank for a period starting on the date on which it was prepaid
and ending on the last day of the Interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
4
<PAGE>
The Bank will have no obligation to accept an election for an IBOR Rate
Portion if any of the following described events has occurred and is continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of an IBOR Rate Portion are not available in the offshore
dollar inter-bank market; or
(ii) the IBOR Rate does not accurately reflect the cost of an IBOR
Rate Portion.
3.4 Long Term Base Rate. The election of Long Term Base Rates shall be
subject to the following terms and requirements:
(a) The "Long Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest period
for the Portion, as the rate at which the Bank would be able to borrow funds in
the Money Market in the amount of Portion and with an interest payment frequency
and principal repayment schedule equal to the Portion and for a term equal to
the applicable interest period. The Long Term Base Rate shall include
adjustments for reserve requirements, federal deposit insurance, interest
accrual methods, and any other similar adjustment which the Bank deems
appropriate. The Long Term Base Rate is the Bank's estimate only and the Bank is
under no obligation to actually purchase or match funds for any transaction.
(b) "Money Market" means one or more wholesale funding markets available to
the Bank, Including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(c) The interest period during which the Long Term Base Rate will be in
effect will be one year or more.
(d) Each Long Term Base Rate Portion will be for an amount not less than
Five Hundred Thousand Dollars ($500,000).
(e) The Borrower may prepay the Long Term Base Rate Portion in whole or in
part in the minimum amount of Five Hundred Thousand Dollars ($500,000). The
Borrower will give the Bank irrevocable written notice of the Borrower's
intention to make the prepayment, specifying the date and amount of the
prepayment. The notice must be received by the Bank at least 5 banking days in
advance of the prepayment. All prepayments of principal on the Long Term Base
Rate Portion will be applied on the most remote payment of principal then
unpaid.
(f) Each prepayment of a Long Term Base Rate Portion, whether voluntary, by
reason of acceleration or otherwise will be accompanied by payment of all
accrued interest on the amount of the prepayment and the prepayment fee
described below.
(g) The prepayment fee will be the sum of fees calculated separately for
each Prepaid Installment, as follows:
5
<PAGE>
(i) The Bank will first determine the amount of interest which would
have accrued each month for the Prepaid Installment had it remained outstanding
until the applicable Original Payment Date, using the interest rate applicable
to the Long Term Base Rate Portion:
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue for that
Prepaid Installment if it were reinvested from the date of prepayment through
the Original Payment Date, using the Treasury Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than
zero, the Bank will discount the monthly differences to the date of prepayment
by the Treasury Rate. The Bank will then add together all of the discounted
monthly differences for the Prepaid Installment.
(h) The following definitions will apply to the calculation of the
prepayment fee:
"Original Payment Dates" mean the dates on which principal of the Long
Term Base Rate Portion would have been paid if there had been no prepayment. If
any of the principal would have been paid later than the end of the interest
period in effect at the time of prepayment, then the Original Payment Date for
that amount will be the last day of the interest period.
"Prepaid Installment" means the amount of the prepaid principal of the
Long Term Base Rate Portion which would have been paid on a single Original
Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by reinvesting a
specified Prepaid Installment in such securities from the date of prepayment
through the Original Payment Date.
(i) The Bank may adjust the Treasury Rate to reflect the compounding,
accrual basis, or other costs of the Long Term Base Rate Portion. Each of the
rates is the Bank's estimate only and the Bank is under no obligation to
actually reinvest any prepayment. The rates will be based on information from
either the Telerate or Reuters information services, The Wall Street Journal, or
other infonmation sources the Bank deems appropriate.
4. FEES AND EXPENSES
4.1 Fees.
(a) Waiver fee. If the Bank, at its discretion, agrees to waive or amend
any terms of this Agreement, the Borrowers will at the Bank's option, pay the
Bank a fee for each waiver or amendment in an amount advised by the Bank at the
time the Borrowers request the waiver or amendment. Nothing in this paragraph
shall imply that the Bank is obligated to agree to any waiver or amendment
requested by the Borrowers. The Bank may impose additional requirements as a
condition to any waiver or amendment.
4.2 Expenses. The Borrowers agree to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees and documentation fees.
6
<PAGE>
4.3 Reimbursement Costs.
(a) The Borrowers agree to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require. The audits and
appraisals may be performed by employees of the Bank or by independent
appraisers.
5. COLLATERAL
5.1 Personal Property. The Borrowers' obligations to the Bank under this
Agreement will be secured by personal properly the Borrowers now own or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrowers. In addition, all personal property
collateral securing this Agreement shall also secure all other present and
future obligations of the Borrowers or any one of them to the Bank (excluding
any consumer credit covered by the federal Truth in Lending law, unless the
Borrowers have otherwise agreed in writing). All personal property collateral
securing any other present or future obligations of the Borrowers or any one of
them to the Bank shall also secure this Agreement.
(a) Machinery and equipment.
(b) Inventory,
(c) Receivables.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 Requests for Credit; Equal Access by all Borrowers. Any Borrower (or a
person or persons authorized by any one of the Borrowers), acting alone, can
borrow up to the full amount of credit provided under this Agreement. Each
Borrower will be liable for all extensions of credit made under this Agreement
to any other Borrower. Each request for an extension of credit will be made in
writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
6.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrowers to sign one or more promissory notes.
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6.3 Telephone and Telefax Authorizatlon.
(a) The Bank may honor telephone or telefax Instructions for advances or
repayments or for the designation of optional interest rates given by any one of
the individuals authorized to sign loan agreements on behalf of each Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14591-05068, or such other accounts with the Bank as
designated in writing by the Borrowers.
(c) The Borrowers indemnify and excuse the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection with
any act resulting from telephone or telefax instnuctions the Bank reasonably
believes are made by any individual authorized by the Borrowers to give such
instructions. This indemnity and excuse will survive this Agreement's
termination.
6.4 Direct Debit (Pre-Billing).
(a) The Borrowers agree that the Bank will debit the Borrower's account
number 14591-05068, or such other of the Borrowers' accounts with the Bank as
designated in writing by the Borrowers the "Designated Account") on the date
each payment of principal and interest and any fees from the Borrowers becomes
due (the "Due Date"). If the Due Date is not a banking day, the Designated
Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrowers a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no new
extensions of credit or payments will be made between the date of the billing
statement and the Due Date, and that there will be no changes in the applicable
interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount"). If the
Billed Amount debited to the Designated Account differs from the Accrued Amount,
the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of the
discrepancy. The Borrowers will not be in default by reason of any such
discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of the
discrepancy. Regardless of any such discrepancy, interest will continue to
accrue based on the actual amount of principal outstanding without compounding.
The Bank will not pay the Borrowers interest on any overpayment.
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(d) The Borrowers will maintain sufficient funds in the Designated Account
to cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the debit
will be reversed.
6.5 Banking Days. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an offshore rate (if
any), a banking day is a day other than a Saturday or a Sunday on which the Bank
is open for business in California and dealing in offshore dollars. All payments
and disbursements which would be due on a day which is not a banking day will be
due on the next banking day. All payments received on a day which is not a
banking day will be applied to the credit on the next banking day.
6.6 Taxes. If any payments to the Bank Under this Agreement are made from
outside the United States, the Borrowers will not deduct any foreign taxes from
any payments they make to the Bank. If any such taxes are imposed on any
payments made by the Borrowers (including payments under this paragraph), the
Borrowers will pay the taxes and will also pay to the Bank, at the time interest
is paid, any additional amount which the Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such taxes had not been
imposed. The Borrowers will confirm that they have paid the taxes by giving the
Bank official tax receipts (or notarized copies) within 30 days after the due
date.
6.7 Additional Costs. The Borrowers will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
6.8 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
6.9 Default Rate. Upon the occurrence of any default under this Agreement,
principal amounts outstanding under this Agreement will at the option of the
Bank bear interest at a rate which is 2 percentage point(s) higher than the rate
of interest otherwise provided under this Agreement. This will not constitute a
waiver of any default.
6.10 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Prime Rate plus 2 percentage
points. This may result in compounding of interest.
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7. CONDITIONS
The Bank must receive the following items, in form and content acceptable
to the Bank, before it is required to extend any credit to the Borrowers under
this Agreement:
7.1 Authorizations. Evidence that the execution, delivery and performance
by each Borrower and each trust guarantor of this Agreement and any instrument
or agreement required under this Agreement have been duly authorized.
7.2 Governing Documents. A copy of each Borrowers articles of
incorporation.
7.3 Security Agreements. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
7.4 Evidence of Priority. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except as allowed in Paragraphs 9.5 and 9.6 of this Agreement.
7.5 Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
7.6 Guaranties. Guaranties signed by Michael S. Weinstock as an individual
and as Trustee of the Michael S. Weinstock Living Trust, and Richard Shapiro as
an individual and as Trustee of the Richard Shapiro Family Trust, each in the
amount of Two Million One Hundred Fifty Thousand Dollars ($2,150,000).
7.7 Subordination Agreements. Subordination agreements in favor of the Bank
signed by Richard Shapiro and Michael S. Weinstock.
7.8 Other Items. Any other items that the Bank reasonably requires.
8. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is repaid in
full, each Borrower makes the following representations and warranties. Each
request for an extension of credit constitutes a renewed representation:
8.1 Organization of Borrowers. Each Borrower is a corporation duly formed
and existing under the laws of the state where organized.
8.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within each Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
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8.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
8.4 Good Standing. In each state in which each Borrower does business, it
is properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
8.5 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which any Borrower is bound.
8.6 Financial Information. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrowers' (and any guarantors) financial condition, including all material
contingent liabilities.
(b) in compliance with all government regulations that apply.
8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrowers or any one of them which, if lost, would impair
the Borrowers' or any Borrower's financial condition or ability to repay the
loan, except as have been disclosed in writing to the Bank.
8.8 Collateral. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
8.9 Permits, Franchises. Each Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
8.10 Other Obligations. No Borrower is in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
8.11 Income Tax Matters. No Borrower has any knowledge of any pending
assessments or adjustments of its income tax for any year.
8.12 No Event of Default. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
8.13 Insurance. The Borrowers have obtained, and maintained in effect, the
insurance coverage required in the "Covenants" section of this Agreement.
8.14 Location of Borrowers. Each Borrower's place of business (or, if any
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrowers' signature on this Agreement.
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8.15 Year 2000 Compliance. Each Borrower has conducted a comprehensive
review and assessment of its systems and equipment applications and made inquiry
of such Borrower's key suppliers, vendors and customers with respect to the
"year 2000 problem" (that is, the inability of computers, as well as embedded
microchips in non-computing devices, to properly perform date-sensitive
functions with respect to certain dates prior to and after December 31, 1999).
Based on that review and inquiry, none of the Borrowers believes the year 2000
problem, including costs of remediation, will result in a material adverse
change in its business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit. Each Borrower has
developed adequate contingency plans to ensure uninterrupted and unimpaired
business operation in the event of a failure of its own or a third party's
systems or equipment due to the year 2000 problem, including those of vendors,
customers, and suppliers, as well as a general failure of or interruption in its
communications and delivery infrastructure.
9. COVENANTS
The Borrowers agree, so long as credit is available under this Agreement
and until the Bank is repaid in full:
9.1 Use of Proceeds. To use the proceeds of Facility No. 1 only for working
capital and to finance new acquisitions and capital expenditures. The proceeds
of Facility No. 2 were used to repay the Borrowers prior term loan and to repay
a portion of the outstanding principal balance under its prior revolving line of
credit.
9.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 90 days of Borrower's fiscal year end, Borrower's annual
financial statements. These financial statements must be audited by a certified
public accountant ("CPA.") acceptable to the Bank. The statements shall be
prepared on a consolidated basis.
(b) Within 45 days of the period's end, Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The statements
shall be prepared on a consolidated basis.
(c) Copies of Borrower2's Form 10-K Annual Report, Form 10-Q Quarterly
Report and Form 8-K Current Report within 5 days after the date of filing with
the Securities and Exchange Commission.
(d) Within 90 days of Borrower 2's fiscal year end, Borrower 2's annual
projections with consolidating schedules.
(e) Each guarantor's annual financial statements in form satisfactory to
the Bank within 90 days of calendar year end.
These financial statements may be guarantor prepared.
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(f) Copies of each guarantor's federal income tax return (with all forms K-
1 attached), within 30 days of filing, together with a statement of any
contributions made by the guarantor to any subchapter S corporation, trust, or
limited liability corporation and, if requested by the Bank, copies of any
extensions of the filing date.
9.3 Total Liabilities to Tangible Net Worth. With respect to Borrower 2, to
maintain on a consolidated basis a ratio of total liabilities to tangible net
worth not exceeding the amounts indicated for each period specified below:
Period Ratio
For the quarter ending December 26, 1999 2.0:1.0
For the quarter ending March 26, 2000 1.85:1.0
For the quarter ending June 25, 2000 and thereafter 1.75 :1.0.
This covenant will be calculated as of the end of each fiscal quarter of
Borrower 2.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of Borrower 2's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense. deferred research and
development costs, deferred marketing expenses, deferred receivables, and other
like intangibles, and monies due from affiliates, officers, directors, employees
or shareholders of Borrower 2) plus liquor license less total liabilities and
minority interest, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
9.4 Debt Service Coverage Ratio. With respect to Borrower 2, to maintain on
a consolidated basis a Debt Service Coverage Ratio of at least the amounts
indicated for each period specified below:
Period Ratio
For the fiscal quarter ending September 26,1999 1.0:1.0
For the fiscal quarter ending December 26, 1999 1.1:1.0
For the fiscal quarter ending March 26, 2000 1.2:1.0
For the fiscal quarter ending June 25, 2000
and each fiscal quarter thereafter 1.3:1.0.
"Debt Service Coverage Ratio" is defined as the sum of net income after
taxes plus depreciation and amortization plus interest expense (including
payments on notes payable to related parties) minus dividends divided by the sum
of the current portion of long-term liabilities plus interest expense (including
payments on notes payable to related parties) plus principal payments made
against notes to related parties less $230,000 for quarter ending September
26, 1999, December 26, 1999, and March 26, 2000 or $130,000 for quarter ending
June 25, 2000. This ratio will be calculated at the end of each fiscal quarter,
using the results of that quarter and each of the 3 immediately preceding
quarters. The current portion of long term liabilities will be measured as of
the last day of the calculation period.
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9.5 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities and lines of credit in existence on the date of this
Agreement disclosed in writing to the Bank.
(e) Obligations under leases or management contracts for the operation of
restaurant locations, including purchase money equipment contracts, in an
unlimited amount.
9.6 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on properly any Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Liens securing obligations under leases for the operation of restaurant
locations including purchase money equipment contracts.
9.7 Paydown Period. To reduce the amount of advances outstanding under
Facility No. 1 to zero for a period of at least 30 consecutive days in each
line-year. "Line-year" means the period between the date of this Agreement and
June 30, 2000, and each subsequent one-year period (if any).
9.8 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Two Hundred Thousand Dollars ($200,000) against any
one or more of the Borrowers (or any guarantor).
(b) any substantial dispute between any Borrower (or any guarantor) and any
government authority.
(c) any event of default under this Agreement, or any event which, with
notice or lapse of time or both, would constitute an event of default.
(d) any material adverse change in any Borrowers (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
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(e) any change in any Borrower's name, legal structure, place of business,
or chief executive office if such Borrower has more than one place of business
any actual contingent liabilities of the Borrower (or any guarantor), and any
such contingent liabilities which are reasonably foreseeable.
9.9 Books and Records. To maintain adequate books and records.
9.10 Audits. To allow the Bank and its agents to inspect the Borrowers'
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrowers' properties, books or records are in
the possession of a third party, the Borrowers authorize that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records. The Bank has no duty to inspect the Borrowers'
properties or to examine, audit, or copy books and records and the Bank shall
not incur any obligation or liability by reason of not making any such
inspection or inquiry. In the event that the Bank inspects any Borrowers
properties or examines, audits, or copies books and records, the Bank will be
acting solely for the purposes of protecting the Bank's security and preserving
the Bank's rights under this Agreement. None of the Borrowers nor any other
parties are entitled to rely on any inspection or other inquiry by the Bank. The
Bank owes no duty of care to protect the Borrowers or any other parties against,
or to inform the Borrowers or any other parties of, any adverse condition that
may be observed as affecting the Borrowers' properties or premises, or the
Borrowers' business. In the event that the Bank has a duty or obligation under
applicable laws, regulations or legal requirements to disclose any report or
findings made as a result of or in connection with, any site visit, observation
or testing by the Bank, the Bank may make such a disclosure to the Borrowers or
any other parties.
9.11 Compliance with Laws. To comply with the laws (including any
fictitious name statute), regulations, and orders of any government body with
authority over each Borrower's business.
9.12 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises each Borrower now has.
9.13 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep each Borrower's properties in good working condition.
9.14 Perfection of Liens. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
9.15 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
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9.16 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property damage
insurance policies covering the tangible property comprising the collateral.
Each insurance policy must be in an amount acceptable to the Bank. The insurance
must be issued by an insurance company acceptable to the Bank and must include a
lender's loss payable endorsement in favor of the Bank in a form acceptable to
the Bank.
(b) General Business Insurance. To maintain insurance as is usual for the
business the Borrowers are in.
(c) Evidence of Insurance. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
9.17 Additional Negative Covenants. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrowers. or any Borrower's present business.
(b) liquidate or dissolve the Borrowers' or any Borrower's business
excluding Pizzeria Uno.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a limited
liability company that would cause the Borrower (i) to incur any contingent
liabilities or (ii) to be in violation of any term or provision of this
Agreement.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of part of the
Borrowers' or any Borrowers business or the Borrowers' or any Borrower's assets
excluding Pizzeria Uno.
(f) enter into any sale and leaseback agreement covering the Borrowers'or
any Borrower's fixed assets.
(g) acquire or purchase a business or its assets.
(h) voluntarily suspend the Borrowers' or any Borrower's business for more
than 7 days in any 30 day period.
9.18 Subsidiaries as Co-Borrower. Any 100% owned subsidiary (excluding
Pizzeria Uno) is to become a Co-Borrower on this Agreement.
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10. HAZARDOUS WASTE INDEMNIFICATION
The Borrowers will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrowers' or any Borrowers
property or operations or property leased to the Borrowers or any Borrower. The
indemnity includes but is not limited to attorneys' fees (including the
reasonable estimate of the allocated cost of in-house counsel and staff. The
indemnity extends to the Bank, its parent, subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns.
"Hazardous substances" means any substance, material or waste that is or becomes
designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant"
or a similar designation or regulation under any federal, state or local law
(whether under common law, statute, regulation or otherwise) or judicial or
administrative interpretation of such, including without limitation petroleum or
natural gas. This indemnity will survive repayment of the Borrowers' obligations
to the Bank.
11. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrowers in default, stop making any additional credit
available to the Borrowers, and require the Borrowers to repay their entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to any Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
11.1 Failure to Pay. Any Borrower fails to make a payment under this
Agreement when due.
11.2 Lien Priority. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this Agreement (or any
guaranty).
11.3 False Information. Any Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
11.4 Bankruptcy. Any Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against any Borrower (or any guarantor)
or any Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
11.5 Receivers. A receiver or similar official is appointed for any
Borrower's (or any guarantors) business, or the business is terminated.
11.6 Lawsuits. Any lawsuit or lawsuits are filed against any one or more of
the Borrowers (or any guarantor) in an aggregate amount of Five Hundred Thousand
Dollars ($500,000) or more in excess of any insurance coverage.
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11.7 Judgments. Any judgments or arbitration awards are entered against any
one or more of the Borrowers (or any guarantor), or any one or more of the
Borrowers (or any guarantor) enters into any settlement agreements with respect
to any litigation or arbitration, in an aggregate amount of Two Hundred Thousand
Dollars ($200,000) or more in excess of any insurance coverage.
11.8 Government Action. Any government authority takes action that the Bank
believes materially adversely affects any Borrower's (or any guarantor's)
financial condition or ability to repay.
11.9 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in any Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
11.10 Cross Default. Any default occurs under any agreement in connection
with any credit any Borrower (or any guarantor) or any related entity or
affiliate of any Borrower has obtained from anyone else or which any Borrower
(or any guarantor) or any such related entity or affiliate has guaranteed.
11.11 Default under Related Documents. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by this
Agreement is violated or no longer in effect.
11.12 Other Bank Agreements. Any Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
any Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
11.13 Other Breach Under Agreement. Any Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article. This includes any
failure or anticipated failure by any Borrower to comply with any financial
covenants set forth in this Agreement, whether such failure is evidenced by
financial statements delivered to the Bank or is otherwise known to any Borrower
or the Bank.
11.14 Guarantor Covenants. Robert Shapiro and Michael S. Weinstock (the
"Guarantors") fail to comply with the following covenant:
(a) Liquidity. The Guarantors, on an aggregate basis, will maintain
unencumbered liquid assets (net of all direct debt due within 24 months and
contingent indebtedness except for non-recourse, real estate debt and debt of
the Borrowers) equal to at least Three Million Dollars ($3,000,000). "Liquid
assets" means the following assets of the Guarantors:
(i) cash and certificates of deposit:
(ii) U.S. treasury bills and other obligations of the federal
government; and
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(iii) readily marketable securities (including commercial paper, but
excluding restricted stock and stock subject to the provisions of Rule 144 of
the Securities and Exchange Commission).
Within 30 days of December 31 and June 30, the Borrowers will provide to
the Bank copies of statements from depository institutions or brokerage firms,
or other evidence acceptable to the Bank of the Guarantors' liquid assets.
If more than 25% of the value of the Guarantors' liquid assets is
represented by margin stock, the Borrowers will provide the Bank a Form U-1
Purpose Statement, and the Bank and the Borrowers will comply with the
restrictions imposed by Regulation U of the Federal Reserve, which may require a
reduction in the amount of credit provided to the Borrowers.
(b) Trusts. The Guarantors will not transfer any assets to a trust unless
the trust is acceptable to the Bank in form and content, and the trustee
guaranties payment of the Borrowers obligations under this Agreement prior to
any such transfer.
(c) Divorce Settlement. With respect to Richard Shapiro, upon the issuance
of the Court Order Divorce Settlement between himself and Francine Shapiro,
copies of such settlement will be provided to the Bank.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
12.2 California Law. This Agreement is governed by California law.
12.3 Successors and Assigns. This Agreement is binding on the Borrowers
and the Bank's successors and assignees. The Borrowers agree that they may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrowers with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat all
financial information exchanged as confidential. If a participation is sold or
the loan is assigned, the purchaser will have the right of set-off against the
Borrowers.
12.4 Arbitration. Any claim or controversy ("Claim") between the parties,
whether arising in contract or tort or by statute including, but not limited to,
Claims resulting from or relating to this Agreement shall, upon the request of
either party, be resolved by arbitration in accordance with the Federal
Arbitration Act (Title 9, US Code). Arbitration proceedings will be conducted in
accordance with the rules for arbitration of financial services disputes of
J.A.M.S./Endispute. The arbitration shall be conducted in any U.S State where
real or tangible personal property collateral for the credit is located or if
there is no such collateral, in California. The arbitration hearing shall
commence within ninety (90) days of the demand for arbitration and close within
ninety (90) days of commencement, and any award, which may include legal fees,
shall be issued (with a brief written statement of the reasons therefore) within
thirty (30) days of the close of
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hearing. Any dispute concerning whether a claim is arbitrable or barred by the
statute of limitations shall be determined by the arbitrator. This arbitration
provision is not intended to limit the right of any party to exercise self-help
remedies, to seek and obtain interim or provisional relief of any kind or to
initiate judicial or nonjudicial foreclosure against any real or personal
property collateral.
12.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
12.6 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
12.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any ease is commenced by or against any
of the Borrowers under the Bankruptcy Code (Title 11, United States Code) or any
similar or successor statute, the Bank is entitled to recover costs and
reasonable attorneys' fees incurred by the Bank related to the preservation,
protection, or enforcement of any rights of the Bank in such a case. As used in
this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-
house counsel.
12.8 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally liable to the
Bank for the payment of all obligations arising under this Agreement, and that
such liability is independent of the obligations of the other Borrower(s). The
Bank may bring an action against any Borrower, whether an act on is brought
against the other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the Bank to
the other Borrower(s) or any guarantor will not release such Borrower from its
obligations under this Agreement.
(c) Each Borrower waives any right to assert against the Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the other
Borrower(s) or any other party liable to the Bank for the obligations of the
Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower(s) and of all
circumstances which bear upon the risk of nonpayment. Each Borrower waives any
right it may have to require the Bank to disclose to such Borrower any
information which the Bank may now or hereafter acquire concerning the financial
condition of the other Borrower(s).
20
<PAGE>
(e) Each Borrower waives all rights to notices of default or nonperformance
by any other Borrower under this Agreement. Each Borrower further waives all
rights to notices of the existence or the creation of new indebtedness by any
other Borrower.
The Borrowers represent and warrant to the Bank that each will derive
benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that the Bank
will not be required to inquire as to the disposition by any Borrower of funds
disbursed in accordance with the terms of this Agreement.
(f) Until all obligations of the Borrowers to the Bank under this Agreement
have been paid in full, each Borrower waives any right of subrogation,
reimbursement, indemnification and contribution (contractual, statutory or
otherwise), including without limitation, any claim or right of subrogation
under the Bankruptcy Code (Title 11, United States Code) or any successor
statute, which such Borrower may now or hereafter have against any other
Borrower with respect to the indebtedness incurred under this Agreement. Each
Borrower waives any right to enforce any remedy which the Bank now has or may
hereafter have against any other Borrower, and waives any benefit of, and any
right to participate in, any security now or hereafter held by the Bank.
12.9 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other
agreements required by this Agreement, this Agreement will prevail.
12.10 Indemnification. Each Borrower will indemnify and hold the Bank
harmless from any loss, liability, damages, judgments, and costs of any kind
relating to or arising directly or indirectly out of (a) this Agreement or any
document required hereunder, (b) any credit extended or committed by the Bank to
the Borrowers hereunder, and (c) any litigation or proceeding related to or
arising out of this Agreement, any such document, or any such credit. This
indemnity includes but is not limited to attorneys' fees (including the
allocated cost of in-house counsel). This indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys, and assigns. This indemnity will survive repayment of the
Borrowers' obligations to the Bank. All sums due to the Bank hereunder shall be
obligations of the Borrowers, due and payable immediately without demand.
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<PAGE>
12.11 Notices. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, or by
overnight courier, to the addresses on the signature page of this Agreement, or
sent by facsimile to the fax numbers listed on the signature page, or to such
other addresses as the Bank and the Borrowers may specify from time to time in
writing. Notices sent by first class mail shall be deemed delivered on the
earlier of actual receipt or on the fourth business day after deposit in the
U.S. mail.
12.12 Headings. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
12.13 Counterparts. This Agreement may be executed in as many counterparts
as necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.
12.14 Prior Agreement Supeneded. This Agreement supersedes the Business
Loan Agreement entered into as of July 17, 1998 between the Bank and the
Borrowers, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
This Agreement is executed as of the date stated at the top of the first
page.
Bank of America, N.A.
By: Kurt A. Cardoza, Vice President
Address where notices to the Bank are to be sent:
Address for Notices:
San Gabriel Valley Commercial Banking
Office #01463
15625 E. Stafford St.
City of Industry, CA 91744
Grill Concepts, Inc.
/s/
Robert Spivak
President and Chief Executive Officer
Address for Notices:
11661 SanVicenteBoulevard
Los Angeles, CA 90049
Address for Notices:
9560 Dayton Way
Beverly Hills, CA 90210
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<PAGE>
EXHIBIT 10.19
THIS WARRANT AND THE SHARES OF COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED
UPON ANY EXERCISE OF THE WARRANT HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS
WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
W00-A 1
WARRANT
to Purchase Shares
of
Common Stock (.00004 par value)
of
GRILL CONCEPTS, INC.
November 15, 1999
This certifies that, for value received, PETER ROUSSAK, ("Roussak") and any
subsequent transferee pursuant to the terms hereof (each, a "Holder"), is
entitled to purchase, subject to the provisions of this Warrant, from Grill
Concepts, Inc., a Delaware corporation (the "Issuer"), at any time or from time
to time on or after the date hereof (the "Warrant Date") and on or before the
fifth anniversary of the Warrant Date (the "Expiration Date"), Three Thousand
Seven Hundred Fifty (3,750) fully paid and nonassessable shares of common stock,
$.00004 par value (the "Common Stock"), of the Issuer at an exercise price equal
to $2.00 per share, subject to adjustment pursuant to the terms hereunder (the
"Exercise Price") (such shares of Common Stock and other securities issued and
issuable upon exercise of this Warrant, the "Warrant Shares").
Section 1. Exercise of Warrant.
-------------------
(a) Subject to the provisions hereof, this Warrant may be exercised,
in whole or in part, but not as to a fractional share, at any time or from
time to time on or after the Warrant Date and on or before the Expiration
Date, by presentation and surrender hereof to the Issuer at the address
which, in accordance with the provisions of Section 11 hereof, is then
effective for notices to the Issuer, with the Election to Purchase Form
annexed hereto as Schedule One, duly executed and accompanied by payment to
the Issuer as further set forth below in this Section 1, for the account of
the Issuer, of the Exercise Price for the number of Warrant Shares
specified in such form. If this Warrant should be exercised in part only,
the Issuer shall, upon surrender of this Warrant, execute and deliver a new
Warrant
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<PAGE>
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder. The Issuer shall maintain at its
principal place of business a register for the registration of this Warrant
and registration of transfer of the Warrant. The Exercise Price for the
number of Warrant Shares specified in the Election to Purchase Form shall
be payable in United States Dollars by (1) certified or official bank check
payable to the order of the Issuer or by wire transfer of immediately
available funds to an account specified by the Issuer for that purpose, (2)
an election by the Holder to have the Issuer withhold shares of Common
Stock issuable upon exercise, (3) certificates representing shares of
Common Stock theretofore owned by the Holder duly endorsed for transfer to
the Issuer, or (4) any combination of the preceding, equal in value to the
aggregate Exercise Price.
(b) Certificates representing Warrant Shares shall bear the following
restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER AN
EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
Section 2. Reservation of Shares; Preservation of Rights of Holder. The
-------------------------------------------------------
Issuer hereby agrees that there shall be reserved for issuance and/or delivery
upon exercise of this Warrant, such number of Warrant Shares as shall be
required for issuance or delivery upon exercise of this Warrant. The Warrant
surrendered upon exercise shall be canceled by the Issuer. After the Expiration
Date no shares of Common Stock shall be subject to reservation in respect of
this Warrant. The Issuer further agrees (i) that it will not, by amendment of
its Articles of Incorporation or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observation or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Issuer, (ii) promptly to
take all action as may from time to time be required in order to permit the
Holder to exercise this Warrant and the Issuer duly and effectively to issue
shares of its Common Stock or other securities as provided herein upon the
exercise hereof, and (iii) promptly to take all action required or provided
herein to protect the rights of the Holder granted hereunder against dilution.
Without limiting the generality of the foregoing, should the Warrant Shares at
any time consist in whole or in part of shares of capital stock having a par
value, the Issuer agrees that before taking any action which would cause an
adjustment of the Exercise Price so that the same would be less than the then
par value of such Warrant Shares, the Issuer shall take any corporate action
which may, in the opinion of its counsel, be necessary in order that the Issuer
may validly and legally issue fully paid and nonassessable shares of such Common
Stock at the Exercise Price as so adjusted. The Issuer further agrees that it
will not establish a par value for its Common Stock while this Warrant is
outstanding in an amount greater than the Exercise Price.
2
<PAGE>
Section 3. Exchange, Transfer, Assignment or Loss of Warrant. Any
-------------------------------------------------
attempted transfer of this Warrant, the Warrant Shares or any new Warrant not in
accordance with this Section shall be null and void, and the Issuer shall not in
any way be required to give effect to such transfer. No transfer of this
Warrant shall be effective for any purpose hereunder until (i) written notice of
such transfer and of the name and address of the transferee has been received by
the Issuer, and (ii) the transferee shall first agree in a writing deposited
with the Secretary of the Issuer to be bound by all the provisions of this
Warrant. Upon surrender of this Warrant to the Issuer by any transferee
authorized under the provisions of this Section 3, the Issuer shall, without
charge, execute and deliver a new Warrant registered in the name of such
transferee at the address specified by such transferee, and this Warrant shall
promptly be canceled. The Issuer may deem and treat the registered holder of
any Warrant as the absolute owner thereof for all purposes, and the Issuer shall
not be affected by any notice to the contrary. Any Warrant if presented by an
authorized transferee, may be exercised by such transferee without prior
delivery of a new Warrant issued in the name of the transferee.
Upon receipt by the Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Issuer will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute a separate contractual obligation on the
part of the Issuer, whether or not the Warrant so lost, stolen destroyed or
mutilated shall be at any time enforceable by anyone.
Section 4. Rights of Holder. Neither a Holder nor his transferee by
----------------
devise or the laws of descent and distribution or otherwise shall be, or have
any rights or privileges of, a shareholder of the Issuer with respect to any
Warrant Shares, unless and until certificates representing such Warrant Shares
shall have been issued and delivered thereto.
Section 5. Adjustments in Exercise Price and Warrant Shares. The Exercise
------------------------------------------------
Price and Warrant Shares shall be subject to adjustment from time to time as
provided in this Section 5.
(a) If the Issuer is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or
smaller number of shares, the number of shares of Common Stock for which
this Warrant may be exercised shall be increased or reduced, as of the
record date for such recapitalization, in the same proportion as the
increase or decrease in the outstanding shares of Common Stock, and the
Exercise Price shall be adjusted so that the aggregate amount payable for
the purchase of all Warrant Shares issuable hereunder immediately after the
record date for such recapitalization shall equal the aggregate amount so
payable immediately before such record date.
(b) If the Issuer declares a dividend on Common Stock, or makes a
distribution to holders of Common Stock, and such dividend or distribution
is payable or made in Common Stock or securities convertible into or
exchangeable for Common Stock, or rights to purchase Common Stock or
securities convertible into or exchangeable for Common Stock, the number of
shares of Common Stock for which this Warrant may be exercised shall be
increased, as of the record date for determining which holders of Common
Stock shall be
3
<PAGE>
entitled to receive such dividend or distribution, in proportion to the
increase in the number of outstanding shares (and shares of Common Stock
issuable upon conversion of all such securities convertible into common
Stock) of Common Stock as a result of such dividend or distribution, and
the Exercise Price shall be adjusted so that the aggregate amount payable
for the purchase of all the Warrant Shares issuable hereunder immediately
after the record date for such dividend or distribution shall equal the
aggregate amount so payable immediately before such record date.
(c) If the Issuer declares a dividend on Common Stock (other than a
dividend covered by subsection (b) above) or distributes to holders of its
Common Stock, other than as part of its dissolution or liquidation or the
winding up of its affairs, any shares of its capital stock, any evidence of
indebtedness or any cash or other of its assets (other than Common Stock or
securities convertible into or exchangeable for Common Stock), the Holder
shall receive notice of such event as set forth in Section 7 below.
(d) In case of any consolidation of the Issuer with, or merger of the
Issuer into, any other corporation (other than a consolidation or merger in
which the Issuer is the continuing corporation and in which no change
occurs in its outstanding Common Stock), or in case of any sale or transfer
of all or substantially all of the assets of the Issuer, or in the case of
any statutory exchange of securities with another corporation (including
any exchange effected in connection with a merger of a third corporation
into the Issuer, except where the Issuer is the surviving entity and no
change occurs in its outstanding Common Stock), the corporation formed by
such consolidation or the corporation resulting from such merger or the
corporation which shall have acquired such assets or securities of the
Issuer, as the case may be, shall execute and deliver to the Holder
simultaneously therewith a new Warrant, satisfactory in form and substance
to the Holder, together with such other documents as the Holder may
reasonably request, entitling the Holder thereof to receive upon exercise
of such Warrant the kind and amount of shares of stock and other securities
and property receivable upon such consolidation, merger, sale, transfer, or
exchange of securities, or upon the dissolution following such sale or
other transfer, by a holder of the number of shares of Common Stock
purchasable upon exercise of this Warrant immediately prior to such
consolidation, merger, sale, transfer, or exchange. Such new Warrant shall
contain the same basic other terms and conditions as this Warrant and shall
provide for adjustments which, for events subsequent to the effective date
of such written instrument, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 5. If any such
consolidation, merger, sale, transfer or exchange should occur prior to the
Warrant Date, the Warrant Date shall be adjusted to the date which is one
business day prior to the closing of any such consolidation, merger, sale,
transfer or exchange. The above provisions of this paragraph (d) shall
similarly apply to successive consolidations, mergers, exchanges, sales or
other transfers covered hereby.
(e) If the Issuer shall, at any time before the expiration of this
Warrant dissolve, liquidate or wind up its affairs, the Holder shall, upon
exercise of this Warrant have the right to receive, in lieu of the shares
of Common Stock of the Issuer that the Holder otherwise would have been
entitled to receive, the same kind and amount of assets as would have been
issued, distributed or paid to the Holder upon any such dissolution,
liquidation or winding
4
<PAGE>
up with respect to such shares of Common Stock of the Issuer had the Holder
been the holder of record of such shares of Common Stock receivable upon
exercise of this Warrant on the date for determining those entitled to
receive any such distribution. If any such dissolution, liquidation or
winding up results in any cash distribution in excess of the Exercise Price
provided by this Warrant for the shares of Common Stock receivable upon
exercise of this Warrant, the Holder may, at the Holder's option, exercise
this Warrant without making payment of the Exercise Price and, in such
case, the Issuer shall, upon distribution to the Holder, consider the
Exercise Price to have been paid in full and, in making settlement to the
Holder, shall obtain receipt of the Exercise Price by deducting an amount
equal to the Exercise Price for the shares of Common Stock receivable upon
exercise of this Warrant from the amount payable to the Holder. For
purposes of this paragraph, the sale of all or substantially all of the
assets of the Issuer and distribution of the proceeds thereof to the
Issuer's shareholders shall be deemed liquidation.
(f) If an event occurs which is similar in nature to the events
described in this Section 5, but is not expressly covered hereby, the Board
of Directors of the Issuer shall make or arrange for an equitable
adjustment to the number of Warrant Shares and the Exercise Price.
(g) The term "Common Stock" shall mean the Common Stock, $.00004 par
value, of the Issuer as the same exists at the date of issuance of this
Warrant or as such stock may be constituted from time to time, except that
for the purpose of this Section 5, the term "Common Stock" shall include
any stock of any class of the Issuer which has no preference in respect of
dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Issuer and which
is not subject to redemption by the Issuer.
(h) The Issuer shall retain a firm of independent public accountants
of recognized standing (who may be any such firm regularly employed by the
Issuer) to make any computation required under this Section 5, and a
certificate signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 5.
(i) Whenever the number of Warrant Shares or the Exercise Price shall
be adjusted as required by the provisions of this Section 5, the Issuer
forthwith shall file in the custody of its secretary or an assistant
secretary, at its principal office, and furnish to each Holder hereof, a
certificate prepared in accordance with paragraph (h) above, showing the
adjusted number of Warrant Shares and the Exercise Price and setting forth
in reasonable detail the circumstances requiring the adjustments.
(j) Notwithstanding any other provision, this Warrant shall be binding
upon and inure to the benefit of any successors and assigns of the Issuer.
(k) No adjustment in the Exercise Price in accordance with the
provisions of this Section 5 need be made if such adjustment would amount
to a change in such Exercise Price of less than $.01 provided however, that
the amount by which any adjustment is not made by reason of the provisions
of this paragraph (k) shall be carried forward and taken into account at
the time of any subsequent adjustment in the Exercise Price.
5
<PAGE>
(l) If an adjustment is made under this Section 5 and the event to
which the adjustment relates does not occur, then any adjustments in
accordance with this Section 5 shall be readjusted to the Exercise Price
and the number of Warrant Shares which would be in effect had the earlier
adjustment not been made.
Section 6. Taxes on Issue or Transfer of Common Stock and Warrant. The
------------------------------------------------------
Issuer shall pay any and all documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock or
other securities on the exercise of this Warrant. The Issuer shall not be
required to pay any tax which may be payable in respect of any transfer of this
Warrant or in respect of any transfers involved in the issue or delivery of
shares or the exercise of this Warrant in a name other than that of the Holder
and the person requesting such transfer, issue or delivery shall be responsible
for the payment of any such tax (and the Issuer shall not be required to issue
or deliver said shares until such tax has been paid or provided for).
Section 7. Notice of Adjustment. So long as this Warrant shall be
--------------------
outstanding, (a) if the Issuer shall propose to pay any dividends or make any
distribution upon the Common Stock, or (b) if the Issuer shall offer generally
to the holder of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
other similar rights, or (c) if there shall be any proposed capital
reorganization of the Issuer in which the Issuer is not the surviving entity,
recapitalization of the capital stock of the Issuer, consolidation or merger of
the Issuer with or into another corporation, sale, lease or other transfer of
all or substantially all of the property and assets of the Issuer, or voluntary
or involuntary dissolution, liquidation or winding up of the Issuer, or (d) if
the Issuer shall give to its stockholders any notices, report or other
communication respecting any significant or special action or event, then in
such event, the Issuer shall give to the Holder, at least ten days prior to the
relevant date described below (or such shorter period as is reasonably possible
if ten days is not reasonably possible), a notice containing a description of
the proposed action or event and stating the date or expected date on which a
record of the Issuer's stockholders is to be taken for any of the foregoing
purposes, and the date or expected date on which any such dividend,
distribution, subscription, reclassification, reorganization, consolidation,
combination, merger, conveyance, sale, lease or transfer, dissolution,
liquidation or winding up is to take place and the date or expected date, if any
is to be fixed, as of which the holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such event.
Section 8. Piggyback Registration Rights.
-----------------------------
a. The Corporation covenants and agrees with any holder of the
Warrants or Warrant Shares (the "Registrable Securities") that if, at any time
within the period commencing on the Warrant Date and ending on the Expiration
Date, it proposes to file a registration statement with respect to any class of
equity or equity-related security (other than in connection with an offering to
the Company's employees or in connection with an acquisition, merger or similar
transaction) under the Securities Act in a primary registration on behalf of the
Corporation and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be used for registration of
the Registrable Securities, the Corporation will give prompt written notice
(which, in the case of a registration statement pursuant to the exercise of
demand registration rights shall be within ten (10) business days after the
Corporation's receipt of notice of such exercise and, in any event, shall be at
least 30 days prior to such filing) to the holders of Registrable Securities at
the
6
<PAGE>
addresses appearing on the records of the Corporation of its intention to file a
registration statement and will offer to include in such registration statement
all, but not less than 20% of the Registrable Securities, subject to paragraphs
i and ii of this Section 8.a., such number of Registrable Securities with
respect to which the Corporation has received written requests for inclusion
therein within ten (10) days after the giving of notice by the Corporation. All
registrations requested pursuant to this Section 8.a. are referred to herein as
"Piggyback Registrations". All Piggyback Registrations pursuant to this Section
8 will be made solely at the Corporation's expense. This Section is not
applicable to a registration statement filed by the Corporation on Forms S-4 or
S-8 or any successor forms.
i. Priority on Primary Registrations. If a Piggyback Registration
---------------------------------
includes an underwritten primary registration on behalf of the Corporation
and the underwriter(s) for such offering determines in good faith and
advises the Corporation in writing that in its/their opinion the number of
Registrable Securities requested to be included in such registration
exceeds the number that can be sold in such offering without materially
adversely affecting the distribution of such securities by the Corporation,
the Corporation will include in such registration (A) first, the securities
that the Corporation proposes to sell and (B) second, the Registrable
Securities requested to be included in such registration, apportioned pro
rata among the holders of the Registrable Securities and holders of other
securities requesting registration.
ii. Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
consists only of an underwritten secondary registration on behalf of
holders of securities of the Corporation, and the underwriter(s) for such
offering advises the Corporation in writing that in its/their opinion the
number of Registrable Securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the distribution of such securities, the
Corporation will include in such registration (A) first, the securities
requested to be included therein by the holders requesting such
registration, and (B) second, the Registrable Securities requested to be
included in such registration and securities of holder of other securities
requested to be included in such registration statement, pro rata among all
such holders on the basis of the number of shares requested to be included
by each such holder, provided, however, the Corporation will use its best
efforts to include not less than 20% of the Registrable Securities.
Notwithstanding the foregoing, if any such underwriter shall determine in
good faith and advise the Corporation in writing that the distribution of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Corporation would materially
adversely affect the distribution of such securities by the Corporation, then
the holders of such Registrable Securities shall delay their offering and sale
for such period ending on the earliest of (1) 90 days following the effective
date of the Corporation's registration statement, (2) the day upon which the
underwriting syndicate, if any, for such offering shall have been disbanded or,
(3) such date as the Corporation, managing underwriter and holders of
Registrable Securities shall otherwise agree. In the event of such delay, the
Corporation shall file such supplements, post-effective amendments and take any
such other steps as may be necessary to permit such holders to make their
proposed offering and sale for a period of 120 days immediately following the
end of any such period of delay. If any party disapproves the terms of any such
underwriting, it may elect to withdraw therefrom by written notice to the
Corporation, the underwriter, and the holder.
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<PAGE>
Notwithstanding the foregoing, the Corporation shall not be required to file a
registration statement to include shares pursuant to this Section 8 if
independent counsel, reasonably satisfactory to the Corporation, renders an
opinion to the Corporation that the Registrable Securities proposed to be
disposed of may be transferred pursuant to the provisions of Rule 144 under the
Securities Act or otherwise without registration under the Securities Act.
b. In connection with the registration of Registrable Securities
hereunder, the Corporation agrees to (i) bear the expenses of any registration;
provided, however, that in no event shall the Corporation be obligated to pay
(A) any fees and disbursements of special counsel for holders of Registrable
Securities, (B) any underwriters' discount or commission in respect of such
Registrable Securities, and (C) any stock transfer taxes attributable to the
sale of the Registrable Securities; (ii) use its best efforts to register or
qualify the Registrable Securities for offer or sale under state securities or
Blue Sky laws of such jurisdictions in which such holders shall reasonably
request, provided, however, that no qualification shall be required in any
jurisdiction where, as a result thereof, the Corporation would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction to which it is not then subject; and (iii) enter
into a cross-indemnity agreement, in customary form, with each underwriter, if
any, and each holder of securities included in such registration statement.
c. The Corporation's obligations under this Section 8 shall be
conditioned upon a timely receipt by the Corporation in writing of: (i)
information as to the terms of such public offering furnished by or on behalf of
each holder of Registrable Securities intending to make a public offering of
his, her or its Registrable Securities, and (ii) such other information as the
Corporation may reasonably require from such holders, or any underwriter for any
of them, for inclusion in such registration statement.
Section 9. Notices. All communications hereunder, other than those
-------
pursuant to Section 8, shall be in writing, and, if sent to the Holder shall be
sufficient in all respects if delivered, sent by registered mail, or by
facsimile and confirmed to the Holder at:
Peter Roussak
9420 Readcrest Drive
Beverly Hills, California 90210
Telephone: (310) 273-8562
Fax: (310) 273-8586
or if to any other Holder, addressed to such Holder at such address as it shall
have specified to the Issuer in writing, or, if sent to the Issuer, shall be
delivered, sent by registered mail or by facsimile and confirmed to the Issuer
at:
Grill Concepts, Inc.
11661 San Vicente Blvd., Suite 404
Los Angeles, CA 90019
Attention: Michael Weinstock, Vice Chairman
Telephone: (310) 820-5559
Facsimile: (310) 820-6530
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Section 10. Governing Law. This Warrant shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of California.
Dated: November 15, 1999
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak
___________________________
Name: Robert Spivak
_________________________
Title: President
________________________
ATTEST:
/s/ Michael Weinstock
______________________________
Michael Weinstock, Secretary
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<PAGE>
EXHIBIT 10.20
THIS WARRANT AND THE SHARES Of COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED
UPON ANY EXERCISE OF THE WARRANT HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS
WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
WARRANT
to Purchase Shares
of
Common Stock (.00001 par value)
of
GRILL CONCEPTS, INC.
February 1, 1999
This certifies that, for value received, The Michigan Avenue Group, a
general partnership ("MAG"), and any subsequent transferee pursuant to the terms
hereof (each, a "Holder") is entitled to purchase, subject to the provisions of
this Warrant, from Grill Concepts, Inc., a Delaware corporation (the "Issuer"),
at any time or from time to time on or after April 1, 2000 (subject to
adjustment pursuant to Section 5(d))(the "Warrant Vesting Date") and on or
before April 1, 2005 (the "Expiration Date"), seven hundred eight thousand three
hundred thirty-three (708,333) fully paid and nonassessable shares of common
stock, $.00001 par value (the "Common Stock"), of the Issuer at a fixed exercise
price equal to $1.75 per share, subject to adjustment pursuant to the terms
hereunder (the "Fixed Exercise Price") plus the Percentage Interest Exercise
Price (hereinafter defined) (such shares of Common Stock and other securities
issued and issuable upon exercise of this Warrant, the "Warrant Shares"). The
Fixed Exercise Price and the Percentage Interest Exercise Price are collectively
called the Exercise Price.
Section 1. Exercise of Warrant.
(a) Subject to the provisions hereof, this Warrant may be exercised, in
whole or in part, but not as to a fractional share, at any time or from time to
time on or after the Warrant Vesting Date and on or before the Expiration Date,
by presentation and surrender hereof to the Issuer at the address which, in
accordance with the provisions of Section 10 hereof, is then effective for
notices to the Issuer, with the Election to Purchase Form annexed hereto as
Schedule One, duly executed and accompanied by payment to the Issuer as further
set forth below in this Section 1, for the account of the Issuer, of the
Exercise Price for the number of Warrant Shares specified in such form. If this
Warrant should be exercised in part only, the Issuer shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. The Issuer shall maintain at its principal place of business a
register for the registration of this Warrant and registration of transfer of
the Warrant.
<PAGE>
(b) The Fixed Exercise Price for the number of Warrant Shares specified in
the Election to Purchase Form shall be payable first by assignment to Issuer for
each such Warrant Share of the sum of 1/708,333 of (i) Holder's right to receive
a Preferred Return pursuant to Section 6.12(b)(i) of the Operating Agreement for
Chicago - The Grill on the Alley LLC, an Illinois limited liability Company
("LLC"), which shall be deemed to be valued in the amount of the accrued but
unpaid Preferred Return at the time of exercise; (ii) Holder's right to receive
Distributions pursuant to Section 6.12(b)(ii) of the Operating Agreement, which
shall be deemed to be valued at the then-balance of Holder's Non-Manager-Members
Adjusted Capital Contributions; and (ii) Holder's interest in the MAG Loan, as
evidenced by the Senior Convertible Promissory Note issued to Holder by LLC,
which shall be deemed to be valued at its then-principal balance plus accrued
but unpaid interest thereon. Any balance of the Fixed Exercise Price for the
number of Warrant Shares specified in the Election to Purchase Form shall be
payable (i) in United States Dollars by certified or official bank check payable
to the order of the Issuer or by wire transfer of immediately available funds to
an account specified by the issuer for that purpose; or (ii) if permitted by the
Issuer as evidenced by written notice to such effect, by means of a "cashless
exercise." In the event the Issuer permits "cashless exercise," the Holder may
deliver in payment of the Fixed Exercise Price (x) certificates representing
shares of Common Stock theretofore owned by the Holder having a fair market
value equal to the balance of the Fixed Exercise Price; (y) an election by the
Holder to have the Issuer withhold the number of shares of Common Stock the fair
market value, less the Fixed Exercise Price, of which is equal to the aggregate
balance of the Fixed Exercise Price of the Warrant Shares specified in the
Election to Purchase Form, or (z) any combination of the preceding and cash,
equal in value to the full amount of the balance of the Fixed Exercise Price.
For purposes hereof, the "fair market value" of shares of Common Stock shall
equal the closing sales price of the Issuer's Common Stock on the last trading
day immediately preceding the date on which the Election to Purchase Form is
delivered to the Issuer along with the Warrant and payment of the Fixed Exercise
Price. Capitalized terms not defined herein shall have the same meaning as in
the Operating Agreement.
(c) The Percentage Interest Exercise Price for each share shall consist of
that portion of Holder's Membership Interest in LLC which constitutes 1/708,333
of 40% of the Percentage Interests in the LLC, whether or not the Members other
than Manager hold more than 40% of the Percentage Interests of the Members in
the LLC. The Percentage Interest Exercise Price for the number of Warrant Shares
specified in the Election to Purchase Form shall be payable by assignment of the
applicable portion of Holder's Membership Interest in LLC.
(d) Certificates representing Warrant Shares shall bear the following
restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
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<PAGE>
Section 2. Reservation of Shares: Preservation of Rights of Holder. The
Issuer hereby agrees that there shall be reserved for issuance and/or delivery
upon exercise of this Warrant, such number of Warrant Shares as shall be
required for issuance or deliver upon full exercise of this Warrant. The Warrant
surrendered upon exercise shall be canceled by the Issuer. After the Expiration
Date no shares of Common Stock shall be subject to reservation in respect of
this Warrant. The Issuer further agrees (i) that it will not, by amendment of
its Articles of Incorporation or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observation or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Issuer, (ii) promptly to
take all action as may from time to time be required in order to permit the
Holder to exercise this Warrant and the Issuer duly and effectively to issue
shares of its Common Stock or other securities as provided herein upon the
exercise hereof, and (iii) promptly to take all action required or provided
herein to protect the rights of the Holder granted hereunder against dilution.
Without limiting the generality of the foregoing, should the Warrant Shares at
any time consist in whole or in part of shares of capital stock having a par
value, the Issuer agrees that before taking any action which would cause an
adjustment of the Fixed Exercise Price so that the same would be less than the
then par value of such Warrant Shares, the Issuer shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Issuer may validly and legally issue fully paid and nonassessable shares of such
Common Stock at the Fixed Exercise Price as so adjusted. The Issuer further
agrees that it will not establish a par value for its Common Stock while this
Warrant is outstanding in an amount greater than the Fixed Exercise Price.
Section 3. Exchange, Transfer, Assignment or Loss of Warrant. This Warrant
is not transferable or assignable except to the partners of MAG or to members of
the family of such partners, including trusts and/or family partnerships for the
benefit of said family members. Any attempted transfer of this Warrant, the
Warrant Shares or any new Warrant not in accordance with this Section shall be
null and void, and the Issuer shall not in any way be required to give effect to
such transfer. No transfer of this Warrant shall be effective for any purpose
hereunder until (i) written notice of such transfer and of the name and address
of the transferee has been received by the Issuer, and (ii) the transferee shall
first agree in a writing deposited with the Secretary of the Issuer to be bound
by all the provisions of this Warrant. Upon surrender of this Warrant to the
Issuer by any transferee authorized under the provisions of this Section 3, the
Issuer shall, without charge, execute and deliver a new Warrant registered in
the name of such transferee at the address specified by such transferee, and
this Warrant shall promptly be canceled. The Issuer may deem and treat the
registered holder of any Warrant as the absolute owner thereof for all purposes,
and the Issuer shall not be affected by any notice to the contrary. Any Warrant
if presented by an authorized transferee, may be exercised by such transferee
without prior delivery of a new Warrant issued in the name of the transferee.
Upon receipt by the Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Issuer will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute a separate contractual obligation on the
part of the Issuer, whether or not the Warrant so lost, stolen destroyed or
mutilated shall be at any time enforceable by anyone.
3
<PAGE>
Section 4. Rights of Holder. Neither a Holder nor his transferee by devise
or the laws of descent and distribution or otherwise shall be, or have any
rights or privileges of, a shareholder of the Issuer with respect to any Warrant
Shares, unless and until certificates representing such Warrant Shares shall
have been issued and delivered thereto.
Section 5. Adjustments in Fixed Exercise Price and Warrant Shares. The
Fixed Exercise Price and Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 5.
(a) If the Issuer is recapitalized through the subdivision or combination
of its outstanding shares of Common Stock into a larger or smaller number of
shares, the number of shares of Common Stock for which this Warrant may be
exercised shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock and the Fixed Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all Warrant
Shares issuable hereunder immediately after the record date for such
recapitalization shall equal the aggregate amount so payable immediately before
such record date.
(b) If the Issuer declares a dividend on Common Stock or makes a
distribution to holders of Common Stock and such dividend or distribution is
payable or made in Common Stock or securities convertible into or exchangeable
for Common Stock or rights to purchase Common Stock or securities convertible
into or exchangeable for Common Stock the number of shares of Common Stock for
which this Warrant may be exercised shall be increased, as of the record date
for determining which holders of Common Stock shall be entitled to receive such
dividend or distribution, in proportion to the increase in the number of
outstanding shares (and shares of Common Stock issuable upon conversion of all
such securities convertible into Common Stock) of Common Stock as a result of
such dividend or distribution, and the Fixed Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all the Warrant Shares
issuable hereunder immediately after the record date for such dividend or
distribution shall equal the aggregate amount so payable immediately before such
record date.
(c) If the Issuer declares a dividend on Common Stock (other than a
dividend covered by subsection (b) above) or distributes to holders of its
Common Stock, other than as part of its dissolution or liquidation or the
winding up of its affairs, any shares of its capital stock any evidence of
indebtedness or any cash or other of its assets (other than for Common Stock),
the Holder shall receive notice of such event as set forth in Section 7 below.
(d) In case of any consolidation of the Issuer with, or merger of the
Issuer into, any other corporation (other than a consolidation or merger in
which the Issuer is the continuing corporation and in which no change occurs in
its outstanding Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Issuer, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Issuer, except where
the Issuer is the surviving entity and no change occurs in its outstanding
Common Stock), the corporation formed by such consolidation or the corporation
resulting from such merger or the corporation which shall have
4
<PAGE>
acquired such assets or securities of the Issuer, as the case may be, shall
execute and deliver to the Holder simultaneously therewith a new Warrant,
satisfactory in form and substance to the Holder, together with such other
documents as the Holder may reasonably request, entitling the Holder thereof to
receive upon exercise of such Warrant the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, sale,
transfer, or exchange of securities, or upon the dissolution following such sale
or other transfer, by a holder of the number of shares of Common Stock
purchasable upon exercise of this Warrant immediately prior to such
consolidation, merger, sale, transfer, or exchange. Such new Warrant shall
contain the same basic other terms and conditions as this Warrant and shall
provide for adjustments which, for events subsequent to the effective date of
such written instrument, shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 5. If any such consolidation,
merger, sale, transfer or exchange should occur prior to the Warrant Vesting
Date, the Warrant Vesting Date shall be adjusted to the date which is one
business day prior to the closing of any such consolidation, merger, sale,
transfer or exchange. The above provisions of this paragraph (d) shall similarly
apply to successive consolidations, mergers, exchanges, sales or other transfers
covered hereby.
(e) If the Issuer shall, at any time before the expiration of this Warrant
dissolve, liquidate or wind up its affairs, the Holder shall, upon exercise of
this Warrant have the right to receive, in lieu of the shares of Common Stock of
the Issuer that the Holder otherwise would have been entitled to receive, the
same kind and amount of assets as would have been issued, distributed or paid to
the Holder upon any such dissolution, liquidation or winding up with respect to
such shares of Common Stock of the Issuer had the Holder been the holder of
record of such shares of Common Stock receivable upon exercise of this Warrant
on the date for determining those entitled to receive any such distribution. If
any such dissolution, liquidation or winding up results in any cash distribution
in excess of the Fixed Exercise Price provided by this Warrant for the shares of
Common Stock receivable upon exercise of this Warrant, the Holder may, at the
Holder's option, exercise this Warrant without making payment of the Fixed
Exercise Price and, in such case, the Issuer shall, upon distribution to the
Holder, consider the Fixed Exercise Price to have been paid in full and, in
making settlement to the Holder, shall obtain receipt of the Fixed Exercise
Price by deducting an amount equal to the Fixed Exercise Price for the shares of
Common Stock receivable upon exercise of this Warrant from the amount payable to
the Holder. For purposes of this paragraph, the sale of all or substantially all
of the assets of the Issuer and distribution of the proceeds thereof to the
Issuer's shareholders shall be deemed liquidation.
(f) If an event occurs which is similar in nature to the events described
in this Section 5, but is not expressly covered hereby, the Board of Directors
of the Issuer shall make or arrange for an equitable adjustment to the number of
Warrant Shares and the Fixed Exercise Price.
(g) The term "Common Stock" shall mean the Common Stock, $.00001 par value,
of the Issuer as the same exists at the date of issuance of this Warrant or as
such stock may be constituted from time to time, except that for the purpose of
this Section 5, the term "Common Stock" shall include any stock of any class of
the Issuer which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Issuer and which is not subject to redemption by the Issuer.
5
<PAGE>
(h) The Issuer shall retain a firm of independent public accountants of
recognized standing (who may be any such firm regularly employed by the Issuer)
to make any computation required under this Section 5, and a certificate signed
by such firm shall be conclusive evidence of the correctness of any computation
made under this Section 5.
(i) Whenever the number of Warrant Shares or the Fixed Exercise Price shall
be adjusted as required by the provisions of this Section 5, the Issuer
forthwith shall file in the custody of its secretary or an assistant secretary,
at its principal office, and furnish to each Holder hereof, a certificate
prepared in accordance with paragraph (h) above, showing the adjusted number of
Warrant Shares and the Fixed Exercise Price and setting forth in reasonable
detail the circumstances requiring the adjustments.
(j) Notwithstanding any other provision, this Warrant shall be binding upon
and inure to the benefit of any successors and assigns of the Issuer.
(k) No adjustment in the Fixed Exercise Price in accordance with the
provisions of this Section 5 need be made if such adjustment would amount to a
change in such Fixed Exercise Price of less than $.01 provided however, that the
amount by which any adjustment is not made by reason of the provisions of this
paragraph (k) shall be carried forward and taken into account at the time of any
subsequent adjustment in the Fixed Exercise Price.
(l) If an adjustment is made under this Section 5 and the event to which
the adjustment relates does not occur, then any adjustments in accordance with
this Section 5 shall be readjusted to the Fixed Exercise Price and the number of
Warrant Shares which would be in effect had the earlier adjustment not been
made.
Section 6. Taxes on Issue or Transfer of Common Stock and Warrant. The
Issuer shall pay any and all documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock or
other securities on the exercise of this Warrant. The Issuer shall not be
required to pay any tax which may be payable in respect of any transfer of this
Warrant or in respect of any transfers involved in the issue or delivery of
shares or the exercise of this Warrant in a name other than that of the Holder
and the person requesting such transfer, issue or delivery shall be responsible
for the payment of any such tax (and the Issuer shall not be required to issue
or deliver said shares until such tax has been paid or provided for).
Section 7. Notice of Adjustment. So long as this Warrant shall be
outstanding, (a) if the Issuer shall propose to pay any dividends or make any
distribution upon the Common Stock, or (b) if the Issuer shall offer generally
to the holder of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
other similar rights, or (c) if there shall be any proposed capital
reorganization of the Issuer in which the Issuer is not the surviving entity,
recapitalization of the capital stock of the Issuer, consolidation or merger of
the Issuer with or into another corporation, sale, lease or other transfer of
all or substantially all of the property and assets of the Issuer, or voluntary
or involuntary dissolution, liquidation or winding up of the Issuer, or (d) if
the Issuer shall give to its stockholders any notices, report or other
communication respecting any significant or special action or event, then in
such event, the Issuer shall give to the Holder, at least ten days prior to
6
<PAGE>
the relevant date described below (or such sooner period as is reasonably
possible if ten days is not reasonably possible), a notice containing a
description of the proposed action or event and stating the date or expected
date on which a record of the Issuer's stockholders is to be taken for any of
the foregoing purposes, and the date or expected date on which any such
dividend, distribution, subscription, reclassification, reorganization,
consolidation, combination, merger, conveyance, sale, lease or transfer,
dissolution, liquidation or winding up is to take place and the date or expected
date, if any is to be fixed, as of which the holders of Common Stock for
securities or other property deliverable upon such event.
Section 8. Registration Rights.
(a) Demand Registration Rights. The Issuer covenants and agrees with the
holders of Warrants and Warrant Shares that, subject to the availability of
audited financial statements which would comply with Regulation S-X under the
Securities Act, upon written request of the then Holder(s) of at least a
majority of the Warrants Shares (including Warrant Shares underlying Warrants
not yet exercised), made at any time within the period commencing on the Vesting
Date and ending one year after the Expiration Date, the Issuer will file as
promptly as practicable and, in any event, within 60 days after receipt of such
written request, at its expense (other than the fees of counsel and sales
commissions for such Holders), no more than once, a post-effective amendment
(the "Amendment") to a registration statement, or a new registration statement
under the Securities Act, registering or qualifying the Warrant Shares for sale.
Within fifteen (15) days after receiving any such notice, the Issuer shall give
notice to the other Holders of the Warrants or Warrant Shares, if any, advising
that the Issuer is proceeding with such Amendment or registration statement and
offering to include therein the Warrant Shares of such Holders. The Issuer shall
not be obligated to any such other Holder unless such other Holder shall accept
such offer by notice in writing to the Issuer within ten (10) days thereafter.
The Issuer will use its best efforts through its officers, directors, auditors
and counsel in all matters necessary or advisable, to file and cause to become
effective such Amendment or registration statement as promptly as practicable
and for a period of one year thereafter to reflect in the Amendment or
registration statement financial statements which are prepared in accordance
with Section 10(a)(3) of the Securities Act and any facts or events arising
that, individually, or in the aggregate, represent a fundamental and/or material
change in the information set forth in the Amendment or registration statement
to enable any Holders of the Warrants to exercise such Warrants and sell Warrant
Shares, or to enable any holders of Warrant Shares to sell such Warrant Shares,
during said one year period. If any registration pursuant to this paragraph 8(a)
is an underwritten offering, the Holders of a majority of the Warrant Shares to
be included in such registration shall be entitled to select the underwriter or
managing underwriter (in the case of a syndicated offering) of such offering,
subject to the Issuer's approval which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Issuer covenants and agrees with any
holder of the Warrants and Warrant Shares that if, at any time within the period
commencing on the Warrant Vesting Date and ending on the Expiration Date, it
proposes to file a registration statement with respect to any class of equity or
equity-related security (other than in connection with an offering to the
Issuer's employees or in connection with an acquisition, merger or similar
transaction) under the Securities Act in a primary registration on behalf of the
Issuer and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used
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<PAGE>
may be used for registration of the Warrant Shares, the Issuer will give prompt
written notice (which, in the case of a registration statement pursuant to the
exercise of demand registration rights shall be within ten (10) business days
after the Issuer's receipt of notice of such exercise and, in any event, shall
be at least 30 days prior to such filing) to the holders of Warrants and Warrant
Shares at the addresses appearing on the records of the Issuer of its intention
to file a registration statement and will offer to include in such registration
statement all, but not less than 20% of the Warrant Shares, subject to
paragraphs i and ii of this Section 8(b) such number of Warrant Shares with
respect to which the Issuer has received written requests for inclusion therein
within ten (10) days after the giving of notice by the Issuer. All registrations
requested pursuant to this Section 8(b) are referred to herein as "Piggyback
Registrations". All Piggyback Registrations pursuant to this Section 8 will be
made solely at the Issuer's expense. This Section is not applicable to a
registration statement filed by the Issuer on Forms S-4 or S-8 or any successor
forms.
i. Priority on Primary Registrations. If a Piggyback Registration
includes an underwritten primary registration on behalf of the Issuer and the
underwriter(s) for such offering determines in good faith and advises the Issuer
in writing that in its/their opinion the number of Warrant Shares requested to
be included in such registration exceeds the number that can be sold in such
offering without materially adversely affecting the distribution of such
securities by the Issuer, the Issuer will include in such registration (A)
first, the securities that the Issuer proposes to sell and (B) second, the
Warrant Shares requested to be included in such registration, apportioned pro
rata among the holders of the Warrant Shares and holders of other securities
requesting registration.
ii. Priority on Secondary Registrations. If a Piggyback Registration
consists only of an underwritten secondary registration on behalf of holders of
securities of the Issuer, and the underwriter(s) for such offering advises the
Issuer in writing that in its/their opinion the number of Warrant Shares
requested to be included in such registration exceeds the number which can be
sold in such offering without materially adversely affecting the distribution of
such securities, the Issuer will include in such registration (A) first, the
securities requested to be included therein by the holders requesting such
registration, and (B) second, the Warrant Shares requested to be included in
such registration and securities of holder of other securities requested to be
included in such registration statement, pro rata among all such holders on the
basis of the number of shares requested to be included by each such holder,
provided, however, the Issuer will use its best efforts to include not less
than 20% of the Warrant Shares.
Notwithstanding the foregoing, if any such underwriter shall determine in
good faith and advise the Issuer in writing that the distribution of the Warrant
Shares requested to be included in the registration concurrently with the
securities being registered by the Issuer would materially adversely affect the
distribution of such securities by the Issuer, then the holders of such Warrant
Shares shall delay their offering and sale for such period ending on the
earliest of (1) 90 days following the effective date of the Issuer's
registration statement, (2) the day upon which the underwriting syndicate, if
any, for such offering shall have been disbanded or, (3) such date as the
Issuer, managing underwriter and holders of Warrant Shares shall otherwise
agree. In the event of such delay, the Issuer shall file such supplements, post-
effective amendments and take any such other steps as may be necessary to permit
such holders to make their proposed offering
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<PAGE>
and sale for a period of 120 days immediately following the end of any such
period of delay. If any party disapproves the terms of any such underwriting, it
may elect to withdraw therefrom by written notice to the Issuer, the
underwriter, and the holder. Notwithstanding the foregoing, the Issuer shall not
be required to file a registration statement to include shares pursuant to this
Section 8 if independent counsel, reasonably satisfactory to the Issuer, renders
an opinion to the Issuer that the Warrant Shares proposed to be disposed of may
be transferred pursuant to the provisions of Rule 144 under the Securities Act
or otherwise without registration under the Securities Act.
(c) Actions to be taken by the Issuer. In connection with the registration
of Warrant Shares hereunder, the Issuer agrees to (i) bear the expenses of any
registration; provided, however, that in no event shall the Issuer be obligated
to pay (A) any fees and disbursements of special counsel for holders of Warrant
Shares, (B) any underwriters' discount or commission in respect of such Warrant
Shares, and (C) any stock transfer taxes attributable to the sale of the Warrant
Shares; (ii) use its best efforts to register or qualify the Warrant Shares for
offer or sale under state securities or Blue Sky laws of such jurisdiction in
which such holders shall reasonably request, provided, however, that no
qualification shall be required in any jurisdiction where, as a result thereof,
the Issuer would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is not then
subject; and (iii) enter into a cross-indemnity agreement, in customary form,
with each underwriter, if any, and each holder of securities included in such
registration statement.
(d) Action to be Taken by the Holders. The Issuer's obligations under this
Section 8 shall be conditioned upon a timely receipt by the Issuer in writing
of: (i) information as to the terms of such public offering furnished by or on
behalf of each holder of Warrant Shares intending to make a public offering of
his, her or its Warrant Shares, and (ii) such other information as the Issuer
may reasonably require from such holders, or any underwriter for any of them,
for inclusion in such registration statement.
Section 9. Notices All communications hereunder shall be in writing and, if
sent to the Holder shall be sufficient in all respects if delivered, sent by
registered mail, or by facsimile and confirmed to the Holder at:
The Michigan Avenue Group c/o Albert Sarnoff
75 Rockefeller Plaza
New York NY 10019
Telephone:
Facsimile:
The Michigan Avenue Group
11828 LaGrange Avenue
Los Angeles, CA 90064
Attention: Patricia M. Knox
Telephone: 310/477-3593
Facsimile: 310/477-2522
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or if to any other Holder, addressed to such Holder at such address as it shall
have specified to the Issuer in writing or, if sent to the Issuer, shall be
delivered, sent by registered mail or by facsimile and confirmed to the Issuer
at:
Grill Concepts, Inc.
11661 San Vicente Blvd. Suite 404
Los Angeles, CA 90019
Attention: Michael Weinstock Vice Chairman
Telephone: 310/820-5559
Facsimile: 310/820-6530
Section 10. Governing Law. This Warrant shall be governed by, and
interpreted in accordance with, the laws of the State of California.
Dated: _________________, 1999
GRILL CONCEPTS, INC.
By: /s/
Robert Spivak, President
ATTEST:
/s/
Michael Weinstock
Secretary
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EXHIBIT 10.21
THIS WARRANT AND THE SHARES OF COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED
UPON ANY EXERCISE OF THE WARRANT HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS
WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
WARRANT
to Purchase Shares
of
Common Stock (.00001 par value)
of
GRILL CONCEPTS, INC.
February 1, 1999
This certifies that, for value received, The Michigan Avenue Group, a general
partnership ("MAG"), and any subsequent transferee pursuant to the terms hereof
(each, a "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from Grill Concepts, Inc., a Delaware corporation (the "Issuer"), at
any time or from time to time on or after the end of the Term of the Lease
(defined in Section 1(c)) (subject to adjustment pursuant to Section 5(d))(the
"Warrant Vesting Date") and on or before five (5) years from the Warrant Vesting
Date) (the "Expiration Date"), seventy thousand eight hundred thirty-three
(70,833) fully paid and nonassessable shares of common stock, $.00001 par value
(the "Common Stock"), of the Issuer at an exercise price equal to $1.75 per
share, subject to adjustment pursuant to the terms hereunder (the "Exercise
Price") (which shares of Common Stock and other securities issued and issuable
upon exercise of this Warrant, the "Warrant Shares").
Section 1. Exercise of Warrant.
(a) Subject to the provisions hereof this Warrant may be exercised, in
whole or in part, but not as to a fractional share, at any time or from time to
time on or after the Warrant Vesting Date and on or before the Expiration Date,
by presentation and surrender hereof to the Issuer at the address which, in
accordance with the provisions of Section 10 hereof, is then effective for
notices to the Issuer, with the Election to Purchase Form annexed hereto as
Schedule One, duly executed and accompanied by payment to the Issuer as further
set forth below in this Section 1, for the account of the Issuer, of the
Exercise Price for the number of Warrant Shares specified in such form. If this
Warrant should be exercised in part only, the Issuer shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. The Issuer shall maintain at its principal place of business a
register for the registration of this Warrant and registration of transfer of
the Warrant.
<PAGE>
(b) The Exercise Price for the number of Warrant Shares specified in the
Election to Purchase Form shall be payable (i) in United States Dollars by
certified or official bank check payable to the order of the Issuer or by wire
transfer of immediately available funds to an account specified by the Issuer
for that purpose; or (ii) if permitted by the Issuer as evidenced by written
notice to such effect, by means of a "cashless exercise." In the event the
Issuer permits "cashless exercise," the Holder may deliver in payment of the
Fixed Exercise Price (x) certificates representing shares of Common Stock
theretofore owned by the Holder having a fair market value equal to the Exercise
Price; (y) an instruction by the Holder to have the Issuer withhold the number
of shares of Common Stock the fair market value, less the Exercise Price, of
which is equal to the aggregate Exercise Price of the Warrant Shares specified
in the Election to Purchase Form, or (z) any combination of the preceding and
cash, equal in value to the full amount of the Exercise Price. For purposes
hereof, the "fair market value" of shares of Common Stock shall equal the
closing sales price of the Issuer's Common Stock on the last trading day
immediately preceding the date on which the Election to Purchase Form is
delivered to the Issuer along with the Warrant and payment of the Exercise
Price.
(c) Unless the Warrant Vesting Date has previously been accelerated
pursuant to Section 5(d), in the event Chicago - The Grill on the Alley LLC,
prior to the Warrant Vesting Date, effectively exercises its First Option to
Extend (as defined in the Lease) its ten (10)-year Lease for an additional five
(5) years, this Warrant shall be of no further force or effect. "Lease" shall
mean that certain lease dated , 199 , between The Westin Chicago Limited
Partnership, an Illinois limited partnership, as Landlord, and Chicago - The
Grill on the Alley LLC, an Illinois limited liability company, as Tenant, for
the operation of a restaurant at the hotel commonly known as The Westin Michigan
Avenue in Chicago, Illinois. The Term of the Lease, and the end of the Term, are
defined at Section 1.1(f) of the Lease.
(d) In the event of the exercise by the Holder(s) of that certain Warrant
of even date issued to MAG for 708,333 shares of Common Stock (the "Other
Shares") for all or any part of which Other Shares, the number of Warrant Shares
subject to this Warrant shall be reduced as follows: if all of the Other Shares
are acquired, this Warrant shall be of no further force or effect; if less than
all of the Other Shares are acquired, the number of Warrant Shares hereunder
shall be reduced by 1/708,333 multiplied by 70,833 for each Other Share so
acquired. Any reduction of less than one share shall be inoperative.
(e) Certificates representing Warrant Shares shall bear the following
restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
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<PAGE>
Section 2. Reservation of Shares: Preservation of Rights of Holder. The
Issuer hereby agrees that there shall be reserved for issuance and/or delivery
upon exercise of this Warrant, such number of Warrant Shares as shall be
required for issuance or delivery upon full exercise of this Warrant. The
Warrant surrendered upon exercise shall be canceled by the Issuer. After the
Expiration Date no shares of Common Stock shall be subject to reservation in
respect of this Warrant. The Issuer further agrees (i) that it will not by
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observation or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
the Issuer, (ii) promptly to take all action as may from time to time be
required in order to permit the Holder to exercise this Warrant and the Issuer
duly and effectively to issue shares of its Common Stock or other securities as
provided herein upon the exercise hereof, and (iii) promptly to take all action
required or provided herein to protect the rights of the Holder granted
hereunder against dilution. Without limiting the generality of the foregoing,
should the Warrant Shares at anytime consist in whole or in part of shares of
capital stock having a par value, the Issuer agrees that before taking any
action which would cause an adjustment of the Fixed Exercise Price so that the
same would be less than the then par value of such Warrant Shares, the Issuer
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Issuer may validly and legally issue fully paid and
nonassessable shares of such Common Stock at the Fixed Exercise Price as so
adjusted. The Issuer further agrees that it will not establish a par value for
its Common Stock while this Warrant is outstanding in an amount greater than the
Fixed Exercise Price.
Section 3. Exchange. Transfer. Assignment or Loss of Warrant. This Warrant
is not transferable or assignable except to the partners of MAG or to members of
the family of such partners, including trusts and/or family partnerships for the
benefit of said family members. Any attempted transfer of this Warrant, the
Warrant Shares or any new Warrant not in accordance with this Section shall be
null and void, and the Issuer shall not in any way be required to give effect to
such transfer. No transfer of this Warrant shall be effective for any purpose
hereunder until (i) written notice of such transfer and of the name and address
of the transferee has been received by the Issuer, and (ii) the transferee shall
first agree in a writing deposited with the Secretary of the Issuer to be bound
by all the provisions of this Warrant. Upon surrender of this Warrant to the
Issuer by any transferee authorized under the provisions of this Section 3, the
Issuer shall, without charge, execute and deliver a new Warrant registered in
the name of such transferee at the address specified by such transferee, and
this Warrant shall promptly be canceled. The Issuer may deem and treat the
registered holder of any Warrant as the absolute owner thereof for all purposes,
and the Issuer shall not be affected by any notice to the contrary. Any Warrant
if presented by an authorized transferee, may be exercised by such transferee
without prior delivery of a new Warrant issued in the name of the transferee.
Upon receipt by the Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and On the case of loss,
theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Issuer will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute a separate contractual obligation on the
part of the Issuer, whether or not the Warrant so lost, stolen destroyed or
mutilated shall be at any time enforceable by anyone.
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<PAGE>
Section 4. Rights of Holder. Neither a Holder nor his transferee by devise
or the laws of descent and distribution or otherwise shall be, or have any
rights or privileges of, a shareholder of the Issuer with respect to any Warrant
Shares, unless and until certificates representing such Warrant Shares shall
have been issued and delivered thereto.
Section 5. Adjustments in Fixed Exercise Price and Warrant Shares. The
Fixed Exercise Price and Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 5.
(a) If the Issuer is recapitalized through the subdivision or combination
of its outstanding shares of Common Stock into a larger or smaller number of
shares, the number of shares of Common Stock for which this Warrant may be
exercised shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock and the Fixed Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of a Warrant
Shares issuable hereunder immediately beer the record date for such
recapitalization shall equal the aggregate amount so payable immediately before
such record date.
(b) If the Issuer declares a dividend on Common Stock, or makes a
distribution to holders of Common Stock, and such dividend or distribution is
payable or made in Common Stock or securities convertible into or exchangeable
for Common Stock or rights to purchase Common Stock or securities convertible
into or exchangeable for Common Stock, the number of shares of Common Stock for
which this Warrant may be exercised shall be increased, as of the record date
for determining which holders of Common Stock shall be entitled to receive such
dividend or distribution, in proportion to the increase in the number of
outstanding shares (and shares of Common Stock issuable upon conversion of all
such securities convertible into common Stock) of Common Stock as a result of
such dividend or distribution, and the Fixed Exercise Price shall be adjusted so
that the aggregate amount payable f or the purchase of all the Warrant Shares
issuable hereunder immediately after the record date for such dividend or
distribution shall equal the aggregate amount so payable immediately before such
record date.
(c) If the Issuer declares a dividend on Common Stock (other than a
dividend covered by subsection (b) above) or distributes to holders of its
Common Stock, other than as part of its dissolution or liquidation or the
winding up of its affairs, any shares of its capital stock, any evidence of
indebtedness or any cash or other of its assets (other than for Common Stock),
the Holder shall receive notice of such event as set forth in Section 7 below.
(d) In case of any consolidation of the Issuer with, or merger of the
Issuer into, any other corporation (other than a consolidation or merger in
which the Issuer is the continuing corporation and in which no change occurs in
its outstanding Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Issuer, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Issuer, except where
the Issuer is the surviving entity and no change occurs in its outstanding
Common Stock), the corporation formed by such consolidation or the corporation
resulting from such merger or the corporation which shall have
4
<PAGE>
acquired such assets or securities of the Issuer, as the case may be, shall
execute and deliver to the Holder simultaneously therewith a new Warrant,
satisfactory in form and substance to the Holder, together with such other
documents as the Holder may reasonably request, entitling the Holder thereof to
receive upon exercise of such Warrant the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, sale,
transfer, or exchange of securities, or upon the dissolution following such sale
or other transfer, by a holder of the number of shares of Common Stock
purchasable upon exercise of this Warrant immediately prior to such
consolidation, merger, sale, transfer, or exchange. Such new Warrant shall
contain the same basic other terms and conditions as this Warrant and shall
provide for adjustments which, for events subsequent to the effective date of
such written instrument, shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 5. If any such consolidation,
merger, sale, transfer or exchange should occur prior to the Warrant Vesting
Date, the Warrant Vesting Date shall be adjusted to the date which is one
business day prior to the closing of any such consolidation, merger, sale,
transfer or exchange. The above provisions of this paragraph (d) shall similarly
apply to successive consolidations, mergers, exchanges, sales or other transfers
covered hereby.
(e) If the Issuer shall, at any time before the expiration of this Warrant
dissolve, liquidate or wind up its affairs, the Holder shall, upon exercise of
this Warrant have the right to receive, in lieu of the shares of Common Stock of
the Issuer that the Holder otherwise would have been entitled to receive, the
same kind and amount of assets as would have been issued, distributed or paid to
the Holder upon any such dissolution, liquidation or winding up with respect to
such shares of Common Stock of the Issuer had the Holder been the holder of
record of such shares of Common Stock receivable upon exercise of this Warrant
on the date for determining those entitled to receive any such distribution. If
any such dissolution, liquidation or winding up results in any cash distribution
in excess of the Fixed Exercise Price provided by this Warrant for the shares of
Common Stock receivable upon exercise of this Warrant, the Holder may, at the
Holder's option, exercise this Warrant without making payment of the Fixed
Exercise Price and, in such case, the Issuer shall, upon distribution to the
Holder, consider the Fixed Exercise Price to have been paid in full and, in
making settlement to the Holder, shall obtain receipt of the Fixed Exercise
Price by deducting an amount equal to the Fixed Exercise Price for the shares of
Common Stock receivable upon exercise of this Warrant from the amount payable to
the Holder. For purposes of this paragraph, the sale of all or substantially all
of the assets of the Issuer and distribution of the proceeds thereof to the
Issuer's shareholders shall be deemed liquidation.
(f) If an event occurs which is similar in nature to the events described
in this Section 5, but is not expressly covered hereby, the Board of Directors
of the Issuer shall make or arrange for an equitable adjustment to the number of
Warrant Shares and the Fixed Exercise Price.
(g) The term "Common Stock" shall mean the Common Stock $.00001 par value,
of the Issuer as the same exists at the date of issuance of this Warrant or as
which stock may be constituted from time to time, except that for the purpose of
this Section 5, the term "Common Stock" shall include any stock of any class of
the Issuer which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Issuer and which is not subject to redemption by the Issuer.
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<PAGE>
(h) The Issuer shall retain a firm of independent public accountants of
recognized standing (who may be any such firm regularly employed by the Issuer)
to make any computation required under this Section 5, and a certificate signed
by such firm shall be conclusive evidence of the correctness of any computation
made under this Section 5. Whenever the number of Warrant Shares or the Fixed
Exercise Price shall be adjusted as required by the provisions of this Section
5, the Issuer forthwith shall file in the custody of its secretary or an
assistant secretary, at its principal office, and furnish to each Holder hereof,
a certificate prepared in accordance with paragraph (h) above, showing the
adjusted number of Warrant Shares and the Fixed Exercise Price and setting forth
in reasonable detail the circumstances requiring the adjustments.
(j) Notwithstanding any other provision, this Warrant shall be binding
upon and inure to the benefit of any successors and assigns of the Issuer.
(k) No adjustment in the Fixed Exercise Price in accordance with the
provisions of this Section 5 need be made if such adjustment would amount to a
change in which Fixed Exercise Price of less than $.01 provided however, that
the amount by which any adjustment is not made by reason of the provisions of
this paragraph (k) shall be carried forward and taken into account at the time
of any subsequent adjustment in the Fixed Exercise Price.
(l) If an adjustment is made under this Section 5 and the event to which
the adjustment relates does not occur, then any adjustments in accordance with
this Section 5 shall be readjusted to the Fixed Exercise Price and the number of
Warrant Shares which would be in effect had the earlier adjustment not been
made.
Section 6. Taxes on Issue or Transfer of Common Stock and Warrant. The
Issuer shall pay any and all documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock or
other securities on the exercise of this Warrant. The Issuer shall not be
required to pay any tax which may be payable in respect of any transfer of this
Warrant or in respect of any transfers involved in the issue or delivery of
shares or the exercise of this Warrant in a name other than that of the Holder
and the person requesting such transfer, issue or delivery shall be responsible
for the payment of any such tax (and the Issuer shall not be required to issue
or deliver said shares until which tax has been paid or provided for).
Section 7. Notice of Adjustment. So long as this Warrant shall be
outstanding, (a) if the Issuer shall propose to pay any dividends or make any
distribution upon the Common Stock, or (b) if the Issuer shall offer generally
to the holder of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
other similar rights, or (c) if there shall be any proposed capital
reorganization of the Issuer in which the Issuer is not the surviving entity,
recapitalization of the capital stock of the Issuer, consolidation or merger of
the Issuer with or into another corporation, sale, lease or other transfer of
all or substantially all of the property and assets of the Issuer, or voluntary
or involuntary dissolution liquidation or winding up of the Issuer, or (d) if
the Issuer shall give to its stockholders any notices, report or other
communication respecting any significant or special action or event, then in
which event, the Issuer shall give to the Holder, at least ten days prior to the
relevant date described below (or such shorter period as is reasonably possible
if ten days is not reasonably possible), a notice containing a description of
the proposed action or event and
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stating the date or expected date on which a record of the Issuer's stockholders
is to be taken for any of the foregoing purposes, and the date or expected date
on which any such dividend, distribution, subscription, reclassification,
reorganization, consolidation, combination, merger, conveyance, sale, lease or
transfer, dissolution, liquidation or winding up is to take place and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
for securities or other property deliverable upon such event.
Section 8. Registration Rights.
(a) Demand Registration Rights. The Issuer covenants and agrees with the
holders of Warrants and Warrant Shares that, subject to the availability of
audited financial statements which would comply with Regulation S-X under the
Securities Act, upon written request of the then Holder(s) of at least a
majority of the Warrants Shares (including Warrant Shares underlying Warrants
not yet exercised), made at any time within the period commencing on the Vesting
Date and ending one year after the Expiration Date, the Issuer will file as
promptly as practicable and, in any event, within 60 days after receipt of such
written request, at its expense (other than the fees of counsel and sales
commissions for such Holders), no more than once, a post-effective amendment
(the "Amendment") to a registration statement, or a new registration statement
under the Securities Act, registering or qualifying the Warrant Shares for sale.
Within fifteen (15) days after receiving any which notice, the Issuer shall give
notice to the other Holders of the Warrants or Warrant Shares, if any, advising
that the Issuer is proceeding with such Amendment or registration statement and
offering to include therein the Warrant Shares of such Holders. The Issuer shall
not be obligated to any such other Holder unless such other Holder shall accept
such offer by notice in writing to the Issuer within ten (10) days thereafter.
The Issuer will use its best efforts, through its officers, directors, auditors
and counsel in all matters necessary or advisable, to file and cause to become
effective such Amendment or registration statement as promptly as practicable
and for a period of one year thereafter to reflect in the Amendment or
registration statement financial statements which are prepared in accordance
with Section l0(a)(3) of the Securities Act and any facts or events arising
that, individually, or in the aggregate, represent a fundamental and/or material
change in the information set forth in the Amendment or registration statement
to enable any Holders of the Warrants to exercise such Warrants and sell Warrant
Shares, or to enable any holders of Warrant Shares to sell such Warrant Shares,
during said one year period. If any registration pursuant to this paragraph 8(a)
is an underwritten offering, the Holders of a majority of the Warrant Shares to
be included in such registration shall be entitled to select the underwriter or
managing underwriter (in the case of a syndicated offering) of such offering,
subject to the Issuer's approval which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Issuer covenants and agrees with
any holder of the Warrants and Warrant Shares that if, at any time within the
period commencing on the Warrant Vesting Date and ending on the Expiration Date,
it proposes to file a registration statement with respect to any class of equity
or equity-related security (other than in connection with an offering to the
Issuer's employees or in connection with an acquisition, merger or similar
transaction) under the Securities Act in a primary registration on behalf of the
Issuer and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be used for registration of
the Warrant Shares, the Issuer will give prompt written notice (which, in the
case of a registration statement pursuant to the exercise of demand registration
rights shall be
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within ten (10) business days after the Issuer's receipt of notice of such
exercise and, in any event, shall be at least 30 days prior to such filing) to
the holders of Warrants and Warrant Shares at the addresses appearing on the
records of the Issuer of its intention to file a registration statement and will
offer to include in such registration statement all, but not less than 20% of
the Warrant Shares, subject to paragraphs i and ii of this Section 8(b) such
number of Warrant Shares with respect to which the Issuer has received written
requests for inclusion therein within ten (10) days after the giving of notice
by the Issuer. All registrations requested pursuant to this Section 8(b) are
referred to herein as "Piggyback Registrations." All Piggyback Registrations
pursuant to this Section 8 will be made solely at the Issuer's expense. This
Section is not applicable to a registration statement filed by the Issuer on
Forms S-4 or S-8 or any successor forms.
i. Priority on Primary Registrations. If a Piggy back Registration
includes an underwritten primary registration on behalf of the Issuer and the
underwriter(s) for such offering determines in good faith and advises the
Issuer in writing that in its/their opinion the number of Warrant Shares
requested to be included in such registration exceeds the number that can be
sold in such offering without materially adversely affecting the distribution of
such securities by the Issuer, the Issuer will include in such registration (A)
first, the securities that the Issuer proposes to sell and (B) second, the
Warrant Shares requested to be included in such registration, apportioned pro
rata among the holders of the Warrant Shares and holders of other securities
requesting registration.
ii. Priority on Secondary Registrations. If a Piggyback Registration
consists only of an underwritten secondary registration on behalf of holders of
securities of the Issuer, and the underwriter(s) for such offering advises the
Issuer in writing that in its/their opinion the number of Warrant Shares
requested to be included in such registration exceeds the number which can be
sold in such offering without materially adversely affecting the distribution of
such securities, the Issuer will include in such registration (A) first, the
securities requested to be included therein by the holders requesting such
registration, and (B) second, the Warrant Shares requested to be included in
such registration and securities of holder of other securities requested to be
included in such registration statement, pro rata among all such holders on the
basis of the number of shares requested to be included by each such holder,
provided, however, the Issuer will use its best efforts to include not less
than 20% of the Warrant Shares. Notwithstanding the foregoing, if any such
underwriter shall determine in good faith and advise the Issuer in writing that
the distribution of the Warrant Shares requested to be included in the
registration concurrently with the securities being registered by the Issuer
would materially adversely affect the distribution of such securities by the
Issuer, then the holders of such Warrant Shares shall delay their offering and
sale for such period ending on the earliest of (1) 90 days following the
effective date of the Issuer's registration statement, (2) the day upon which
the underwriting syndicate, if any, for such offering shall have been disbanded
or, (3) such date as the Issuer, managing underwriter and holders of Warrant
Shares shall otherwise agree. In the event of such delay, the Issuer shall file
such supplements, post-effective amendments and take any such other steps as may
be necessary to permit such holders to make their proposed offering and sale for
a period of 120 days immediately following the end of any such period of delay.
If any party disapproves the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Issuer, the underwriter, and the
holder. Notwithstanding the foregoing, the Issuer shall not be required to file
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a registration statement to include shares pursuant to this Section 8 if
independent counsel, reasonably satisfactory to the Issuer, renders an opinion
to the Issuer that the Warrant Shares proposed to be disposed of may be
transferred pursuant to the provisions of Rule 144 under the Securities Act or
otherwise without registration under the Securities Act.
(c) Actions to be taken by the Issuer. In connection with the registration
of Warrant Shares hereunder, the Issuer agrees to (i) bear the expenses of any
registration; provided, however, that in no event shall the Issuer be obligated
to pay (A) any fees and disbursements of special counsel for holders of Warrant
Shares, (B) any underwriters' discount or commission in respect of such Warrant
Shares, and (C) any stock transfer taxes attributable to the sale of the Warrant
Shares; (ii) use its best efforts to register or qualify the Warrant Shares for
offer or sale under state securities or Blue Sky laws of such jurisdictions in
which such holders shall reasonably request, provided, however, that no
qualification shall be required in any jurisdiction where, as a result thereof,
the Issuer would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is not then
subject; and (iii) enter into a cross-indemnity agreement, in customary form,
with each underwriter, if any, and each holder of securities included in such
registration statement.
(d) Action to be Taken by the Holders The Issuer's obligations under this
Section 8 shall be conditioned upon a timely receipt by the Issuer in writing of
(i) information as to the terms of such public offering furnished by or on
behalf of each holder of Warrant Shares intending to make a public offering of
his, her or its Warrant Shares, and (ii) such other information as the Issuer
may reasonably require from such holders, or any underwriter for any of them,
for inclusion in such registration statement.
Section 9. Notices. All communications hereunder shall be in writing, and,
if sent to the Holder shall be sufficient in all respects if delivered, sent by
registered mail, or by facsimile and confirmed to the Holder at:
The Michigan Avenue Group c/o Albert Sarnoff
75 Rockefeller Plaza
New York, NY 10019
Telephone:
Facsimile:
The Michigan Avenue Group
11828 LaGrange Avenue
Los Angeles, CA 90064
Attention: Patricia M. Knott
Telephone: 310/477-3593
Facsimile: 310/477-2522
or if to any other Holder, addressed to such Holder at such address as it shall
have specified to the Issuer in writing, or, if sent to the Issuer, shall be
delivered, sent by registered mail or by facsimile and confirmed to the Issuer
at:
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Grill Concepts, Inc.
11661 San Vicente Blvd.
Suite 404
Los Angeles, CA 90019
Attention: Michael Weinstock, Vice Chairman
Telephone: 310/820-5559
Facsimile: 310/820-6530
Section 10. Governing Law This Warrant shall be governed by, and
interpreted in accordance with, the laws of the State of California.
Dated: , 1999
GRILL CONCEPTS, INC.
By: /s/
Spivak, President
ATTEST:
/s/
Michael Weinstock, Secretary
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<PAGE>
EXHIBIT 10.22
THIS WARRANT AND THE SHARES OF COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED
UPON ANY EXERCISE OF THE WARRANT HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE
WARRANT
to Purchase Shares
of
Common Stock (.00001 par value)
of
GRILL CONCEPTS, INC.
February 1, 1999
This certifies that, for value received, The Michigan Avenue Group, a
general partnership ("MAG"), and any subsequent transferee pursuant to the terms
hereof (each, a "Holder") is entitled to purchase, subject to the provisions of
this Warrant, from Grill Concepts, Inc., a Delaware corporation (the "Issuer"),
at any time or from time to time on or after the end of the First Extension
Period of the Lease (defined in Section 1(c)) (subject to adjustment pursuant to
Section 5(d)(the "Warrant Vesting Date") and on or before five (5) years from
the Warrant Vesting Date) (the "Expiration Date"), thirty-five thousand four
hundred seventeen (35,417) fully paid and nonassessable shares of common stock,
$.00001 par value (the "Common Stock"), of the Issuer at an exercise price equal
to $1.75 per share, subject to adjustment pursuant to the terms hereunder (the
"Exercise Price") (such shares of Common Stock and other securities issued and
issuable upon exercise of this Warrant, the "Warrant Shares").
Section 1. Exercise of Warrant.
(a) Subject to the provisions hereof, this Warrant may be exercised, in
whole or in part, but not as to a fractional share, at anytime or from time to
time on or after the Warrant Vesting Date and on or before the Expiration Date,
by presentation and surrender hereof to the Issuer at the address which, in
accordance with the provisions of Section 10 hereof, is then effective for
notices to the Issuer, with the Election to Purchase Form annexed hereto as
Schedule One, duly executed and accompanied by payment to the Issuer as further
set forth below in this Section 1, for the account of the Issuer, of the
Exercise Price for the number of Warrant Shares specified in such form. If this
Warrant should be exercised in part only, the Issuer shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. The Issuer shall maintain at its principal place of business a
register for the registration of this Warrant and registration of transfer of
the Warrant.
<PAGE>
(b) The Exercise Price for the number of Warrant Shares specified in the
Election to Purchase Form shall be payable (i) in United States Dollars by
certified or official bank check payable to the order of the Issuer or by wire
transfer of immediately available funds to an account specified by the Issuer
for that purpose; or (ii) if permitted by the Issuer as evidenced by written
notice to such effect, by means of a "cashless exercise." In the event the
Issuer permits "cashless exercise," the Holder may deliver in payment of the
Fixed Exercise Price (x) certificates representing shares of Common Stock
theretofore owned by the Holder having a fair market value equal to the Exercise
Price; (y) an election by the Holder to have the Issuer withhold the number of
shares of Common Stock the fair market value, less the Exercise Price, of which
is equal to the aggregate Exercise Price of the Warrant Shares specified in the
Election to Purchase Form, or (z) any combination of the preceding and cash,
equal in value to the full amount of the Exercise Price. For purposes hereof,
the "fair market value" of shares of Common Stock shall equal the closing sales
price of the Issuer's Common Stock on the last trading day immediately preceding
the date on which the Election to Purchase Form is delivered to the Issuer along
with the Warrant and payment of the Exercise Price.
(c) Unless the Warrant Vesting Date has previously been accelerated
pursuant to Section 5(d), in the event Chicago - The Grill on the Alley LLC,
prior to the Warrant Vesting Date, (i) has not effectively exercised its First
Option to Extend its ten (10)-year Lease, or (ii) effectively exercises its
Second Option to Extend its ten (10)-year Lease for an additional five (5)
years, this Warrant shall be of no further force or effect. "Lease" shall mean
that certain lease dated ___________ 199____ between The Westin Chicago Limited
Partnership, an Illinois limited partnership, as Landlord, and Chicago - The
Grill on the Alley LC, an Illinois limited liability company, as Tenant, for the
operation of a restaurant at the hotel commonly known as The Weston Michigan
Avenue in Chicago, Illinois. The First Extension Period, the First Option to
Extend and the Second Option to Extend are defined at Section 31 of the Lease.
(d) In the event of the exercise by the Holder(s) of that certain Warrant
of even date issued to MAG for 708,333 shares of Common Stock (the"Other
Shares") for all or any part of such Other Shares, the number of Warrant Shares
subject to this Warrant shall be reduced as follows: if all of the Other Shares
are acquired, this Warrant shall be of no further force or effect; if less than
all of the Other Shares are acquired, the number of Warrant Shares hereunder
shall be reduced by 1/708,333 multiplied by 35,417 for each Other Share so
acquired. Any reduction of less than one share shall be inoperative.
(e) Certificates representing Warrant Shares shall bear the following
restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
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<PAGE>
Section 2. Reservation of Shares: Preservation of rights of Holder. The
Issuer hereby agrees that there shall be reserved for issuance and/or delivery
upon exercise of this Warrant, such number of Warrant Shares as shall be
required for issuance or delivery upon full exercise of this Warrant. The
Warrant surrendered upon exercise shall be canceled by the Issuer. After the
Expiration Date no shares of Common Stock shall be subject to reservation in
respect of this Warrant. The Issuer further agrees (i) that it will not, by
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observation or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
the Issuer, (ii) promptly to take all action as may from time to time be
required in order to permit the Holder to exercise this Warrant and the Issuer
duly and effectively to issue shares of its Common Stock or other securities as
provided herein upon the exercise hereof, and (iii) promptly to take all action
required or provided herein to protect the rights of the Holder granted
hereunder against dilution. Without limiting the generality of the foregoing,
should the Warrant Shares at any time consist in whole or in part of shares of
capital stock having a par value, the Issuer agrees that before taking any
action which would cause an adjustment of the Fixed Exercise Price so that the
same would be less than the then par value of such Warrant Shares, the Issuer
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Issuer may validly and legally issue fully paid and
nonassessable shares of such Common Stock at the Fixed Exercise Price as so
adjusted. The Issuer further agrees that it will not establish a par value for
its Common Stock while this Warrant is outstanding in an amount greater than the
Fixed Exercise Price.
Section 3. Exchange. Transfer, Assignment or Loss of Warrant. This Warrant
is not transferable or assignable except to the partners of MAG or to members of
the family of such partners, including trusts and/or family partnerships for the
benefit of said family members. Any attempted transfer of this Warrant, the
Warrant Shares or any new Warrant not in accordance with this Section shall be
null and void, and the Issuer shall not in any way be required to give effect to
such transfer. No transfer of this Warrant shall be effective for any purpose
hereunder until (i) written notice of such transfer and of the name and address
of the transferee has been received by the Issuer, and (ii) the transferee shall
first agree in a writing deposited with the Secretary of the Issuer to be bound
by all the provisions of this Warrant. Upon surrender of this Warrant to the
Issuer by any transferee authorized under the provisions of this Section 3, the
Issuer shall, without charge, execute and deliver a new Warrant registered in
the name of such transferee at the address specified by such transferee, and
this Warrant shall promptly be canceled. The Issuer may deem and treat the
registered holder of any Warrant as the absolute owner thereof for all purposes,
and the Issuer shall not be affected by any notice to the contrary. Any Warrant
if presented by an authorized transferee, may be exercised by such transferee
without prior delivery of a new Warrant issued in the name of the transferee.
Upon receipt by the Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Issuer will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute a separate contractual obligation on the
part of the Issuer, whether or not the Warrant so lost, stolen destroyed or
mutilated shall be at any time enforceable by anyone.
3
<PAGE>
Section 4. Rights of Holder. Neither a Holder nor his transferee by devise
or the laws of descent and distribution or otherwise shall be, or have any
rights or privileges of, a shareholder of the Issuer with respect to any Warrant
Shares, unless and until certificates representing such Warrant Shares shall
have been issued and delivered thereto.
Section 5. Adjustments in Fixed Exercise Price and Warrant Shares. The
Fixed Exercise Price and Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 5.
(a) If the Issuer is recapitalized through the subdivision or combination
of its outstanding shares of Common Stock into a larger or smaller number of
shares, the number of shares of Common Stock for which this Warrant may be
exercised shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the Fixed Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all Warrant
Shares issuable hereunder immediately after the record date for such
recapitalization shall equal the aggregate amount so payable immediately before
such record date.
(b) If the Issuer declares a dividend on Common Stock or makes a
distribution to holders of Common Stock, and such dividend or distribution is
payable or made in Common Stock or securities convertible into or exchangeable
for Common Stock, or rights to purchase Common Stock or securities convertible
into or exchangeable for Common Stock, the number of shares of Common Stock for
which this Warrant may be exercised shall be increased, as of the record date
for determining which holders of Common Stock shall be entitled to receive such
dividend or distribution, in proportion to the increase in the number of
outstanding shares (and shares of Common Stock issuable upon conversion of all
such securities convertible into common Stock) of Common Stock as a result of
such dividend or distribution, and the Fixed Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all the Warrant Shares
issuable hereunder immediately after the record date for such dividend or
distribution shall equal the aggregate amount so payable immediately before such
record date.
(c) If the Issuer declares a dividend on Common Stock (other than a
dividend covered by subsection (b) above) or distributes to holders of its
Common Stock other than as part of its dissolution or liquidation or the winding
up of its affairs, any shares of its capital stock any evidence of indebtedness
or any cash or other of its assets (other than for Common Stock), the Holder
shall receive notice of such event as set forth in Section 7 below.
(d) In case of any consolidation of the Issuer with, or merger of the
Issuer into, any other corporation (other than a consolidation or merger in
which the Issuer is the continuing corporation and in which no change occurs in
its outstanding Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Issuer, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Issuer, except what
the Issuer is the surviving entity and no change occurs in its outstanding
Common Stock), the corporation formed by such consolidation or the corporation
resulting from such merger or the corporation which shall have
4
<PAGE>
acquired such assets or securities of the Issuer, as the case may be, shall
execute and deliver to the Holder simultaneously therewith a new Warrant,
satisfactory in form and substance to the Holder, together with such other
documents as the Holder may reasonably request, entitling the Holder thereof to
receive upon exercise of such Warrant the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, sale,
transfer, or exchange of securities, or upon the dissolution following such sale
or other transfer, by a holder of the number of shares of Common Stock
purchasable upon exercise of this Warrant immediately prior to such
consolidation, merger, sale, transfer, or exchange. Such new Warrant shall
contain the same basic other terms and conditions as this Warrant and shall
provide for adjustments which, for events subsequent to the effective date of
such written instrument, shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 5. If any such consolidation,
merger, sale, transfer or exchange should occur prior to the Warrant Vesting
Date, the Warrant Vesting Date shall be adjusted to the date which is one
business day prior to the closing of any such consolidation, merger, sale,
transfer or exchange. The above provisions of this paragraph (d) shall similarly
apply to successive consolidations, mergers, exchanges, sales or other transfers
covered hereby.
(e) If the Issuer shall, at any time before the expiration of this Warrant
dissolve, liquidate or wind up its affairs, the Holder shall, upon exercise of
this Warrant have the right to receive, in lieu of the shares of Common Stock of
the Issuer that the Holder otherwise would have been entitled to receive, the
same kind and amount of assets as would have been issued, distributed or paid to
the Holder upon any such dissolution, liquidation or winding up with respect to
such shares of Common Stock of the Issuer had the Holder been the holder of
record of such shares of Common Stock receivable upon exercise of this Warrant
on the date for determining those entitled to receive any such distribution. If
any such dissolution, liquidation or winding up results in any cash distribution
in excess of the Fixed Exercise Price provided by this Warrant for the shares of
Common Stock receivable upon exercise of this Warrant, the Holder may, at the
Holder's option, exercise this Warrant without making payment of the Fixed
Exercise Price and, in such case, the Issuer shall, upon distribution to the
Holder, consider the Fixed Exercise Price to have been paid in full and, in
making settlement to the Holder, shall obtain receipt of the Fixed Exercise
Price by deducting an amount equal to the Fixed Exercise Price for the shares of
Common Stock receivable upon exercise of this Warrant from the amount payable to
the Holder. For purposes of this paragraph, the sale of all or substantially all
of the assets of the Issuer and distribution of the proceeds thereof to the
Issuer's shareholders shall be deemed liquidation.
(f) If an event occurs which is similar in nature to the events described
in this Section 5, but is not expressly covered hereby, the Board of Directors
of the Issuer shall make or arrange for an equitable adjustment to the number of
Warrant Shares and the Fixed Exercise Price.
(g) The term "Common Stock" shall mean the Common Stock, $.00001 par value,
of the Issuer as the same exists at the date of issuance of this Warrant or as
such stock may be constituted from time to time, except that for the purpose of
this Section 5, the term "Common Stock" shall include any stock of any class of
the Issuer which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Issuer and which is not subject to redemption by the Issuer.
5
<PAGE>
(h) The Issuer shall retain a firm of independent public accountants of
recognized standing (who may be any such firm regularly employed by the Issuer)
to make any computation required under this Section 5, and a certificate signed
by such firm shall be conclusive evidence of the correctness of any computation
made under this Section 5.
(i) Whenever the number of Warrant Shares or the Fixed Exercise Price shall
be adjusted as required by the provisions of this Section 5, the Issuer
forthwith shall file in the custody of its secretary or an assistant secretary,
at its principal office, and furnish to each Holder hereof, a certificate
prepared in accordance with paragraph (h) above, showing the adjusted number of
Warrant Shares and the Fixed Exercise Price and setting forth in reasonable
detail the circumstances requiring the adjustments.
(g) Notwithstanding any other provision, this Warrant shall be binding upon
and inure to the benefit of any successors and assigns of the Issuer.
(k) No adjustment in the Fixed Exercise Price in accordance with the
provisions of this Section 5 need be made if such adjustment would amount to a
change in such Fixed Exercise Price of less than $.01 provided however, that the
amount by which any adjustment is not made by reason of the provisions of this
paragraph (k) shall be carried forward and taken into account at the time of any
subsequent adjustment in the Fixed Exercise Price.
(l) If an adjustment is made under this Section 5 and the event to which
the adjustment relates does not occur, then any adjustments in accordance with
this Section 5 shall be readjusted to the Fixed Exercise Price and the number of
Warrant Shares which would be in effect had the earlier adjustment not been
made.
Section 6. Taxes on Issue or Transfer of Common Stock and Warrant. The
Issuer shall pay any and all documentary stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of shares of Common Stock or
other securities on the exercise of this Warrant. The Issuer shall not be
required to pay any tax which may be payable in respect of any transfer of this
Warrant or in respect of any transfers involved in the issue or delivery of
shares or the exercise of this Warrant in a name other than that of the Holder
and the person requesting such transfer, issue or deliver shall be responsible
for the payment of any such tax (and the Issuer shall not be required to issue
or deliver said shares until such tax has been paid or provided for).
Section 7. Notice of adjustment. So long as this Warrant shall be
outstanding, (a) if the Issuer shall propose to pay any dividends or make any
distribution upon the Common Stock, or (b) if the Issuer shall offer generally
to the holder of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
other similar rights, or (c) if there shall be any proposed capital
reorganization of the Issuer in which the Issuer is not the surviving entity,
recapitalization of the capital stock of the Issuer, consolidation or merger of
the Issuer with or into another corporation, sale, lease or other transfer of
all or substantially all of the property and assets of the Issuer, or voluntary
or involuntary dissolution, liquidation or winding up of the Issuer, or (d) if
the Issuer shall give to its stockholders any notices, report or other
communication respecting any significant or special action or event, then in
such event, the Issuer shall give to the Holder, at least ten days prior to
6
<PAGE>
the relevant date described below (or such shorter period as is reasonably
possible if ten days is not reasonably possible), a notice containing a
description of the proposed action or event and stating the date or expected
date on which a record of the Issuer's stockholders is to be taken for any of
the foregoing purposes, and the date or expected date on which any such
dividend, distribution, subscription, reclassification, reorganization,
consolidation, combination, merger, conveyance, sale, lease or transfer,
dissolution, liquidation or winding up is to take place and the date or expected
date, if any is to be fixed, as of which the holders of Common Stock for
securities or other property deliverable upon such event.
Section 8. Registration Rights.
(a) Demand Registration Rights. The Issuer covenants and agrees with the
holders of Warrants and Warrant Shares that, subject to the availability of
audited financial statements which would comply with Regulation S-X under the
Securities Act, upon written request of the then Holder(s) of at least a
majority of the Warrants Shares (including Warrant Shares underlying Warrants
not yet exercised), made at any time within the period commencing on the Vesting
Date and ending one year after the Expiration Date, the Issuer will file as
promptly as practicable and, in any event, within 60 days after receipt of such
written request, at its expense (other than the fees of counsel and sales
commissions for such Holders), no more than once, a post-effective amendment
(the "Amendment") to a registration statement, or a new registration statement
under the Securities Act, registering or qualifying the Warrant Shares for sale.
Within fifteen (15) days after receiving any such notice, the Issuer shall give
notice to the other Holders of the Warrants or Warrant Shares, if any, advising
that the Issuer is proceeding with such Amendment or registration statement and
offering to include therein the Warrant Shares of such Holders. The Issuer shall
not be obligated to any such other Holder unless such other Holder shall accept
such offer by notice in writing to the Issuer within ten (10) days thereafter.
The Issuer will use its best efforts, through its officers, directors, auditors
and counsel in all matters necessary or advisable, to file and cause to become
effective such Amendment or registration statement as promptly as practicable
and for a period of one year thereafter to reflect in the Amendment or
registration statement financial statements which are prepared in accordance
with Section l0(a)(3) of the Securities Act and any fact or events arising that,
individually, or in the aggregate, represent a fundamental and/or material
change in the information set forth in the Amendment or registration statement
to enable any Holders of the Warrants to exercise such Warrants and sell Warrant
Shares, or to enable any holders of Warrant Shares to sell such Warrant Shares,
during said one year period. If any registration pursuant to this paragraph 8(a)
is an underwritten offering, the Holders of a majority of the Warrant Shares to
be included in such registration shall be entitled to select the underwriter or
managing underwriter (in the case of a syndicated offering) of such offering,
subject to the Issuer's approval which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Issuer covenants and agrees with any
holder of the Warrants and Warrant Shares that if, at any time within the period
commencing on the Warrant Vesting Date and ending on the Expiration Date, it
proposes to file a registration statement with respect to any class of equity or
equity-related security (other than in connection with an offering to the
Issuer's employees or in connection with an acquisition, merger or similar
transaction) under the Securities Act in a primary registration on behalf of the
Issuer and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be
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<PAGE>
used for registration of the Warrant Shares, the Issuer will give prompt written
notice (which, in the case of a registration statement pursuant to the exercise
of demand registration rights shall be within ten (10) business days after the
Issuer's receipt of notice of such exercise and, in any event, shall be at least
30 days prior to such filing) to the holders of Warrants and Warrant Shares at
the addresses appearing on the records of the Issuer of its intention to file a
registration statement and will offer to include in such registration statement
all, but not less than 200% of the Warrant Shares, subject to paragraphs i and
ii of this Section 8(b) such number of Warrant Shares with respect to which the
Issuer has received written requests for inclusion therein within ten (10) days
after the giving of notice by the Issuer. All registrations requested pursuant
to this Section 8(b) are referred to herein as "Piggyback Registrations." All
Piggyback Registrations pursuant to this Section 8 will be made solely at the
Issuer's expense. This Section is not applicable to a registration statement
filed by the Issuer on Forms S-4 or S-8 or any successor forms.
i. Priority on Primary Registrations. If a Piggyback Registration
includes an underwritten primary registration on behalf of the Issuer and the
underwriter(s) for such offering determines in good faith and advises the Issuer
in writing that in its/their opinion the number of Warrant Shares requested to
be included in such registration exceeds the number that can be sold in such
offering without materially adversely affecting the distribution of such
securities by the Issuer, the Issuer will include in such registration (A)
first, the securities that the Issuer proposes to sell and (B) second, the
Warrant Shares requested to be included in such registration, apportioned pro
rata among the holders of the Warrant Shares and holders of other securities
requesting registration.
ii. Priority on Secondary Registrations. If a Piggyback Registration
consists only of an underwritten secondary registration on behalf of holders of
securities of the Issuer, and the underwriter(s) for such offering advises the
Issuer in writing that in its/their opinion the number of Warrant Shares
requested to be included in such registration exceeds the number which can be
sold in such offering without materially adversely affecting the distribution of
such securities, the Issuer will include in such registration (A) first, the
securities requested to be included therein by the holders requesting such
registration, and (B) second, the Warrant Shares requested to be included in
such registration and securities of holder of other securities requested to be
included in such registration statement, pro rata among all such holders on the
basis of the number of shares requested to be included by each such holder,
provided, however, the Issuer will use its best efforts to include not less than
20% of the Warrant Shares.
Notwithstanding the foregoing, if any such underwriter shall determine
in good faith and advise the Issuer in writing that the distribution of the
Warrant Shares requested to be included in the registration concurrently with
the securities being registered by the Issuer would materially adversely affect
the distribution of such securities by the Issuer, then the holders of such
Warrant Shares shall delay their offering and sale for such period ending on the
earliest of (1) 90 days following the effective date of the Issuer's
registration statement, (2) the day upon which the underwriting syndicate, if
any, for such offering shall have been disbanded or, (3) such date as the
Issuer, managing underwriter and holders of Warrant Shares shall otherwise
agree. In the event of such delay, the Issuer shall file such supplements, post-
effective amendments and take any such other steps as may be necessary to permit
such holders to make their proposed
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<PAGE>
offering and sale for a period of 120 days immediately following the end of any
such period of delay. If any party disapproves the terms of any such
underwriting it may elect to withdraw therefrom by written notice to the Issuer,
the underwriter, and the holder. Notwithstanding the foregoing the Issuer shall
not be required to file a registration statement to include shares pursuant to
this Section 8 if independent counsel, reasonably satisfactory to the Issuer,
renders an opinion to the Issuer that the Warrant Shares proposed to be disposed
of may be transferred pursuant to the provisions of Rule 144 under the
Securities Act or otherwise without registration under the Securities Act.
(c) Actions to be taken by the Issuer. In connection with the registration
of Warrant Shares hereunder, the Issuer agrees to (i) bear the expenses of any
registration; provided, however, that in no event shall the Issuer be obligated
to pay (A) any fees and disbursements of special counsel for holders of Warrant
Shares, (B) any underwriters' discount or commission in respect of such Warrant
Shares, and (C) any stock transfer taxes attributable to the sale of the Warrant
Shares; (ii) use its best efforts to register or qualify the Warrant Shares for
offer or sale under state securities or Blue Sky laws of such jurisdictions in
which such holders shall reasonably request, provided, however, that no
qualification shall be required in any jurisdiction where, as a result thereof,
the Issuer would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is not then
subject; and (iii) enter into a cross-indemnity agreement in customary form,
with each underwriter, if any, and each holder of securities included in such
registration statement.
(d) Action to be Taken by the Holders. The Issuer's obligations under this
Section 8 shall be conditioned upon a timely receipt by the Issuer in writing
of: (i) information as to the terms of such public offering furnished by or on
behalf of each holder of Warrant Shares intending to make a public offering of
his, her or its Warrant Shares, and (ii) such other information as the Issuer
may reasonably require from such holders, or any underwriter for any of them,
for inclusion in such registration statement.
Section 9. Notices. All communications hereunder shall be in writing, and,
if sent to the Holder shall be sufficient in all respects if delivered, sent by
registered mail, or by facsimile and confirmed to the Holder at:
The Michigan Avenue Group
c/o Albert Sarnoff
75 Rockefeller Plaza
New York, NY 10019
Telephone:
Facsimile:
The Michigan Avenue Group
11828 LaGrange Avenue
Los Angeles, CA 90064
Attention: Patricia M. Knox
Telephone: 310/477-3593
Facsimile: 310/477-2522
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or if to any other Holder, addressed to such Holder at such address as it shall
have specified to the Issuer in writing, or, if sent to the Issuer, shall be
delivered, sent by registered mail or by facsimile and confirmed to the Issuer
at:
Grill Concepts, Inc.
11661 San Vicente Blvd.
Suite 404
Los Angeles, CA 90049
Attention: Michael Weinstock, Vice Chairman
Telephone: 310/820-5559
Facsimile: 310/820-6530
Section 10. Governing Law. This Warrant shall be governed by, and
interpreted in accordance with, the laws of the State of California.
Dated: _______________, 1999
GRILL CONCEPTS, INC.
By: /s/ Robert Spivak, President
ATTEST
/s/ Michael Weinstock, Secretary
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EXHIBIT 10.23
GUARANTY
THIS GUARANTY ("Guaranty") is made and entered into as of February 1, 1999
by Grill Concepts, Inc., a Delaware corporation ("GCI") and Grill Concepts,
Inc., a California corporation ("GCICA") (each a "Guarantor" and collectively,
"Guarantors").
RECITALS
A. GCI and The Michigan Avenue Group, a general partnership ("MAG") have
formed and are the members of Chicago-The Grill on the Alley, LLC, an Illinois
limited liability company ("LLC") and have entered into an Operating Agreement
governing the operations of the LLC (the "Operating Agreement").
B. LLC has executed and delivered to MAG a Senior Convertible Promissory
Note in the principal amount of $1,699,000 (the "Note").
C. In order to induce MAG to enter into the Operating Agreement, to make
its Initial Capital Contribution thereunder and to make the MAG Loan evidenced
by the Note, Guarantors are required to execute and deliver this Guaranty.
NOW, THEREFORE, in consideration of the above Recitals, which are
incorporated into the Agreement below by reference as if fully set forth
therein; and in consideration of MAG executing and delivering the Operating
Agreement, making its Initial Capital Contribution thereunder, and making the
MAG Loan; and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Guarantors, each Guarantor
agrees with MAG as follows:
AGREEMENT
ARTICLE I
REPRESENTATIONS AND WARRANTIES
Each Guarantor makes the following representations and warranties to and in
favor of MAG which shall be continuing representations and warranties so long as
any Guarantied Obligations (as defined below) shall remain unpaid and
unsatisfied:
Section 1.1. Existence and Rights. GCI is a corporation duly formed and
validly existing under the laws of Delaware. GCICA is a corporation duly formed
and validly existing under the laws of California. Each Guarantor has the
corporate power and authority, rights and franchises to own property and to
carry on its business as now carried on and is duly qualified and in good
standing in each jurisdiction which the property owned by it or the business
conducted by it makes such qualification necessary, and each Guarantor has the
power and adequate authority to make and carry out this Guaranty.
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Section 1.2. Guaranty Authorized and Binding. The execution, delivery and
performance of this Guaranty are duly authorized and this Guaranty is a valid
and legally binding obligation of each Guarantor enforceable in accordance with
its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
and subject to general principles of equity.
Section 1.3. No Conflict. The execution and delivery of this Guaranty are
not, and the performance of this Guaranty will not be, in contravention of, or
in conflict with, any agreement, indenture or undertaking to which either
Guarantor is a party or by which it or any of their property is or may be bound
or affected; do not, and will not, require the consent or approval of any
governmental authority; are not, and will not be, in contravention of, or in
conflict with, any applicable law binding on either Guarantor or any term or
provision of either Guarantor's charter or bylaws; and do not, and will not,
cause any security interest, lien or other encumbrance to be created or imposed
upon any of such assets or property.
ARTICLE II
GUARANTY
Section 2.1. Guaranty. Guarantors jointly and severally hereby
unconditionally and irrevocably guaranty to MAG the prompt payment (on demand in
lawful money of the United States) and performance of any and all Guarantied
Obligations (as defined below). The term "Guarantied Obligations" as used herein
means all obligations of LLC (i) under the Operating Agreement to pay the
Initial Capital Contributions and the Converted Capital Contributions of MAG
(but not the Preferred Return thereon) in accordance with the Scheduled
Repayments, and (ii) under the Note to pay and perform all obligations set forth
therein, subject to the terms and conditions set forth therein (as such
agreements may be amended or waived by LLC and MAG from time to time).
Section 2.2. Continuing Guaranty. This is a continuing guaranty of the
Guarantied Obligations and shall remain in full force and effect until payment
and performance in full of the Guarantied Obligations. Each Guarantor
understands and agrees that this Guaranty shall be construed as an irrevocable
and continuing guaranty of payment and performance. Each Guarantor authorizes
LLC and MAG without notice or demand and without affecting each Guarantor's
liability hereunder, from time to time, to make any change to the terms of the
Operating Agreement, the Note or in any other term of all or any of the
Guarantied Obligations, or any other amendment or waiver of or any consent to
departure from the Operating Agreement, the Note or any of the documents
executed in connection therewith.
Section 2.3. Nature of Guaranty. A separate action or separate actions
under this Guaranty may be brought and prosecuted against either Guarantor or
both Guarantors whether or not any action is brought or prosecuted against LLC,
against the other Guarantor or against any other person or whether LLC or any
other person is joined in any such action or actions. Any circumstance which
operates to toll any statute of limitations applicable to LLC shall also operate
to toll the statute of limitations applicable to both Guarantors.
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Section 2.4. Waivers. Each Guarantor hereby waives the right to require MAG
to proceed against LLC or any other person liable on the Guarantied Obligations
or to pursue any other remedy in MAG's power whatsoever, and each Guarantor
waives the right to have the proceeds of property of LLC or any other person
liable on the Guarantied Obligations first applied to the discharge of the
Guarantied Obligations. When making any demand on either Guarantor hereunder
against the Guarantied Obligations, MAG may, but shall be under no obligation
to, make a similar demand on LLC or on the other Guarantor, and any failure by
MAG to make any such demand or to collect any payments from LLC shall not
relieve either Guarantor of its obligations or liabilities hereunder. MAG may,
at its election, exercise any right or remedy it may have against LLC or any
other person without affecting or impairing in any way the liability of either
Guarantor hereunder, except to the extent the Guarantied Obligations have been
indefeasibly paid, and each Guarantor waives any defense arising out of the
absence, impairment or loss of any right of reimbursement or subrogation or any
other right or remedy of either Guarantor against LLC, whether resulting from
such election by MAG or otherwise. Each Guarantor hereby waives, to the fullest
extent permitted by law, all rights and benefits under any applicable law
purporting to reduce a guarantor's obligations in proportion to the obligation
of the principal. Each Guarantor hereby waives any defense based upon or arising
by reason of: (a) any lack of authority of any officer, director or any other
person acting or purporting to act on behalf of LLC, or any defect in the
formation of LLC; (b) any act or omission by LLC which directly or indirectly
results in or aids the discharge of LLC or any Guarantied Obligations by
operation of law or otherwise; or (c) any modification of the Guarantied
Obligations, in any form whatsoever, including without limitation the renewal,
extension, acceleration or other change in time for payment or performance of
the Guarantied Obligations, any waiver or modification of conditions precedent
or any other change in the terms of the Guarantied Obligations or any part
thereof Each Guarantor hereby waives all presentments, demands for performance,
notices of nonperformance, protest, notices of protest, notices of dishonor and
notices of acceptance of this Guaranty and of the existence, creation or
incurring of new or additional obligations. Each Guarantor assumes the
responsibility for being and keeping itself informed of the financial condition
of LLC and of all other circumstances bearing upon the risk of nonpayment or
nonperformance by LLC of the Guarantied Obligations which diligent inquiry would
reveal, represents that it has adequate means of obtaining such financial
information from LLC on a continuing basis, and agrees that MAG shall have no
duty to advise either Guarantor of information known to it regarding such
condition or any such circumstances. Each Guarantor hereby waives notice of any
action taken or omitted by MAG in reliance hereon, and any requirement that MAG
be diligent and prompt in making demands hereunder, notice of any waiver or
amendment of any terms and conditions of the Operating Agreement or Note, notice
of any default by LLC or the assertion of any right of MAG hereunder, any right
to plead or assert any election of remedies in any action to enforce this
Guaranty in respect of its obligations hereunder.
Section 2.5. Bankruptcy Not Discharge. Notwithstanding anything to the
contrary herein contained, this Guaranty shall continue to be effective or
reinstated, as the case may be, if at any time payment, or any part thereof, of
any or all of the Guarantied Obligations is rescinded or must otherwise be
restored or returned by MAG upon the insolvency, bankruptcy or reorganization of
LLC. Notwithstanding any modification, discharge or extension of the Guarantied
Obligations or any amendment, waiver, modification, stay or cure of MAG's rights
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which may occur in any bankruptcy or reorganization case or proceeding
concerning LLC, whether permanent or temporary, and whether or not assented to
by MAG, each Guarantor hereby agrees that it shall be obligated hereunder to pay
and perform the Guarantied Obligations and discharge its other obligations in
accordance with the terms of the Guarantied Obligations as set forth in this
Guaranty in effect on the date hereof Each Guarantor understands and
acknowledges that by virtue of this Guaranty, it has specifically assumed any
and all risks of a bankruptcy or reorganization case or proceeding with respect
to LLC.
Section 2.6. Guarantors' Understandings With Respect To Waivers. Guarantors
warrant and agree that each of the waivers set forth above is made with such
Guarantor's full knowledge of its significance and consequences and made after
the opportunity to consult with counsel of its own choosing, and that under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any of said waivers are determined to be contrary to any applicable law
or public policy, such waiver shall be effective only to the extent permitted by
law.
ARTICLE 111
SENIORITY OF NOTE:
SUBROGATION: SECURITY
Section 3.1. Seniority. The obligations of LLC under the Note, and the
obligations of each Guarantor under this Guaranty, shall be senior to all other
Indebtedness of LLC and each Guarantor, respectively, except for (i) existing
Indebtedness of each Guarantor; (ii) Replacement Indebtedness of each Guarantor;
(iii) Indebtedness of LLC (which may be guaranteed by either Guarantor) incurred
for the purpose of acquiring equipment for the Restaurant (as defined in the
Operating Agreement) prior to the date the Restaurant opens for business or
Indebtedness incurred by LLC (which may be guaranteed by Guarantor) permitted by
the Operating Agreement for the purpose of acquiring additional equipment for
the Restaurant, (iv) Indebtedness of either Guarantor incurred to acquire
equipment for additional restaurants opened after the date hereof, or(v)
Indebtedness of either Guarantor incurred on a non-recourse basis in connection
with assets acquired by such Guarantor after the date hereof for which the
obligations are limited to such assets (the "Excluded Indebtedness"). For
purposes hereof, Indebtedness means at any date any of the following: (i) all
obligations, unconditional or contingent, for borrowed money including, without
limitation, principal, interest, premium, penalties and costs (including for
this purpose all obligations incurred under Capitalized Leases), or obligations
evidenced by bonds, notes, debentures or similar instruments; and (ii) all
obligations to pay the balance deferred and unpaid of the purchase price of any
business, real property, other assets or interests therein, except any such
balance that constitutes a trade payable arising in the ordinary course of
business. For purposes hereof, (i) "Capitalized Lease" means a lease of real or
personal property which, in accordance with generally accepted accounting
principles, has been or should have been capitalized by LLC or either Guarantor;
and (ii) "interest" includes, without limitation, interest which may accrue
subsequent to the filing of a petition for relief in bankruptcy or subsequent to
LLC or either Guarantor becoming subject to any other federal or state debtor
relief statute. Neither Guarantor shall incur any Indebtedness from and after
the date of this Guaranty, except for Excluded Indebtedness, which is not either
expressly subordinated to the obligations contained in this Guaranty, or junior
to such obligations by reason of priority established by the security for this
Guaranty granted to MAG. "Replacement Indebtedness" means Indebtedness
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incurred to reimburse existing Indebtedness of Guarantors in the aggregate
amount for both Guarantors not to exceed Three Million Two Hundred Thirty-nine
Thousand Five Hundred Dollars ($3,239,500), inclusive of any line of credit, and
upon terms not materially more onerous than existing Indebtedness of Guarantors
comprising that amount.
Section 3.2. Subrogation. Until the Guarantied Obligations shall have been
paid in full, each Guarantor shall withhold exercise of (a) any claim, right or
remedy, direct or indirect, that such Guarantor now has or may hereafter have
against LLC or any of its assets in connection with this Guaranty or the
performance by either Guarantor of its obligations hereunder, in each case
whether such claim, right or remedy arises in equity, under contract, by statute
(including without limitation under California Civil Code Sections 2847, 2848 or
2849), under common law or otherwise and including without limitation (i) any
right of subrogation, reimbursement or indemnification that either Guarantor now
has or may hereafter have against LLC, and (ii) any right to enforce, or to
participate in, any claim, right or remedy that MAG now has or may hereafter
have against LLC, except for GCI's rights to a Management Fee as provided for in
the Operating Agreement, subject to the subordination of such rights, as
provided for in the Operating Agreement.
Section 3.3. Security. Each Guarantor, as security for the performance of
its obligations under this Guaranty, hereby grants to MAG a security interest in
all of the properties now owned or hereafter acquired by such Guarantor (except
for properties the subject of Excluded Indebtedness) as more particularly
described in, and pursuant to the provisions of, the Security Agreement attached
hereto as Exhibit A.
ARTICLE IV
MISCELLANEOUS
Section 4.1. Survival of Warranties. All representations, warranties,
covenants and agreements of each Guarantor contained herein shall survive the
execution and delivery of this Guaranty and shall be deemed made continuously,
and shall continue in full force and effect, until the termination of this
Guaranty.
Section 4.2. No Waiver. No waiver, forbearance, failure or delay by MAG in
exercising, or in beginning to exercise, any right, power or remedy, nor any
simultaneous or later exercise thereof, shall constitute a waiver of MAG's
rights hereunder, and every right, power or remedy of MAG shall continue in full
force and effect until such right, power or remedy is specifically waived in
writing. No single or partial exercise of any right, power or remedy by MAG
shall preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. All remedies hereunder are cumulative and are not
exclusive of any other remedies that may be available to MAG at law, in equity,
or otherwise.
Section 4.3. Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) if
personally delivered, when so delivered, (ii) if mailed, two Business Days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid and addressed to the intended recipient as set forth below,
(iii) if
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given by telecopier, once such notice or other communication is transmitted to
the telecopier number specified below and the appropriate answer back or
telephonic confirmation is received, or (iv) if sent through an overnight
delivery service in circumstances to which such service guarantees next day
delivery, the day following being so sent:
If to GCI or GCICA: Grill Concepts, Inc.
11661 San Vicente Boulevard, Suite 404
Los Angeles, CA 90049
Attention: Robert Spivak, President
Telecopier No.: 310/820-6530
with a copy to:
Herzog, Fisher & Grayson
9460 Wilshire Boulevard, Fifth Floor
Beverly Hills, CA 90212
Attention: Michael Grayson, Esq.
Telecopier No.: 310/278-5430
If to LLC:
Chicago - The Grill on the Alley
---c/o Grill Concepts, Inc.
11661 San Vicente Boulevard, Suite 404
Los Angeles, CA 90049
Attention: Robert Spivak, President
Telecopier No.: 310/820-6530
with a copy to:
Herzog, Fisher, Grayson & Wolfe, A Law Corporation
9460 Wilshire Boulevard, Fifth Floor
Beverly Hills, CA 90212
Attention: Michael Grayson, Esq.
Telecopier No.: 310/278-5430
If to MAG:
The Michigan Avenue Group
c/o Albert Sarnoff
75 Rockefeller Plaza
New York, NY 10019
Telecopier No.:
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with a copy to:
The Michigan Avenue Group
c/o Wolff-DiNapoli LLC
11828 La Grange Avenue, Second Floor
Los Angeles, CA 90025
Attention: Patricia M. Knott
Telecopier No.: 310/477-2522
with a copy to:
Greenberg Glusker Fields Claman & Machtinger LLP
1900 Avenue of the Stars, Suite 2100
Los Angeles, CA 90067-4590
Attention: C. Bruce Levine, Esq.
Telecopier No.: 310/553-0687
Any party may give any notice, request, demand, claim or other communication
hereunder using any other means (including ordinary mail or electronic mail),
but no such notice, request, demand, claim or other communication shall be
deemed to have been duly given unless and until it actually is received by the
individual for whom it is intended. Any party may change the address to which
notices, requests, demands, claims and other communications hereunder are to be
delivered by giving the other parties notice in the manner herein set forth.
Section 4.4. Severability. Any provision of this Guaranty which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdictions.
Section 4.5. Governing Law: Jurisdiction. This Guaranty shall be governed
by and construed in accordance with the substantive laws of the State of
California and the United States of America without regard to any law which
would result in the selection or application of the law of any other
jurisdiction.
Section 4.6. Binding Effect: Assignment. This Guaranty shall be binding
upon and inure to the benefit of MAG and each Guarantor and their respective
successors and assigns, provided that neither Guarantor shall have the right to
assign its rights and obligations hereunder without the prior written consent of
MAG (and any attempted assignment in contravention of the terms hereof shall be
void). This Guaranty shall, without further reference, pass to, and may be
relied on and enforced by, any successor or assignee of MAG.
Section 4.7. Headings. Article and Section headings in this Guaranty are
included herein for the convenience of reference only and shall not constitute a
part of this Guaranty for any other purpose.
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Section 4.8. Arbitration.
(a) Any dispute or difference between the parties arising out of this
Guaranty which the parties are unable to resolve themselves shall be submitted
to and resolved by arbitration as herein provided. Either a Guarantor (on behalf
of itself or LLC) or MAG may request the American Arbitration Association (the
"AAA") to designate one arbitrator, who shall be a retired California Superior
Court or Court of Appeals judge.
(b) The arbitrator shall consider the dispute at issue at Los Angeles,
California at a mutually agreed upon time within sixty (60) days (or such longer
period as may be acceptable to Guarantors and MAG) of the designation of the
arbitrator. The arbitration proceeding shall be held in accordance with the
rules for commercial arbitration of the AAA in effect on the date of the initial
request by Guarantors or MAG, as the case may be, that gave rise to the dispute
to be arbitrated (as such rules are modified by the terms of this Guaranty or
may be further modified by mutual agreement of Guarantors and MAG) and shall
include an opportunity for the parties to conduct discovery in accordance with
California Code of Civil Procedure Section 1283.05, as amended, in advance of
the proceeding. Notwithstanding the foregoing, the parties hereto agree that
they will attempt, and they intend that they and the arbitrator should use their
best efforts in that attempt, to conclude the arbitration proceeding and have a
final decision from the arbitrator within 120 days from the date of selection of
the arbitrator; provided, however, that the arbitrator shall be entitled to
extend such 120-day period for one or more additional 1 20-day periods. The
arbitrator shall immediately deliver a written award with respect to the dispute
to each of the parties, who shall promptly act in accordance therewith. Each
party to such arbitration agrees that any award of the arbitrator shall be
final, conclusive and binding and that they will not contest any action by any
other party thereto in accordance with an award of the arbitrator. It is
specifically understood and agreed that any party may enforce any award rendered
pursuant to the arbitration provisions of this Section 4.8 by bringing suit in
any court of competent jurisdiction.
(c) Neither this agreement to arbitrate nor any demand for arbitration
hereunder shall waive any party's right to obtain any provisional remedy,
including, without limiting the generality of the foregoing, injunctive relief,
from any court of competent jurisdiction, as may be necessary in such party's
sole and subjective judgment, with respect to matters otherwise subject to
arbitration pursuant to the terms of this Guaranty. However, if either party
seeks or obtains such provisional remedy, an arbitration hereunder shall also be
commenced, and, if necessary, the merits of the controversy or claim and/or the
determination of an appropriate permanent remedy shall be settled by arbitration
in accordance with this Guaranty.
(d) All fees, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by the party that prevails in any such arbitration commenced
pursuant to this Section 4.8 or any judicial action or proceeding seeking to
enforce the agreement to arbitrate disputes as set forth in this Section 4.8, or
seeking provisional remedies as authorized by this Section 4.8, or seeking to
enforce any order or award of any arbitration commenced pursuant to this Section
4.8 may be assessed against the party or parties that do not prevail in such
arbitration in such manner as the arbitrator or the court in such judicial
action, as the case may be, may determine to be appropriate under the
circumstances. All costs and expenses attributable to the arbitrator shall be
allocated among the parties to the arbitration in such manner as the arbitrator
shall determine to be appropriate under the circumstances.
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Section 4.9. Entire Agreement. This Guaranty constitutes the entire
agreement and understanding between the parties pertaining to the subject matter
hereof and supersedes all prior or contemporaneous drafts, agreements,
representations and understandings of the parties. Each party acknowledges that
it has expressly bargained for a prohibition of any implied or oral amendments
or modifications of any kind, nature or character. Each party agrees and
acknowledges that this Guaranty is fully integrated and not in need of parol
evidence in order to reflect the intentions of the parties, and that the parties
intend the literal words of this Guaranty to govern the transactions described
herein, and for all prior negotiations, drafts and other extraneous
communications to have no significance or evidentiary effect whatsoever.
Section 4.10. Counterparts. This Guaranty may be executed in counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute but one and the same instrument.
IN WITNESS WHEREOF, this Guaranty has been entered into by the undersigned
as of the date and year first above written.
"GUARANTOR"
GRILL CONCEPTS, INC., a Delaware corporation
By: /s/ Robert Spivak,
Robert Spivak, President
By: /s/ Michael Weinstock
Michael Weinstock, Secretary
GRILL CONCEPTS, INC., a California corporation
By: /s/ Robert Spivak
Robert Spivak, President
By: /s/ Michael Weinstock
Michael Weinstock, Secretary
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EXHIBIT 10.24
OPERATING AGREEMENT
FOR
CHICAGO - THE GRILL ON THE ALLEY LLC,
an Illinois limited liability company
THIS OPERATING AGREEMENT (the "Agreement") is made as of February 1, 1999
by and between Grill Concepts, Inc., a Delaware corporation (sometimes herein
called "GCI"), and The Michigan Avenue Group, a general partnership (sometimes
herein called "MAG"), with reference to the following facts:
A. GCI, directly or through one or more of its subsidiaries, Grill Concepts,
Inc., a California corporation ("GCICA"), and The Grill on the Alley, Inc., a
California corporation ("GA"), operates The Grill on the Alley 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 on the Alley" 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 GCI now owns or may hereafter acquire, develop or
adopt or designate for use in connection with the Operating System.
B. MAG and GCI have formed Chicago - The Grill on the Alley LLC (the "Company')
to own and operate a "Grill on the Alley" restaurant ("Restaurant") on the
Premises in the hotel in Chicago, Illinois commonly known as The Westin Michigan
Avenue pursuant to the lease agreement dated February 16, 1999 between Company
and The Westin Chicago Limited Partnership (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 Illinois
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 I shall have the meanings set forth elsewhere in this Agreement):
1.1 "Act" means the Illinois Limited Liability Company Act, Section 805
Illinois Compiled Statutes, Act 180, as the same may be amended from time to
time.
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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-l(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-
l(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-l(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently 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 Illinois Secretary of State and as amended from time
to time.
1.6 "Assignee" means a person who has acquired a Distributional Interest
in the Company but who has not been admitted as a Substituted Member.
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.
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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
3.4.
1.9 "Capital Budgets" are the annual capital expense budgets described in
Section 9.12.
1.10 "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.
I.11 "Capital Expenditure Reserve" means amounts reserved for capital
expenditures as set forth in the annual Capital Budgets, approved as set forth
in Section 9.12, less aggregate actual capital expenditures utilizing amounts so
reserved.
1.12 "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.
1.13 "Company" means CHICAGO - THE GRILL ON THE ALLEY LLC.
1.14 "Company Minimum Gain" shall have the meaning ascribed to the term
"Partnership Minimum Gain" in Regulations Section 1.704-2(d)(1).
1.15 "Construction Budget" is described in Section 9.11.
1.16 "Converted Capital Contribution" means, for each Member, the principal
balance of that portion of the MAG Loan from time to time converted into a
Membership Interest as provided for in Section 3.2 of this Agreement.
1.17 "Discretionary Additional Capital Contribution" is defined in Section
3.3.
1.18 "Dissociation Event" means with respect to any Member one or more of
the following: the death, insanity, bankruptcy, dissolution, withdrawal,
retirement, resignation or
expulsion as a Member; transfer of all or substantially all of his or its
Distributional Interest; or occurrence of any other event which terminates the
continued membership of any Member.
1.19 "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; provided, however, that reserves for
capital expenditures shall be established in the amount of the Capital
Expenditure Reserve, but reserves for capital expenditures in excess thereof may
be established only with the consent of a Supermajority Interest. Payment of the
Management Fee pursuant to the Management Agreement is an expense of the Company
and is not a Distribution of Distributable Cash. Payment of principal and
interest upon the MAG Loan, even if payable pari passu with Distributions, is
payment of a debt of the Company, or payment of interest on a debt of the
Company, and is not a Distribution of Distributable Cash.
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1.20 "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
or payments upon the MAG Loan.
1.21 "Distributional Interest" means a Member's or Distributional 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.
1.22 "Distributional Interest Owner" means the owner of a Distributional
Interest who is not a Member.
1.23 "Equipment Loan" means money borrowed by Company prior to the date the
Restaurant opens for business for the purpose of acquiring equipment installed
in the Restaurant prior to the date it opens for business.
1.24 "Excluded Loans" means the Equipment Loan together with any additional
loans to the Company for the purpose of acquiring additional equipment for use
in the Restaurant after the Restaurant opens for business, if such additional
loans are approved by a Super majority Interest.
1.25 "Existing Marks" is defined in Recital A.
1.26 "Fiscal Year" means the Company's fiscal year, which shall be the
calendar year.
1.27 "Force Majeure" is defined in Section 6.14(c).
1.28 "Former Member" shall have the meaning ascribed to it in Section 8.2.
1.29 "Former Member's Interest" shall have the meaning ascribed to it in
Section 8.2.
1.30 "GCI" means Grill Concepts, Inc., a Delaware corporation.
I.31 "GCICA" means Grill Concepts, Inc., a California corporation.
1.32 "GCI Warrants" means warrants to purchase seven hundred eight thousand
three hundred thirty-three (708,333) shares of common stock of GCI (plus up to
an additional seventy thousand eight hundred thirty-three (70,833) shares under
certain circumstances) issued to the Non-Manager-Members in connection with the
formation of the Company and the making of the MAG Loan, the form of which is
attached hereto as Exhibit D.
1.33 "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
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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.
1.34 "Guaranty" means the guaranty of GCI provided for in Section 3.2, in
the form attached hereto as Exhibit B.
1.35 "Initial Capital Contribution" means the Capital Contributions
provided for in Section 3.1 of this Agreement.
1.36 "Landlord" means The Westin Chicago Limited Partnership as the
landlord under the Lease.
1.37 "Lease" is defined in Recital B.
1.38 "License Rights" is defined in Section 3.1(a) of this Agreement.
1.39 "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.
1.40 "MAG Loan" means the obligation of Company to Members other than the
Manager pursuant to Section 3.2 of this Agreement.
1.41 "MAG Note" shall mean the promissory note evidencing the MAG Loan, the
form of which is attached hereto as Exhibit A.
1.42 "Majority Interest" means Members holding more than fifty percent
(50%) of the Percentage Interests.
1.43 "Management Agreement"means the agreement attached hereto as Exhibit
E.
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1.44 "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.
1.45 "Manager's Adjusted Additional Capital Contribution" means the excess
of the Mandatory Additional Capital Contribution and Discretionary Additional
Capital Contribution of Manager over Distributions to Manager under Sections
6.12(b)(iii) and 6.12(b)(iv) of this Agreement.
1.46 "Mandatory Additional Capital Contribution" means the required Capital
Contributions of GCI as set forth in Section 3.3.
1.47 "Marks" is defined in Recital A.
1.48 "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.
1.49 "Member Nonrecourse Debt" shall have the meaning ascribed to the term
"partner nonrecourse debt" in Regulations Section 1.704-2(b)(4).
1.50 "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).
1.51 "Member Nonrecourse Deductions" shall have the meaning ascribed to the
term "partner nonrecourse deductions" in Regulations Section 1.704-2(i).
1.52 "Membership Interest" means a Member's entire interest in the Company
including the Member's Distributional 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.
1.53 "Non-Manager-Members" means the Members other than Manager.
1.54 "Non-Manager-Member's Adjusted Capital Contributions" means, for
each Member other than Manager, the excess of (1) such Member's Initial Capital
Contribution to the Company plus such Member's Converted Capital Contribution,
over (2) Distributions to such Member under Section 6.12(b)(ii) of this
Agreement.
1.55 "Nonrecourse Debt" shall have the meaning set forth in Regulations
Section 1.704-2(b)(3)
1.56 "Nonrecourse Deductions" shall have the meaning, and the amount
thereof shall be, as set forth in Regulations Section 1.704-2(c).
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1.57 "Nonrecourse Liability" shall have the meaning set forth in
Regulations Section 1.704-2(b)(3).
1.58 "Operating System" is defined in Recital A.
1.59 "Payment Deficit" is defined in Section 6.14(a).
1.60 "Permitted Payment Deficit" is defined in Section 6.14(b).
1.61 "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, as adjusted from time to time.
1.62 "Person" means an individual, general partnership, limited
partnership, limited liability company, corporation, trust, estate, real estate
investment trust association or any other entity.
1.63 "Preferred Return" means, for each Member other than Manager, a
cumulative return of eight percent (8%) annually, not compounded, from the date
of such a Member's Initial Capital Contribution and Converted Capital
Contribution, respectively, to and including January 1, 2000; and, from and
after January 1, 2000, a cumulative return compounded quarterly of eight percent
(8%) per annum, on the unpaid balance of such Member's Non-Manager-Member's
Adjusted Capital Contribution.
1.64 "Premises" means the property described in the Lease.
1.65 "Pro Rata Share" shall have the meaning ascribed to it in Section
7.8(b).
1.66 "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 different 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 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
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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-l(b) shall be subtracted from such taxable income or loss.
1.67 "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.
1.68 "Remaining Members" shall have the meaning ascribed to it in Section
8.1.
1.69 "Restaurant" is defined in Recital B.
1.70 "Schedule" means the attachment hereto identifying the Members, their
residential or business addresses, their Percentage Interests, and the Capital
Contributions.
1.71 "Scheduled Repayment" means the aggregate combined scheduled repayment
(i) of principal and interest upon the MAG Loan, (ii) Distributions effecting
payment of Preferred Return attributable to the Initial Capital Contribution of
Non-Manager-Member and attributable to the Converted Capital Contribution of
Members, and (ii) Distributions effecting payment of the Initial Capital
Contribution of Non-Manager-Members and of the Converted Capital Contribution of
Members, all as set forth in Exhibit D attached hereto.
1.72 "Supermajority Interest" means the vote of (i) Members holding more
than eighty percent (80%) of the Percentage Interest, and (ii) Members holding a
Majority Interest of Non-Manager-Members.
ARTICLE 2.
ORGANIZATIONAL MATTERS
2.1 Formation. Pursuant to the Act, the Members have formed an Illinois
limited liability company under the laws of the State of Illinois by filing the
Articles with the Illinois Secretary of State. 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 "CHICAGO - THE GRILL ON THE
ALLEY LLC." The business of the Company may be conducted under the name "The
Grill on the Alley". The Manager shall file or cause to be filed any assumed or
fictitious name certificates and similar filings, and any amendments thereto,
that the Manager considers appropriate or advisable.
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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 a registered
office and registered agent in the State of Illinois 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
Illinois, 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 Chicago - The Grill on the Alley
restaurant located in the Chicago Westin Hotel, Chicago, Illinois without the
consent of all Members.
ARTICLE 3.
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contributions. Subject to Section 9.11, the Members, as
their Initial Capital Contributions, shall contribute to the capital of the
Company the following:
3.1(a) Manager shall contribute, in cash, am amount equal to all formation
and closing costs in respect of the formation of the Company, the negotiation,
establishment and implementation of the MAG Loan and the Lease, including but
not limited to attorneys, accountants and other fees associated therewith, all
of which shall be paid by the Company. In addition, 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, and subject to termination as provided by, the
Management Agreement. The Manager shall receive no credit to its Capital Account
for contribution of cash pursuant to this Section 3.1 (a) nor for contribution
of the License Rights, nor shall the Manager receive any compensation for such
contribution except as set forth herein.
3.1 (b) MAG shall contribute, in cash, the sum of One Thousand Dollars ($
1,000).
3.2 MAG Loan. Subject to Section 9.11, MAG shall lend to the Company the
sum of One Million Six Hundred Ninety-Nine Thousand Dollars ($1,699,000),
bearing interest at the rate of eight percent (8%) per annum, payable as set
forth in the form of the MAG Note attached hereto as Exhibit A and convertible
into Membership Interests as hereinafter set forth. The proceeds of
such loan shall be used solely for construction and design costs, approved
pursuant to the provisions of Section 9.11. The Company, so long as the MAG
Loan, or any portion thereof, is outstanding, shall not make any Distributions
to its Members which are prohibited by Section 6.15 of this Agreement. MAG may
convert all or any portion of such MAG Loan into
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Membership Interests at any time, and from time to time, on or before January
31, 2002. Upon such conversion, the Capital Account of MAG shall be increased in
an amount equal to the then-principal balance of the MAG Loan so converted. Any
interest accrued but unpaid with respect to the amount so converted shall be
deemed to be an accrued but unpaid Preferred Return. GCI and GCICA shall
guarantee repayment of the MAG Loan, together with interest thereon, and shall
guarantee repayment of the capital into which the MAG Loan is converted, if such
loan is so converted, all in the form of the Guaranty attached hereto as Exhibit
B. The Guaranty shall be secured by a Security Agreement in the form attached
hereto as Exhibit C. GCI also agrees that, except for the Equipment Loan, as
approved pursuant to Section 9.11, and except for additional loans to the
Company for the purpose of acquiring additional equipment installed after the
Restaurant opens for business, if such additional equipment loans are approved
by a Supermajority Interest or are within the Capital Expenditure Reserve,
Company and GCI and/or GCICA will not incur any subsequent indebtedness for
borrowed monies unless such Company indebtedness is expressly subordinated to
Company's obligations with respect to the MAG Loan and unless such GCI and/or
GCICA indebtedness is either expressly subordinate to GCI's and GCICA's
obligations with respect to the MAG Loan or is junior to the security for the
Guaranty; provided, however, that nothing herein contained shall prohibit GCI
and/or GCICA, as distinguished from Company, from borrowing funds which are not
so subordinated or junior for (i) equipment for additional restaurants opened by
GCI and/or GCICA after the date hereof; (ii) on a non-recourse basis in
connection with assets acquired by GCI and/or GCICA after the date hereof for
which the obligations are limited to such assets; or (iii) to refinance existing
Indebtedness of GCI and/or GCICA in the aggregate amount for both GCI and GCICA
not to exceed Three Million Two Hundred Thirty-nine Thousand Five Hundred
Dollars ($3,239,500) inclusive of any line of credit, and upon terms not
materially more onerous than the existing Indebtedness of GCI and/or GCICA
comprising such amount.
Upon such conversion, the Percentage Interests of the Members shall not be
affected, but only the rights to Distributable Cash pursuant to Sections
6.12(b)(i) and 6.12(b)(ii) shall be affected.
3.3 Additional Capital Contributions. Except as provided in this Section
3.3 and Section 6.6, the Members shall not be required to contribute additional
capital to the Company. GCI shall contribute to the capital of the Company, as
and when required, any and all funds necessary for the Company to complete the
Restaurant in such manner as to comply with the terms of the Lease, and,
additionally, in such a manner as is necessary for it to open for the operation
of its business ("Mandatory Additional Capital Contribution"); provided,
however, that, in lieu of contributions to provide funds, the Company may borrow
the funds constituting the Equipment Loan. GCI may contribute additional capital
to fund any operating losses, to fund payments of the MAG Loan or to fund
payments of the Preferred Return or the Scheduled Repayments of the Initial
Capital Contributions and Converted Capital Contributions ("Discretionary
Additional Capital Contributions").
3.4 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
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(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-
l(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- l (b), and shall
be interpreted and applied in a manner consistent with such Regulations. The
transferee of all or a portion of a Distributional Interest shall succeed to
that portion of the transferor's Capital Account which is allocable to the
portion of the Distributional Interest transferred. A Member who has more than
one Distributional Interest in the Company shall have a single Capital Account
that reflects all such Distributional Interests, regardless of the class of
Distributional Interests owned by such Member and of the time or manner in which
the Distributional Interests were acquired.
3.5 Treatment of Capital Contributions. Except as otherwise specifically
set forth in this Agreement, no Member shall:
3.5(a) receive any interest on its Capital Contributions or on the balance
in its Capital Account;
3.5(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;
3.5(c) have the right to demand or receive property other than cash in
return for its Capital Contributions or as Distributions;
3.5 (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
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3.5(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.
3.6 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 10.4, 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:
4.2(a) The Members holding a Super majority 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 Members holding a Super majority 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 a Distributional Interest Owner and will not entitle the Member to
any Distribution from or purchase by the Company under Section 35-60 of the Act
prior to the time he would have received such Distribution from the Company as a
Member or any other amount in respect of his Membership Interest, nor shall the
withdrawing Member be relieved of any liabilities to the Company or its
creditors. The Manager may not withdraw as a Member, but if the Manager
wrongfully withdraws as a Member, it will not be entitled to any Distribution
from or purchase by the Company under Section 35-60 of the Act, but its rights
will be governed by the provisions of Section 8.1 of this Agreement.
4.4 Termination of Membership Interest. Upon the transfer of a Non-Manager-
Member's Membership Interest in violation of this Agreement, the withdrawal of a
Non-Manager-Member in accordance with Section 4.3, or the occurrence of a
Dissociation Event as to such Non-Manager-Member, unless the Company consents to
the admission of a successor as a Member, the Membership Interest of such a
Member shall be terminated by the Manager and Articles 7 and 8 shall apply.
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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;
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(b) and
(c) (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 Ten Thousand Dollars
($10,000) other than the Equipment Loan or the MAG Loan;
4.7(h) Approval of the Construction Budget and any capital expense budget
providing for capital expenditures in excess of the Capital Expenditure Reserve;
4.7(i) Approval of a material deviation from the Construction Budget 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(1) The admission of additional Members to the Company; and
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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 pursuant to the Management Agreement, to the extent
such Management Agreement is applicable. 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.
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) 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 and except that this provision is
not intended to vary the rights granted under Section 35-45(6) of the Act. The
removal of a Member as a Manager, at the election of the Majority Interest of
the Non-Manager-Members, shall be a Dissociation Event and, upon such election,
shall affect the Manager's rights as a Member and shall constitute a withdrawal
of the Manager as a Member.
5.2(c) 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.
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5.2(d) 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.
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
Super majority 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 five
percent (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, reduceable to three
percent (3%) pursuant to Section 6.13 of this Agreement. This Management Fee (in
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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.
5.6 Conflicts.
5.6(a) 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.
5.6(b) 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.
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.
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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 Illinois 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.
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. The determination of Profit and Loss allocations
shall be made as soon as practicable after the end of each Fiscal Year of the
Company.
6.2 Allocations of Profits and Losses. In each Fiscal Year of the Company,
Profits and Losses shall be allocated to the Manager, except that a gross income
allocation shall be made to the Non-Manager-Members in the amount of
Distributions to such Members pursuant to Sections 6.12(b)(i) and 6.12(b)(v).
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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 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-l(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
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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-l(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.
6.7 Tax Credits. All tax credits shall, subject to the applicable
provisions of the Code and Regulations Section 1.704-l(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-l(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
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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-
l(b).
6.10(b) Subject to the provisions of the Regulations Section 1.704-l(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.
6.12(a) The Manager shall make Distributions of Distributable Cash no less
frequently than quarterly during a Fiscal Year to the extent of Distributions
under Sections 6.12(b)(i) and 6.12(b)(ii), even though such Distributions are
necessarily prior to the final determination of Profit and Loss allocations and
Distributions to be made for that Fiscal Year. 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. The
Manager shall make Distributions of the balance of the Distributable Cash
attributable to a Fiscal Year annually. Such Distributions shall be made
promptly upon determination of the actual Distributable Cash for such Fiscal
Year, but in all events within forty-five (45) days after the end of such Fiscal
Year.
6.12(b) Except as provided in Section 10.4, in each Fiscal Year of the
Company, Distributions of Distributable Cash shall be made to the Members as
follows:
(i) First, 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)(i) in the proportion that the Preferred Return has accrued.
(ii) Second, to the Members other than the Manager in amounts
sufficient to pay their Initial Capital Contributions and their Converted
Capital Contributions on a quarterly
basis in accordance with the Scheduled Repayments.
(iii) Third, to the Manager in an amount sufficient to repay its
Discretionary Additional Capital Contributions; provided, however, that such
payments are subordinated to current payments then due and to prior payments
remaining outstanding under Sections 6.12(b)(i) and 6.12(b)(ii).
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(iv) Fourth, to the Manager in an amount sufficient to repay its Mandatory
Additional Capital Contribution, without interest, in thirty-nine (39) equal
quarterly installments, the first payment of which will be made on April 1,
2000; provided, however, that such payments are subordinated to current payments
then due and to prior payments remaining outstanding, under Sections 6.12(b)(i)
and 6.12(b)(ii).
(v) Thereafter, to the Members in accordance with their Percentage
Interests.
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 Adjustment to Distributions.
6.14(a) In the event that any of the following occur, there shall be deemed
to be a Payment Deficit: (i) the Preferred Return is not paid on January 1, 2000
and thereafter on a quarterly basis; (ii) repayment of the Initial Capital
Contributions or the Converted Capital Contributions of the Members other than
the Manager are not made on a quarterly basis in accordance with the Scheduled
Repayments and Section 6.12(b)(ii); or (iii) payment of principal and interest
upon any portion of the MAG Loan from time to time outstanding is not timely
made on January 1, 2000 and thereafter on a quarterly basis. If a Payment
Deficit at any time exceeds the Permitted Payment Deficit, without limiting any
remedies under the MAG Note, in addition to the remedies under the MAG Note and
at the election of MAG, the following shall occur: (a) the Management Fee
provided for in Section 5.5 shall be reduced in perpetuity to three percent (3%)
and shall be subordinated to payments upon the MAG Loan and to Distributions
under Section 6.12(b)(i) and 6.12(b)(ii); and (b) the Percentage Interest of
Manager shall be reduced in perpetuity to one percent (1%) and the Percentage
Interests of the Members other than the Manager shall be increased to ninety-
nine percent (99%) proportionately to their Percentage Interests immediately
prior to such increase.
6.14(b) The Permitted Payment Deficit shall mean a Payment Deficit of up to
One Hundred Twenty-Six Thousand Three Hundred Eighty-One Dollars and Eighty-Nine
Cents ($126,381.89) which has not been outstanding for more than nine (9)
months; provided, however, that the total Payment Deficit does not exceed Two
Hundred Fifty-Two Thousand Seven Hundred Sixty-Three Dollars and Seventy-Eight
Cents ($252,763.78); and provided, further, that at any time a Payment Deficit
of $126,381.89 has been outstanding for more than nine (9) months, no more
recent Payment Deficit may exist. For purposes of the calculation or
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determination of the amounts of a Payment Deficit, (a) all of the obligations
described in clauses (i), (ii) and (iii) above with respect to any quarterly
payment date shall be aggregated; and (b) any such quarterly payment which is
not paid in full shall be deemed to be unpaid in its entirety, in order to avoid
manipulation by partial payments. Payments shall be applied first to the most
recent payment due so as to preclude avoidance of a Payment Deficit by
selectively choosing the application of payments to particular installments. As
an example of the application of the preceding three sentences, if a payment of
Sixty-Three Thousand One Hundred Ninety Dollars and Ninety-Four Cents
($63,190.94) due on April 1 were not made, and if payments of $63,190.94 due on
the following July 1, October 1 and January 1 were not made, on the following
April 1, there would be $126,381.88 outstanding more than nine (9) months and
there would be $252,763.78 past due. In order to avoid a Payment Deficit in
excess of the Permitted Payment Deficit, a payment on April 1 of past due
amounts of $126,381.88 plus a payment of the then-current amount of $63,190.94
would be required. If such payments were not made on such April 1, the Payment
Deficit would exceed the Permitted Payment Deficit and the provisions of Section
6.14(a) would apply. If such payments were made on April 1, and if the full
payment due on July 1 were not made, there would then be a Payment Deficit in
excess of the Permitted Payment Deficit in that there would be a Payment Deficit
of $126,381.89 outstanding for more than nine (9) months and there would exist a
more recent Payment Deficit as well. It is the understanding of the parties that
there may exist at all times a Payment Deficit of $126,381.89, unless it has
been outstanding for more than nine (9) months and a more recent Payment Deficit
exists.
6.14(c) Notwithstanding the provisions of Sections 6.14(a) and 6.14(b), the
failure to make the payment of the Preferred Return due on January 1, 2000 or
the payment of interest due on January 1,2000 shall not be deemed to constitute
a Payment Deficit unless and until payment of both of such amounts are not made
on or before January 2, 2001. In the event such payments are not made on or
before January 2, 2001, they shall be deemed to have been a Payment Deficit from
and after January I,2000 in determining the existence of a Payment Deficit in
excess of the Permitted Payment Deficit. In addition, notwithstanding the
provisions of Section 6.14(b) which provide that "payments shall be applied
first to the most recent payment due," Manager may direct that any payments made
on or before January 2, 2001 be applied to either or both of the Preferred
Return due on January 1, 2000 or to the interest due on January 1, 2000.
6.14(d) Notwithstanding the provisions of Sections 6.14(a), 6.14(b) and
6.14(c), in the event the Restaurant is not open for business by reason of an
uninsured force majeure, payments due during the Force Majeure Period shall not
be deemed delinquent until the expiration of the Grace Period. At the election
of Company, payments deferred by reason of the Force Majeure Period may either
be paid in full together with interest thereon on or before the end of the Grace
Period or may be added to the balance of MAG Loan and the amortization of the
MAG Loan adjusted to provide for equal quarterly amortization over the balance
of the term of the MAG Loan (or, if applicable, the Distributions required by
Sections 6.12(b)(i) and 6.12(b)(ii)). The Force Majeure Period shall be the
lesser of (i) the length of time the Restaurant is not open for business by
reason of an uninsured force majeure, or (ii) one (1) year. The Grace Period
shall commence at the end of the Force Majeure Period and shall continue for a
length of time equal to the length of the Force Majeure Period. Force majeure is
an act or event beyond the control of Manager, providing Manager has taken
reasonable precautions against such act or event and
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providing such act or event cannot be attributed to the negligence or willful
nonperformance or misconduct of Manager. Such act or events include wars,
embargoes, riots, civil disturbances, fires, storms, floods, typhoons,
earthquakes and other natural calamities, strikes and labor disputes,
interruption of transportation and public-utility strikes, government act and
restrictions, and other causes which cannot be overcome or prevented by due
diligence. Such acts or events do not include any financial or economic
inability of Manager to perform.
6.14(e) Notwithstanding the application of payments for purposes of
determining the nature and extent of a Payment Deficit, all delinquent payments
of any of the obligations described in clauses (i), (ii) and (iii) of Section
6.14(a) shall bear interest at eight percent (8%) per annum until paid.
6.15 Special Restriction on Distributions. The Company shall not make any
Distributions of Distributable Cash to its Members, except for Distributions
pursuant to Sections 6.12(b)(i) and
6.12(b)(ii), pari passu with payments of principal and interest made upon
the MAG Loan, at any time there exists a Default on such MAG Loan, or if there
exists any condition, event or act which with the giving of notice or passage of
time or both would constitute a Default on the MAG Loan.
6.16 Restriction on Distributions.
6.16(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.
6.16(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;
(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.
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6.16(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.
6.17 Return of Distributions. Except for Distributions made in violation of
the Act or this Agreement, no Member or Distributional 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
Distributional Interest Owner or paid by a Member or Distributional 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 Distributional 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 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
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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 Permitted Transfers.
7.4(a) The Membership Interest of any Member other than Manager may be
transferred subject to compliance with Section 7.2, and without the priorwritten
consent of Members as required by Section 7.1, by the Member (i) by inter vivos
gift or by testamentary transfer to any spouse, parent, sibling, in-law, child
or grandchild of the Member, or to a trust for the benefit of the Member or such
spouse, parent, sibling, in-law, child or grandchild of the Member, (ii) to any
Affiliate of the Member; it being agreed that in executing this Agreement, each
Member has consented to such transfers, or (iii) to any other Member, including
Manager. For purposes of this Section, a partner of MAG shall be deemed to be an
Affiliate of MAG.
7.4(b) The Membership Interest of Manager may be transferred subject to
compliance with Section 7.2 above, and without the prior written consent of
Members as required by Section 7.1 above, to a Person pursuant to a merger or
consolidation of Manager or the sale of all or substantially all of Manager's
assets; provided, however, that the successor has a net worth not less than that
of Manager at the time of such transfer, and that the successor expressly
assumes the obligations of Manager under this Agreement.
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, 7.3
and/or 7.4 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, 7.3 and/or 7.4 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 Distributional 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
Distributional 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
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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 Distributional Interest Owner.
7.8 Right to Purchase Non-Distributional Interest. Upon and
contemporaneously with any transfer, assignment, conveyance or sale (whether
arising out of an attempted charge upon that Member's Distributional Interest by
judicial process, a foreclosure by creditor of the Member or otherwise) of all
or any portion of a Member's Distributional 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 One Dollar ($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 Distributional 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 FirstRefusal. 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), except for transfers permitted by Section 7.4, 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.
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 am 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.
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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 Dissociation Event. Upon the occurrence of any Dissociation Event, the
Company shall not dissolve. In the event of a Dissociation Event with respect to
the Manager or the termination of the Management Agreement due to the fault of
Manager, the Manager hereby agrees that, upon the election of the Majority
Interests of the Non-Manager-Members, 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 Manager is dissociated, or the Manager's
Membership Interest is sold back to the Company as provided for in the previous
sentence, the remaining members ("Remaining Members") voting by a Majority
Interest shall elect a new Manager.
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 a Dissociation Event 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 Distributional Interest and not a Membership Interest as described in
Sections 7.5 and 7.6 unless the Members consent to the admission of a successor-
in-interest pursuant to Article 7.
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8.3 Buyout Right.
8.3(a) In the event that GCI is then the Manager and it is acquired in a
transaction resulting in a Change of Control of GCI, GCI has the option
exercisable for the ninety (90) day period commencing on the date of such Change
of Control to purchase the Membership Interest of the Members other than the
Manager for the sum of Three Million Two Hundred Fifty Thousand Dollars
($3,250,000) (the "Basic Purchase Price"), plus any accrued but unpaid Preferred
Return (the "Preferred Return Purchase Price") (the Preferred Return Purchase
Price plus the Basic Purchase Price are the "Membership Interest Purchase
Price"), provided that GCI also concurrently acquires from the holders of any
remaining MAG Loan such remaining MAG Loan for its then-face value plus all
accrued but unpaid interest thereon (the 'Note Purchase Price'). The Membership
Interest Purchase Price shall be paid to such Members in the ratio of their
Percentage Interests. The Note Purchase Price shall be paid to the holders of
the MAG Loan proportionately to their interest. The Basic Purchase Price will be
reduced proportionately by the proportion that GCI Warrants previously exercised
by the Members other than the Manager bear to the number of GCI Warrants issued
to such Members. The Members will be required to relinquish any GCI Warrants not
exercised prior to notice to them by GCI of the exercise of the within option.
The proportionate reduction of the Basic Purchase Price shall relate solely to
the Basic Purchase Price and shall not affect the Preferred Return Purchase
Price or the Note Purchase Price. Change of Control shall mean a transaction,
or a series of related transactions, pursuant to which more than fifty percent
(50%) of the stock of GCI, or substantially all of the assets of GCI, is
acquired by a third party who is not at the date of this Agreement the
beneficial owner of more than five percent (5%) of the stock of GCI.
8.3(b) In the event GCI determines to exercise the option, GCI shall send a
written notice to each of the Members and each of the holders of the MAG Loan
specifying a closing date of not more than sixty (60) days from the exercise of
the option and setting forth the computation of the Membership Interest Purchase
Price and the Note Purchase Price. At the closing, GCI shall pay the Membership
Interest Purchase Price and the Note Purchase Price in cash, and the Members and
holders of the MAG Loan 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, or the interest in the MAG
Loan, free and clear of all liens, claims or encumbrances.
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:
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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 Distributional 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.
9.2(a) (i) Upon the request of any Member or Distributional Interest Owner
for purposes reasonably related to the interest of that Person as a Member or
Distributional Interest Owner, the Manager shall promptly deliver to the
requesting Member or Distributional 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 Distributional Interest Owner has the
right, upon reasonable request for purposes reasonably related to the interest
of the Person as Member, Manager or Distributional 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.
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9.2(c) Any request, inspection or copying by a Member or Distributional
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 Distributional 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
Illinois Secretary of State the report required under Section 50-1 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.
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 Illinois 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. The Company's accountant shall be selected by the
Manager.
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9.8 Tax Matters for the Company Handled by Manager. Manager 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. Manager 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," Manager shall oversee the Company tax affairs in the overall best
interests of the Company.
9.9 Tax Status and Returns. 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 I 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).
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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.
9.11 Construction Budget: Advance of MAG Loan. 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, if any, required under the
Lease. The Super majority Interest must approve such Construction Budget
concurrently with the approval of the Landlord, if required, of the Tenant's
plans under the Lease. The Initial Capital Contributions from the Non-Manager-
Members and the MAG Loan shall be contributed and advanced, respectively, on
February 1, 1999, but may not be utilized prior to the approval by the
Supermajority Interest of the Construction Budget and approval by the Landlord,
if required under 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 contributions and loans shall be
returned to MAG. The Preferred Return, and interest upon the MAG Loan, shall
commence on February 1, 1999. The MAG Loan shall be placed into a special
construction account in the name of Company. Such account shall be subject to
the control of MAG, which shall designate the signatories thereon. The MAG Loan
shall be released from time to time upon the submission by Manager to MAG of
evidence of progress of the completion of construction in accordance with the
provisions of the Construction Budget. If, at any time, it appears that the
construction will exceed the Construction Budget, Manager shall place the amount
of such anticipated excess in an escrow account to assure completion. The
establishment of such account is a condition precedent to the continued release
of the MAG Loan.
9.12 Annual Budget. The Manager shall present an annual operating budget
and annual capital expense budget in December of each year for the following
year. The capital expense budget shall be subject to the approval of Members
holding a Majority Interest of the Non-Manager-Members, which approval shall not
be unreasonably withheld or delayed.
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; or
10.1(d) The sale of all or substantially all of the assets of the
Company.
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10.2 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.
10.3 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 orby 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.
10.4 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:
10.4(a) to the payment of all taxes, debts and other obligations and
liabilities of the Company (including the MAG Loan) 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;
10.4(b) to the Members to the extent of any unpaid Preferred Return;
10.4(c) to the Members to the extent of any balance of the Non-Manager-
Members Adjusted Capital Contributions;
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10.4(d) to the Manager to the extent of any balance of the Manager's
Adjusted Additional Capital Contributions; and
10.4(e) the balance, if any, shall be distributed to the Members in
accordance with Section 6.12(b)(v).
10.5 Limitations on Payments Made in Dissolution. Except as otherwise
specifically provided in this Agreement or in other written agreements among
the Members, 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.
10.6 Articles of Dissolution. The Manager, if it has not wrongfully
dissolved the Company, or the Members, if it has, shall execute Articles of
Dissolution in such form as shall be prescribed by the Illinois Secretary of
State and file the Articles as required by the Act upon the completion of the
winding up of the affairs of the Company.
10.7 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
Distributional 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.
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.
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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.
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;
that Wolff has had extensive business dealings with the partners of MAG in which
he has been represented by Greenberg Glusker Fields Claman & Machtinger LLP;
that Wolff is a substantial investor in and a substantial creditor of Manager;
and that Herzog, Fisher, Grayson & Wolfe, A Law Corporation, has represented
Manager on an ongoing and continuous basis and has represented certain
Affiliates of Wolff, i.e., Keith Wolff and Adam Keller along with entities owned
by them. 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 Clamam & Machtinger LLP may
be influenced in its representation of the Company by its representation of
Wolff and his Affliates and MAG, and that Herzog, Fisher, Grayson & Wolfe, A Law
Corporation, may be influenced in its representation of the Company by its
representation of the Manager or of Affiliates of Wolff. It is possible that if
each Member had separate counsel, such counsel might structure the formation of
the Company and the
35
<PAGE>
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 by Greenberg Glusker Fields Claman & Machtinger LLP of both Wolff
and his Affiliates, MAG and the Company and the representation of Herzog, Fisher
& Grayson, A Law Corporation, of both Manager and its Affiliates and the
Company. Each Member specifically acknowledges that among the Affiliates of
Wolff for whom Greenberg Glusker Fields Claman & Machtinger LLP have performed
services are Keith Wolff and Adam Keller, along with entities owned by them; and
that Keith Wolff, Adam Keller and/or such entities have ongoing business
relationships with Manager and have acted for Manager in connection with its
negotiations with MAG. Each Member further specifically acknowledges that
Greenberg Glusker Fields Claman & Machtinger LLP has been engaged by GCI to
perform services for it relating to employee relations and other labor matters.
MAG specifically acknowledges that there may be a conflict between Wolff and his
Affiliates, as an investor in and creditor of Manager, and MAG; and that
Greenberg Glusker Fields Claman & Machtinger LLP may be influenced in its
representation of MAG by its representation of Wolff and his Affiliates, and as
persons with an ongoing business relations with GCI. MAG expressly waives such
conflict or potential conflict. Each party waives generally each and all of the
conflicts and potential conflicts which are outlined in this Section 12.1.
Without limiting the foregoing, the Members agree that no attorney shall be
precluded from representing a Member (including Manager) in connection with any
case, claim, controversy or dispute because of having represented the Company
and/or another Member (including Manager).
12.2 Complete Agreement. This Agreement and the Articles, together with
the other documents referred to herein, 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 and 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.
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 certificates and other instruments which may be required to be
filed by the Company or the Member under the laws of the State of Illinois 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
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.
37
<PAGE>
12.10 Disputed Matters: Arbitration.
12.10(a) Any dispute or difference between the parties 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 and resolved
by arbitration as herein provided. Any party may request the American
Arbitration Association (the "AAA") to designate one arbitrator, who shall be a
retired California Superior Court or Court of Appeals judge.
12.10(b) The arbitrator shall consider the dispute at issue at Los Angeles,
California at a mutually agreed upon time within sixty (60) days (or such longer
period as may be acceptable to the parties) of the designation of the
arbitrator. The arbitration proceeding shall be held in accordance with the
rules for commercial arbitration of the AAA in effect on the date of the initial
request by a party that gave rise to the dispute to be arbitrated (as such rules
are modified by the terms of this Agreement or may be further modified by mutual
agreement of the parties) and shall include an opportunity for the parties to
conduct discovery in accordance with California Code of Civil Procedure Section
1283.05, as amended, in advance of the proceeding. Notwithstanding the
foregoing, the parties hereto agree that they will attempt, and they intend that
they and the arbitrator should use their best efforts in that attempt, to
conclude the arbitration proceeding and have a final decision from the
arbitrator within 120 days from the date of selection of the arbitrator;
provided, however, that the arbitrator shall be entitled to extend such 120-day
period for one or more additional 120-day periods. The arbitrator shall
immediately deliver a written award with respect to the dispute to each of the
parties, who shall promptly act in accordance therewith. Each party to such
arbitration agrees that any award of the arbitrator shall be final, conclusive
and binding and that they will not contest any action by any other party thereto
in accordance with an award of the arbitrator. It is specifically understood and
agreed that any party may enforce any award rendered pursuant to the arbitration
provisions of this Section 12.10 by bringing suit in any court of competent
jurisdiction.
12.10(c) Neither this agreement to arbitrate nor any demand for arbitration
hereunder shall waive any party's right to obtain any provisional remedy,
including, without limiting the generality of the foregoing, injunctive relief,
from any court of competent jurisdiction, as may be necessary in such party's
sole and subjective judgment, with respect to matters otherwise subject to
arbitration pursuant to the terms of this Agreement. However, if any party seeks
or obtains such provisional remedy, an arbitration hereunder shall also be
commenced, and, if necessary, the merits of the controversy or claim and/or the
determination of an appropriate permanent remedy shall be sealed by arbitration
in accordance with this Agreement.
12.10(d) To the extent judicial proceedings are permitted or required
hereunder, 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.
12.10(e) All fees, costs and expenses (including reasonable attorneys' fees
and expenses) incurred by the party that prevails in any such arbitration
commenced pursuant to this Section 12.10 or any judicial action or proceeding
seeking to enforce the agreement to arbitrate disputes as set forth in this
Section 12.10, or seeking provisional remedies as authorized by this Section
38
<PAGE>
12.10, or seeking to enforce any order or award of any arbitration commenced
pursuant to this Section 12.10 may be assessed against the party or parties that
do not prevail in such arbitration in such manner as the arbitrator or the court
in such judicial action, as the case may be, may determine to be appropriate
under the circumstances. All costs and expenses attributable to the arbitrator
shall be allocated among the parties to the arbitration in such manner as the
arbitrator shall determine to be appropriate under the circumstances.
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.
12.14 Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (1) if
personally delivered, when so delivered, (2) if mailed, two Business Days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid and addressed to the intended recipient as set forth below, (3)
if given by telecopier, once such notice or other communication is transmitted
to the telecopier number specified below and the appropriate answer back or
telephonic confirmation is received, or (4) if sent through an overnight
delivery service in circumstances to which such service guarantees next day
delivery, the day following being so sent:
If to GCI: Grill Concepts, Inc.
11661 San Vicente Boulevard, Suite 404
Los Angeles, CA 90049
Attention: Robert Spivak, President
Telecopier No.: 310/820-6530
with a copy to: Herzog, Fisher & Grayson
9460 Wilshire Boulevard, Fifth Floor
Beverly Hills, CA 90212
Attention: Michael Grayson, Esq.
Telecopier No.: 310/278-5430
39
<PAGE>
If to Company: Chicago - The Grill on the Alley
c/o Grill Concepts, Inc.
11661 San Vicente Boulevard, Suite 404
Los Angeles, CA 90049
Attention: Robert Spivak, President
Telecopier No.: 310/820-6530
with a copy to: Herzog, Fisher, Grayson & Wolfe, A Law Corporation
9460 Wilshire Boulevard, Fifth Floor
Beverly Hills, CA 90212
Attention: Michael Grayson, Esq.
Telecopier No.: 310/278-5430
If to MAG: The Michigan Avenue Group
c/o Albert Samoff
75 Rockefeller Plaza
New York, NY 10019
Telecopier No.:
with a copy to: The Michigan Avenue Group
c/o Wolff-DiNapoli LLC
11828 La Grange Avenue, Second Floor
Los Angeles, CA 90025
Attention: Patricia M. Knott
Telecopier No.: 310/477-2522
with a copy to: Greenberg Glusker Fields Claman & Machtinger LLP
1900 Avenue of the Stars, Suite 2100
Los Angeles, CA 90067-4590
Attention: Bernard Shearer, Esq.
Telecopier No.: 310/553-0687
Any party may give any notice, request, demand, claim or other communication
hereunder using any other means (including ordinary mail or electronic mail),
but no such notice, request, demand, claim or other communication shall be
deemed to have been duly given unless and until it actually is received by the
individual for whom it is intended. Any party may change the address to which
notices, requests, demands, claims and other communications hereunder are to be
delivered by giving the other parties notice in the manner herein set forth.
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
40
<PAGE>
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 Distributional Interest Owner has any interest in specific property
of the Company. Without limiting the foregoing, each Member and Distributional
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 Time is of the Essence. All dates and times in this Agreement are of
the essence.
12.20 Remedies Cumulative. The remedies under this Agreement are
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
12.21 Governing Law. The local, internal laws of Illinois govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the Members.
IN WITNESS WHEREOF, all of the Members of Chicago - The Grill on the Alley
LLC, an Illinois limited liability company, have executed this Agreement,
effective as of the date written above.
"GCI"
GRILL CONCEPTS, INC., a Delaware corporation
By: /s/
Spivak, President
By: /s/
Michael Weinstock, Secretary
"MAG"
THE MICHIGAN AVENUE GROUP, a general partnership
By:/s/
Albert Sarnoff, General Partner
41
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
--------------------
GRILL CONCEPTS, INC.
<TABLE>
<CAPTION>
Name Sate of Organization
---- -------------------
<S> <C>
Grill Concepts, Inc. California
Uno Concepts of Cherry Hill, Inc. New Jersey
Uno Concepts of New Jersey, Inc. New Jersey
C.T.S. Investments, Inc. Pennsylvania
Grill Concepts D.C., Inc. District of Columbia
The Grill on the Alley, Inc. California
Emndee, Inc. California
San Jose Grill LLC California
Universal Grill Concepts, Inc. California
Chicago - The Grill on the Alley, LLC Illinois
</TABLE>
<PAGE>
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. on Form S-8 (File No. 333-
04181) and the Registration Statement of the 1998 Comprehensive Stock Option and
Award Plan of Grill Concepts, Inc. on Form S-8 (File No. 333-57369) of our
report dated April 7, 2000 on our audits of the consolidated financial
statements of Grill Concepts, Inc. and Subsidiaries as of December 26, 1999 and
December 27, 1998 and for each of the three fiscal years in the period ended
December 26, 1999, which report is included in the Company's Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles California
April 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 352,453
<SECURITIES> 0
<RECEIVABLES> 738,757
<ALLOWANCES> 0
<INVENTORY> 426,680
<CURRENT-ASSETS> 1,812,141
<PP&E> 13,963,015
<DEPRECIATION> 5,690,506
<TOTAL-ASSETS> 11,287,552
<CURRENT-LIABILITIES> 5,497,409
<BONDS> 2,927,708
0
2
<COMMON> 160
<OTHER-SE> 3,461,376
<TOTAL-LIABILITY-AND-EQUITY> 11,287,552
<SALES> 38,431,886
<TOTAL-REVENUES> 38,975,976
<CGS> 10,886,476
<TOTAL-COSTS> 10,886,476
<OTHER-EXPENSES> 27,971,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375,647
<INCOME-PRETAX> (257,879)
<INCOME-TAX> 6,000
<INCOME-CONTINUING> 117,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (405,537)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.11)
</TABLE>
