-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MkLq5VfrViwt9aisl27tnyHNEeyAEmhzTJzDWMiNzz1yBCOFQgwNpPV1UXj6cMEk CWwxalm0bHK8tr5/cezOSA== 0000950153-01-500818.txt : 20010802 0000950153-01-500818.hdr.sgml : 20010802 ACCESSION NUMBER: 0000950153-01-500818 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20010801 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: GRILL CONCEPTS INC CENTRAL INDEX KEY: 0000895041 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 133319172 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-51213 FILM NUMBER: 1695073 BUSINESS ADDRESS: STREET 1: 11661 SAN VICENTE BLVD STE 404 CITY: LOS ANGELES STATE: CA ZIP: 90049 BUSINESS PHONE: 3108205559 MAIL ADDRESS: STREET 1: 11661 SAN VICENTE BLVD STREET 2: SUITE 404 CITY: LOS ANGELES STATE: CA ZIP: 90049 FORMER COMPANY: FORMER CONFORMED NAME: MAGELLAN RESTAURANT SYSTEMS INC DATE OF NAME CHANGE: 19940531 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD HOTEL & RESORTS WORLDWIDE INC CENTRAL INDEX KEY: 0000316206 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521193298 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 777 WESTERCHESTER AVENUE STREET 2: SUITE 400 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146408100 MAIL ADDRESS: STREET 1: 2231 E CAMELBACK RD. 4TH FL STREET 2: SUITE 4O0 CITY: PHOENOX STATE: AZ ZIP: 85016 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STARWOOD LODGING CORP DATE OF NAME CHANGE: 19950215 SC 13D 1 p65372sc13d.htm SC 13D sc13d
CUSIP No.  398502104 Page  1 of   6 Pages

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 13D

(Rule 13d-101)

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-1(a)

AND AMENDMENTS THERETO FILED PURSUANT TO RULE 13d-2(a)

(Amendment No.         )*


Grill Concepts, Inc.
(Name of Issuer)


Common Stock, $.00004 Par Value

(Title of Class of Securities)

398502104

(CUSIP Number)

Kenneth S. Siegel
Starwood Hotels & Resorts Worldwide, Inc.
777 Westchester Avenue
White Plains, NY 10604
(914) 640-8235

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

July 27, 2001

(Date of Event Which Requires Filing of This Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-l(e), 240.13d-1(f) or 240.13d-1(g), check the following box.  (BOX)

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

*The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

 

CUSIP No.  398502104 Page  2 of   6 Pages

             
(1) Names of Reporting Persons
I.R.S. Identification Nos. of Above Persons (Entities Only)

Starwood Hotels & Resorts Worldwide, Inc. IRS ID No. 52-1193298
 
 
(2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [   ]
(b) [   ]
 
 
(3) SEC USE ONLY
 
 
(4) SOURCE OF FUNDS*

        WC and OO
 
 
(5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) or 2(e)		 [    ]
 
 
(6) CITIZENSHIP OR PLACE OF ORGANIZATION

        Maryland
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
(7)   SOLE VOTING POWER

          1,333,334

(8)  SHARED VOTING POWER

          N/A

(9)  SOLE DISPOSITIVE POWER

          1,333,334

(10)  SHARED DISPOSITIVE POWER

          N/A
 
(11) AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

          1,333,334
 
 
(12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*

          [   ]
 
 
(13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

          27.4%
 
 
(14) TYPE OF REPORTING PERSON*

          CO
 

*SEE INSTRUCTIONS BEFORE FILLING OUT!

 

CUSIP No.  398502104 Page  3 of   6 Pages

Item 1. Security and Issuer.

     The class of equity security to which this statement on Schedule 13D relates is the common stock, $.00004 par value per share (the “Common Stock”), of Grill Concepts, Inc. (“Issuer”), a Delaware corporation, with principal executive offices located at 11661 San Vicente Boulevard, Suite 404, Los Angeles, California 90049.

Item 2. Identity and Background.

     (a)  – (c) This statement is being filed by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), a hotel and leisure company with brand names that include Sheraton®, Westin®, Four Points®, St. Regis®, W® and The Luxury Collection®. Starwood’s principal executive offices are located at 777 Westchester Avenue, White Plains, New York 10604.

     The executive officers of Starwood and their principal occupations are as follows:

       Barry S. Sternlicht, Chairman and Chief Executive Officer
       Robert F. Cotter, Chief Operating Officer
       Ronald C. Brown, Executive Vice President and Chief Financial Officer
       Steven R. Goldman, Executive Vice President, Acquisitions and Development
       David K. Norton, Executive Vice President, Human Resources
       Kenneth S. Siegel, Executive Vice President, General Counsel and Secretary

     The principal business address of each of the above listed executive officers is 777 Westchester Avenue, White Plains, New York 10604.

     The directors of Starwood, their principal occupations and addresses are as follows:

  Jean-Marc Chapus, Managing Director of Trust Company of the West, 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.
 
  Bruce W. Duncan, private investor, P.O. Box 622, Lake Forest, Illinois 60045.
 
  Eric Hippeau, President and Executive Managing Director of Softbank Corp., 28 East 28th Street, New York, New York 10016.
 
  George J. Mitchell, former United States Senator and Special Counsel to the law firm of Verner Liipfert, Bernhard, McPherson and Hand, 901 15th Street N.W., Suite 700, Washington, DC 20005-2301.
 
  Stephen R. Quazzo, Managing Director and Chief Executive Officer of Transwestern Investment Company LLC, 150 N. Wacker, Suite 800, Chicago, Illinois 60606.
 
  Thomas O. Ryder, Chairman and Chief Executive Officer of Readers Digest Association, Inc., Readers Digest Road, Pleasantville, New York 10570.
 
  Daniel H. Stern, President of Reservoir Capital Group, LLC, 650 Madison Avenue, 26th Floor, New York, New York 10022.
 
  Barry S. Sternlicht, Chairman and Chief Executive Officer of Starwood, 777 Westchester Avenue, White Plains, New York 10604.
 
  Raymond S. Troubh, financial consultant, Ten Rockefeller Plaza, Suite 712, New York, New York 10020.

 

CUSIP No.  398502104 Page  4 of   6 Pages

  Daniel W. Yih, Principal, Portfolio Management of GTCR Golder Rauner, LLC,
6100 Sears Tower, Chicago, Illinois 60606-6402.
 
  Kneeland C. Youngblood, Managing Partner of Pharos Capital Group, LLC,
100 Crescent Court, Suite 1740, Dallas, Texas 75201.

     (d)  During the past five years, neither Starwood nor, to Starwood’s knowledge, any of its officers or directors, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

     (e)  During the past five years, neither Starwood nor, to Starwood’s knowledge, any of its officers or directors, was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

     (f)  Every natural person identified in Item 2 of this statement on Schedule 13D is a United States citizen.

Item 3. Source and Amount of Funds or Other Consideration.

     Pursuant to a Subscription Agreement, dated as of May 16, 2001, between Issuer and Starwood (the “Subscription Agreement”), Issuer sold to Starwood, for a purchase price of $1,000,000.50, 666,667 shares of Common Stock. The funds used to purchase the Shares were obtained from Starwood’s working capital. In addition, under the terms of the Subscription Agreement, Issuer issued to Starwood a warrant to purchase an additional 666,667 shares of Common Stock at an exercise price of $2.00 per share (the “Warrants”). Pursuant to the terms of a warrant agreement dated as of July 27, 2001, the Warrants are exercisable by Starwood at any time, in whole or in part, on or before July 27, 2006.

Item 4. Purpose of Transaction.

     In May 2001, Starwood and Issuer entered into the Subscription Agreement, and agreed to enter into certain related agreements (collectively, the “Agreements”), pursuant to which Starwood and Issuer agreed to jointly develop Issuer’s branded restaurants in hotel properties owned, managed or franchised by Starwood with Starwood being the exclusive major hotel operator in which Issuer’s “Grill”, “Daily Grill” and “City Bar & Grill” branded restaurants are developed, managed, operated or licensed.

     (a)  The Agreements provide for the issuance by Issuer to Starwood, after the aggregate number of Issuer branded restaurants covered by management or licensing agreements with Starwood reaches five, ten, fifteen and twenty (each, a “Development Threshold Date”), of warrants (the “Development Warrants”) to purchase a number of shares of Common Stock equal to 4% of the shares of capital stock of Issuer outstanding as of each Development Threshold Date. The Development Warrants will have an exercise price per share equal to (1) if the fair market value per share of the Common Stock as of the applicable Development Threshold Date is greater than the fair market value per share of the Common Stock as of the closing date of the transactions contemplated by the Agreements (the “Closing Date”), the greater of (A) 75% of the fair market value per share of the Common Stock on the date of issuance of the Development Warrants or (B) the fair market value per share of the Common Stock on the Closing Date, or (2) if the fair market value per share of the Common Stock as of the applicable Development Threshold Date is equal to or less than the fair market value per share of the Common Stock on the Closing Date, the fair market value per share of the Common Stock as of the applicable Development Threshold Date.

     In addition to the Development Warrants, the Agreements provide for the issuance by Issuer of warrants (the “Incentive Warrants”) to Starwood to purchase a number of shares of Common Stock equal to 0.75% of the then outstanding shares of capital stock of Issuer on the date of execution of any management

 

CUSIP No.  398502104 Page  5 of   6 Pages

or license agreement (the “Initial Incentive Threshold Date”) resulting in the total number of restaurants being operated pursuant to the Agreements exceeding 35% of the total branded restaurants operated by Issuer. Additional Incentive Warrants will be issued by Issuer to Starwood on each anniversary of the Initial Incentive Threshold Date provided that the incentive threshold continues to be satisfied.

     (b)  Not applicable.

     (c)  Not applicable.

     (d)  Under the terms of the Agreements, so long as Starwood owns no fewer than 333,333 shares of Common Stock, Issuer and certain Issuer stockholders agreed to take appropriate actions to cause one nominee of Starwood to be elected to Issuer’s board of directors or, in the event the number of restaurants operated pursuant to the Agreements equals or exceeds ten restaurants, to cause two nominees of Starwood to be elected to Issuer’s board of directors. On June 25, 2001, the stockholders of Issuer elected Starwood’s nominee, Norman MacLeod, to serve as a member of the board of directors of Issuer.

     (e)  Issuer’s restated certificate of incorporation has been amended as of June 25, 2001, as a condition to closing under the Agreements, to increase the number of authorized shares of Common Stock from 7,500,000 to 12,000,000 shares.

     (f)  Not applicable.

     (g)  See (e) above.

     (h)  Not applicable.

     (i)  Not applicable.

     (j)  Not applicable.

Item 5. Interest in Securities of Issuer.

     (a)  – (b) Starwood beneficially owns 1,333,334 shares of Common Stock (the 666,667 outstanding Shares and an additional 666,667 shares of Common Stock underlying the Warrants) representing 27.4% of the issued and outstanding shares of Common Stock of Issuer as of May 29, 2001, assuming the issuance of the Shares as of such date. Starwood has sole voting and dispositive power over the shares of Common Stock beneficially owned by it.

     To Starwood’s knowledge, no shares of Common Stock are beneficially owned by any of the persons named in Item 2 above.

     (c)  Neither Starwood, nor, to Starwood’s knowledge, any person named in Item 2 above, has effected any transaction in shares of Common Stock during the past 60 days.

     (d)  Not applicable.

     (e)  Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.

     Except as described herein, to Starwood’s knowledge, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among Starwood or any of the persons named in Item 2 and between such persons and any person with respect to any securities of Issuer, including but not limited to transfer or voting of any of the securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies.

 

CUSIP No.  398502104 Page  6 of   6 Pages

Item 7. Material to be Filed as Exhibits.

  1.   Subscription Agreement, dated as of May 16, 2001, between Grill Concepts, Inc. and Starwood Hotels & Resorts Worldwide, Inc.
 
  2.   Warrant to Purchase Shares of Common Stock of Grill Concepts, Inc., dated as of July 27, 2001
 
  3.   Development Agreement, dated as of July 27, 2001, between Grill Concepts, Inc. and Starwood Hotels & Resorts Worldwide, Inc.
 
  4.   Stockholders’ Agreement, dated as of July 27, 2001, among Grill Concepts, Inc., Starwood Hotels & Resorts Worldwide, Inc., Robert Spivak, Michael Weinstock, Lewis Wolff, Keith Wolff and the Wolff Revocable Trust of 1993

SIGNATURES

     After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

 
By: /s/ Kenneth S. Siegel
Kenneth S. Siegel
Executive Vice President, General Counsel
   and Secretary

Dated: July 31, 2001

  EX-99.1 3 p65372ex1.txt EX-99.1 1 EXHIBIT 1 SUBSCRIPTION AGREEMENT SUBSCRIPTION AGREEMENT, dated as of May 16, 2001, between GRILL CONCEPTS, INC., a corporation organized and existing under the laws of the State of Delaware ("ISSUER"); and STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., a corporation organized and existing under the laws of the State of Maryland ("INVESTOR"); W I T N E S S E T H: WHEREAS, Issuer wishes to issue and sell to Investor, and Investor wishes to purchase from Issuer, 666,667 shares (the "SHARES") of Issuer's common stock, par value $0.00004 per share ("COMMON STOCK") at a price of $1.50 per share, all upon the terms and subject to the conditions set forth herein; WHEREAS, Issuer wishes to issue to Investor, and Investor wishes to acquire from Issuer, warrants (the "INITIAL WARRANTS") to purchase 666,667 shares (the "INITIAL WARRANT SHARES") of Common Stock at an exercise price of $2.00 per share, all upon the terms and subject to the conditions set forth herein and in the applicable warrant certificate; and WHEREAS, Issuer and Investor wish to enter into an agreement, effective concurrently with the purchase of the Shares and acquisition of the Initial Warrants, substantially in the form attached hereto as Exhibit A (the "DEVELOPMENT AGREEMENT") pursuant to which, inter alia, Issuer has agreed to issue to Investor: (i) warrants (the "DEVELOPMENT WARRANTS") to purchase certain additional shares of Common Stock from time to time for every five GCI Concept Facilities (as defined in the Development Agreement) opened after the date hereof; and (ii) warrants (the "INCENTIVE WARRANTS," and together with the Development Warrants, the "SUBSEQUENT WARRANTS") to purchase certain additional shares of Common Stock from time to time in the event that the total number of GCI Concept Facilities represent more than thirty-five percent of the aggregate then operational GCI Facilities (as defined in the Development Agreement); in each case, upon the terms and subject to the conditions specified in the Development Agreement and the applicable warrant certificate; NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows: SECTION 1. Certain Defined Terms. Capitalized terms used and not otherwise defined in the body hereof are used herein as defined in Schedule I hereto. 2 2 SECTION 2. Authorization of the Securities. Issuer shall, prior to the Closing: (a) duly authorize the issuance and sale of the Shares to Investor at a purchase price of $1.50 per share; (b) duly authorize the issuance of the Initial Warrants, and the Initial Warrant Shares upon exercise thereof, to Investor; and (c) duly authorize the issuance of the Subsequent Warrants, and the shares of Common Stock issuable upon exercise thereof (collectively, the "SUBSEQUENT WARRANT SHARES"), to Investor. SECTION 3. Purchase and Sale of Shares and Warrants. On the Closing Date and at the Closing, Issuer shall: (a) sell, issue, and deliver to Investor or its assigns, free and clear of all Encumbrances, and Investor or its assigns shall purchase from Issuer for an aggregate purchase price of $1,000,000.50 (the "PURCHASE PRICE"), the Shares; and (b) issue and deliver to Investor or its assigns, free and clear of all Encumbrances, the Initial Warrants. SECTION 4. Closing Deliveries. Subject to Section 13, at the Closing: (a) Issuer shall execute and deliver or cause to be delivered to Investor the Share Certificate, the Initial Warrant Certificate, and the other Transaction Agreements, opinions, certificates, and documents required to be delivered pursuant to Section 12(b); and (b) Investor shall deliver to Issuer by wire transfer of immediately available funds to the Purchase Price Bank Account the Purchase Price, and subject to the satisfaction of each of the conditions specified in Section 12(b), execute and deliver to Issuer each Transaction Agreement to which Investor is a party. SECTION 5. Representations and Warranties of Issuer. As an inducement to Investor to enter into this Agreement, except as set forth in the Disclosure Schedule (with reference to the section and, if applicable, subsection or clause to which such exception relates), Issuer hereby represents and warrants to Investor as provided below: (a) Organization and Authority. Issuer and each Subsidiary is a corporation or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, and, upon approval of the terms of the Transaction Agreements by the stockholders of Issuer as required by Sections 8, 12(a)(ii), and 12(b)(xii) (the "STOCKHOLDER APPROVAL REQUIREMENT"), has all necessary power and authority: (i) to own and operate its properties and assets and to carry on its business as now conducted and presently proposed to be conducted; (ii) to issue and sell: (A) the Shares; (B) the Initial Warrants; (C) the Initial Warrant Shares; (D) the Subsequent Warrants; and (E) the Subsequent Warrant Shares; and (iii) to enter into this Agreement, to carry out its obligations hereunder, and to consummate the transactions contemplated hereby. Issuer and each Subsidiary is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, appropriate, or desirable, except for those jurisdictions in which failure to be so licensed or qualified would not have a Material Adverse Effect. 3 3 (b) Authorization, Execution and Delivery. Subject to the Stockholder Approval Requirement, the execution and delivery of this Agreement and each other Transaction Agreement to which it is a party by Issuer, the performance by Issuer of its obligations hereunder and thereunder, and the consummation by Issuer of the transactions contemplated hereby and thereby will have been duly authorized and approved by all requisite action on the part of Issuer. Subject to the Stockholder Approval Requirement, this Agreement has been, and upon execution of Issuer of each other Transaction Agreement to which it is a party will have been, duly executed and delivered by Issuer, and (assuming due authorization, execution and delivery by Investor) this Agreement constitutes, and each other Transaction Agreement to which it is a party will constitute, a legal, valid, and binding obligation of Issuer enforceable against Issuer in accordance with its terms. (c) Capital Stock. (i) A true and complete description of the authorized, issued, and outstanding capital stock of Issuer is set forth in Section 5)c)i) of the Disclosure Schedule. Except as described in Section 5)c)i) of the Disclosure Schedule, there are no options, warrants, convertible securities, or other Contracts of any kind, nature, or description whatsoever relating to the capital stock of Issuer or obligating Issuer to issue or sell any shares of capital stock of, or any other interest in, Issuer. None of the issued and outstanding shares of Common Stock was issued in violation of any preemptive rights. There are no outstanding contractual obligations of Issuer or any Subsidiary to repurchase, redeem, or otherwise acquire any shares of Common Stock or Preferred Stock or to provide funds to, or make any investment (in the form of a loan, capital contribution, or otherwise) in, any other Person. (ii) Upon consummation of the transactions contemplated hereby (excluding the impact of the issuance of any Subsequent Warrants) and registration of the Shares in the name of Investor in the stock records of Issuer: (A) Investor will own the percent of the issued and outstanding capital stock of Issuer on a fully-diluted basis (assuming the exercise, exchange, or conversion of all of the options, warrants, convertible securities, and other Contracts of any kind, nature, or description whatsoever relating to the capital stock of Issuer or obligating Issuer to issue or sell any shares of capital stock of, or any other interest in, Issuer or any subsidiary thereof; and assuming consummation of all of the transactions contemplated hereby) specified in Section 5)c)i) of the Disclosure Schedule; (B) the Shares and the Initial Warrants will be duly authorized, validly issued, fully paid and nonassessable, and free and clear of all Encumbrances; and (C) the Subsequent Warrants and the shares of Common Stock issuable upon exercise of the Initial Warrants and the Subsequent Warrants will be duly and properly reserved for issuance and, upon the issuance thereof, will be duly authorized, validly issued, fully paid, and nonassessable, and free and clear of all Encumbrances. 4 4 (iii) The offer, issuance, and sale of all outstanding shares of capital stock of Issuer were registered and related prospectuses delivered in accordance with, or were exempt from the registration and prospectus delivery requirements of, the Securities Act; and were registered or qualified, or were exempt from registration and qualification, under the registration, permit, or qualification requirements of all applicable state securities laws. (iv) Other than the Investor Rights Agreement and the Stockholders Agreement, there are no voting trusts, stockholder agreements, proxies, or other Contracts in effect with respect to the voting or transfer of any shares of capital stock of, or any other interests in, Issuer. (v) The stock register of Issuer accurately records: (A) the name and address of each Person owning shares of capital stock of Issuer; and (B) the certificate number of each certificate evidencing shares of capital stock issued by Issuer, the number of shares evidenced by each such certificate, the date of issuance thereof, and, in the case of cancellation, the date of cancellation thereof. (d) Subsidiaries. (i) Set forth in Section 5(d)i) of the Disclosure Schedule is a true and complete list of all Subsidiaries. Except as described in Section 5(d)i) of the Disclosure Schedule, neither Issuer nor any Subsidiary: (A) owns, beneficially or of record, any direct or indirect equity or other interest or any right (contingent or otherwise) to acquire the same in any Person; (B) is a member of, nor is any part of its business conducted through, any partnership; and (C) is a participant in any joint venture or similar arrangement. (ii) There are no options, warrants, convertible securities, or other Contracts of any kind, nature, or description whatsoever relating to the capital stock of any Subsidiary or obligating Issuer or any Subsidiary to issue or sell any shares of capital stock of, or any other interest in, any Subsidiary. None of the issued and outstanding shares of capital stock of any Subsidiary was issued in violation of any preemptive rights. There are no outstanding contractual obligations of Issuer or any Subsidiary to repurchase, redeem, or otherwise acquire any shares of capital stock of any Subsidiary or to provide funds to, or make any investment (in the form of a loan, capital contribution, or otherwise) in, any other Person. (iii) There are no voting trusts, stockholder agreements, proxies, or other Contracts in effect with respect to the voting or transfer of any shares of capital stock of, or any other interests in, any Subsidiary. (iv) The stock register of each Subsidiary accurately records: (A) the name and address of each Person owning shares of capital stock of such Subsidiary; and (B) the certificate number of each certificate evidencing shares of capital stock issued by such Subsidiary, the number of shares evidenced by each 5 5 such certificate, the date of issuance thereof, and, in the case of cancellation, the date of cancellation thereof. (e) Exchange Act Documents. Issuer is subject to Section 13 or 15(d) of the Exchange Act and has timely made all periodic and other filings required to be made under the Exchange Act and the rules promulgated thereunder for Issuer's fiscal years ended December 26, 1999 and December 31, 2000. The information contained in the following documents (collectively, the "EXCHANGE ACT DOCUMENTS") filed by Issuer with the Commission was true, correct, and complete in all material respects as of the respective filing date of each such document: (i) Issuer's Annual Report on Form 10-K for the year ended December 31, 2000; and (ii) all other documents, if any, filed by Issuer with the Commission since December 31, 2000. (f) No Conflict. The execution, delivery, and performance of this Agreement and each other Transaction Agreement to which it is a party by Issuer do not and will not: (i) violate, conflict with, or result in the breach of any provision of the certificate of incorporation or by-laws (or similar organizational documents) of Issuer or any Subsidiary; (ii) conflict with or violate (or cause an event or condition which could reasonably be expected to result in a Material Adverse Effect as a result of) any Law or Governmental Order applicable to Issuer or any Subsidiary or any of their respective assets, properties, or businesses; or (iii) except as set forth in Section 5(f) of the Disclosure Schedule, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time or both would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Shares, the Initial Warrants, the Initial Warrant Shares, the Subsequent Warrants, or the Subsequent Warrant Shares, or on any of the assets or properties of Issuer or any Subsidiary pursuant to, any Contract to which Issuer or any Subsidiary is a party or by which any of such assets or properties is bound or affected. (g) Consents and Approvals. The execution, delivery, and performance of this Agreement and each other Transaction Agreement to which it is a party by Issuer do not and will not require any consent, approval, authorization, or other order of, action by, filing with, or notification to, any Governmental Authority or any other Person; except for the Stockholder Approval Requirement and the filing of notices of sale in accordance with the registration, permit, or qualification requirements of all applicable state securities laws. 6 6 (h) Financial Information; Books and Records. (i) The Financial Statements: (A) were prepared in accordance with the books of account and other financial records of Issuer and each Subsidiary; (B) present fairly the consolidated financial condition and results of operations of Issuer and each Subsidiary as of the dates thereof or for the periods covered thereby; (C) were prepared in accordance with U.S. GAAP applied on a basis consistent with the past practices of Issuer and each Subsidiary and throughout the periods involved; and (D) include all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial condition and results of operations of Issuer as of the dates thereof or for the periods covered thereby. (ii) The books of account and other financial records of Issuer and each Subsidiary reflect all items of income and expense and all assets and liabilities required to be reflected therein in accordance with U.S. GAAP applied on a basis consistent with the past practices of Issuer and each Subsidiary and throughout the periods involved, are true and complete in all material respects, do not contain or reflect any material inaccuracies or discrepancies, and have been maintained in accordance with good business and accounting practices. (i) No Undisclosed Liabilities. There are no Liabilities of Issuer or any Subsidiary; except for: (i) Liabilities adequately reflected or reserved against on the Financial Statements; or (ii) Liabilities incurred since December 31, 2000, in the ordinary course of business, consistent with past practice, of Issuer and each Subsidiary, which Liabilities are not material, individually or in the aggregate. Set forth in Section 5(i) of the Disclosure Schedule is a true and complete schedule of all outstanding indebtedness of Issuer and its Subsidiaries, except for any outstanding indebtedness which is not in excess of $10,000 individually, or $50,000 in the aggregate. (j) Conduct in the Ordinary Course. Since December 31, 2000, Issuer and each Subsidiary has conducted its businesses and operations in the ordinary course and consistent with good business practices. (k) Litigation; Governmental Orders. (i) Set forth in Section 5(k)(i) of the Disclosure Schedule is a true and complete list and brief description of each Action by or against Issuer or any Subsidiary or affecting any of the assets, properties, businesses, or operations thereof, pending before, or, to the best knowledge of Issuer, threatened to be brought by or before, any Governmental Authority at any time during the past three years, which has had or could reasonably be expected to have a Material Adverse Effect or could reasonably be expected to affect the legality, validity, or enforceability of this Agreement or any other Transaction Agreement or the consummation of the transactions contemplated hereby or thereby. 7 7 (ii) Set forth in Section 5(k)(ii) of the Disclosure Schedule is a true and complete list and brief description of each Governmental Order applicable to Issuer or any Subsidiary or affecting any of the assets, properties, businesses, or operations thereof; and no such Governmental Order has had or could reasonably be expected to have a Material Adverse Effect or could reasonably be expected to affect the legality, validity, or enforceability of this Agreement or any other Transaction Agreement or the consummation of the transactions contemplated hereby or thereby. (l) Compliance with Laws. Issuer and each Subsidiary have conducted and continue to conduct their respective businesses and operations in accordance with all applicable Laws and Governmental Orders, and neither Issuer nor any Subsidiary is in violation of any such Law or Governmental Order, except where the failure to so comply or any such violation could not reasonably be expected to have a Material Adverse Effect. (m) Contracts. Each Material Contract is legal, valid, and binding on the respective parties thereto and is in full force and effect and, upon consummation of the transactions contemplated hereby, shall continue in full force and effect without penalty or other adverse consequence. Neither Issuer nor any Subsidiary nor, to the best knowledge of Issuer, any other party thereto is in breach of or default under any Material Contract. (n) Real Property. Issuer or a Subsidiary, as the case may be, is in peaceful and undisturbed possession of each parcel of Real Property and there are no contractual or legal restrictions that preclude or restrict the ability of Issuer or such Subsidiary to use the premises for the purposes for which they are currently being used. (o) Intellectual Property. All of the Owned Intellectual Property is owned by Issuer or a Subsidiary, free and clear of all Encumbrances, and all of the Licensed Intellectual Property is held by Issuer or a Subsidiary pursuant to valid and subsisting licenses or sublicenses. The rights of Issuer and the Subsidiaries in, to, or under such Owned Intellectual Property and Licensed Intellectual Property do not conflict with or infringe on the rights of any other Person. No Action has been made or asserted or is pending, nor, to the best knowledge of Issuer, has any such Action been threatened, against Issuer or any Subsidiary either based upon or challenging or seeking to deny or restrict the use by Issuer or any Subsidiary of any of the Owned Intellectual Property or Licensed Intellectual Property or alleging that any services provided, or products manufactured or sold by Issuer or any Subsidiary are being provided, manufactured, or sold in violation of any Intellectual Property of any Person. To the best knowledge of Issuer, no Person is using any Intellectual Property that is confusingly similar to the Owned Intellectual Property or the Licensed Intellectual Property or that infringe upon the Owned Intellectual Property or the Licensed Intellectual Property or upon the rights of Issuer or any Subsidiary therein, 8 8 thereto, or thereunder. Neither Issuer nor any Subsidiary has granted any license or sublicense or other right to any other Person with respect to any of the Owned Intellectual Property or the Licensed Intellectual Property. The consummation of the transactions contemplated hereby will not result in the termination or impairment of any of the Owned Intellectual Property or the Licensed Intellectual Property. To the best knowledge of Issuer, no employee of Issuer or any Subsidiary has violated any proprietary information agreement, employment agreement, or similar Contract, which such employee had with any previous employer, or any Intellectual Property policy of any such employer, or is a party to any Action relating to Intellectual Property. (p) Assets. Issuer or a Subsidiary owns, leases, or has the legal right to use all of the Material Assets and, with respect to Contracts forming a part of the Material Assets, Issuer or a Subsidiary is a party to and enjoys the right to the benefits of such Contracts. Issuer or a Subsidiary has good and marketable title to, or, in the case of leased or subleased, or licensed or sublicensed Material Assets, valid and subsisting leasehold interests in or licenses to, all of the Material Assets, free and clear of all Encumbrances, except for Permitted Encumbrances. (q) Customers and Suppliers. No supplier to or customer of Issuer has terminated or substantially altered, or has notified Issuer of any intention to terminate or substantially alter, its existing business relationship with Issuer, except for any termination or alteration which could not reasonably be expected to have a Material Adverse Effect. (r) Key Employees. To the best knowledge of Issuer, no officer or senior management, technical, or professional employee of Issuer or any Subsidiary (each a "KEY EMPLOYEE") intends to terminate his or her employment relationship with Issuer or any such Subsidiary, and neither Issuer nor any Subsidiary has any present intention to terminate the employment of any officer or management, technical, or professional employee thereof. Each director and Key Employee is under written contract to Issuer or the relevant Subsidiary to maintain in confidence all confidential or proprietary information acquired by such individual in the course of his or her employment therewith, and to assign to Issuer or such Subsidiary all inventions made by such individual within the scope of his or her employment during such employment and for a reasonable period thereafter. (s) Certain Interests. Except as set forth in Section 5(s) of the Disclosure Schedule, to the best knowledge of Issuer, no stockholder, director, officer, or Key Employee of Issuer or any Subsidiary, no relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such stockholder, director, officer, or Key Employee, and no Affiliate of any such Person: (i) has any direct or indirect financial interest in any competitor, customer, or supplier of Issuer or any Subsidiary; provided, however, that the ownership of securities representing no more than one percent of the outstanding 9 9 voting power of any competitor, supplier, or customer, and which are also listed on any national securities exchange or traded actively in the national over-the-counter market, shall not be deemed to be a "financial interest" so long as the Person owning such securities has no other connection or relationship with such competitor, supplier or customer; (ii) owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property belonging to or used, held for use, or intended to be used by Issuer or any Subsidiary or forming a part of or used, held for use, or intended to be used in connection with, necessary for, or otherwise material to the conduct of, the business and operations of Issuer or any Subsidiary; or (iii) has outstanding any indebtedness to Issuer or any Subsidiary. Except as set forth in Section 5(s) of the Disclosure Schedule, neither Issuer nor any Subsidiary has any Liability or any other obligation of any kind, nature, or description whatsoever to or on behalf of any stockholder, director, officer, or Key Employee of Issuer or any Subsidiary, or, to the best knowledge of Issuer, to any relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such stockholder, director, officer, or Key Employee, or to any Affiliate of any such Person; except for Liabilities relating to: (A) the payment of salary for services rendered; (B) the reimbursement of reasonable and necessary business expenses incurred on behalf of Issuer or such Subsidiary; and (C) the payment or grant of other standard employee benefits made generally available to all employees of Issuer or such Subsidiary (including stock option agreements outstanding under any employee stock option plan approved by the board of directors of Issuer or such Subsidiary). (t) Taxes. Issuer and each Subsidiary has timely filed each return and report in respect of Taxes required to be filed thereby (collectively, the "TAX RETURNS"). All Taxes required to be shown on any Tax Return or otherwise due from Issuer or any Subsidiary have been timely paid. All Tax Returns are true and complete in all material respects. No adjustment relating to any Tax Return has been proposed formally or informally by any Governmental Authority and, to the best knowledge of Issuer, no basis exists for any such adjustment. There are no pending or, to the best knowledge of Issuer, threatened Actions for the assessment or collection of Taxes against Issuer or any Subsidiary or any other Person that was required or permitted to be included in the filing of a Tax Return with Issuer or any Subsidiary on a consolidated or combined basis. There are no Tax liens on any properties or assets of Issuer or any Subsidiary, except for Tax liens in excess of $7,500 individually, or $15,000 in the aggregate. Issuer is entitled to a valid tax loss carry-forward for United States income tax purposes of not less than $2,254,000 as of the last audited Issuer financial statements, which tax loss carry-forward will not expire (to the extent not used) for at least four years from the date hereof; provided that: (i) Issuer has not utilized any tax loss carry-forward since the date of Issuer's last audited financial statements; and (ii) neither Issuer nor any Subsidiary has taken any action that could reasonably be expected to preclude Issuer from utilizing any such tax loss carry-forward. 10 10 (u) Environmental Matters. Issuer and each Subsidiary is and has been in compliance with all applicable Environmental Laws; has obtained all Environmental Permits necessary, appropriate, or desirable in connection with the ownership of their respective properties and assets and the conduct of their respective businesses; and is and has been in compliance with the requirements of all such Environmental Permits; in each case, except for any failure to so comply, or to so obtain an Environmental Permit, which could not reasonably be expected to have a Material Adverse Effect. (v) Insurance. All material assets, properties, and risks of Issuer and each Subsidiary are, and for the past three years have been, covered by valid and, except for policies that have expired under their terms in the ordinary course, currently effective insurance policies or binders of insurance (including, without limitation, general liability insurance, property insurance, business interruption insurance, directors and officers insurance and workers' compensation insurance) issued in favor of Issuer, in each case with reputable insurance companies, in such types and amounts and covering such risks as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of Issuer and each Subsidiary. (w) Private Offering; NASD Compliance. Assuming the accuracy of Investor's representations in Section 6, the offer, issuance, and sale of the Shares, the Initial Warrants, the Initial Warrant Shares, the Subsequent Warrants, and the Subsequent Warrant Shares are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, and have been registered or qualified, or are exempt from registration and qualification, under the registration, permit, or qualification requirements of all applicable state securities laws. The offering and sale of the Shares and the Initial Warrants pursuant to the terms and conditions of this Agreement and the Initial Warrants Certificate do not violate the National Association of Securities Dealers, Inc. ("NASD") By-Laws or the marketplace rules of the Nasdaq Stock Market, and Issuer is in full compliance with the listing eligibility rules promulgated by the Nasdaq Stock Market and has not received any oral or written notification from NASD or any Governmental Authority regarding any failure to comply with such listing eligibility criteria. (x) Registration Rights. Except as set forth in Section 5(x) of the Disclosure Schedule, the Investor Rights Agreement and the registration rights to be provided to the investors making the contemporaneous investment described in Section 12(b)(iv) of this Agreement, neither Issuer nor any Subsidiary has granted to any Person any rights to cause Issuer or any such Subsidiary to register under the Securities Act, any shares of capital stock of Issuer or any such Subsidiary now or hereafter held thereby, or to sell any such shares of capital stock in connection with any registration under the Securities Act, undertaken by Issuer or any Subsidiary on its own behalf or on behalf of any other Person. 11 11 (y) Full Disclosure. Set forth in Section 5(y) of the Disclosure Schedule is a list of pending material transactions not otherwise disclosed in the Disclosure Schedule. To the best knowledge of Issuer, there exist no facts, circumstances, or conditions, that have resulted in or could reasonably be expected to result in a Material Adverse Effect and which have not been disclosed in this Agreement or the Disclosure Schedule. No representation or warranty of Issuer in this Agreement or any other Transaction Agreement, nor any statement or certificate furnished or to be furnished to Investor pursuant hereto or thereto, or in connection with the transactions contemplated hereby or thereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. (z) Brokers. No broker, finder, or investment banker is entitled to any brokerage, finder's, or other fee or commission in connection with the transactions contemplated hereby based upon any Contract made by or on behalf of Issuer. SECTION 6. Representations and Warranties of Investor. As an inducement to Issuer to enter into this Agreement, except as set forth in a writing delivered by Investor prior to the date hereof, Investor hereby represents and warrants to Issuer as follows: (a) Organization and Authority. Investor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Maryland, and has all necessary power and authority to enter into this Agreement and each other Transaction Agreement to which it is a party, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. (b) Authorization, Execution and Delivery. The execution and delivery of this Agreement and each other Transaction Agreement to which it is a party by Investor, the performance by Investor of its obligations hereunder and thereunder, and the consummation by Investor of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite action on the part of Investor. This Agreement has been, and at the Closing each other Transaction Agreement to which it is a party will have been, duly executed and delivered by Investor, and (assuming due authorization, execution, and delivery by Issuer and each other party thereto) this Agreement constitutes, and at the Closing each other Transaction Agreement to which it is a party will constitute, a legal, valid, and binding obligation of Investor enforceable against Investor in accordance with its terms. (c) No Conflict. The execution, delivery, and performance of this Agreement and each other Transaction Agreement to which it is a party by Investor do not and will not: (i) violate, conflict with, or result in the breach of 12 12 any provision of the certificate of incorporation or by-laws of Investor; (ii) conflict with or violate any Law or Governmental Order applicable to Investor; or (iii) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time or both would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Investor pursuant to, any Contract to which Investor is a party or by which any of such assets or properties is bound or affected. (d) Governmental Consents and Approvals. The execution, delivery, and performance of this Agreement and each other Transaction Agreement to which it is a party by Investor do not and will not require any consent, approval, authorization, or other order of, action by, filing with, or notification to, any Governmental Authority. (e) Investment Purpose, Knowledge and Experience. Investor is acquiring the Shares and the Initial Warrants for its own account, not as a nominee or agent, solely for the purpose of investment and not with a view to, or for offer or sale in connection with, any distribution thereof. Investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its purchase of the Shares and the Initial Warrants, is able to bear the economic risk of such investment for an indefinite period of time, and has sufficient financial resources available to support the complete loss of its investment the Shares and the Initial Warrants. SECTION 7. Access to Information. From the date hereof until the earlier of the Closing or the termination hereof in accordance with its terms, upon reasonable notice, Issuer shall and shall cause its Representatives and each Subsidiary and their respective Representatives: (i) to afford Investor and its Representatives reasonable access, during normal business hours, to the offices, properties, other facilities, books, and records of Issuer and each Subsidiary and to those of their respective Representatives who have any knowledge relating to Issuer or any Subsidiary; and (ii) to furnish to Investor and its Representatives such additional financial and operating data and other information regarding the business, assets, properties, and goodwill of Issuer and each Subsidiary as Investor may reasonably request from time to time. SECTION 8. Regulatory and Other Authorizations; Notices and Consents. Issuer shall use its best efforts to obtain or cause to be obtained all authorizations, consents, orders, and approvals of all Governmental Authorities and officials that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and shall cooperate fully with Investor in promptly seeking to obtain all such authorizations, consents, orders, and approvals. Issuer shall promptly give or cause to be given such notices to third parties and use its best efforts to obtain or cause to be obtained such third party consents and estoppel certificates (including, without limitation appropriate evidence of the satisfaction 13 13 of the Stockholder Approval Requirement) as Investor may in its sole and absolute discretion deem necessary, appropriate, or desirable in connection with the transactions contemplated hereby. To the best knowledge of Issuer, there exist no facts, circumstances, or conditions that could reasonably be expected to result in the failure of Issuer to obtain each consent, approval, and authorization necessary, appropriate, or desirable for the consummation of the transactions contemplated hereby. SECTION 9. Notice of Developments. From the date hereof until the earlier of the Closing or the termination hereof in accordance with its terms, Issuer shall promptly notify Investor in writing of: (a) all events, facts, circumstances, conditions, and occurrences arising subsequent to the date hereof which could reasonably be expected to result in any breach of any representation, warranty, covenant, or agreement of Issuer contained herein, or which could reasonably be expected to have the effect of making any representation or warranty of Issuer contained herein untrue, incomplete, or incorrect in any material respect; and (b) all other material developments affecting the assets, liabilities, business, financial condition, operations, results of operations, or prospects of Issuer. SECTION 10. Ordinary Course of Business; Closing Efforts. From the date hereof until the earlier of the Closing or the termination hereof in accordance with its terms: (a) Issuer shall carry on its business in the usual, regular and ordinary course in all material respects, in substantially the same manner as previously conducted, and shall use all reasonable efforts to preserve intact its rights and franchises and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its ongoing business shall not be impaired in any material respect at the Closing; and Issuer shall not enter into any new line of business or incur or commit to any capital expenditures or any Liabilities in connection therewith other than capital expenditures and Liabilities incurred or committed to in the ordinary course of business consistent with past practice; and (b) Issuer shall use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under this Agreement and applicable Laws to consummate the purchase and sale of the Shares and the Initial Warrants as contemplated by this Agreement as soon as practicable after the date hereof, including: (i) preparing and filing as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings, ruling requests and other documents and to obtain as promptly as practicable all proxies, consents, waivers, licenses, orders, registrations, approvals, permits, rulings and authorizations necessary or advisable to be obtained from Issuer's stockholders and any Third Party and/or Governmental Authority in order to consummate the purchase and sale of the Shares and the Initial Warrants contemplated by this Agreement; and (ii) taking all reasonable steps as may be necessary to obtain all such material proxies, consents, waivers, licenses, registrations, permits, authorizations, rulings, orders, and approvals. SECTION 11. No Solicitation or Negotiation. From the date hereof until the earlier of the Closing or the termination hereof in accordance with its terms and except as expressly provided in Section 11 of the Disclosure Schedule, Issuer shall not, and shall cause its controlled Affiliates and other Representatives not to, directly or 14 14 indirectly: (a) solicit, initiate, consider, encourage, or accept any other proposals or offers from any Person relating to: (i) any acquisition or purchase of all or any portion of the capital stock or assets (other than sales of non-material assets of Issuer in the ordinary course of Issuer's business) of Issuer or any Subsidiary; (ii) any business combination with Issuer or any Subsidiary; or (iii) any other extraordinary business transaction involving or otherwise relating to Issuer or any Subsidiary; or (b) participate in any discussions, conversations, negotiations, or other communications regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage any effort or attempt by any other Person to seek to do any of the foregoing; provided, however, that nothing contained in this section shall prohibit the board of directors of Issuer from: (i) considering, negotiating, and approving and recommending to the stockholders of Issuer the contemporaneous investment in Issuer by an investor satisfactory to Investor in its sole discretion on substantially the same terms and conditions set forth herein; (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or exchange offer; or (iii) after receiving the advice of outside counsel to the effect that the board of directors of Issuer is required to do so in order to discharge properly its fiduciary duties, considering, negotiating, and approving and recommending to the stockholders of Issuer an unsolicited bona fide written acquisition proposal relating to the sale of the entire company, which acquisition proposal was not received in violation of this section. Issuer shall promptly notify Investor if any such proposal or offer, or any inquiry or other contact with any Person with respect thereto, is or has been made and shall, in any such notice to Investor, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry, or contact and the terms and conditions of such proposal, offer, inquiry, or other contact. Neither Issuer nor any Subsidiary shall, without the prior written consent of Investor, release any Person from, or waive any provision of, any confidentiality or standstill agreement to which Issuer or any Subsidiary is a party. SECTION 12. Conditions to Closing. (a) The obligations of Issuer to consummate the transactions contemplated hereby shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (i) Representations, Warranties and Covenants. The representations and warranties of Investor contained herein shall have been true and complete when made and shall be true and complete in all material respects as of the Closing Date, with the same force and effect as if made as of such date, other than such representations and warranties as are made as of another date, which shall remain true and complete in all material respects as of such other date; and the covenants and agreements contained herein to be performed or observed by Investor at or prior to the Closing shall have been performed or observed in all material respects. (ii) Stockholder Approval. The stockholders of Issuer shall have duly approved the terms of, and the execution by Issuer of, each of the Transaction Agreements to which it is a party. 15 15 (iii) No Actions; Laws. No Action shall have been commenced or threatened by or before any Governmental Authority against Issuer or Investor, and no Law shall have been enacted, issued, promulgated, enforced, or entered, that could reasonably be expected to restrain, prohibit, invalidate, render impossible or unlawful, or otherwise materially and adversely affect the transactions contemplated hereby; provided, however, that the provisions of this paragraph shall not apply if Issuer shall have solicited or encouraged, directly or indirectly, any such Action or Law. (b) The obligations of Investor to consummate the transactions contemplated hereby shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (i) Representations, Warranties and Covenants. The representations and warranties of Issuer contained herein shall have been true and complete when made and shall be true and complete in all material respects as of the Closing Date, with the same force and effect as if made as of such date, other than such representations and warranties as are made as of another date, which shall remain true and complete in all material respects as of such other date; and the covenants and agreements contained herein to be performed or observed by Issuer at or prior to the Closing shall have been performed or observed in all material respects. (ii) Transaction Agreements. Each Transaction Agreement shall have been executed and delivered by the parties thereto and shall be in full force and effect on the Closing Date, and there shall exist no facts, circumstances, or conditions that constitute or, with the giving of notice or lapse of time or both, could constitute a default thereunder or breach thereof or could give any party thereto the right to terminate such agreement. (iii) No Actions; Laws. No Action shall have been commenced or threatened by or before any Governmental Authority against Issuer or Investor, and no Law shall have been enacted, issued, promulgated, enforced, or entered, that could reasonably be expected: (A) to restrain, prohibit, invalidate, render impossible or unlawful, or otherwise materially and adversely affect the transactions contemplated hereby; or (B) to result in a Material Adverse Effect; provided, however, that the provisions of this paragraph shall not apply if Investor shall have solicited or encouraged, directly or indirectly, any such Action or Law. (iv) Contemporaneous Investment. Issuer shall have received aggregate net proceeds of not less than $1,000,000 from the issuance and sale of shares of Common Stock to one or more investors other than Investor, at a price per share of not less than $1.50, in a financing transaction consummated subsequent to the date first above written. 16 16 (v) Board Representation. Starwood's initial designee to serve as a member of the board of directors of Issuer shall have been duly appointed or elected to such office. (vi) Pizzeria Uno Disposition. Issuer shall have consummated the sale of its South Plainfield, New Jersey Pizzeria Uno restaurant for not less than $700,000 in gross cash proceeds to Issuer. (vii) HRP Amendment. Issuer and Hotel Restaurant Properties, Inc. shall have executed and delivered to Investor an amendment to their agreement, dated August 27, 1998, and amended as of August 10, 1998 and May 11, 1999, which shall be in the form attached hereto as Exhibit H. (viii) Westin Michigan Avenue Release. Issuer shall have executed and delivered to Investor, in exchange for a payment of not more than $25,000, a settlement and release agreement in the form attached hereto as Exhibit I relating to the Issuer restaurant in the Westin Michigan Avenue. (ix) Officers' and Secretary's Certificate. Investor shall have received from the president and the chief financial officer of Issuer and from the secretary of Issuer executed certificates dated the Closing Date, substantially in the forms attached hereto as Exhibits B and C, respectively. (x) Legal Opinions. Investor shall have received from Herzog, Fisher, Grayson & Wolfe, and Vanderkam and Sanders, each counsel to Issuer, legal opinions in form and substance reasonably satisfactory to Investor. (xi) Share and Warrant Certificates. Investor shall have received the Share Certificate and the Initial Warrants Certificate, each duly authorized and executed by Issuer. (xii) Consents and Approvals. The stockholders of Issuer shall have duly approved the terms of, and the execution by Issuer of, each of the Transaction Agreements to which it is a party. Investor and Issuer shall have received, each in form and substance satisfactory to Investor, all authorizations, consents, orders, and approvals of all Governmental Authorities and officials and all third party consents and estoppel certificates and all corporate approvals (including, without limitation appropriate evidence of the satisfaction of the Stockholder Approval Requirement) which Investor reasonably deems necessary, appropriate, or desirable for the consummation of the transactions contemplated hereby. (xiii) No Material Adverse Effect. No event or events shall have occurred, or shall be reasonably likely to occur, which, individually or in the aggregate, have resulted in or could reasonably be expected to result in a Material Adverse Effect. 17 17 SECTION 13. Termination. This Agreement may be terminated by written notice of termination at any time prior to the Closing: (a) by Investor if: (i) any event or condition occurs that results in, or could reasonably be expected to result in, a Material Adverse Effect; (ii) any representation or warranty of Issuer contained herein was not true and complete in all material respects when made; (iii) Issuer does not comply in all material respects with each covenant or agreement contained herein to be performed or observed by it; or (iv) Issuer makes a general assignment for the benefit of creditors, or any proceeding is instituted by or against Issuer seeking to adjudicate it a bankrupt or insolvent, or seeking the liquidation, winding up, or reorganization, arrangement, adjustment, protection, relief, or composition of its debts under any Law relating to bankruptcy, insolvency, or reorganization; (b) by Issuer if: (i) any representation or warranty of Investor contained herein was not true and complete in all material respects when made; or (ii) Investor does not comply in all material respects with each covenant or agreement contained herein to be performed or observed by it; (c) by Investor or Issuer if the Closing has not occurred within thirty (30) days after the date of Issuer's annual stockholders' meeting with respect to fiscal year 2000, which is anticipated to occur on June 25, 2001; provided, however, that the right to terminate this Agreement pursuant to this clause shall not be available to any party whose failure to fulfill any obligation hereunder is the cause of, or results in, the failure of the Closing to occur on or prior to such date; (d) by Investor or Issuer if any Governmental Authority issues any order, decree, or ruling or takes any other action restraining, enjoining, or otherwise prohibiting the transactions contemplated hereby and such order, decree, ruling, or other action becomes final and nonappealable; or (e) by the mutual written consent of Investor and Issuer. SECTION 14. Use of Proceeds. Issuer shall use the proceeds received from the sale of the Shares hereunder for working capital purposes and shall not use any of such proceeds for repayment of any of Issuer's outstanding indebtedness. SECTION 15. Senior Management. Issuer shall use its best efforts to retain pursuant to a written employment contract Robert Spivak as the chief executive officer of Issuer for at least the three-year period commencing on the Closing Date, with the compensation package described in Section 15 of the Disclosure Schedule. SECTION 16. Indemnification; Contribution. (a) Indemnification. Each party hereto (in its capacity as indemnitor hereunder, the "INDEMNITOR"), shall indemnify 18 18 the other party hereto, each Affiliate of such other party, each successor and assign of each such Person, and each Representative of each of the foregoing (each such Person in its capacity as indemnitee hereunder, an "INDEMNITEE"), with respect to, and hold each of them harmless from and against, any and all Losses resulting from, arising out of, or relating to Indemnitor's breach of any representation, warranty, covenant, or agreement thereof contained in this Agreement or any other Transaction Agreement, and any action or omission of Indemnitor in connection with the performance of its obligations under this Agreement or any other Transaction Agreement. (b) Contribution. To the extent that the undertakings of Indemnitor set forth in this section may be unenforceable, Indemnitor shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by any Indemnitee. (c) Loss Notices. If any Indemnitee determines that any facts or circumstances have given or could reasonably be expected to give rise to a right of indemnification under this section, such Indemnitee shall give Indemnitor notice (a "LOSS NOTICE") of such facts or circumstances within thirty days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and describing in reasonable detail the facts and circumstances upon which such determination is based; provided that, if any such determination is based, in whole or in part, on any Action brought by or on behalf of any third party (a "THIRD-PARTY CLAIM"), such Indemnitee shall give Indemnitor a Loss Notice in respect thereof within ten days of such determination; provided further that any failure timely to provide a Loss Notice shall not release Indemnitor from any of its obligations under this section, except to the extent Indemnitor is materially prejudiced by such failure, and shall not relieve Indemnitor from any other obligation or liability that it may have to any Indemnitee otherwise than under this section. (d) Third-Party Claims. If Indemnitor acknowledges in writing within five Business Days after its receipt of any Loss Notice relating to any Third-Party Claim its obligation to indemnify and hold harmless any Indemnitee under this section from and against any Losses resulting from such Third-Party Claim, then Indemnitor shall be entitled to assume and control the defense of such Third-Party Claim at its expense and through counsel of its choice (which counsel shall be reasonably acceptable to such Indemnitee); provided that, if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of such Indemnitee for the same counsel to represent both such Indemnitee and Indemnitor, then such Indemnitee shall be entitled to retain its own counsel, at Indemnitor's sole cost and expense, in each jurisdiction for which such Indemnitee reasonably determines counsel is required. If Indemnitor is, directly or indirectly, conducting the defense against any Third-Party Claim, Indemnitee shall cooperate with Indemnitor in such defense and make available to Indemnitor all witnesses, pertinent records, materials, and information in such Indemnitee's possession or under its control relating thereto as is reasonably required by Indemnitor. If any Indemnitee is, directly or indirectly, conducting the defense against any Third-Party Claim, Indemnitor shall cooperate with such Indemnitee in such defense 19 19 and make available to such Indemnitee, at Indemnitor's sole cost and expense, all such witnesses, records, materials, and information in Indemnitor's possession or under its control relating thereto as is reasonably required by such Indemnitee. Indemnitor shall not settle any Third-Party Claim without the prior written consent of the Indemnitee which delivered the Loss Notice in respect thereof. (e) Other Rights and Remedies Not Affected. The indemnification rights of the parties under this section are independent of and in addition to such rights and remedies as the parties may have at law or in equity or otherwise for any misrepresentation, breach of warranty, or failure to fulfill any agreement or covenant hereunder on the part of any party hereto, including, without limitation, the right to seek specific performance, rescission, or restitution, none of which rights or remedies shall be affected or diminished hereby. SECTION 17. Miscellaneous. (a) Further Action. Issuer shall, promptly after any request therefor by Investor and at Issuer's sole cost and expense, take or cause to be taken all actions, do or cause to be done all things, and execute and deliver or cause to be executed and delivered all documents, instruments, certificates, further assurances, or other papers, which Investor may reasonably deem necessary, appropriate, or desirable in connection with this Agreement and the consummation of the transactions contemplated hereby. (b) Survival of Certain Covenants and Agreements. Issuer's covenants and representations and agreements contained in Sections 5, 14, 15, 16, and 17 shall survive the Closing; and Issuer's covenants and representations and agreements contained in Sections 5, 16, and 17 shall survive the termination or expiration hereof. (c) Expenses. Except as otherwise provided herein each party hereto shall pay its own costs and expenses, including, without limitation, all fees and disbursements of counsel, incurred by or on behalf of such party in connection with this Agreement and the consummation of the transactions contemplated hereby; provided, however, that, if a final and binding judgment is obtained by any party to this Agreement against any other party to this Agreement in any Designated Action, such judgment debtor shall pay all out-of-pocket costs and expenses (including, without limitation, reasonable fees and disbursements of counsel, accountants, experts, and consultants) incurred by such judgment creditor in connection with or resulting from such Designated Action. (d) Notices. Any notice, request, claim, demand, or other communication given or made hereunder by any party hereto shall be in writing and shall be given or made by delivery in person, or by reputable overnight business courier service, telecopy, or registered or certified mail (postage prepaid, return receipt requested) to the addressee at its address or telecopier number set forth in Schedule II hereto (or to such other address or telecopier number as such party may hereafter specify for such purpose by notice given in accordance with this paragraph). Any notice, request, claim, demand, or other communication given or made hereunder by telecopy shall be 20 20 followed promptly by a confirmation copy sent by reputable overnight business courier service. Any notice, demand, request, or other communication hereunder shall be effective upon the earliest of: (i) the receipt thereof by the addressee; (ii) the deposit thereof in the mails of the United States of America; provided, however, that the time period in which any response to any such notice, demand, request, or other communication is required to be given shall commence from the date of receipt thereof by the addressee as evidenced by the return receipt with respect thereto; (iii) the rejection or other refusal of delivery thereof by the addressee or any agent of the addressee; or (iv) the failure of delivery thereof as a result of the addressee's failure to properly give notice hereunder of any change of its address or telecopier number. (e) Assignment. Except as otherwise provided herein, no party hereto shall assign its rights or delegate its obligations hereunder by operation of law or otherwise without each other party's express written consent (which consent may be granted or withheld in such party's sole and absolute discretion); provided that (i)Investor may assign in whole or in part its rights hereunder to any Affiliate thereof without the consent of Issuer; and (ii) either party hereto may assign in whole or in part its rights hereunder to any Person that acquires more than 50% of the outstanding voting securities or all or substantially all of the assets of the assigning party (whether by way of merger or otherwise). Notwithstanding anything to the contrary contained in this Agreement, Issuer shall not assign in whole or in part any of its rights or delegate any of its obligations hereunder to any acquiror thereof that is a Major Hotel Operator (as defined in Section 3(a) of the Development Agreement) other than Investor until the later to occur of : (A) the Closing Date; and (B) the expiration pursuant to its terms of Issuer's exclusivity covenant in Section 3(b) of the Development Agreement. (f) Amendment; Waiver. No amendment or restatement hereof or supplement or other modification hereto shall be valid or effective unless such amendment, restatement, supplement, or other modification is in writing, expressly refers hereto, and is signed by each party hereto. No consent to, or waiver, discharge, or release of, any term or provision or breach hereof shall be valid or effective unless such consent, waiver, discharge, or release is in writing, expressly refers hereto, and is signed by the party to be bound thereby, and no such consent, waiver, discharge, or release shall constitute a consent, waiver, discharge, or release of any other term or provision hereof or any subsequent breach hereof, whether or not similar in nature, or a subsequent consent, waiver, discharge, or release of the same term, provision, or breach hereof. No failure to exercise or delay in exercising any right, power, or remedy hereunder by either party hereto, including any failure to insist in any instance upon strict, complete, or timely performance or observance by the other party hereto of any term or provision hereof or obligation hereunder, shall constitute a consent, waiver, discharge, or release of any such right, power, or remedy, and no single or partial exercise of any right, power, or remedy by either party hereto shall preclude any other or further exercise of any such right, power, or remedy. (g) Entire Agreement. This Agreement, including all annexes, appendices, exhibits, and schedules hereto, constitutes the entire agreement between the 21 21 parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous negotiations, covenants, agreements, representations, warranties, undertakings, and understandings, written or oral, and courses of conduct and dealing between the parties hereto, with respect to the subject matter hereof. (h) Severability. If any term or other provision hereof is determined by any court of competent jurisdiction to be invalid, illegal, or unenforceable in whole or in part by reason of any applicable Law or public policy, and such determination becomes final and nonappealable, such term or other provision shall remain in full force and effect to the fullest extent permitted by Law, and all other terms and provisions hereof shall remain in full force and effect in their entirety. (i) Successors and Assigns; No Third-Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and permitted assigns, and nothing herein, whether express or implied, is intended to or shall confer upon any other Person any legal or equitable right, power, or remedy of any kind, nature, or description whatsoever under or by reason hereof; provided, however, that the terms and provisions hereof relating to indemnification of any indemnitee not party hereto shall inure to the benefit of such indemnitee. (j) Remedies. (i) All rights, powers, and remedies hereunder of each party hereto shall, to the fullest extent permitted by law, be cumulative and not alternative, and in addition to all other rights, powers, and remedies of such party, whether specifically granted hereunder or otherwise existing under any Law, and may be exercised from time to time and as often and in such order as such party may deem necessary, appropriate, or desirable, and the exercise or the beginning of the exercise of any right, power, or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power, or remedy. (ii) Issuer hereby acknowledges that irreparable damage would occur, and Investor's remedies at law would be inadequate, if any term or provision hereof was not performed or observed strictly in accordance herewith, and hereby unconditionally and irrevocably waives any defense that may be available to it that Investor's remedies at law are adequate or that its injuries are not irreparable. Investor may, without posting any bond or other security and in addition to any remedy available to it at law, obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction, or any other equitable remedy which may then be available to it. (k) Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California. (l) Waiver of Jury Trial. Each party hereto hereby unconditionally and irrevocably waives all right to trial by jury in any action, suit, or proceeding (whether 22 22 based on contract, tort, or otherwise) based upon, resulting from, arising out of, or relating to this Agreement or any transaction or agreement contemplated hereby. (m) Jurisdiction; Service of Process. Each party hereto hereby unconditionally and irrevocably submits, for itself and its property, to the exclusive jurisdiction of the Designated Courts over any Designated Action. All claims with respect to any Designated Action shall be heard and determined in a Designated Court. No party hereto shall commence any Designated Action except in a Designated Court. No party hereto shall, and each party hereto hereby waives any right it may have to: (i) plead or make any objection to the venue of any Designated Court; (ii) plead or make any claim that any Designated Action brought in any Designated Court has been brought in an improper or otherwise inconvenient forum; (iii) plead or make any claim that any Designated Court lacks personal jurisdiction over it; or (iv) seek any punitive damages in any Designated Action. Any final Governmental Order in any Designated Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The summons and complaint or any other process in any Designated Action may be served by mailing to any of the addresses set forth herein or by hand delivery to an individual of suitable age and discretion at any such address, and any such service shall be deemed to be complete on the date such process is so mailed or delivered and to have the same force and effect as personal service within the State of California. (n) Preparation and Negotiation of This Agreement. Each party hereto has participated equally in the preparation and negotiation of this Agreement, including all annexes, appendices, exhibits, and schedules hereto, and each party hereto hereby unconditionally and irrevocably waives to the fullest extent permitted by law any rule of interpretation or construction requiring that this Agreement, including any annex, appendix, exhibit, or schedule hereto, be interpreted or construed against the drafting party. (o) Headings. The descriptive headings contained herein are for convenience of reference only and shall not affect in any way the meaning, construction, or interpretation of any term or provision hereof. (p) Exhibits. Each annex, appendix, exhibit, and schedule hereto is hereby incorporated herein by reference in its entirety. (q) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement with the same effect as if such signatures were upon the same instrument. (r) Delivery Via Telecopier. Delivery of an executed counterpart hereof via telecopier shall be as effective as delivery of a manually executed counterpart hereof. 23 23 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 24 IN WITNESS WHEREOF, each party hereto has executed and delivered this Agreement as of the date first written above. GRILL CONCEPTS, INC. By: Name: Title: STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. By: Name: Title: 25 SCHEDULE II CERTAIN DEFINED TERMS "ACTION" means any claim (including, without limitation, any Environmental Claim), action, suit, arbitration, inquiry, proceeding, notice of violation, or investigation by or before any Governmental Authority. "ADJUSTED DILUTED SHARES" means the Fully Diluted Shares less those Securities issuable upon exercise of outstanding stock options or warrants to the extent that (i) such Securities have an exercise price of not less than $8.00 per share (as adjusted for stock splits, stock dividends, recapitalizations and the like), and (ii) the Fair Market Value is less than $8.00 per share (as adjusted for stock splits, stock dividends, recapitalizations and the like). "AFFILIATE" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means, with respect to the relationship between or among two or more Persons, the possession, directly or indirectly, or as trustee, personal representative, or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative, or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "AGREEMENT" means this subscription agreement, including all annexes, appendices, exhibits, and schedules hereto, as amended, supplemented, or otherwise modified from time to time. "ASSETS" means, collectively, the properties, assets, and Contract rights forming a part of or used, held for use, or intended to be used in connection with, necessary for, or otherwise material to the conduct of, the business and operations of Issuer and each Subsidiary, including, without limitation, the Owned Intellectual Property, the Licensed Intellectual Property, the Owned Real Property, and the Leased Real Property. "BUSINESS DAY" means any day that is not a Saturday, a Sunday, or another day on which banks are required or authorized by Law to be closed in New York, New York or Los Angeles, California. "CLOSING" means the closing of the sale, issuance, and delivery of the Shares and the Warrants contemplated by Section 3) to be held at 10:00 a.m., local time, on the Closing Date at the offices of Levin & Srinivasan LLP, 1776 Broadway, Suite 1900, New York, New York, 10019, or at such other place or at such other time as Issuer and Investor may mutually agree upon in writing. 26 2 "CLOSING DATE" means the later of: (i) the date hereof; and (ii) the fifteenth (15th) Business Day following the satisfaction or waiver of all conditions to the obligations of the parties set forth in Section 12). "COMMISSION" means the United States Securities and Exchange Commission. "COMMON STOCK" has the meaning specified in the recitals hereto. "CONTRACT" means any contract, agreement, lease, sublease, license, sublicense, guaranty, letter of credit, credit or loan agreement, pledge or security agreement, note, bond, mortgage, deed of trust, indenture, commitment, sale or purchase order, or other understanding or arrangement, written or oral, of any kind, nature, or description whatsoever, or any waiver, consent, or other authorization relating to any of the foregoing. "DESIGNATED ACTION" means any Action based upon, resulting from, arising out of, or relating to this Agreement or any transaction or agreement contemplated hereby, or for the recognition or enforcement of any judgment resulting from any such Action. "DESIGNATED COURT" means any court of the State of California and any federal court of the United States of America, in either case, sitting in the City and County of Los Angeles, and any appellate court therefrom. "DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto, dated as of the date hereof, and forming a part hereof. "DEVELOPMENT AGREEMENT" has the meaning specified in the recitals hereto. "ENCUMBRANCE" means any security interest, pledge, mortgage, lien (including, without limitation, any environmental or tax lien), charge, encumbrance, adverse claim, preferential arrangement, or restriction of any kind, nature, or description whatsoever, including, without limitation, any restriction on the use, voting, transfer, receipt of income, or other exercise of any attributes of ownership. "ENVIRONMENTAL CLAIM" means any action, suit, demand, demand letter, claim, lien, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order, or consent agreement relating in any way to any Environmental Law, Environmental Permit, or Hazardous Materials. "ENVIRONMENTAL LAW" shall mean any Law, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree, or judgment, relating to pollution or 27 3 protection of the environment, health, safety, or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release, or discharge of Hazardous Materials. "ENVIRONMENTAL PERMIT" shall mean any permit, approval, identification number, license, or other authorization required under any applicable Environmental Law. "EXCHANGE ACT" means, as of any date of determination, the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as in effect as of such date. "EXCHANGE ACT DOCUMENTS" has the meaning specified in Section 5(e). "FAIR MARKET VALUE" means, with respect to the Common Stock and as of any date of determination: (i) if such Common Stock is listed on any national securities exchange of the United States of America, the average of the closing sale prices of such securities on the principal such exchange on which such Common Stock is listed (or, on any trading day during such period on which there were no sales, the average of the highest bid and lowest asked prices on such exchange at the end of such day) on each trading day during the thirty-day period ending on the last Business Day immediately preceding such date of determination; (ii) if such Common Stock is not listed on any national securities exchange of the United States of America but is quoted on the Nasdaq System, the average of the representative bid and asked prices quoted on such system as of 4:00 p.m., New York time, on each trading day during the thirty-day period ending on the last Business Day immediately preceding such date of determination; (iii) if such Common Stock is not listed on any national securities exchange of the United States of America and is not quoted on the Nasdaq System, the average of the highest bid and lowest asked prices in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated on each trading day during the thirty-day period ending on the last Business Day immediately preceding such date of determination; or (iv) if such Common Stock is not then publicly traded, the fair value of such Common Stock as determined in good faith and certified by the board of directors of Issuer, which determination shall be final and binding absent manifest error. "FINANCIAL STATEMENTS" means the audited consolidated balance sheets of Issuer and the Subsidiaries as at, and the related audited consolidated statements of operations, stockholders' equity, and cash flows of Issuer and the Subsidiaries for the fiscal year ended as of December 31, 2000, together with all related notes and schedules thereto, accompanied by the reports thereon of Issuer's independent public accountants, in the form as filed with the Commission as part of an Exchange Act Document. "FULLY-DILUTED SHARES" means, as of any date of determination, the sum of: (i) the aggregate number of shares of Common Stock issued and outstanding as of such date (excluding any shares of Common Stock held in the treasury of Issuer or held by any controlled Affiliate of Issuer); plus (ii) the number of shares of Common Stock 28 4 issuable upon the exercise, conversion, or exchange of all outstanding options, warrants, convertible securities, and other rights, agreements, arrangements, or commitments of any kind, nature, or description whatsoever relating to the capital stock of Issuer or obligating Issuer to issue or sell any shares of capital stock of, or any other interest in, Issuer. "GOVERNMENTAL AUTHORITY" means any national, federal, state, municipal, local, or other government, governmental, regulatory, or administrative authority, agency, or commission, or any court, tribunal, or judicial or arbitral body. "GOVERNMENTAL ORDER" means any order, writ, judgment, injunction, decree, stipulation, determination, or award entered by or with any Governmental Authority. "HAZARDOUS MATERIALS" means: (i) petroleum and petroleum products, by products, or breakdown products, radioactive materials, asbestos containing materials, and polychlorinated biphenyls; and (ii) any other chemicals, materials, or substances defined or regulated as toxic or hazardous or as a pollutant or contaminant or as a waste under any applicable Environmental Law. "INDEMNITEE" has the meaning specified in Section 16)a). "INDEMNITOR" has the meaning specified in Section 16)a). "INITIAL WARRANT CERTIFICATE" means the warrant certificate of Issuer evidencing the Initial Warrants, substantially in the form attached hereto as Exhibit G. "INITIAL WARRANTS" has the meaning specified in the recitals hereto. "INITIAL WARRANT SHARES" has the meaning specified in the recitals hereto. "INTELLECTUAL PROPERTY" means, collectively: all original works of authorship or copyrights fixed in any tangible medium of expression; all interests patent of the United States of America or any other country; all trademarks, trade names, trade styles, trade dress, service marks, logos, designs, corporate names, and other similar general intangibles; and all other intellectual property, including, without limitation, to the extent not constituting any of the foregoing, all inventions, ideas, moral rights, computer software, technology (including know-how and show-how), trade secrets, and other confidential, proprietary, technical, and business information of any kind, nature, or description whatsoever. "INVESTOR" has the meaning specified in the preamble hereto. "INVESTOR RIGHTS AGREEMENT" means the investor rights agreement to be entered into between Issuer and Investor at or prior to the Closing, substantially in the form attached hereto as Exhibit D. 29 5 "ISSUER" has the meaning specified in the preamble hereto. "KEY EMPLOYEE" has the meaning specified in Section 5(r). "LAW" means any international, national, federal, state, provincial, municipal, local, or other statute, law, ordinance, regulation, rule, code, order, or other requirement or rule of law. "LEASED REAL PROPERTY" means all real property leased by Issuer or any Subsidiary as tenant, together with, to the extent leased by Issuer or any Subsidiary, all buildings and other structures, facilities, or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of Issuer or any Subsidiary attached or appurtenant thereto, and all easements, licenses, rights, and appurtenances relating to the foregoing. "LIABILITIES" means all debts, liabilities, and obligations of any kind, nature, or description whatsoever, whether accrued or fixed, absolute or contingent, matured or unmatured, known or unknown or determined or determinable, including, without limitation, those arising under any Law (including, without limitation, any Environmental Law), Action, or Governmental Order and those arising under any Contract. "LICENSED INTELLECTUAL PROPERTY" means all Intellectual Property licensed or sublicensed by Issuer or any Subsidiary, as licensee. "LOSSES" means, with respect to any specified Person, all Liabilities, losses, damages, claims, costs, expenses, amounts paid in settlement, interest, awards, judgments, penalties, or fines of any kind, nature, or description whatsoever (including, without limitation, all reasonable fees and disbursements of counsel, accountants, experts, and consultants) suffered, incurred, or sustained by such Person or to which such Person becomes subject (including, without limitation, in connection with any Action brought or otherwise initiated by or on behalf of such Person), resulting from, arising out of, or relating to any specified facts or circumstances. "LOSS NOTICE" has the meaning specified in Section 16(c). "MATERIAL ADVERSE EFFECT" means any circumstance, change in, or effect on Issuer, or any Subsidiary which, individually or in the aggregate with any other circumstances, changes in, or effects on Issuer, or any Subsidiary is, or could reasonably be expected to be, materially adverse to the business, operations, assets or liabilities, employee relationships, customer or supplier relationships, prospects, results of operations, or the condition (financial or otherwise) of Issuer and the Subsidiaries, taken as a whole. 30 6 "MATERIAL ASSETS" means all Assets of Issuer or any of its Subsidiaries that are material, individually or in the aggregate, to the business or operations of Issuer and its Subsidiaries, taken as a whole. "MATERIAL CONTRACTS" means all Contracts to which Issuer or any of its Subsidiaries are a party or by which the Assets of Issuer or any of its Subsidiaries are bound that are material, individually or in the aggregate, to the business or operations of Issuer and its Subsidiaries, taken as a whole. "NASD" has the meaning specified in Section 5(w). "OWNED INTELLECTUAL PROPERTY" means all Intellectual Property owned by Issuer or any Subsidiary. "OWNED REAL PROPERTY" means all real property owned by Issuer or any Subsidiary, together with all buildings and other structures, facilities, or improvements currently or hereafter located thereon, all fixtures, systems, equipment, and items of personal property of Issuer or any Subsidiary attached or appurtenant thereto, and all easements, licenses, rights, and appurtenances relating to the foregoing. "PERMIT" means any license, permit, franchise, certificate, or other authorization or approval of any kind, nature, or description whatsoever issued by any Governmental Authority. "PERMITTED ENCUMBRANCES" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (i) liens for taxes, assessments and governmental charges or levies not yet due and payable which are not in excess of $7,500 in the aggregate; (ii) Encumbrances imposed by Law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations that: (A) are not overdue for a period of more than thirty days; and (B) are not in excess of $7,500 in the case of a single property or $15,000 in the aggregate at any time; (iii) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (iv) minor survey exceptions, reciprocal easement agreements, and other customary encumbrances on title to real property that: (A) were not incurred in connection with any indebtedness; (B) do not render title to the property encumbered thereby unmarketable; and (C) do not, individually or in the aggregate, materially adversely affect the value or use of such property for its current and anticipated purposes. "PERMITTED TRANSFEREE" means, with respect to Investor or any Stockholder (as defined in the preamble to the Stockholders' Agreement), (i) a natural person who is the issue or spouse of such Stockholder and to whom Securities are transferred: (a) by will or the laws of descent and distribution; or (b) by gift without consideration of any kind; (ii) any charitable foundation all the trustees of which are 31 7 Stockholders or otherwise Permitted Transferees; and (iii) Investor or any Affiliate of Investor. "PERSON" means any individual, partnership, firm, corporation, limited liability company, joint venture, association, trust, unincorporated organization, or other entity. "PURCHASE PRICE" has the meaning specified in Section 3. "PURCHASE PRICE BANK ACCOUNT" means one or more bank accounts in the United States of America to be designated by Issuer in a written notice to Investor not fewer than three Business Days prior to the Closing. "REAL PROPERTY" means the Leased Real Property and the Owned Real Property. "REPRESENTATIVE" means, with respect to any specified Person, any Affiliate, manager, director, officer, employee, agent, accountant, or counsel of, or other Person empowered to act for, such Person. "SECURITIES" means shares of Common Stock; any rights, options, or warrants to purchase shares of Common Stock; and any other securities of any kind, nature, or description whatsoever convertible into or exercisable or exchangeable for shares of Common Stock, including, without limitation, shares of any series of preferred stock of Issuer. "SECURITIES ACT" means, as of any date of determination, the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as in effect as of such date. "SHARE CERTIFICATE" means the share certificate of Issuer evidencing the Shares, substantially in the form attached hereto as Exhibit F. "SHARES" has the meaning specified in the recitals hereto. "STOCKHOLDER APPROVAL REQUIREMENT" has the meaning specified in Section 5(a). "STOCKHOLDERS' AGREEMENT" means the stockholders' agreement to be entered into among Issuer, Investor, and certain other stockholders of Issuer at or prior to the Closing, substantially in the form attached hereto as Exhibit E. "SUBSEQUENT WARRANTS" has the meaning specified in the recitals hereto. "SUBSEQUENT WARRANT SHARES" has the meaning specified in the recitals hereto. 32 8 "SUBSIDIARIES" means all corporations, partnerships, limited liability companies, joint ventures, associations, and other entities controlled by (as such term is used in the definition of "Affiliates" above) Issuer directly or indirectly through one or more intermediaries. "TAXES" means all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind, nature, or description whatsoever (together with all interest, penalties, loss, damage, liability, expense, additions to tax and additional amounts or costs incurred or imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: (i) taxes or other charges on or with respect to income, franchises, concessions, windfall or other profits, gross receipts, property, sales, use, capital, gains, capital stock or shares, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; (ii) taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; (iii) license, registration and documentation fees; and (iv) customs duties, tariffs, and similar charges. "TAX RETURNS" has the meaning specified in Section 5(t). "THIRD-PARTY CLAIM" has the meaning specified in Section 16(c). "TRANSACTION AGREEMENTS" means this Agreement, the Development Agreement, the Investor Rights Agreement, the Stockholders' Agreement, the Share Certificate and the Initial Warrants Certificate. "TRANSFER" means, with respect to any specified Securities, to make, offer or agree to make, or suffer to be made any sale, transfer, assignment, allocation, distribution, gift, or other disposition of, or to create, incur, assume, permit, or suffer to exist any Encumbrance upon or with respect to, by operation of Law or otherwise (including, without limitation, by merger, consolidation, dividend, or distribution), all or any part of such Securities; provided that any pledge by Investor of Securities in connection with a financing facility entered into by Investor shall not constitute a "Transfer". "U.S. GAAP" means United States generally accepted accounting principles and practices as in effect from time to time and applied consistently throughout the periods involved. 33 ADDRESSES FOR NOTICES If to Issuer: Grill Concepts, Inc. 11661 San Vicente Blvd., Suite 404 Los Angeles, California 90049 Attention: Michael Weinstock, Chairman Telephone: (310) Telecopier: (310) 820-6530 with copies to: Herzog, Fisher, Grayson & Wolfe 9460 Wilshire Boulevard, Fifth Floor Beverly Hills, California 90212 Attention: Michael Grayson Telephone: (310) Telecopier: (310) 278-5430 and Vanderkam & Sanders 440 Louisiana, Suite 475 Houston, Texas 77002 Attention: Michael Sanders Telephone: (713) 547-8900 Telecopier: (713) 547-8910 If to Investor: Before August 1, 2001: Starwood Hotels and Resorts Worldwide, Inc. 777 Westchester Avenue White Plains, New York 10604 Attention: Senior Vice President -- Business Development Telephone: (914) 640-8176 Telecopier: (914) 640-8124 On or after August 1, 2001: Starwood Hotels and Resorts Worldwide, Inc. 1111 Westchester Avenue White Plains, New York 10604-3500 Attention: Senior Vice President -- Business Development Telephone: (914) 640-8176 Telecopier: (914) 640-8124 with copies to: Before August 1, 2001: Starwood Hotels and Resorts Worldwide, Inc. 34 2 777 Westchester Avenue White Plains, New York 10604 Attention: General Counsel Telephone: (914) 640-2609 Telecopier: (914) 640-8260 On or after August 1, 2001: Starwood Hotels and Resorts Worldwide, Inc. 1111 Westchester Avenue White Plains, New York 10604-3500 Attention: General Counsel Telephone: (914) 640-2609 Telecopier: (914) 640-8260 and Levin & Srinivasan LLP 1776 Broadway, Suite 1900 New York, New York 10019 Attention: Notices (194/046) Telephone: (212) 957-4511 Telecopier: (212) 957-4565 EX-99.2 4 p65372ex2.txt EX-99.2 1 EXHIBIT 2 THIS WARRANT AND THE SHARES OF COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED UPON ANY EXERCISE OF THIS 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 (.00004 par value per share) of GRILL CONCEPTS, INC. Dated as of July 27, 2001 COMMON STOCK WARRANTS This certifies that, for value received, STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. or its registered assigns ("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 before 5:00 p.m. New York time on the fifth (5th) anniversary of the date first above written (the "EXPIRATION DATE"), 666,667 fully paid and nonassessable shares of common stock, $.00004 par value per share (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"). Capitalized terms not defined herein shall have the meanings ascribed to such terms in the subscription agreement, dated as of May 16, 2001, between the Issuer and the Holder (the "SUBSCRIPTION Agreement"). 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 date hereof and on or before the Expiration Date, by presentation and surrender hereof to the Issuer at the address which, in accordance with the notice provisions of Section 10 hereof, is then effective for notices to the Issuer, with the Election to Purchase Form annexed hereto as Schedule I, duly executed, 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 2 2 place of business a register (the "REGISTER") for the registration of this Warrant and registration of any transfer or assignment in whole or in part of the Warrant. (b) The Exercise Price for the number of Warrant Shares specified in the Election to Purchase Form shall be payable in United States Dollars by (i) 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, (ii) an election by the Holder to have the Issuer withhold shares of Common Stock issuable upon exercise (a "CASHLESS EXERCISE"), (iii) certificates representing shares of Common Stock theretofore owned by the Holder duly endorsed for transfer to the Issuer, or (iv) any combination of the preceding, equal in value to the aggregate Exercise Price. For purposes hereof, a Cashless Exercise shall be effected by surrendering the Warrant, in part or in whole, for such number of Warrant Shares as is determined by dividing (A) the total Exercise Price payable in respect of the number of Warrant Shares being purchased upon such exercise by (B) the amount by which the Fair Market Value per share of Common Stock as of the Exercise Date exceeds the Exercise Price per share. (c) 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 (a) that it will not, by amendment of its Certificate 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, and (b) 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. 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 3 3 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. SECTION 3. Exchange, Transfer, Assignment or Loss of Warrant. (a) During the one-year period commencing on the date first above written and ending immediately prior to the first anniversary thereof (the "RESTRICTED PERIOD"), this Warrant is not transferable or assignable by the Holder except with the prior written consent of the Issuer. Notwithstanding the foregoing, (i) the Holder may at any time prior to the expiration of this Warrant transfer or assign this Warrant in whole or in part to any Permitted Transferee, and (ii) upon expiration of the Restricted Period, the Holder may freely transfer or assign this Warrant in whole or in part to any third party without the prior consent of the Issuer. Issuer shall register any such transfer or assignment in the Register upon surrender of this Warrant, with the Form of Assignment attached as Schedule II hereto duly filled in and signed, to the Issuer at the office of Issuer specified in Section 1(a). Upon any such registration of transfer or assignment, a new Warrant, in substantially the form of this Warrant, evidencing the rights of the Holder so transferred shall be issued to the transferee and a new Warrant, in similar form, evidencing the rights of the Holder to purchase the balance of the Warrant Shares purchasable hereunder, if any, shall be issued to the Holder. (b) 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 any transferee or assignee thereof shall be, or have any rights or privileges of, a stockholder of the Issuer with respect to any Warrant Shares, unless and until this Warrant has been exercised. 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 4 4 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 Exercise Price shall be adjusted so that the aggregate Exercise Price for the purchase of all the Warrant Shares issuable hereunder immediately after the record date for such dividend or distribution shall equal the aggregate Exercise Price 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 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. 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 other than as covered by Section 5(d), 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 5 5 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 aggregate 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, at Holder's option, 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 the Issuer sells or issues on or prior to the first anniversary of the date hereof any shares of Common Stock (or options, warrants, or other securities convertible, exercisable, or exchangeable for shares of Common Stock, excluding options in an amount not to exceed in the aggregate fifteen percent (15%) of the Fully-Diluted Shares issued to employees of Issuer at an exercise price equal to or greater than the Fair Market Value as of the date of grant) for consideration per share (in the case of options, warrants, or other securities convertible, exercisable, or exchangeable for shares of Common Stock, on an as-converted basis) less than the Exercise Price then in effect immediately prior to the issuance of such additional Common Stock (the "NEW ISSUANCE PRICE"), then upon consummation of such sale or issuance (a "TRIGGERING TRANSACTION"), the Exercise Price shall automatically be decreased by an amount equal to the difference between (i) the Exercise Price in effect immediately prior to such Triggering Transaction; and (ii) the New Issuance Price. (g) 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. (h) 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. (i) 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 absent manifest error. 6 6 (j) 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. (k) Notwithstanding any other provision, this Warrant shall be binding upon and inure to the benefit of any successors and assigns of the Issuer. (l) 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 (l) shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. (m) 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 solely 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. In case at any time: (a) the Issuer shall declare any cash dividend on its Common Stock; (b) the Issuer shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (c) the Issuer shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) the Issuer shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of current earnings or dividends payable in Common Stock); (e) the Issuer shall issue shares of its capital stock at a price per share less than the Exercise Price in effect as of the date of such issuance; (f) there shall be any capital reorganization, or reclassification of the capital stock of the Issuer, or consolidation or merger of the Issuer with another corporation (other than a subsidiary of the Issuer in which the Issuer is the surviving or continuing corporation and no change occurs in the Issuer's Common Stock), or sale of all or substantially all of its assets to, another corporation; (g) 7 7 there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Issuer; or (h) the Issuer proposes to take any other action or an event occurs which would require an adjustment pursuant to subsection (i) of this Section 7; then, in any one or more of said cases, the Issuer shall give at least fifteen days' prior written notice, addressed to Holder at the address of Holder as shown on the books of the Issuer, of (i) the date on which the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights, or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up; (ii) in the case of any issuance of capital at a price per share less than the then applicable Exercise Price, the date of such issuance and the number of shares issued; and (iii) in the case of any reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, the date (or, if not then known, a reasonable approximation thereof by the Issuer) when same shall take place. Such notice shall also specify (or, if not then known, reasonably approximate), if applicable, the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. SECTION 8. No Dilution or Impairment. The Issuer shall not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Issuer will not increase the par value, if any, of any shares of stock receivable upon the exercise of any Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Issuer may validly and legally issue fully paid and non-assessable stock upon the exercise of each Warrant. SECTION 9. Registration Rights. Section 3 of the investor rights agreement, dated as of July ___, 2001, between the Issuer and the Holder (the "INVESTOR RIGHTS AGREEMENT") is incorporated herein by reference and made a part hereof mutatis mutandis. SECTION 10. Representations and Warranties of the Issuer; Indemnity; Miscellaneous. Sections 5, 16 and 17 of the Subscription Agreement are incorporated herein by reference and made a part hereof mutatis mutandis. GRILL CONCEPTS, INC. By: ______________________ Name: Title: 8 SCHEDULE I FORM OF ELECTION TO PURCHASE To: [ ] The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, [_____] shares of Grill Concepts, Inc. Common Stock issuable upon the exercise of this Warrant for an aggregate exercise price of $_______ payable in [cash][cashless exercise][shares], and requests that certificates for such shares be issued in the name of: (Name) (Address) (United States Social Security or other taxpayer identifying number, if applicable) and, if different from above, be delivered to: (Name) (Address) and, if the number of Warrant Shares so purchased are not all of the Warrant Shares issuable upon exercise of this Warrant, that a Warrant to purchase the balance of such Warrant Shares be registered in the name of, and delivered to, the undersigned at the address stated below. Date: , 200 Name of Registered Owner: Address: Signature: 9 SCHEDULE II FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________ the right represented by the within Warrant to purchase the _______ shares of the _________ Common Stock of Grill Concepts, Inc., to which the within Warrant relates, and appoints ___________________ attorney to transfer said right on the books of Grill Concepts, Inc., with full power of substitution in the premises. Dated: ___________________________ ------------------------------ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) EX-99.3 5 p65372ex3.txt EX-99.3 1 EXHIBIT 3 DEVELOPMENT AGREEMENT DEVELOPMENT AGREEMENT, dated as of July 27, 2001 (as hereafter amended, supplemented, or otherwise modified from time to time, this "AGREEMENT"), between GRILL CONCEPTS, INC., a corporation organized and existing under the laws of the State of Delaware ("GCI"); and STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., a corporation organized and existing under the laws of the State of Maryland ("STARWOOD"); W I T N E S S E T H: WHEREAS, pursuant to the subscription agreement, dated as of May 16, 2001 (the "SUBSCRIPTION AGREEMENT"), between GCI and Starwood, GCI issued to Starwood 666,667 shares of common stock of GCI, par value $0.00004 per share (the "COMMON STOCK"), and warrants to purchase 666,667 shares of Common Stock; WHEREAS, GCI is principally engaged in the business of developing, managing, operating, and licensing restaurants under the "Grill" (the "GRILL"), the "Daily Grill" (the "Daily"), and the "City Bar & Grill" (the "CITY") trademarks and business concepts; WHEREAS, GCI and Starwood wish to consider jointly developing Grill-, Daily-, and City-branded restaurants in certain hotels (collectively, the "STARWOOD PROPERTIES") owned, managed, or franchised by Starwood (any such restaurant developed in any Starwood Property, a "GCI CONCEPT FACILITY"), all upon the terms and subject to the conditions set forth herein; and WHEREAS, it is a condition precedent to Starwood's willingness to consummate the transactions contemplated by the Subscription Agreement that GCI shall have executed and delivered this Agreement; NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows: SECTION 1. Certain Defined Terms. Capitalized terms used and not otherwise defined in the body hereof are used herein as defined in the Subscription Agreement. SECTION 2. Development Proposals; Negotiation in Good Faith. Either party hereto may at any time in its sole discretion propose to develop a new GCI Concept Facility in any Starwood Property. Upon the making of any such proposal, each party hereto shall negotiate in good faith with a view to agreeing on the terms and conditions applicable to such development; but neither party hereto shall have any legal or binding obligation or commitment to enter into any agreement with respect to any such proposed development. Whenever Starwood and GCI agree to develop a new GCI Concept Facility in any Starwood Property, they shall, among other things, enter into a management agreement which shall be negotiated on a property-by-property basis using, as a starting point, the management agreement term sheet 2 2 attached as Exhibit A hereto (each, a "Management Agreement"), in the case of any Grill- or Daily-branded restaurant, or a license agreement which shall be negotiated on a property-by-property basis using, as a starting point, the template agreement attached as Exhibit B hereto (each, a "License Agreement"), in the case of any City-branded restaurant. SECTION 3. Exclusivity. (a) GCI shall not, and shall not permit any controlled Affiliate thereof to, develop, manage, operate, or license any Grill-, Daily-, or City-branded restaurant in any hotel or resort owned, managed, or franchised by any Person that owns the rights to be a licensor or franchisor of a hotel brand name (a "Flag") whereby there are greater than fifty (50) hotels or resorts operating under such Flag (any such Person, a "Major Hotel Operator"); provided that this restriction shall not apply to the Grill-, Daily- and City-branded restaurants listed on Exhibit C hereto, which restaurants GCI hereby represents to Starwood are the only Grill-, Daily- or City-branded restaurants that GCI develops, manages, operates or licenses (or with respect to which GCI is in the process of negotiating Management Agreements or License Agreements) in any hotel or resort owned, managed, or franchised by a Major Hotel Operator (other than Starwood) as of the date hereof; provided further that this restriction shall not restrict GCI from engaging in branded operations with non-Major Hotel Operators. (b) All of GCI's covenants under this Section 3, including Sections 3(a), 3(b), 3(c) and 3(d), shall expire and be of no further force or effect at midnight on any anniversary of the Closing Date (each, an "ANNIVERSARY DATE"), if (i) the aggregate number of GCI Concept Facilities covered by Management Agreements and/or License Agreements entered into during the period commencing on the Closing Date and ending on such Anniversary Date; divided by (ii) the number of full calendar years that have elapsed between the Closing Date and such Anniversary Date; is less than 3.0. Solely by way of illustration, if the aggregate number of GCI Concept Facilities covered by Management Agreements and/or License Agreements entered into during the first twelve-month period following the Closing Date is nine (9), GCI's covenant under Section 3(a) shall remain in effect until at least the fourth anniversary of the Closing Date (as of which date it will expire if the aggregate number of GCI Concept Facilities covered by Management Agreements and/or License Agreements entered into during such four-year period is less than twelve (12)). (c) Subject to the provisions of Section 3(b) above, GCI's covenant under Section 3(a) with respect to Daily-branded restaurants only shall expire and be of no further force or effect at midnight on any Anniversary Date, if (i) the aggregate number of Daily-branded GCI Concept Facilities covered by Management Agreements entered into during the period commencing on the Closing Date and ending on such Anniversary Date; divided by (ii) the number of full calendar years that have elapsed between the Closing Date and such Anniversary Date; is less than 1.0. Solely by way of illustration, if the aggregate number of Daily-branded GCI Concept Facilities covered by Management Agreements entered into during the first twelve-month period following the Closing Date is three (3), and provided GCI's covenant has not expired pursuant to the terms of Section 3(b), GCI's covenant under Section 3(a) with respect to Daily-branded restaurants shall remain in effect until at least the fourth anniversary of the Closing Date (as of which date it will expire if the aggregate number of Daily-branded GCI Concept Facilities covered by Management Agreements entered into during such four-year period is less than four (4)). 3 3 (d) Subject to the provisions of Section 3(b) above, GCI's covenant under Section 3(a) with respect to Grill-branded restaurants only shall expire and be of no further force or effect at midnight on the second anniversary of the Closing Date or on any consecutive two-year anniversary thereof, if the aggregate number of Grill-branded GCI Concept Facilities covered by Management Agreements entered into during the two-year period ending on such date is less than one (1). Solely by way of illustration, if the aggregate number of Grill-branded GCI Concept Facilities covered by Management Agreements entered into during the first twelve-month period following the Closing Date is two (2), and provided GCI's covenant has not expired pursuant to the terms of Section 3(b), GCI's covenant under Section 3(a) with respect to Grill-branded restaurants shall remain in effect until at least the sixth anniversary of the Closing Date (as of which date it will expire if the aggregate number of Grill-branded GCI Concept Facilities covered by Management Agreements entered into during such six-year period is less than three (3)). SECTION 4. Development Warrants. GCI shall issue to Starwood, promptly after the date as of which the aggregate number of GCI Concept Facilities covered by Management Agreements and/or License Agreements entered into on or after the date hereof reaches five, ten, fifteen, and twenty (each, a "DEVELOPMENT THRESHOLD DATE"), a warrant substantially in the form attached as Exhibit D hereto (each, a "DEVELOPMENT WARRANT") to purchase a number of shares of Common Stock representing, four percent (4%) of the then outstanding shares of Capital Stock of GCI (for purposes of this Agreement, the term "Capital Stock" shall refer to the aggregate of the then outstanding shares of Common Stock and the then outstanding shares of any class or series of preferred stock of GCI). (a) If the Fair Market Value of the Common Stock as of the applicable Development Threshold Date is greater than the Fair Market Value of the Common Stock as of the Closing Date (the "CLOSING DATE SHARE PRICE"), the Development Warrants will have an exercise price equal to the greater of (i) seventy-five percent (75%) of the Fair Market Value of the Common Stock as of the applicable Development Threshold Date; and (ii) the Closing Date Share Price; or (b) If the Fair Market Value of the Common Stock as of the applicable Development Threshold Date is less than the Closing Date Share Price, the Development Warrants will have an exercise price equal to the Fair Market Value of the Common Stock as of the applicable Development Threshold Date. For the avoidance of doubt, the Development Threshold Date shall be the date of the opening to the public of the relevant GCI Concept Facility that triggered GCI's obligation to issue the Development Warrants. SECTION 5. Incentive Warrants. (a) If, as of the date of execution of any Management Agreement or License Agreement covering any new GCI Concept Facility (the "INITIAL INCENTIVE THRESHOLD DATE"), the aggregate number of GCI Concept Facilities covered by Management Agreements and/or License Agreements entered into on or after the date hereof (the "AGGREGATE NEW FACILITIES") represents more than thirty-five percent (35%) of the then existing 4 4 Grill-, Daily-, or City-branded restaurants (including all such GCI Concept Facilities) (the "INCENTIVE THRESHOLD"), GCI shall issue to Starwood, promptly after the Initial Incentive Threshold Date, a warrant substantially in the form attached as Exhibit D hereto to purchase a number of shares of Common Stock representing, 0.75 percent (three-quarters of one percent) of the then outstanding shares of Capital Stock of GCI (an "INCENTIVE WARRANT") at an exercise price in each case equal to the Fair Market Value of the Common Stock on the Initial Incentive Threshold Date. (b) (i) If, as of the first anniversary of the Initial Incentive Threshold Date (the "FIRST INCENTIVE ANNIVERSARY DATE"), the Aggregate New Facilities exceed the Incentive Threshold, GCI shall issue to Starwood, promptly thereafter, an additional Incentive Warrant at an exercise price equal to the Fair Market Value of the Common Stock on the First Incentive Anniversary Date to purchase a number of shares of Common Stock representing 0.75 percent (three-quarters of one percent) of the then outstanding shares of Capital Stock of GCI, and GCI shall issue to Starwood an additional Incentive Warrant on each subsequent anniversary of the Initial Incentive Threshold Date (at an exercise price in each case equal to the Fair Market Value of the Common Stock as of the applicable anniversary thereof) to purchase a number of shares of Common Stock representing 0.75 percent (three-quarters of one percent) of the then outstanding shares of Capital Stock of GCI until the Aggregate New Facilities do not exceed the Incentive Threshold as of any such anniversary date; and (ii) if, as of the First Incentive Anniversary Date or any subsequent anniversary thereof, the Aggregate New Facilities do not exceed the Incentive Threshold, GCI shall not be obligated to issue to Starwood an additional Incentive Warrant unless and until the Aggregate New Facilities again exceed the Incentive Threshold as of the date of execution of a Management Agreement or License Agreement covering a new GCI Concept Facility (a "SUBSEQUENT INCENTIVE THRESHOLD DATE"). In such event, GCI shall be obligated to issue to Starwood an additional Incentive Warrant promptly thereafter and on each subsequent anniversary of the Subsequent Incentive Threshold Date (at an exercise price in each case equal to the Fair Market Value of the Common Stock as of the Subsequent Incentive Threshold Date or the applicable anniversary thereof) to purchase a number of shares of Common Stock representing 0.75 percent (three-quarters of one percent) of the then outstanding shares of Capital Stock of GCI until the Aggregate New Facilities do not exceed the Incentive Threshold as of any such anniversary date. In such event, GCI's obligation to issue additional Incentive Warrants will be suspended until the Aggregate New Facilities again exceed the Incentive Threshold. The provisions of this Section 5(b) shall apply iteratively until the expiration or termination of this Agreement. SECTION 6. Account Management. Promptly after the execution and delivery of the first Management Agreement or License Agreement hereunder, GCI shall assign one of its account managers to Starwood's GCI Concept Facility development team. The specific terms of such assignment shall be negotiated by the parties in good faith, with the understanding that as the number of GCI Concept Facilities increases it will become a full-time position. 5 5 SECTION 7. Miscellaneous. The terms and provisions set forth in Sections 16 and 17 of the Subscription Agreement are incorporated in this Agreement by reference and made a part hereof mutatis mutandis. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 6 6 \ IN WITNESS WHEREOF, each party hereto has executed and delivered this Agreement as of the date first written above. GRILL CONCEPTS, INC. By: Name: Title: STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. By: Name: Title: 7 EXHIBIT A FORM OF MANAGEMENT AGREEMENT TERM SHEET Starwood and Grill Concepts may desire to enter into a Management Agreement to govern the relationship at a Starwood site. The following terms may govern such a relationship and may be used in negotiating a definitive management agreement, however in no way shall anything listed below be binding to either party. Starwood hotel/ restaurant = HOT Grill Concepts = GRIL 1. TERM [5 to 10] years, with [one] 5-year renewal term based on performance metrics, which may include, but are not limited to hurdles based on revenue and return on capital 2. GRIL May include, but are not limited to: SERVICES - Meals (breakfast, lunch, dinner) [includes restaurant and bar] - Banquets and Catering* - Room/ Poolside Service* - Training - Marketing - Budgeting - Coordination of construction and/or capital improvements - Employee discounts on meals 3. AGENCY GRIL will operate as an independent contractor, all restaurant employees [may] be employees of GRIL 4. FEE Net Income from [Meals] only may be distributed as follows: STRUCTURE a. HOT Priority Return of [12]% of total development costs (remodel and pre-opening costs) b. GRIL Primary Mgmt. Fee of [3]% of total revenues** c. HOT Secondary Return of [3]% of total development costs (remodel and pre-opening costs) d. GRIL Secondary Mgmt. Fee of [1-2]% of total revenues** e. If net income is insufficient to make payments [a,b,c,d], such fees will accrue [with interest] and be payable in such year as there is additional net income remaining after the pay out of items a-e f. Remaining Net Income split [60-65]% to HOT and [35-40]% to GRIL * Net income from these services may not be on the same income distribution terms as listed above. GRIL's incentive compensation for Banquets and Catering may be based on a [X]% above a pro-forma net income number and capped at $[X]. ** If applicable, a cost allocation (rental) payment to HOT of [4-10]% of total revenues may be distributed in priority to any or all priority and/ or secondary returns. 8 2 5. TERMINATION The agreement may be terminated by HOT after the following: - Events of default (GRIL may also terminate under events of default) - HOT does not receive a minimum annual payment of [10-12]% of total development cost and/ or a [X]% cost allocation (rental) payment - Delays pertaining to the failure of GRIL to, if GRIL is responsible for these areas: a) deliver the initial remodel plans within 60 days of agreement execution b) submit initial remodel plans to the City within 90 days of execution c) obtain all applicable building permits within 180 days of execution d) obtain conditional liquor license approval from the State within 180 days of execution Reasonable cure periods/ additional termination provisions may be included in this section 6. ASSIGNMENT If HOT transfers its ownership of the site, HOT may have the right to terminate this agreement with 90 days notice upon payment of a termination fee equal to the sum of GRIL's fees over the trailing [24-36] months (items referenced in sections 4b, 4e, and 4f) divided by [24-36], and multiplied by the months remaining in the term, provided that the termination fee may be no less than the sum of GRIL's trailing [12] month fees (as referenced above) and no greater than the sum of GRIL's trailing [24-36] month fees 7. GOVERNING State where the restaurant is located LAW 9 EXHIBIT B FORM OF LICENSE AGREEMENT LICENSE AGREEMENT TEMPLATE TO BE NEGOTIATED BY THE LICENSED SITE This Agreement is made effective as of ___________________ (the "Effective Date") by and between Hotel Restaurant Properties, Inc. II ("HRPII") with offices at 11828 La Grange Ave., Los Angeles, CA 90025, Grill Concepts, Inc. ("Affiliate") with offices at 11661 San Vicente Boulevard, Suite 404, Los Angeles, CA 90049 and ______________________ (the "Operator") with offices at ______________________________. WHEREAS, HRPII and/or Affiliate own and operate, among other restaurants, The Daily Grill restaurant chain ("Daily Grill"), the City Bar & Grill ("City Grill") and have substantial experience in the management and operation of such restaurants. For the purpose of this Agreement, Licensor shall mean HRPII and/or Affiliate. WHEREAS, for the purpose of this Agreement, "Licensor Managed Units" shall be defined as all Daily Grill and City Grill locations that (a) have been open for greater than twelve (12) months and (b) have been operated by Licensor whereby substantially all of the restaurant employees are employees of the Licensor; WHEREAS, Licensor has developed and continues to develop certain proprietary recipes and food products described on Exhibit A (the "Proprietary Products"); WHEREAS, in connection with the sale of such Proprietary Products, Licensor has developed and owns certain designs, logos, names and trademarks as described on Exhibit B (the "Name and Marks"); WHEREAS, the Operator currently manages the ___________________ Hotel ("Hotel Manager") including an existing hotel restaurant, bar, and operation which, pursuant to the terms hereof, will be converted to a full service restaurant under the name the "[City Grill]" (the "Restaurant") using proprietary recipes, logos and systems developed by Licensor; WHEREAS, the Operator wishes to use certain Proprietary Products and Names and Marks of Licensor in connection with the operation of the Restaurant, all as hereinafter described; WHEREAS, Licensor has agreed to permit such use of its Proprietary Products, Names and Marks upon the terms and conditions set forth herein; NOW THEREFORE, in consideration for the premises hereto and the mutual covenants and agreements hereinafter contained the parties agree as follows: 10 2 1. TERM Subject to Section 7 and the provisions herein, this Agreement shall be in effect for a term of ten (10) years commencing as of the Effective Date (the "Term"). 2. GRANT OF RIGHTS Licensor represents that it is the owner of the Name and the Marks as shown on Exhibit B. Subject to Operator satisfying its obligations to Licensor hereunder, Licensor hereby (a) grants Operator during the term hereof, the non-exclusive right to use the Name and Marks in connection with the Restaurant in the ___________ Hotel (the "Hotel"), and (b) covenants during the Term hereof, not to license the use of its Name and Marks to any third party for use within a ________ mile radius of the Hotel. 3. DESIGN AND CONSTRUCTION APPROVAL Operator will be required to pay all costs to convert the existing Restaurant to a turn-key [City Grill] facility of comparable quality to the existing Licensor Managed Units. Operator and Licensor agree to follow the design and construction approval process described in Exhibit J. 4. SALE OF PROPRIETARY PRODUCTS 4.1 Operator agrees to feature the Names and Marks in the Restaurant and sell certain Proprietary Products as referenced in Exhibit A and Exhibit B throughout the Term of this Agreement. 4.2 In connection with its preparation and sale of Proprietary Products, Operator covenants to: (a) strictly abide by all Licensor's recipe formulations related to such products, including specifications for production, cooking, temperature and holding times; (b) insure that wholesome and unadulterated ingredients are used in the production of the Proprietary Products and that such ingredients meet the grade levels prescribed by Licensor in its recipes; (c) maintain quality standards described in Licensor's Manuals, copies of which will be delivered to and received by Operator. Means and methods of production shall be maintained using the system consistent with those at the Licensor Managed Units. (d) use ingredients purchased only from approved suppliers where use of such items is specified by Licensor and to abide by established shelf life set for such items; as long as the Operator requested supplier can provide the same ingredients used by Licensor at the Licensor Managed Units, the selection and approval of 11 3 suppliers shall not be unreasonable and approval of new suppliers shall not be unreasonably delayed. (e) use only Licensor approved and/or specified packaging for the Proprietary Products; (f) obtain prior approval from Licensor for all uses of Licensor's Marks and/or Name, such approval shall not be unreasonably withheld or delayed; and all Restaurant items that use the [City Grill] name and/or logo as subsequently modified or amended including, but not limited to menus, marketing collateral, signage, and promotion within the Hotel; (g) provide Restaurant patrons with the menus in Exhibit D which have been mutually approved by Operator and Licensor at the execution of this Agreement ("Approved Menus"); and (h) maintain all food and beverage items on the Approved Menus, the portion size, ingredients, ingredient quality, and plate presentation relating to each Approved Menu item and not change any of the foregoing without the prior written consent of Licensor. 4.3 In furtherance of the above, Licensor will provide Operator with the right to utilize the proprietary [City Grill] breakfast, lunch, dinner, children's, and bar menus requirements for each menu item on the Approved Menus and provide Operator with complete recipe cards, and plate presentation requirements including photographs for each menu item on the Approved Menus. 5. ROYALTY FEES 5.1 In consideration of the rights granted pursuant to Section 2 above, Operator shall pay Licensor a royalty ("Royalty Payment") equal to the greater of (i) 2% of Gross Revenues (as defined below) derived from the sale of food and beverage from the Restaurant, or (ii) $75,000 per year ("Minimum Annual Royalty"). The Minimum Annual Royalty shall be increased annually by the CPI Increase defined below. As used herein, the term "CPI" means the Price Index (or, if that Index is no longer published or is revised, a successor or substitute index appropriately adjusted) published by the Bureau of Labor Statistics of the United States Department of labor, for the Los Angeles County, California area, for a calendar month. As used herein, the term "Base Index" means the Price Index for the month during which the Effective Date occurs. On each anniversary date of the Effective Date during the Term, the percentage of increase, if any, in the then Price Index over the Base Index shall be determined (the "CPI Increase"); notwithstanding the foregoing, however, for purposes hereof, in no event shall the CPI Increase during the Term be greater than six percent (6%) per year. 5.2 Upon execution of this Agreement, Operator shall pay Licensor a sum of $75,000 ("Initial Royalty"). The Initial Royalty payment will be applied to the first year's Royalty Payment. The Royalty Payments commencing at the beginning of the Second Year shall be paid 12 4 to Licensor on a monthly basis without offset or deduction, with each such payment due and payable on the 15th day of the following month. The minimum monthly Royalty payment will be equal to the Minimum Annual Royalty divided by 12. The Royalty Payment due Licensor for each twelve (12) month period during the Term shall be computed based on Operator's Gross Revenue at the Restaurant for each said period. To the extent the Royalty Payment due Licensor for each such 12 month period exceeds the aggregate of the minimum monthly Royalty Payments received by Licensor for such period, Operator shall pay Licensor a sum equal to the amount of such excess; on or before the tenth day of the month following the last month of the 12th month of the period in question. 5.3 Operator shall be required to electronically transmit its daily Gross Sales to Licensor on a daily basis; Licensor will assist Operator in automating this process. Operator shall be required to provide Licensor with a monthly Profit and Loss Statement for the Restaurant (Licensor is to assist Operator in the development of automated processing of the daily Gross Sales report. Failure to provide automated daily Gross Sales reports shall not be an Event of Default so long as good faith efforts are made to provide the daily Gross Sales information on a daily basis by other means in a timely manner); such Profit and Loss Statement shall be prepared in a manner consistent with GAAP and contain the final numbers contained in Operator's general ledger. Operator shall promptly notify Licensor of any adjustments made to such statements and concurrently provide all such restated statements to Licensor. Licensor shall have the right to audit (at its sole cost and expense) all records relating to Operator's Gross Revenue at the Restaurant and the calculation of fees payable hereunder for a period of three (3) years following each payment period. In the event such audit discloses an error in reported Gross Sales, in an amount greater than 2.5% of such Gross Sales then, in addition to immediately paying to Licensor the additional Royalty Payment due, Operator shall reimburse Licensor for all of its reasonable costs and expenses attributable to such audit. 5.4 Gross Revenue shall mean all revenues generated at the Restaurant from all sources, including without limitation all Restaurant, Room Service and Bar revenues, excluding only those Exclusions expressly set forth on attached Exhibit I. 6. METHODS AND STANDARDS OF OPERATION 6.1 Maintenance and Repair. Operator shall at all times maintain the Restaurant in good condition and repair and shall be solely responsible for maintenance, cleanliness, repair and replacement (where necessary to maintain it in good operating condition), and any liabilities arising therefrom, including but not limited to all signs, furniture, fixture, equipment and any other tangible property on and about the Restaurant. 6.2 Compliance with Laws. Operator shall use reasonable efforts to operate the Restaurant in strict compliance with all applicable laws, rules, and regulations, of governmental authorities, including, but not limited to, any and all alcoholic beverage control laws and regulations. Operator shall procure and continuously maintain thereafter all necessary permits and licenses required for the operation of the Restaurant. 13 5 6.3 INSPECTION. Licensor, or their employees may, but shall not be obligated to inspect the Restaurant during regular operating hours and interview Operator's managers at any reasonable time to determine that the Restaurant is being operated in accordance with the terms of this Agreement and to ensure the protection of the Names and Marks, and the goodwill associated therewith. 6.4 PRE-OPENING TRAINING. Prior to opening the Restaurant under the [City Grill] name and unless otherwise approved by the Licensor at its sole discretion, Operator must complete the following training ("Pre-Opening Training") of Operator's Key Personnel (as defined below). Operator's Key Personnel shall include the: Restaurant Manager (restaurant General Manager), Assistant Restaurant Manager, Head Chef, Sous Chef and Training Server. Prior to the opening under the [City Grill] name, each of the Key Personnel will be required to work and pass, in Licensor's reasonable discretion, all then required training tests at an existing Daily Grill, [City Grill], or Grill on the Alley training facility designated by the Licensor. The length of this training will be between two (2) and four weeks (4) for each of the Key Personnel positions other than the Head Chef position, which will be between four (4) and six (6) weeks in duration. Licensor shall use best efforts to select as the Daily Grill Training Facility a Daily Grill site that is reasonably close in proximity to Operator's location. Licensor may also consider the designation of a Starwood location as an approved training facility. Such a Starwood facility shall have been in operation for no less than one (1) year. Notwithstanding the foregoing, selection of the Training Facility shall be at Licensor's sole discretion, provided that if Starwood demonstrates to GRIL's satisfaction that one or more [City]-branded restaurants located in a Starwood property is qualified to be a training site for Starwood's (or its properties') employees at other [City]-branded restaurants, GRIL, in its sole discretion, may designate such restaurant as the training site for other [City]-branded restaurants to be located in Starwood properties. The Operator shall be required to pay for all travel, lodging, meals, salary, benefits and other expenses of their Key Personnel attending this training. Licensor will not charge any fees for conducting this Pre-Opening Training. 6.5 OPENING TEAM. The Opening Period shall be deemed to extend for a period of approximately two (2) weeks prior to the opening of the Restaurant until two (2) weeks after the opening of the Restaurant. The Opening Period may be extended by a total of fourteen (14) additional days at the reasonable discretion of the Licensor. During the Opening Period, the Licensor, in its discretion, will make arrangements for existing Licensor employees and managers ("Opening Team") to assist in the opening of the Restaurant under the [City Grill] name. Subject to modification by Licensor, in its reasonable discretion, the Opening Team shall be comprised of the following personnel for the indicated periods: one Training Coordinator (2-4 weeks), three Corporate Server Trainers (2-4 weeks), one Busser Trainer (1-2 weeks), one Bartender Trainer (1-2 weeks), and four Kitchen Trainers (3-4 weeks). The number of Opening Team members will not exceed ten (10) people per day excluding Senior Managers as defined 14 6 herein. In addition, Licensor salaried personnel ("Senior Managers") will make periodic visits during the Opening Period and will be considered members of the Opening Team. The Operator shall be responsible for `providing on a complimentary basis' each member of the Opening Team with the following: one guest room per person per night, food and non-alcoholic beverage for each meal period, airport transportation, and reimbursement for airfare for one coach round-trip ticket from a home base location within the continental United States. Additionally, the Operator shall pay Licensor $135.00 per day during the Opening Period, per Opening Team member (excluding Senior Managers). This per day fee shall be increased annually by the CPI Increase as defined in Section 5.1. The hourly wages for the Opening Team members will be paid by Licensor to such members directly. In Exhibit E, Licensor has provided Operator with a detailed estimate of Licensor's total Opening Team costs (excluding complimentary Hotel related charges such as guestrooms and meals) for the Opening Period ("Opening Team Cost Estimate"). The Opening Team Cost Estimate shall be paid by Operator to Licensor thirty (30) days prior to the beginning of the Opening Period. A detailed invoice reconciling the difference between the actual Opening Team costs and the Opening Team Cost Estimate shall be delivered to Operator by Licensor within twenty (20) days of the end of the Opening Period. If actual Licensor Opening Team costs are less than the Opening Team Cost Estimate, Licensor shall refund this over-payment within twenty (20) days of receipt of the invoice. If actual Licensor Opening Team costs exceed the Opening Team Cost Estimate by less than or equal to 15% of the estimate, Operator shall pay the shortage within twenty (20) days of receipt of the invoice. If actual Licensor Opening Team costs exceed the Opening Team Cost Estimate by greater than 15%, Operator shall pay the first 15% of excess costs within twenty (20) days of receipt of the invoice and Licensor will be responsible for all remaining costs above the initial 15%. 6.6 REQUIRED KEY PERSONNEL TRAINING. In order to ensure consistency and quality of the [City Grill] brand (including its Proprietary Products, Names and Marks), the Operator shall be required to have all of its Key Personnel trained by Licensor at all times. In the event that there is turnover in a Key Personnel position at the Restaurant, the Operator will be required to use its best efforts to have the vacated Key Personnel position replaced ("New Key Personnel") within sixty (60) days of the vacated position. All New Key Personnel will be required to work and pass, in Licensor's reasonable discretion, all then required training tests. The required training tests will be similar to those provided to Licensor's employees at the Licensor Managed Units. Licensor, at its reasonable discretion, shall require Key Personnel to attend training at an existing [City Grill], Daily Grill, or Grill on the Alley training facility designated according to Section 6.4 above. The length of this training will be between two (2) and (4) four weeks for each of the Key Personnel positions except the Head Chef position which will be between four (4) and six (6) weeks in duration. At Licensor's sole discretion, abbreviated training may be provided for Key Personnel including Head Chef if competency and experience is sufficient to justify an abbreviated or accelerated training schedule. 15 7 The Operator shall be required to pay for all travel, lodging, meals, salary, benefits and other expenses of their Key Personnel attending this training. In addition, the Operator will be required to pay Licensor $100.00 per day per Key Personnel for this Pre-Opening Training ("Training Fee"). The Training Fee will be adjusted annually by the CPI Increase as defined above. The Training Fee shall be payable within twenty (20) days of completing the training. In the case of Head Chef training, Operator shall have the right to temporarily fill the vacated Head Chef position during the time needed to replace the vacation position and/or during the training period. Operator shall temporarily fill the Head Chef position by requesting a temporary replacement from a) Licensor; or b) another Starwood City or Daily Grill location. If a temporary replacement is not available from Licensor or another Starwood City or Daily Grill location, another Starwood non-City or Daily Grill location may be used. At all times the cost of the temporary Head Chef, including salary and benefits, shall be paid by Operator. 6.7 Operator acknowledges that changes to the menu offerings at the Restaurant must be approved by Licensor in advance. Such approval shall be subject to Licensor's reasonable discretion for breakfast menu items but at all other times, such approval shall be subject to Licensor's sole discretion, provided that any suggested additions to the menu items be consistent with the menu offerings at Licensor Managed Units. In addition, should the Operator elect to operate a buffet-style breakfast, such approval shall not be unreasonably withheld or delayed by Licensor. 6.8 Operator covenants that the Restaurant will be managed by a manager who has been properly trained with respect to Licensor's system and the preparation and sale of the Proprietary Products. 6.9 TRADE-DRESS AND UNIFORMS. The Operator will be required to utilize the specified china, glass, silver, small wares and buffet chafing dishes utilized at other Licensor Managed Units. Operator is also required to conform to the strict uniform dress standards for all salaried and hourly positions within the Restaurant consistent with other Licensor Managed Units. 6.10 PROMOTIONAL PROGRAMS AND COLLATERAL. Licensor will make available to Operator all promotional items available to Licensor Managed Units such as menus, signs, table tents and advertising collateral. The cost of these items will be paid by Operator to Licensor at Licensor's cost with no additional mark-up. No signage, promotions, or advertising using the [City Grill] or other Licensor Names or Marks will be permitted without the prior written approval of Licensor. Approval not to be unreasonably withheld or delayed as long as such approval is consistent with other Licensor Managed Units. 6.11 CHEF TRAINING. At the discretion of Licensor and for a maximum of two (2) times per year, Operator will be required to send Operator's Head Chef to a designated Licensor Managed Unit for a 1-3 day training program. This training program will provide the Operator's Head Chef with further instruction on how to prepare new menu items and to provide support and training on matters impacting the kitchen operation. 16 8 The Operator shall be required to pay for all travel, lodging, meals, salary, benefits and all other expenses of Operator's personnel during this Chef Training. No Training Fee shall be paid to Licensor for this training. 6.12 ANNUAL MANAGER TRAINING. At the discretion of Licensor and for a maximum of one time per year, Operator will be required to send Operator's Restaurant Manager to an annual Manager's Meeting which will be an informational and training program for all licensed, managed and owned Licensor restaurants. It is currently anticipated that this shall be a 2-3 day program; Licensor, may in its discretion, adjust the duration of this training. The Operator shall be required to pay for all travel, lodging, meals, entertainment, salary, benefits and all other expenses of Operator's personnel during this Annual Manager Training. No Training Fee shall be paid to Licensor for this training. 6.13 PRICING POLICIES. Licensor shall provide Operator with average menu pricing from Licensor Managed Units. Operator shall use the average menu pricing to determine reasonable, market-competitive pricing for the Operator's menu. As long as all Licensor Managed Units offer complimentary items such as sourdough bread and soft beverage refills as a brand standard, Operator shall be required to follow these standards. 6.14 INDEPENDENT SERVICE AUDITS. The Operator shall be required to have a minimum of two (2) Independent Service Audits each month conducted by a Licensor approved "mystery shopper" service ("Auditing Agency"). A list of approved Auditing Agencies is attached as Exhibit F; Licensor can, from time to time, add or eliminate Auditing Agencies from this list. The Independent Service Audit shall be conducted in a similar fashion to that of the Licensor Managed Units. The Independent Service Audits shall be sent by the Auditing Agency directly to the Licensor and the Operator every two (2) weeks. The Operator shall pay the reasonable cost of these Independent Service Audits for the Restaurant; such costs shall be consistent with those paid by Licensor at the Licensor Managed Units. A sample of the currently approved Independent Service Audit report is attached in Exhibit G, it being acknowledged that same may be changed from time to time at the sole discretion of the Licensor in accordance with the Independent Service Audit for the Licensor Managed Units and upon written notice to Operator. 6.15 LICENSOR SUPPORT AND VISITATION. Licensor shall have a designated manager ("Operator Consultant") who will be available to answer Operator questions during the Term. The Operator Consultant will visit the Restaurant every eight (8) to twelve weeks (12) at the discretion of Licensor ("Consultant Visits"). During the Consultant Visits the Operator Consultant will perform a comprehensive brand standards audit of the dining room, kitchen areas, and will be present for all meal periods to evaluate service standards and food quality. The Operator Consultant will provide the Operator with a Brand Standards Audit Report after the conclusion of the Consultant Visit. The current Brand Standards Audit Report is included in Exhibit H. The Brand Standards Audit Report may be changed from time to time by the Licensor at the Licensor's discretion and upon written notice to the Operator. At all times however, the standards listed in The Brand Standards Audit Report shall be consistent with those standards upheld by Licensor at Licensor's Managed Units. The Brand Standards Audit Report 17 9 shall be graded on a percentage basis, the results of which may be contested by Operator. If the Restaurant scores above a 90% on the Brand Standards Audit Report for three (3) consecutive Consultant visits, Operator Consultant will visit the Restaurant every twelve (12) to sixteen (16) weeks, until such time as the Restaurant scores lower than 90% on the Brand Standards Audit Report, at which time, Consultant will resume scheduled visits every eight (8) to twelve (12) weeks. There shall be no Licensor Fees associated with this Consultant Visit, however the Operator shall be responsible for providing to the Operator Consultant airfare (coach class only), airport transportation, lodging, and meals during the Consultant Visits. At least one (1) time per year, in addition to a Standard Audit Report, Operator Consultant will provide to Operator a detailed written business performance review addressing P&L performance with specific recommendations as to improvement of profitability and sales growth. The duration of the Consultant Visits will be between 1-3 days at the discretion of the Licensor. 6.16 PERFORMANCE STANDARD MAINTENANCE. The Restaurant may receive one (1) Standards Violation Point in each of the following cases: (a) if the Restaurant shall realize an Independent Service Audit score that is lower than 70% of the total possible Service Audit score (b) if the Operator shall realize a failing score of less than 70% of the total possible score on the Brand Standards Audit Report (c) should the Health Department (or similar governmental or quasi-governmental organization) provide audit grades that are to be posted by the Restaurant for its patrons, and the Restaurant receives a score that is less than ninety percent (90%) of the highest score possible (d) if the Operator is not in compliance with minimum Health Department (or similar governmental or quasi-governmental organization) requirements and all such deficiencies are not cured within thirty (30) days of such violation(s). For the first six (6) months after the Restaurant opens, the Operator shall be granted a grace period during which no Violation Points may be assigned by Licensor to Operator for any cause. If during any twelve (12) month period (following the grace period), the Restaurant receives three (3) Standards Violation Points, the Licensor may require the Operator to participate in a Standards Retraining Program as defined in the following. The Standards Retraining Program requires that Licensor provides for a qualified instructor ("Instructor") for a five (5) to seven (7) day period to provide retraining for the Operator's Key Personnel focusing on the deficient areas noted within the Independent Service Audit(s) and the Brand Standards Audit Report(s). The Operator shall be responsible to provide: airfare (coach), airport transportation, lodging, meals, and salary plus benefits (at Licensor's 18 10 cost) during such period. No additional fees shall be charged by Licensor for this retraining service. The Restaurant shall be deemed to be in a Standards Probation Period for a twelve (12) month period commencing at the time that the Standards Retraining Program is completed. If during Standards Probation Period, the Restaurant receives two (2) Standards Violation Points, ("Standards Probation Violation"), the Licensor shall have the right, but not the obligation, to terminate this Agreement at any time during the Standards Probation Period or within 60 days subsequent to the Standards Probation Period ("Termination Decision Period"). Licensor will provide Operator with thirty (30) days prior written notice should Licensor elect to terminate the Agreement. Should Licensor elect not to terminate this Agreement due to a Standards Probation Violation, at any time during the Termination Decision Period, Licensor shall have the option to: 1 require that Operator participates in another Standards Retraining Program whereby at the end of this program, the Operator shall be deemed to be at the beginning of a Standards Probation Period as defined above, or 2 require Operator to convert all existing Restaurant marks from [City Grill] to another name as designated by the Operator subject to the reasonable approval of Licensor. The newly branded restaurant will operate exactly as a [City Grill] under the same terms and conditions of this Agreement except that all marks shall carry the new name as opposed to the [City Grill] name. If the Licensor requires the Operator to convert all existing marks to another name, Operator shall have the right to elect to pay for all costs to re-brand the Restaurant to the new name. If Operator does not elect to pay for all costs to re-brand the Restaurant, Licensor shall be required to pay for all costs to re-brand the Restaurant to the new name. 3 If Licensor pays for all costs to re-brand the Restaurant, the Term of this Agreement will be extended by twelve (12) months and the Minimum Term as defined in Section 7.6 shall be extended by twelve (12) months. If, Operator elects to pay for all costs to re-brand the Restaurant, the Term of this Agreement shall not be extended. If, at the time of the re-brand, the Minimum Term has expired (the Term is in its 37th month or greater), then the Minimum Term shall not be extended. Once the conversion is completed from a [City Grill] to another name, the Restaurant shall be deemed to be at the beginning of a Standards Probation Period. At no time shall Operator be held to a standard that is greater than the standards at the Licensor Managed Units. In the event that Operator objects to the scores received on a Brand Standards Audit report by Licensor, within thirty days (30) of such audit, either party may request a 3rd party, independent restaurant expert to review Operator's operations against Licensor's standards ("Contested Audit").In the event that the independent audit results in a finding for the Operator, Operator shall not receive a Violation Point for the Contested Audit. Costs of such an audit are to be paid by the party against which the audit finds. 6.17 HEALTH STANDARDS. Operator's receipt of a report that does not pass the Minimum Health Department Standards (or similar governmental or quasi-governmental organization) two 19 11 times or greater within a twenty-four (24) month period, shall be deemed a Standards Probation Violation as defined above. 6.18 LIQUOR LICENSE. Operator's failure to operate a full bar including, but not limited to, beer, wine and liquor for a period of 4 months or greater, shall be deemed a Standards Probation Violation as defined above. 6.19 EMPLOYMENT LAWS. Operator, but not Licensor, shall be liable for any failure of the Restaurant to comply with any federal, state, local and foreign statutes, laws, ordinances, regulations, rules, permits, judgments, orders and decrees affecting labor union activities, civil rights or employment in the United States, including, without limitation, the Civil Rights Act of 1870, 42 U.S.C.Section 1981, the Civil Rights Acts of 1871, 42 U.S.C.Section 1983, the Fair Labor Standards Act, 29 U.S.C.Section 201, et seq., the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., as amended, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, 29 U.S.C.Section 621, et seq., the Rehabilitation Act, 29 U.S.C.Section 701, et seq., The Americans With Disabilities Act of 1990, 29 U.S.C.Section 706, 42 U.S.C.Section 12101, et seq., the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 301, et seq., the Equal Pay Act, 29 U.S.C.Section 201, et seq., the National Labor Relations Act, 29 U.S.C.Section 151, et seq., and any regulations promulgated pursuant to such statutes (collectively, as amended from time to time, and together with any similar laws now or hereafter enacted, the "Employment Laws"). Employees and Consultants of Licensor while performing services for or with Operator's employees shall be liable for any failure resulting from their conduct to comply with any Federal, State, Local statutes, laws, ordinances, regulations, rules, permits, judgments, orders, and decrees affecting labor union activities, civil rights or employment in the United States as stated above. Further all employees and consultants of Licensor are expected to comply with all workplace standards of Starwood provided the activity is not violative of any of the aforementioned laws, statutes, etc. 7. EVENTS OF DEFAULT/TERMINATION 7.1 The following shall constitute events of default: A. If Operator shall be in default in the payment of any amount required to be paid under the terms of this Agreement, and such default continues for a period of ten (10) days after written notice from Licensor; B. If either party shall be in default in the performance of its other obligations under this Agreement, and such default continues for a period of thirty (30) days after written notice from the other party, provided that if such default cannot by its nature reasonably be cured within such thirty-day period, an event of default shall not occur if and so long as the defaulting party promptly commences and diligently pursues the curing of such default; C. If either party shall (i) make an assignment for the benefit of creditors, (ii) institute any proceeding seeking relief under any federal or state bankruptcy or 20 12 insolvency laws, (iii) institute any proceeding seeking the appointment of a receiver, trustee, custodian or similar official for its business or assets or (iv) consent to the institution against it of any such proceeding by any other person or entity (an "Involuntary Proceeding"); or D. If an Involuntary Proceeding shall be commenced against either party and shall remain undismissed for a period of sixty (60) days. 7.2 If any event of default shall occur, the non-defaulting party may terminate this Agreement on sixty (60) days prior notice to the defaulting party. 7.3 The right of termination set forth in this Section 7 shall not be in substitution for, but shall be in addition to, any and all rights and remedies for breach of contract available in law or at equity and in addition to Licensor's right to terminate this Agreement for a Standards Probation Violation as provided for herein. 7.4 Neither party shall be deemed to be in default of its obligations under this Agreement if and to the extent that such party is unable to perform such obligation as a result of fire or other casualty, act of God, strike or other labor unrest, unavailability of materials, war, riot or other civil commotion or any other cause beyond the control of such party (which shall not include the inability of such party to meet its financial obligations). Any party claiming an inability to perform due to any of the causes referred to in this paragraph shall notify the other party of the event causing such inability to perform promptly after such event occurs. 7.5 Operator acknowledges that upon and after the expiration or termination of this Agreement, all rights granted by Licensor hereunder shall immediately and automatically revert to Licensor, and Operator will remove from its signage at the Restaurant and Hotel any reference to the Marks or the Name and cease using any materials, directly or indirectly utilizing Licensor's Proprietary Products, Name and/or Marks. Operator expressly acknowledges and agrees that, except as expressly provided herein, it acquires no rights whatsoever in the Licensor's Proprietary Products, Name and/or Marks. Operator expressly acknowledges that, in the event of Operator's breach of any of the provisions herein, in addition to its other remedies, Licensor shall be entitled to injunctive and equitable relief without the necessity of proving the inadequacy of its legal remedies. 7.6 After the Restaurant has been open under the [City Grill] name for a minimum of thirty-six (36) months ("Minimum Term"), the Operator may cancel this Agreement with sixty (60) days prior written notice to Licensor at any time and for any reason. The effectiveness of such termination shall be conditioned upon Operator's concurrent payment to Licensor of an Early Termination Fee equal to the greater of (i) the prior year's Royalty Fee, or (ii) the then current Minimum Annual Royalty. 8. INDEMNIFICATION 8.1 Operator shall indemnify and hold Licensor (and Licensor's agents, principals, shareholders, partners, trustees, partners, members, officers, directors and employees) harmless 21 13 from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys' fees and expenses) that may be incurred by or asserted against any such party and that arise from (a) the fraud, willful misconduct or gross negligence of Operator or any of its employees, officers, directors, agents or contractors, (b) the breach by Operator of any provision of this Agreement; (c) any action taken by Operator which is beyond the scope of Operator's authority under this Agreement, or (d) Operator's operation of the Hotel including, without limitation, the Restaurant.. If any claim shall be made against Licensor and/or Operator which is based upon a violation or alleged violation of the Employment Laws (an "Employment Claim") relative to operation of Managed Outlet, the Employment Claim shall be the sole obligation of Operator and be within the scope of Operator's indemnification obligation. Licensor shall promptly provide Operator with written notice of any claim or suit brought against it by a third party which might result in such indemnification and Operator shall have the option of defending any claim or suit brought against the Licensor with counsel selected by Operator and reasonably approved by Licensor. Licensor shall cooperate with the Operator or its counsel in the preparation and conduct of any defense to any such claim or suit. 8.2 Licensor shall indemnify, defend and hold Operator harmless from and against any losses, damages, claims or costs (including attorney's fees incurred by Operator in its defense or in enforcing this provision) for trademark or servicemark infringement commenced by any third party against Operator with respect to the use of the Name or the Marks by Operator in accordance with this Agreement. In the event that Operator receives notice of any claims, suit or demand against it on account of any alleged infringement, unfair competition or similar matter relating to its use of the Name or the Marks in accordance with the terms of this License Agreement, Operator shall promptly notify Licensor of such event whereupon Licensor shall take all action necessary to protect and defend Operator and hold Operator harmless as described above. (See Section 9.4 herein for Licensor's Negligence) 8.3 The provisions of this Section shall survive the termination of this Agreement with respect to acts and/or omissions and occurrences arising during the Term. 9. OPERATOR'S INSURANCE 9.1 At all times during the Term, Operator shall carry: (a) Worker's Compensation insurance in such amount as is required by the laws of the State where the Restaurant is located (b) Comprehensive general liability insurance (commercial, dram shop and automobile liability coverages) with limits of not less than $1,000,000 covering each person and $5,000,000 covering each occurrence and property damage liability insurance, with limits of not less than $1,000,000 covering each occurrence and $3,000,000 in the aggregate (with no exclusion for liability assumed by contract) and (c) blanket crime insurance covering its employees in a minimum amount of $500,000. Operator shall deliver to Licensor prior to commencement of Pre-Opening Training hereunder and then on or prior to, the expiration date of any then existing policies in the future during the Term hereof, a certificate or certificates evidencing that such insurance coverages are in effect for a period of not less than one year from the date of such certificate. All policies shall contain a clause providing in substance that such policies shall not be cancelled or any material provisions thereof amended adversely to the Licensor unless it shall have been first given at least thirty (30) days advance notice of such termination or of any such proposed 22 14 amendment. Operator shall cause the Licensor to be named as an additional insured on its liability insurance policies for liability arising out of Operator's responsibilities under this Agreement, including but not limited to Section 7 above. 9.2 All such policies may be provided under blanket and/or umbrella policies carried by the Operator. 9.3 The insurance required by Section 9.1 (b) shall be primary insurance and the insurer shall be liable for the full amount of any loss up to the total limit of liability required without the right of contribution of any other insurance coverage held by the Licensor. 9.4 This Section 9 is subject to all limitations identified in Section 8, respecting Indemnification. Nothing in this Section 9 shall be construed as requiring liability coverage and/or indemnification of the Licensor for Licensor's negligence or willful action or omission. 10. LICENSOR'S CONSENTS AND APPROVALS Except as otherwise expressly provided herein to the contrary, where consent or approval of or authorization (the "Consent") from the Licensor is required hereunder, such Consent shall mean the written consent or written approval form Licensor, in its sole discretion. 11. CONTROVERSY RESOLUTION Except as otherwise expressly provided herein, if any controversy should arise between the parties in the performance, interpretation or application of this Agreement, either may serve upon the other a written notice stating that such party desires to have such controversy mediated by a mediator agreed upon by both parties. In the event the parties fail to agree upon a mediator or fail to resolve the dispute through the services of the mediator, then either party may avail The Courts of the Federal or State Government of the United States. Further not withstanding any provisions herein, the parties shall expressly be entitled to injunctive relief and other equitable or provisional remedies as provided for under California C.C.P. Section 1281.8 or otherwise. The non-prevailing party in any such action agrees to pay the prevailing party's costs and reasonable attorneys' fees incurred in connection therewith. 12. ASSIGNMENT This Agreement and all the parties' respective rights and obligations hereunder may be assigned by either party in their discretion; no such assignment shall relieve the assigning party of any of its obligations hereunder. Notwithstanding the foregoing, if at any time all or substantially all of the Hotel, or more than fifty percent (50%) of Operator's direct or indirect interest therein, is voluntarily sold, conveyed, exchanged or otherwise transferred (including a long term lease having the effect of a sale) to any unaffiliated third party person or entity (other than a person or entity that controls, is controlled by, or is under common control with, Operator or in which Operator has a greater than 20% interest), and should the purchaser of the Hotel elect not to assume this License Agreement, the Operator shall have the right to terminate this 23 15 Agreement upon not less than ninety (90) days written notice. The Licensor shall be paid an early termination fee, equal to A) if the Agreement is in the Minimum Term: the difference between (i) four times the greater of (a) the prior year's Royalty Fee, or (b) the then current Minimum Annual Royalty and (ii) the sum of the total Minimum Annual Royalty payments made to Licensor over the course of this agreement; or B) if the Agreement is not in the Minimum Term: the greater of (i) the prior year's Royalty Fee, or (ii) the then current Minimum Annual Royalty. By way of example, if the Agreement is terminated in the third year of operation, Licensor shall be paid the sum of (i) four times the greater of (a) the prior year's Royalty Fee, or (b) the then current Minimum Annual Royalty (approximately $75,000 * 4) less (ii) the sum of the Royalty payments over the two full operating years (approximately $75,000 * 2). By way of further example, if the Agreement is terminated in the fifth year of operation, Licensor shall be paid the greater of (i) the prior year's Royalty Fee, or (ii) the then current Minimum Annual Royalty (approximately $75,000). 13. NOTICES Any notice, statement or demand required to be given under this Agreement shall be in writing, sent by certified mail, postage prepaid, return receipt requested, or by nationally-recognized overnight courier, receipt confirmed, addressed if to: Operator: ____________________________ Attention: Phone: Fax: With a copy to: Attention: Phone: Fax: HRP II: Hotel Restaurant Properties II Management, Inc. 11828 LaGrange Avenue Los Angeles, CA 90025 Attention: Keith M. Wolff, President Phone: (310) 966-2367 Fax: (310) 477-2522 Affiliate: Grill Concepts, Inc. 11626 San Vicente Boulevard Suite 404 Los Angeles, CA 90049 Attention: Bob Spivak, CEO Phone: (310) 820-8559, ext. 240 Fax: (310) 820-6530 24 16 or to such other addresses as Operator and Licensor shall designate in the manner provided in this Section 14. Any notice or other communication shall be deemed given (a) on the date three (3) business days after it shall have been mailed, if sent by certified mail, or (b) on the date received if it shall have been given to a nationally-recognized overnight courier service. 14. MISCELLANEOUS 14.1 Nothing contained in this Agreement shall be construed in any manner whatsoever to constitute or appoint Operator as the agent or legal representative of Licensor, or to place the parties in the relationship of partners or joint venturers. Neither party shall have any right or authority hereunder to obligate or bind the other in any manner whatsoever. 14.2 The parties agree to comply with all laws, statutes and ordinances relating to the operation conducted hereunder and to each party's rights, obligations and duties hereunder. Each party agrees to indemnify and hold harmless the other party, including its officers, directors, principals, employees, agents and successors, from and against any and all claims, liabilities, losses, damages, costs, expenses, obligations or deficiencies arising out of or by reason of such party's failure to comply with any such laws. 14.3 This Agreement shall be binding upon and inure to the benefit of the respective parties and their successors, assigns and transferees, except as articulated in section 12. 14.4 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision. 14.5 This Agreement shall be construed in accordance with and governed by the laws of the State where the Restaurant is located. 14.6 This Agreement contains the sole and entire agreement between the parties with respect to the subject matter hereof, and shall supersede any and all other agreements between them. The parties acknowledge and agree that neither of them has made any representations with respect to the subject matter of this Agreement, or any representation including the execution and delivery hereof, except such representations as are specifically set forth herein, and each of the parties acknowledges that it has relied on its own judgment in entering into the same. 14.7 No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless the same is made in writing and duly executed by the party to be charged therewith. No evidence of any waiver or modification shall be offered or received in evidence in any proceeding, arbitration, or litigation between the parties arising out of or affecting this Agreement, or the rights or obligations of any party hereunder, unless such waiver or modification is in writing, duly executed as aforesaid. 14.8 This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 25 17 14.9 Owner and Licensor shall execute and deliver all other appropriate supplemental agreements and other instruments, and take any other action necessary to make this Agreement fully and legally effective, binding, and enforceable as between them and as against third parties. 14.10 The headings of the titles to the sections and/or provisions of this Agreement are inserted for convenience only and are not intended to affect the meaning of any of the provisions hereof. 14.11. Notwithstanding any provisions herein at no time will Operator be held to an operating standard greater than that of the Licensor Managed Units, including but not limited to training requirements uniform requirements, menu requirements, etc. However, Operator acknowledges that fees, charges and expenses specified in this Agreement may differ from those allocated to Licensor Managed Units. Notwithstanding any provision specified within this Section 14.11, Operator shall pay Licensor all fees, charges and expenses based on the terms and conditions specified within this Agreement. 14.12. As Operator is the first major Licensee of Licensor, for all transactions completed after the Effective Date, as long as Starwood hotels retains its exclusivity or reaches any Incentive Threshold Date per the Development Agreement pertaining to Starwood's investment in Grill Concepts, Inc., Licensee at all times shall receive the most competitive terms available with regard to Royalty Fees, Methods and Standards of Operations, and Events of Default/Termination such that any other future licensees making substantially similar, larger or smaller commitments to Licensor would not receive more favorable pricing or terms than Licensee. For example, during the term of Starwood's exclusivity, should a lesser amount with regard to the Royalty Payment, Minimum Annual Royalty and Training Fee be charged to any new licensee, Licensee's pricing structure with regard to these items will immediately be reduced accordingly. 26 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. HOTEL RESTAURANT PROPERTIES, INC. II BY: ___________________________ Name: Keith M. Wolff Title:President GRILL CONCEPTS INC. By: ___________________________ Name: Robert L. Spivak Title:President _________________________________ BY: ___________________________ Name: ___________________________ Title:___________________________ 27 EXHIBITS Exhibit A: Description of Proprietary Products Exhibit B: Name, Trademarks, Logos, designs and service marks Exhibit C: Description of facility location Exhibit D: Approved Menus Exhibit E: Opening Team Cost Estimate Exhibit F: Approved Auditing Agencies Exhibit G: Sample Independent Service Audit Report Exhibit H: Sample Brand Standards Audit Report Exhibit I: Revenue Exclusions Exhibit J: Initial Remodel 28 Exhibit J (License Agreement) Initial Remodel of the Restaurant The Operator will be required to remodel, at Operator's sole cost, the existing Restaurant to a quality consistent with the Licensor Managed Units as defined herein ("Initial Remodel"). The Operator will be required to adhere to all Licensor design standards and kitchen specifications consistent with the Licensor Managed Units. Licensor will permit the Operator to utilize the successful Daily Grill/City Grill design package. The Operator shall be required to retain a Licensor Approved Architect to develop the Initial Site Plan and Detail Specifications for the Restaurant conversion at a cost of no greater than $_________ plus customary reimbursables. Licensor will supply specifications for signage, flooring, booths, millwork, ceilings, bus stations, bar areas, kitchens, and all other areas of development. A portion of these specifications are included in Exhibit K and are subject to change at Licensor's reasonable discretion. Based upon the Initial Site Plan and Detailed Specifications, the Operator will obtain Preliminary Cost Estimate to convert the existing Restaurant to a [City Grill] facility. If the Preliminary Cost Estimate is greater than $____________ including all non-construction cost estimates (the "Maximum Preliminary Cost"), Operator shall have the option to terminate this Agreement with no further obligation of Operator or Licensor. If the Preliminary Cost Estimate is less than the Maximum Preliminary Cost, the Operator will be required to proceed with developing complete architectural drawings ("Working Drawings"). Although it is highly recommended that the Operator use the Licensor Approved Architect, the Operator will be permitted to retain its own qualified architect ("Operator Architect") to complete the Working Drawings based on the specifications of the Licensor Approved Architect. If the Licensor Approved Architect is not used to develop the Working Drawings for the Restaurant, Operator will be required to commission the Licensor Approved Architect to consult with the Operator Architect on behalf of the Licensor during the design process. The cost of this consultation will be no greater than $___________ plus customary reimbursables. The Working Drawings are subject to the reasonable approval of the Licensor. Licensor's approval shall be based on the proposed Working Drawings representing a Restaurant of equal or greater quality to the Licensor Managed Units. Based upon the approved Working Drawings, the Operator will obtain a Final Cost Estimate to convert the existing Restaurant to a [City Grill] facility. If the Final Cost Estimate is greater than $____________ including all non-construction cost estimates (the "Maximum Final Cost"), Operator shall have the option to terminate this Agreement with no further obligation of Operator or Licensor. 29 If the Final Cost Estimate is less than the Maximum Final Cost, the Operator will be required to proceed with the development of the [City Grill] restaurant to the specifications of the Working Drawings. If the Final Cost Estimate is greater than the Maximum Final Cost and the Operator elects to proceed, the Licensor will be required to fulfill all of its obligations under this Agreement. The Operator will be permitted to utilize its own qualified contractor subject to Licensor's prior approval ("Operator Contractor"), which approval shall not be unreasonable withheld or delayed. No material changes from the Working Drawings approved by Licensor shall be permitted unless approved in writing by the Licensor Approved Architect, which approval shall not be unreasonably delayed. The Operator shall be required to retain the Licensor Approved Architect for consultation and to approve all change orders to ensure the development of the Restaurant is consistent with the approved Working Drawings. The Operator shall also be required to commission the Licensor Approved Architect to visit the construction site every two (2) weeks during the construction process to ensure that the design and work quality is consistent with the approved Working Drawings. The cost of this consultation during the Initial Remodel construction period will be no greater than $___________ plus customary reimbursables. In addition, the Operator shall be responsible for providing complimentary guest rooms, room tax, and meals for one Licensor Development Coordinator to visit the site every two weeks during the period of the Initial Remodel. 30 EXHIBIT C MAJOR HOTEL OPERATOR EXCLUSIONS Burbank Airport Hilton & Convention Center, Burbank, California (existing Daily Grill) Doubletree Skokie, Skokie, Illinois (existing Daily Grill) San Jose Hilton & Towers, San Jose, California (existing City Bar & Grill) San Jose Fairmont, San Jose, California (existing The Grill) Handlery Hotel, San Francisco, California (under contract) Georgetown Inn, Georgetown, D.C.(existing Daily Grill) Westin Chicago, Chicago Illinois (existing The Grill) Hyatt in Bethesda, MD (under discussion) Anaheim Hilton, Anaheim, California (under discussion) JW Marriot, Atlanta (Buckhead), Georgia (under discussion) Marriot Courtyard, Chicago, Illinois (under discussion) Downtown Marriot, San Diego, California (under discussion) 31 EXHIBIT D FORM OF WARRANT THIS WARRANT AND THE SHARES OF COMMON STOCK OF GRILL CONCEPTS, INC. TO BE ISSUED UPON ANY EXERCISE OF THIS 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 (.00004 par value per share) of GRILL CONCEPTS, INC. Dated as of [DATE] COMMON STOCK WARRANTS This certifies that, for value received, STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. or its registered assigns ("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 before 5:00 p.m. New York time on the fifth (5th) anniversary of the date first above written (the "EXPIRATION DATE"), [NUMBER] fully paid and nonassessable shares of common stock, $.00004 par value per share (the "COMMON STOCK") of the Issuer at an exercise price equal to $[___] 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"). Capitalized terms not defined herein shall have the meanings ascribed to such terms in the subscription agreement, dated as of May 16, 2001, between the Issuer and the Holder (the "SUBSCRIPTION AGREEMENT"). 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 date hereof and on or before the Expiration Date, by presentation and surrender hereof to the Issuer at the address which, in accordance with the notice provisions of Section 10 hereof, is then effective for notices to the Issuer, with the Election to Purchase Form annexed hereto as Schedule I, duly executed, 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 32 balance of the Warrant Shares purchasable hereunder. The Issuer shall maintain at its principal place of business a register (the "Register") for the registration of this Warrant and registration of any transfer or assignment in whole or in part of the Warrant. (b) The Exercise Price for the number of Warrant Shares specified in the Election to Purchase Form shall be payable in United States Dollars by (i) 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, (ii) an election by the Holder to have the Issuer withhold shares of Common Stock issuable upon exercise (a "Cashless Exercise"), (iii) certificates representing shares of Common Stock theretofore owned by the Holder duly endorsed for transfer to the Issuer, or (iv) any combination of the preceding, equal in value to the aggregate Exercise Price. For purposes hereof, a Cashless Exercise shall be effected by surrendering the Warrant, in part or in whole, for such number of Warrant Shares as is determined by dividing (1) the total Exercise Price payable in respect of the number of Warrant Shares being purchased upon such exercise by (2) the amount by which the Fair Market Value per share of Common Stock as of the Exercise Date exceeds the Exercise Price per share. (c) 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 (a) that it will not, by amendment of its Certificate 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, and (b) 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. 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 33 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. SECTION 3. Exchange, Transfer, Assignment or Loss of Warrant. (a) During the one-year period commencing on the date first above written and ending immediately prior to the first anniversary thereof (the "RESTRICTED PERIOD"), this Warrant is not transferable or assignable by the Holder except with the prior written consent of the Issuer. Notwithstanding the foregoing, (i) the Holder may at any time prior to the expiration of this Warrant transfer or assign this Warrant in whole or in part to any Permitted Transferee, and (ii) upon expiration of the Restricted Period, the Holder may freely transfer or assign this Warrant in whole or in part to any third party without the prior consent of the Issuer. Issuer shall register any such transfer or assignment in the Register upon surrender of this Warrant, with the Form of Assignment attached as Schedule II hereto duly filled in and signed, to the Issuer at the office of Issuer specified in Section 1(a). Upon any such registration of transfer or assignment, a new Warrant, in substantially the form of this Warrant, evidencing the rights of the Holder so transferred shall be issued to the transferee and a new Warrant, in similar form, evidencing the rights of the Holder to purchase the balance of the Warrant Shares purchasable hereunder, if any, shall be issued to the Holder. (b) 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 any transferee or assignee thereof shall be, or have any rights or privileges of, a stockholder of the Issuer with respect to any Warrant Shares, unless and until this Warrant has been exercised. 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 34 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 Exercise Price shall be adjusted so that the aggregate Exercise Price for the purchase of all the Warrant Shares issuable hereunder immediately after the record date for such dividend or distribution shall equal the aggregate Exercise Price 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 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. 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 other than as covered by Section 5(d), 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 35 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 aggregate 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, at Holder's option, 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 the Issuer sells or issues on or prior to the first anniversary of the date hereof any shares of Common Stock (or options, warrants, or other securities convertible, exercisable, or exchangeable for shares of Common Stock, excluding options in an amount not to exceed in the aggregate fifteen percent (15%) of the Fully-Diluted Shares issued to employees of Issuer at an exercise price equal to or greater than the Fair Market Value as of the date of grant) for consideration per share (in the case of options, warrants, or other securities convertible, exercisable, or exchangeable for shares of Common Stock, on an as-converted basis) less than the Exercise Price then in effect immediately prior to the issuance of such additional Common Stock (the "NEW ISSUANCE PRICE"), then upon consummation of such sale or issuance (a "TRIGGERING TRANSACTION"), the Exercise Price shall automatically be decreased by an amount equal to the difference between (i) the Exercise Price in effect immediately prior to such Triggering Transaction; and (ii) the New Issuance Price. (g) 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. (h) 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. (i) 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 absent manifest error. (j) 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 36 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. (k) Notwithstanding any other provision, this Warrant shall be binding upon and inure to the benefit of any successors and assigns of the Issuer. (l) 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 (l) shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. (m) 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 solely 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. . In case at any time: (a) the Issuer shall declare any cash dividend on its Common Stock; (b) the Issuer shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (c) the Issuer shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) the Issuer shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of current earnings or dividends payable in Common Stock); (e) the Issuer shall issue shares of its capital stock at a price per share less than the Exercise Price in effect as of the date of such issuance; (f) there shall be any capital reorganization, or reclassification of the capital stock of the Issuer, or consolidation or merger of the Issuer with another corporation (other than a subsidiary of the Issuer in which the Issuer is the surviving or continuing corporation and no change occurs in the Issuer's Common Stock), or sale of all or substantially all of its assets to, another corporation; (g) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Issuer; or (h) the Issuer proposes to take any other action or an event occurs which would require an adjustment pursuant to subsection (i) of this Section 7; then, in any one or more of said cases, the Issuer shall give at least fifteen days' prior written notice, addressed to Holder at the address of Holder as shown on the books of the Issuer, 37 of (i) the date on which the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights, or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up; (ii) in the case of any issuance of capital at a price per share less than the then applicable Exercise Price, the date of such issuance and the number of shares issued; and (iii) in the case of any reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, the date (or, if not then known, a reasonable approximation thereof by the Issuer) when same shall take place. Such notice shall also specify (or, if not then known, reasonably approximate), if applicable, the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. SECTION 8. No Dilution or Impairment. The Issuer shall not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Issuer will not increase the par value, if any, of any shares of stock receivable upon the exercise of any Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Issuer may validly and legally issue fully paid and non-assessable stock upon the exercise of each Warrant. SECTION 9. Registration Rights. Section 3 of the investor rights agreement, dated as of July ___, 2001, between the Issuer and the Holder (the "INVESTOR RIGHTS AGREEMENT") is incorporated herein by reference and made a part hereof mutatis mutandis. SECTION 10. Representations and Warranties of the Issuer; Indemnity; Miscellaneous. Sections 5, 16 and 17 of the Subscription Agreement are incorporated herein by reference and made a part hereof mutatis mutandis. GRILL CONCEPTS, INC. By: ______________________ Name: Title: 38 SCHEDULE I FORM OF ELECTION TO PURCHASE To: [ ] The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, [_____] shares of Grill Concepts, Inc. Common Stock issuable upon the exercise of this Warrant for an aggregate exercise price of $_______ payable in [cash][cashless exercise][shares], and requests that certificates for such shares be issued in the name of: (Name) (Address) (United States Social Security or other taxpayer identifying number, if applicable) and, if different from above, be delivered to: (Name) (Address) and, if the number of Warrant Shares so purchased are not all of the Warrant Shares issuable upon exercise of this Warrant, that a Warrant to purchase the balance of such Warrant Shares be registered in the name of, and delivered to, the undersigned at the address stated below. Date: , 200 Name of Registered Owner: Address: Signature: 39 SCHEDULE II FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________ the right represented by the within Warrant to purchase the _______ shares of the _________ Common Stock of Grill Concepts, Inc., to which the within Warrant relates, and appoints ___________________ attorney to transfer said right on the books of Grill Concepts, Inc., with full power of substitution in the premises. Dated: ___________________________ ______________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) EX-99.4 6 p65372ex4.txt EX-99.4 1 EXHIBIT 4 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of July 27, 2001 (as hereafter amended, supplemented, or otherwise modified from time to time, this "AGREEMENT"), between GRILL CONCEPTS, INC., a corporation organized and existing under the laws of the State of Delaware ("ISSUER"); STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., a corporation organized and existing under the laws of the State of Maryland ("INVESTOR"); and THE STOCKHOLDERS OF ISSUER LISTED IN SCHEDULE I HERETO (the "STOCKHOLDERS"); W I T N E S S E T H: WHEREAS, pursuant to the subscription agreement, dated as of May 16, 2001 (the "SUBSCRIPTION AGREEMENT"), between Issuer and Investor, Issuer issued to Investor 666,667 shares (the "SHARES") of common stock of Issuer, par value $0.00004 per share (the "COMMON STOCK"), and warrants to purchase 666,667 shares of Common Stock (the "INITIAL WARRANTS"); WHEREAS, pursuant to the development agreement, dated as of July ___, 2001 (the "DEVELOPMENT AGREEMENT"), between Issuer and Investor, Issuer has agreed to issue to Investor additional warrants to purchase shares of Common Stock based on: (i) certain development thresholds (the "DEVELOPMENT WARRANTS") and (ii) certain incentive thresholds (the "INCENTIVE WARRANTS" and together with the Initial Warrants and the Development Warrants, the "WARRANTS"); and WHEREAS, it is a condition precedent to Investor's willingness to consummate the transactions contemplated by the Subscription Agreement and the Development Agreement that Issuer and each Stockholder shall have executed and delivered this Agreement; NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows: SECTION 1. Certain Defined Terms. Capitalized terms used and not otherwise defined in the body hereof are used herein as defined in the Subscription Agreement. SECTION 2. Board of Directors Representation. (a) Issuer and each Stockholder (whether in its capacity as a stockholder, director, or officer of Issuer or otherwise) shall take or cause to be taken all actions, do or cause to be done all things, and execute and deliver or cause to be executed and delivered all documents, instruments, certificates, further assurances, or other papers, that may be necessary, appropriate, or 2 2 desirable (including, without limitation, in the case of each Stockholder: (x) by attending stockholder and board of directors meetings in person or by proxy for purposes of obtaining a quorum at such meetings, and executing written consents in lieu of meetings; and (y) by voting at every annual or special meeting of the stockholders of Issuer and at every continuation or adjournment thereof, and on every action or approval by written consent of the stockholders of Issuer in lieu of any such meeting, all voting Securities then owned or controlled, directly or indirectly, thereby) in order to ensure that, so long as Investor holds, directly or indirectly by an Affiliate, not fewer than 333,333 shares of Common Stock (as adjusted for stock splits, stock dividends, recapitalizations, and the like): (i) not fewer than one nominee of Investor is at all times duly elected or appointed as a director of Issuer; (ii) if the aggregate number of GCI Concept Facilities (as defined in the Development Agreement) equals or exceeds ten, not fewer than two nominees of Investor are at all times duly elected or appointed as directors of Issuer; (iii) if the number of individuals Investor is entitled pursuant to this Section 2(a) to nominate to the board of directors of Issuer is one, the number of individuals comprising the entire board of directors of Issuer shall not exceed seven; (iv) if the number of individuals Investor is entitled pursuant to this Section 2(a) to nominate to the board of directors of Issuer is two, the number of individuals comprising the entire board of directors of Issuer shall not exceed eight; and (v) for a period of no less than three years, unless Robert Spivak is physically unable to perform under the conditions of his current Employment Agreement as provided in the Disclosure Schedule, no new employment agreement will be entered into by Issuer with the chief executive officer of Issuer; and no employment agreement with the chief executive officer of Issuer will be unreasonably amended or otherwise modified during such three-year period. (b) Concurrently with the execution of this Agreement, each Stockholder shall deliver to Investor a proxy in the form attached hereto as Exhibit A, which proxy shall be irrevocable to the fullest extent permitted by law and shall state the total number of shares of capital stock of Issuer beneficially owned by such Stockholder. SECTION 3. Stockholder Transfer Restrictions. (a) During the one-year period commencing on the Closing Date and ending immediately prior to the first anniversary of the Closing Date, neither Investor nor any of the Stockholders shall 3 3 Transfer, or take any action which could reasonably be expected to result in any Transfer of, any Securities held thereby. (b) Without limiting the applicability of the foregoing, neither Investor nor any Stockholder shall Transfer, or take any action which could reasonably be expected to result in any Transfer of, any Securities held thereby, except in compliance with all applicable securities Laws and the other terms and conditions of this Agreement. (c) Notwithstanding anything to the contrary contained herein, Investor and any Stockholder may at any time Transfer any or all Securities held thereby to any Permitted Transferee; provided that, prior to the consummation of any Transfer to any Permitted Transferee, such Permitted Transferee shall: (i) execute and deliver to Issuer and each Stockholder a counterpart to this Agreement; and (ii) deliver to Issuer and each Stockholder an opinion of counsel, in form and substance reasonably satisfactory to Issuer, to the effect that the agreements executed and delivered by such Permitted Transferee in accordance with the immediately preceding clause (i) are legal, valid, and binding obligations of such Permitted Transferee, enforceable against such Permitted Transferee in accordance with their terms. SECTION 4. Right to Participate in Certain Dispositions. (a) If at any time prior to the third anniversary of the date first above written and subject to any applicable restriction in Section 3, any Stockholder (for purposes of this section, the "SELLING HOLDER") wishes to sell for cash more than 50,000 shares (which number shall be adjusted for stock splits, stock dividends, recapitalizations and the like) held thereby to a Third Party in a bona fide, fully financed transaction the terms of which have been negotiated directly between the Selling Holder (or its agent) and one or more prospective purchasers (or its/their agent), rather than through an open-market transaction with an unidentified purchaser executed over a securities exchange or quotation service (for purposes of this section, the "PROPOSED TRANSACTION"), the Selling Holder shall give Investor and each transferee of Investor of not fewer than 100,000 shares (which number shall be adjusted for stock splits, stock dividends, recapitalizations and the like) of Common Stock or Securities convertible into or exercisable or exchangeable for not fewer than 100,000 shares (which number shall be adjusted for stock splits, stock dividends, recapitalizations and the like) of Common Stock (together with Investor, the "RIGHTS HOLDERS") written notice thereof (for purposes of this section, a "TAG-ALONG NOTICE") not fewer than forty-five days prior to the date (for purposes of this section, the "SALE DATE") on which the Selling Holder wishes to consummate the Proposed Transaction; provided that Michael Weinstock shall not be subject to this Section 4 from the first date as of which he is neither a member of the board of directors of Issuer nor an employee of Issuer. The Tag-Along Notice shall describe in reasonable detail: (i) the class of Securities, and the number of shares or units or the face amount, as the case may be, of such Securities, the Selling Holder wishes to sell (for purposes of this section, the "TAG-ALONG SECURITIES"); and (ii) the price per share, unit, or face amount, as the case may be, at which, and all other material terms and conditions (including the expected Sale Date) upon which, the Selling Holder wishes to sell the Tag-Along Securities. The Tag-Along Notice shall constitute an offer by the Selling Holder to permit each Rights 4 4 Holder to sell in the Proposed Transaction, upon the terms and subject to the conditions set forth in the Tag-Along Notice, the number of shares or units or the face amount, as the case may be, of Securities equal to the product of: (i) the aggregate number of shares or units or the aggregate face amount, as the case may be, of Tag-Along Securities proposed to be sold in the Proposed Transaction; multiplied by (ii) the quotient of: (A) the number of Fully Diluted Shares held by such Rights Holder as of the date of the Tag-Along Notice; divided by (B) the total number of Fully Diluted Shares outstanding as of the date of the Tag-Along Notice. (b) During the fifteen-day period immediately following its receipt of the Tag-Along Notice (for purposes of this section, the "NOTICE PERIOD"), each Rights Holder may accept the offer made thereby, in whole or in part, by giving the Selling Holder written notice of acceptance (for purposes of this section, an "ACCEPTANCE NOTICE"), which notice shall state the number of shares or units or the face amount, as the case may be, of Securities which such Rights Holder wishes to sell in the Proposed Transaction, and delivering to the Selling Holder in trust for the benefit of such Rights Holder: (i) certificates evidencing the Securities which such Rights Holder wishes to sell in the Proposed Transaction (for purposes of this section, the "PARTICIPATING SECURITIES"), duly endorsed in blank or accompanied by written instruments of transfer in form reasonably satisfactory to the Selling Holder duly executed by such Rights Holder; (ii) an instrument of assignment assigning such Rights Holder's rights and delegating its obligations hereunder in respect of the Participating Securities; and (iii) a special irrevocable power-of-attorney authorizing the Selling Holder, on behalf of such Rights Holder, to sell the Participating Securities upon the terms and subject to the conditions set forth in the Tag-Along Notice. An Acceptance Notice shall constitute an irrevocable agreement by such Rights Holder to sell the number of shares or units or the face amount, as the case may be, of Securities with respect to which such notice was given, at the price and upon the other terms and subject to the conditions set forth in the Tag-Along Notice. Notwithstanding the delivery of an Acceptance Notice by any Rights Holder, the Selling Holder may revoke its offer pursuant to the corresponding Tag-Along Notice at any time prior to consummation of the Proposed Transaction; provided that the Selling Holder shall not thereafter: (i) sell any of the Tag-Along Securities with respect to which it gave such Tag-Along Notice unless it again complies with the requirements of Sections 4(a), (b), and (c); or (ii) deliver another Tag-Along Notice for a period of ninety days after the effective date of such revocation. (c) The Selling Holder shall consummate the Proposed Transaction within sixty days after the expiration of the Notice Period. Immediately after the closing of the Proposed Transaction the Selling Holder shall deliver to each Rights Holder, by wire transfer of immediately available fund to the bank account or accounts specified in the Acceptance Notice, the purchase price for the Participating Securities, if any, sold thereby. (d) During the ninety-day period immediately following the expiration of the Notice Period, the Selling Holder may consummate the Proposed Transaction without the participation of any particular Rights Holder if such Rights Holder did not 5 5 timely deliver an Acceptance Notice in accordance herewith or otherwise timely comply with the requirements hereof, upon terms and subject to conditions no less favorable to the Third Party purchaser than the terms and conditions set forth in the Tag-Along Notice. If the Proposed Transaction contemplated by such Tag-Along Notice is not consummated within such ninety-day period, or the Selling Holder proposes to consummate such transaction upon terms or subject to conditions more favorable to the Selling Holder than those set forth in the Tag-Along Notice, the Selling Holder may not consummate such transaction unless it again complies with the requirements of Sections 4(a), (b), and (c), and the Selling Holder shall immediately return to each Rights Holder all certificates evidencing the unsold Participating Securities that such Rights Holder delivered for sale pursuant to this Section 4, and the related instruments of assignment and power-of-attorney. SECTION 5. Notice of Certain Developments. If Issuer or any Stockholder receives from any Third Party any offer, proposal, or other indication of interest (a "TRANSACTION PROPOSAL") relating to: (i) any issuance or other Transfer of shares of Common Stock or any other Securities; (ii) any merger, consolidation, or other business combination with or into Issuer; (iii) any acquisition of all or any substantial portion of the assets of Issuer; or (iv) any other extraordinary business transaction involving or otherwise relating to Issuer; Issuer or such Stockholder, as the case may be, shall promptly give each Rights Holder written notice of its receipt of such Transaction Proposal, which notice shall describe in reasonable detail: (A) the identity of the Third Party making such Transaction Proposal; and (B) all material terms and conditions of such Transaction Proposal. SECTION 6. Improper Transfer. Any attempt by any Stockholder to make any Transfer other than in accordance with this Agreement shall be null and void, and neither Issuer nor any transfer agent thereof shall give any effect in Issuer's share records to such attempted Transfer. SECTION 7. Certain Interests. Except as described in the Disclosure Schedule, neither Issuer nor any Subsidiary shall knowingly cause or permit any stockholder, director, officer, employee of Issuer or any Subsidiary, or relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such stockholder, director, officer, or employee, or any Affiliate of any such Person: (i) to have any direct or indirect financial interest in any competitor, customer, or supplier of Issuer or any Subsidiary; provided, however, that the ownership of securities representing no more than one percent of the outstanding voting power of any competitor, supplier, or customer, and which are also listed on any national securities exchange or traded actively in the national over-the-counter market, shall not be deemed to be a "financial interest" so long as the person owning such securities has no other connection or relationship with such competitor, supplier or customer; (ii) to own, directly or indirectly, in whole or in part, or to have any other interest in, any tangible or intangible property belonging to or used, held for use, or intended to be used by Issuer or any Subsidiary or forming a part of or used, held for use, or intended to be used in connection with, necessary for, or otherwise material to the conduct of, the business and operations of Issuer or any Subsidiary; or (iii) 6 6 to have outstanding at any time any Indebtedness to Issuer or any Subsidiary. Neither Issuer nor any Subsidiary shall knowingly undertake or assume any liability or any other obligation of any kind, nature, or description whatsoever to or on behalf of any stockholder, director, officer, or employee of Issuer or any Subsidiary, to any relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such stockholder, director, officer, or employee, or to any Affiliate of any such Person; except for liabilities relating to: (A) the payment of salary for services rendered; (B) the reimbursement of reasonable and necessary business expenses incurred on behalf of Issuer or any Subsidiary; and (C) the payment or grant of other standard employee benefits made generally available to all employees of Issuer or such Subsidiary (including stock option agreements outstanding under any employee stock option plan approved by the board of directors of Issuer or such Subsidiary). SECTION 8. Miscellaneous. The terms and provisions set forth in Sections 16 and 17 of the Subscription Agreement are incorporated in this Agreement by reference and made a part hereof mutatis mutandis. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 7 IN WITNESS WHEREOF, each party hereto has executed and delivered this Agreement as of the date first written above. GRILL CONCEPTS, INC. By: Name: Title: STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. By: Name: Title: -------------------------------- ROBERT SPIVAK -------------------------------- MICHAEL WEINSTOCK -------------------------------- LEWIS WOLFF 8 8 -------------------------------- KEITH WOLFF WOLFF REVOCABLE TRUST OF 1993 By: Name: Title: 9 SCHEDULE I STOCKHOLDERS Name Address ---- ------- Robert Spivak 11661 San Vicente Blvd. Suite 404 Los Angeles, California 90049 Michael Weinstock 11661 San Vicente Blvd. Suite 404 Los Angeles, California 90049 Lewis Wolff 11828 La Grange Avenue Los Angeles, California 90025 Keith Wolff 11828 La Grange Avenue Los Angeles, California 90025 Wolff Revocable Trust of 1993 11828 La Grange Avenue Los Angeles, California 90025 GRAPHIC 7 p65372box.gif GRAPHIC begin 644 /EDGAR_ENV/EDGAR_PROD/output/filings/0000950153-01-500818/0000950153-01-500818.0007.gif M1TE&.#EA#``,`/?^``````$!`0("`@,#`P0$!`4%!08&!@<'!P@("`D)"0H* M"@L+"PP,#`T-#0X.#@\/#Q`0$!$1$1(2$A,3$Q04%!45%186%A<7%Q@8&!D9 M&1H:&AL;&QP<'!T='1X>'A\?'R`@("$A(2(B(B,C(R0D)"4E)28F)B7IZ>GM[>WQ\?'U]?7Y^?G]_?X"`@(&!@8*" M@H.#@X2$A(6%A8:&AH>'AXB(B(F)B8J*BHN+BXR,C(V-C8Z.CH^/CY"0D)&1 MD9*2DI.3DY24E)65E9:6EI>7EYB8F)F9F9J:FIN;FYRGI^?GZ"@ MH*&AH:*BHJ.CHZ2DI*6EI::FIJ>GIZBHJ*FIJ:JJJJNKJZRLK*VMK:ZNKJ^O MK["PL+&QL;*RLK.SL[2TM+6UM;:VMK>WM[BXN+FYN;JZNKN[N[R\O+V]O;Z^ MOK^_O\#`P,'!P<+"PL/#P\3$Q,7%Q<;&QL?'Q\C(R,G)RWM_?W^#@X.'AX>+BXN/CX^3DY.7EY>;FYN?GY^CHZ.GIZ>KJZNOK MZ^SL[.WM[>[N[N_O[_#P\/'Q\?+R\O/S\_3T]/7U]?;V]O?W]_CX^/GY^?KZ M^OO[^_S\_/W]_?[^_O___R'Y!`$``/X`+``````,``P`!P@Z`/\)'$APX)L? 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