GRILL CONCEPTS INC - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 29, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________.

Commission File No. 0-23226

GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)

Delaware 13-3319172
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Include Area Code: (310) 820-5559

Securities Registered Under Section 12(b) of the Exchange Act:

Title of Each Class Name of Each Exchange on Which Registered
---------------------- -----------------------------------------------
None None

Securities Registered Under Section 12(g) of the Exchange Act:

Common Stock, $.00004 par value
-------------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing price on the NASDAQ
Small-Cap Market, as of the close of business June 30, 2002 was approximately
$3,922,000. Number of share outstanding of the registrant's common stock,
$.00004 par value, as of March 20, 2003: 5,537,071 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 29, 2002 are
incorporated by reference into Part III.

TABLE OF CONTENTS

PART I Page
----

ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30

PART IV

ITEM 14. CONTROLS AND PROCEDURES 31
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 31

PART I

This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 27 of this Form 10-K.

ITEM 1. BUSINESS

GENERAL

Grill Concepts, Inc. and its subsidiaries (the "Company") develop and
operate casual dining restaurants under the name "Daily Grill" and fine dining
restaurants under the name "The Grill on the Alley." In addition, the Company
owns and operates, or has management or licensing agreements with respect to,
other restaurant properties.

The Company was incorporated under the laws of the State of Delaware in
November of 1985 to acquire and operate franchised Pizzeria Uno restaurants.
Since its acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, the Company has focused principally on the expansion of the
"Daily Grill" and "The Grill on the Alley" restaurant formats of GCI.

At December 29, 2002, the Company owned and operated 13 restaurants and
managed or licensed 7 additional restaurants, consisting of 9 Daily Grill
restaurants and 4 The Grill on the Alley restaurants which are owned and
operated by the Company, 4 Daily Grill restaurants which are managed by the
Company and 2 Daily Grill restaurants and a City Bar & Grill restaurant which
are licensed by the Company. With the exception of three The Grill on the Alley
restaurants, which restaurants are operated by partnerships, all of the Daily
Grill and The Grill on the Alley restaurants which were owned and operated at
December 29, 2002 were solely owned and operated on a non-franchise basis by the
Company.

During 2002, the Company (1) sold its Pizzeria Uno franchise in Cherry
Hill, New Jersey and (2) closed the Daily Grill in Encino, California.

During 2002, the Company continued to pursue a strategic growth plan
whereby the Company plans to open, and/or convert, and operate, and/or manage,
Daily Grill and The Grill on the Alley restaurants in hotel properties in
strategic markets throughout the United States. In 2001 the Company entered
into a strategic alliance with Starwood Hotels and Resorts Worldwide, Inc. to
jointly develop the Company's restaurant properties in Starwood hotels.
Management believes that the opening of restaurants in hotel properties in
strategic markets will help further establish brand name recognition for the
opening of free standing restaurants in those markets. One managed Daily Grill
restaurant was opened in Houston, Texas in July 2002 pursuant to the alliance.
An additional managed Daily Grill restaurant, not covered by the Starwood
alliance, was opened adjoining the Handlery Union Square Hotel in San Francisco,
California in February 2002.

The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 2002 and 2001 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):

-1-

2001 2002
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year 10 10
Restaurant closings - (1)
---- -----
End of year 10 9

Managed or Licensed Restaurants:
Beginning of year 4 4
Restaurant openings - 2
---- -----
End of year 4 6

Total Daily Grill restaurants:
Beginning of year 14 14
Restaurant openings - 2
Restaurants closed or sold - (1)
---- -----
End of year 14 15
=== ===

Grill restaurants:
Company Restaurants:
Beginning of year 3 4
Restaurant openings 1 -
---- -----
End of year 4 4

Total Grill restaurants:
Beginning of year 3 4
Restaurant openings 1 -
---- -----
End of year 4 4
=== ===

Other restaurants1:
Company Restaurants:
Beginning of year 2 1
Restaurants closed or sold (1) (1)
---- -----
End of year 1 -

Managed or Licensed Restaurants:
Beginning of year 1 1
- -
End of year 1 1

Total Other restaurants:
Beginning of year 3 2
Restaurants closed or sold (1) (1)
---- -----
End of year 2 1
==== ===

Total restaurants:
Beginning of year 20 20
Restaurant openings 1 2
Restaurants closed or sold (1) (2)
---- -----
End of year 20 20
==== ===

1 Includes one Pizzeria Uno Restaurant in 2001 operated by the Company
pursuant to a franchise agreement.

-2-

2001 2002
---- ----
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants $60,041 $57,133
Managed Restaurants. n.a. n.a.
Grill restaurants:
Company Restaurants $88,965 $73,057
Managed Restaurants. n.a. n.a.
Other restaurants:
Company Restaurants $34,340 $29,239

Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants - (4.2)%
Managed Restaurants n.a. n.a.
Grill restaurants
Company Restaurants (4.6)% (2.3)%
Managed Restaurants n.a. n.a.
Other restaurants:
Company Restaurants (4.6)% -

Total system sales:
Daily Grill $28,099,000 $25,593,000
Grill 13,714,000 15,196,000
Pizza Restaurants 2,716,000 497,000
Management and license fees 872,000 1,006,000
----------- ---------
Total consolidated revenues 45,401,000 42,292,000

Managed restaurants 10,488,000 13,975,000
Licensed restaurants 7,392,000 6,963,000
Less: management and license fees (872,000) (1,006,000)
----------- ---------

Total system sales $62,409,000 $62,224,000
=========== =========

RESTAURANT CONCEPTS

- - DAILY GRILL RESTAURANTS

Background. At December 29, 2002, the Company, through its subsidiary,
GCI, owned and operated, managed or licensed nine Daily Grill restaurants in
Southern California, three Daily Grill restaurants in the Washington,
D.C./Virginia market, one Daily Grill restaurant in Skokie, Illinois, one Daily
Grill restaurant in San Francisco, California and one Daily Grill restaurant in
Houston, Texas. Daily Grill restaurants are patterned after "The Grill on the
Alley" in Beverly Hills, a fine dining American-style grill restaurant which was
acquired by the Company during 1996. See "-- The Grill on the Alley." The
Grill on the Alley was founded by Robert Spivak, Michael Weinstock and Richard
Shapiro (the founders of GCI) in the early 1980's to offer classic American
foods in the tradition of the classic American dinner house. After successfully
operating The Grill on the Alley for a number of years, in 1988, Messrs. Spivak,
Weinstock and Shapiro decided to expand on that theme by opening the first Daily
Grill restaurant. Daily Grill, in an effort to offer the same qualities that
made The Grill on the Alley successful, but at more value oriented prices,
adopted six operating principles that characterize each Daily Grill restaurant:
high quality food, excellent service, good value, consistency, appealing
atmosphere and cleanliness. GCI emphasized those principles in an effort to
create a loyal patron who will be a "regular" at its restaurants.

Restaurant Sites. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, managed or licensed and as
either hotel based or based in shopping malls and other commercial properties.
At December 29, 2002, fifteen Daily Grill restaurants were in operation, eight
of which were 100% owned by the Company and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, four of which were managed by the Company and located in
hotels and two of which were licensed restaurants.

-3-

Daily Grill locations opened, or are scheduled to open, in the following
months and years, are owned, managed or licensed as indicated and, where
indicated, are located in the referenced hotels:

Ownership
Opened or Interest,
Scheduled Licensed or
Location Opening Managed
- -------- ------ -------

Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Los Angeles International Airport January 1997 Licensed
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California (Hilton Hotel) January 1999 Managed
Washington, D.C. (Georgetown Inn) April 1999 Managed
Universal CityWalk, California May 1999 50%
Skokie, Illinois (DoubleTree Hotel) September 2000 Licensed
San Francisco, California
(Handlery Union Square Hotel) February 2002 Managed
Houston, Texas (Westin Galleria) July 2002 Managed
El Segundo (South Bay), California January 2003 50.1%
Bethesda, Maryland (Hyatt Hotel) September 2003 100%

Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of the Company and,
accordingly, significant effort is exerted to assure that each site selected is
appropriate. For non-hotel based restaurants, the site selection process
focuses on local demographics and household income levels, as well as specific
site characteristics such as visibility, accessibility, parking availability and
traffic volume. Each site must have sufficient traffic such that management
believes the site can support at least twelve strong meal periods a week (i.e.,
five lunches and seven dinners). Preferred Daily Grill sites, which
characterize the existing 100% owned restaurants, are high-end, mid-size retail
shopping malls in large residential areas with significant daytime office
populations and some entertainment facilities. Historically, Daily Grill
restaurants have been anchor tenants at high profile malls and, therefore, have
received significant tenant improvement allowances.

Hotel based Daily Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership,
joint venture or license arrangement or operated pursuant to a management
agreement. As with non-hotel based restaurants, site selection is viewed as
critical and, accordingly, significant effort is exerted to assure that each
site selected is appropriate. The site selection process is the responsibility
of Hotel Restaurant Properties, Inc. ("HRP") which identifies suitable locations
and negotiates leases, license or management agreements for those properties.
See "-- Hotel Property Agreement."

Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 100 and 250 persons. Our costs of existing
non-hotel based restaurants, including leasehold improvements, furniture,
fixtures and equipment and pre-opening expenses, have averaged $325 per foot per
restaurant, less tenant improvement allowances.

Existing hotel based Daily Grill restaurants range in size from 5,000 to
8,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 140 and 250 persons. Management anticipates
that additional hotel based Daily Grill restaurants will require minimal capital
investment on the Company's part. However, each hotel restaurant arrangement
will be negotiated separately and the capital investment by the Company may vary
widely. Opening costs, for the Company, of existing hotel restaurants, including
leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $150,000 to $600,000 per restaurant.

-4-

Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at American-style grill restaurants of
the 1930's and 1940's, in contrast to the "nouvelle cuisine" and diet meal fads
of the 1980's. Daily Grill offers such "signature" items as Cobb salad, Caesar
salad, meatloaf with mashed potatoes, chicken pot pie, chicken burgers,
hamburgers, rice pudding and fresh fruit cobbler. The emphasis at the Daily
Grill is on freshly prepared American food served in generous portions.

Entrees range in price, subject to regional differences in menu pricing,
from $9.50 for an "original" beef dip sandwich to $21.95 for a char-broiled 16
oz. T-bone steak with all the trimmings. The average lunch check is $16.00 per
person and the average dinner check is $24.00 per person, including beverage.
Daily Grill restaurants also offer a children's menu with reduced portions of
selected items at reduced prices. All of the existing Daily Grill restaurants
offer a full range of beverages, including beer, wine and full bar service.
During the year ended December 29, 2002, food and non-alcoholic beverage sales
constituted approximately 85% of the total restaurant revenues for the Daily
Grill restaurants, with alcoholic beverages accounting for the remaining 15%.

Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the
Daily Grill are cooked from scratch utilizing fresh food ingredients. The
Company's management believes that its standards for ingredients and the
preparation of menu items are among the most stringent in the industry.

Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.

Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week and Sunday brunch. Each Daily Grill location
is designed to provide the sense and feel of comfort. In the tradition of an
old-time American-style grill, the setting is very open with a mix of booths and
tables. Several of the restaurants have counters for singles to feel
comfortable. A number of the Daily Grill restaurants have private dining rooms
for banquets or additional seating. The restaurant emphasizes the quality and
freshness of Daily Grill food dishes in addition to the cleanliness of
operations. The dining area is well-lit and is characterized by a "high energy
level". Reservations are accepted but not required.

The attention to detail and quality of the decor is carried through to the
professional service. All Daily Grill employees are trained to treat each
person who visits the restaurant as a "guest" and not merely a customer. Each
server is responsible for assuring that his or her guest is satisfied. In
keeping with the traditions of the past, each Daily Grill employee is taught
that at the Daily Grill "the guest is always right." The Daily Grill's policy
is to accommodate all guest requests, ranging from substitutions of menu items
to take-out orders.

In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 57% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.

The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that at the Daily Grills which have been open for over a
year repeat business is significantly greater than the industry average, with
many guests becoming "regulars" in the tradition of the neighborhood restaurant.

-5-

THE GRILL ON THE ALLEY

Background. At December 29, 2002, the Company, through its subsidiary,
GCI, owned and operated four The Grill on the Alley restaurants ("Grill"), one
in Beverly Hills, California, one in San Jose, California, one in Chicago,
Illinois and one in Hollywood, California, named The Grill on Hollywood.

The original Grill is a fine dining Beverly Hills restaurant which opened
in 1984 and served as the model for the Daily Grill restaurants. The Grill is
set in the traditional style of the old-time grills of New York and San
Francisco, with black-and-white marbled floors, polished wooden booths and deep
green upholstery. In 1995, the Grill was inducted into Nation's Restaurant
News' Fine Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere.

In April of 1996, the Company acquired the original Grill from a
partnership, the managing partner of which was controlled by the Company's
principal shareholders and directors.

Restaurant Sites. At December 29, 2002, the Company operated four Grill
restaurants, two of which are non-hotel based facilities and two of which are
hotel-based facilities.

Grill locations opened, or are scheduled to open, in the following months
and years, are owned or managed as indicated and, where indicated, in the
referenced hotels:
Ownership
Interest,
Licensed or
Location Opened Managed
- -------- ------ -------

Beverly Hills, California January 1984 100.00%
San Jose, California (Fairmont Hotel) May 1998 50.05%
Chicago, Illinois (Westin Hotel) June 2000 60.00%
Hollywood, California November 2001 51.00%

The Company's Grill restaurants are located in leased facilities. As with
the Company's Daily Grill restaurants, site selection is viewed as critical to
the success of the Company and, accordingly, significant effort is exerted to
assure that each site selected is appropriate. For non-hotel based Grill
restaurants, the site selection process focuses on local demographics and
household income levels, as well as specific site characteristics such as
visibility, accessibility, parking availability and traffic volume. Because of
the upscale nature of Grill restaurants, convenience for business patrons is
considered a key site selection criteria.

Hotel based Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by the Company, operated pursuant to a partnership or
joint venture arrangement or operated pursuant to a management agreement. As
with free standing restaurants, site selection is viewed as critical to the
success of the Company and, accordingly, significant effort is exerted to assure
that each site selected is appropriate.

The Beverly Hills based Grill restaurant is approximately 4,300 square feet
- -- of which approximately 1,500 square feet is devoted to kitchen and service
areas -- and seats 120 persons. The Hollywood based Grill restaurant is
approximately 5,600 square feet - of which approximately 2,000 square feet is
devoted to kitchen and service areas - and seats 200 persons.

The San Jose based Grill restaurant is approximately 8,000 square feet --
of which approximately 38% is devoted to kitchen and service areas -- and seats
280 persons. The Chicago based Grill restaurant is approximately 8,500 square
feet, of which approximately 35% is devoted to kitchen and service areas, and
seats more than 300 guests.

Because of the unique nature of Grill restaurants, the size, seating
capacity and opening costs of future sites cannot be reasonably estimated.
Management anticipates that additional hotel based Grill restaurants will
require minimal capital investment on the Company's part. However, each hotel
restaurant arrangement will be negotiated separately and the capital investment
by the Company may vary widely. Total project costs of the existing hotel based
restaurants, including leasehold improvements, furniture, fixtures and equipment
and pre-opening expenses, have ranged from $2.1 million to $3.4 million.

-6-

Menu and Food Preparation. Each Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at fine American-style grill restaurants
of the 1930's and 1940's, featuring steaks and seafood and freshly prepared
salads and vegetables served in generous portions.

Entrees range in price from $11.95 for a hamburger to $34.50 for a Prime
Porterhouse Steak. The average lunch check is $26.00 per person and the average
dinner check is $54.00 per person, including beverage. All of the existing
Grill restaurants offer a full range of beverages, including beer, wine and full
bar service. During the year ended December 29, 2002, food and non-alcoholic
beverage sales constituted approximately 71% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
29%.

Proprietary recipes have been developed for substantially all of the items
offered on the Grill menu. The same recipes are used at each location and all
chefs undergo extensive training in order to assure consistency and quality in
the preparation of food. Virtually all of the menu items offered at the Grill
are cooked from scratch utilizing fresh food ingredients. The Company's
management believes that its standards for ingredients and the preparation of
menu items are among the most stringent in the industry.

Each Grill has up to 8 cooks on duty during regular lunch and dinner hours
to provide prompt, specialized service. Restaurant staff members utilize a
"point-of-sale" computer system to monitor the movement of food items to assure
prompt and proper service of guests and for fiscal control purposes.

Atmosphere and Service. Each Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed
to provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level". Reservations are
accepted but are not required.

The attention to detail and quality of the decor is carried through to the
professional service. All Grill employees are trained to treat each person who
visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with
the traditions of the past, each Grill employee is taught that "the guest is
always right." The Grill's policy is to accommodate all guest requests, ranging
from substitutions of menu items to take-out orders.

In order to assure that the Company's philosophy of guest service is
adhered to, all Grill employees from the kitchen staff to the serving staff
undergo extensive training making each employee knowledgeable not only in the
Company's procedures and policies but in every aspect of Grill operations. The
Company's policy of promoting from within and providing access to senior
management for all employees has produced a work force which works in a
cooperative team approach.

The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that at the original Grill repeat business is significantly
greater than the industry average, with many guests becoming "regulars" in the
tradition of the neighborhood restaurant.

SALE OF PIZZERIA UNO RESTAURANTS

In April 2002, with the sale of its Cherry Hill, New Jersey Pizzeria Uno
Restaurant for $325,000, the Company completed its planned divestiture of its
interests in Pizzeria Uno Restaurants. Previously, the Company operated as many
as four franchised Pizzeria Uno Restaurants. During 1998, the Company
determined that the continued ownership and operation of the Pizza Restaurants
did not fit with the Company's strategic growth plan. Based on that
determination, in July, 2000, the Company closed its Pizzeria Uno restaurant in
Media, Pennsylvania due to declining operations and, in July 2001, the Company
sold its Pizzeria Uno restaurant in South Plainfield, New Jersey for $700,000.

-7-

OTHER RESTAURANT ACTIVITIES

In addition to owning and operating Daily Grill and The Grill, the Company,
at December 29, 2002, also provided management services for Daily Grill
restaurants at the Burbank Hilton, the Georgetown Inn, the Handlery Hotel and
the Westin Galleria and had granted licenses to operate a Daily Grill at LAX, a
Daily Grill at the DoubleTree Hotel in Skokie, Illinois and for the City Bar &
Grill in the San Jose Hilton.

- - RESTAURANT MANAGEMENT SERVICES

In conjunction with the Company's entry into the hotel restaurant market,
in May 1998, the Company began providing management services at the City Bar &
Grill at the San Jose Hilton. In September 2002 the agreement relating to the
Company's management of the City Bar and Grill was converted to a license
agreement under which the Company is entitled to receive royalties equal to the
greater of $2,500 per month or 1.5% on sales.

In May 1998, the Company, pursuant to its agreement with HRP, began
providing management services for a restaurant in the Burbank Hilton Hotel. The
restaurant was converted from its former format to a Daily Grill in January
1999. Pursuant to its management agreement with the hotel, the Company invested
$500,000 for conversion of the restaurant to a Daily Grill and is responsible
for management and supervision of the restaurant. The Company is entitled to a
management fee equal to 8.5% of the gross receipts of the restaurant.
Additionally, the Company is entitled to 30% percent of the annual profits of
the restaurant in excess of a base amount.

In March 1999, the Company, pursuant to the Hotel Property Agreement (see
below), began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to its management agreement with the hotel, the
Company was not required to invest in the restaurant but is responsible for
management and supervision of the restaurant. The Company is entitled to a
management fee equal to 8% of the gross receipts of the restaurant.
Additionally, the Company is entitled to a percentage of the annual profits of
the restaurant.

In February 2002, the Company, pursuant to the Hotel Property Agreement,
began providing management services for a Daily Grill restaurant at the Handlery
Hotel in San Francisco. Pursuant to its management agreement with the hotel,
the Company advanced the restaurant $287,000 to be paid out of future operating
profits. The Company is entitled to a management fee equal to 6% of gross
receipts of the restaurant. Additionally, the Company is entitled to 25% of the
net income of the restaurant.

In July 2002, the Company, pursuant to the Hotel Property Agreement, began
providing management services for a Daily Grill restaurant at the Westin
Galleria in Houston, Texas. Pursuant to its management agreement with the
hotel, the Company advanced the restaurant $64,000 to be repaid out of net
income available for distribution, second only to owner's working capital
advances. The Company is entitled to a management fee equal to 5% of gross
receipts of the restaurant. Additionally, the Company is entitled to 35% of the
annual profits of the restaurant after working capital requirements are
satisfied.

- - RESTAURANT LICENSING

LAX Daily Grill. Since January 1997, CA One Services has operated a Daily
Grill restaurant (the "LAX Daily Grill") in the International Terminal of the
Los Angeles International Airport. The LAX Daily Grill was originally operated
as a joint venture between the Company and CA One Services, and since April 1998
has been operated by CA One Services under a license agreement.

Pursuant to the terms of the License Agreement, the Company is entitled to
receive royalties in an amount equal to 2.5% of the first $5 million of annual
revenues from the restaurant and 4% of annual revenues in excess of $5 million.

Skokie Daily Grill. In September 2000, pursuant to the Hotel Property
Agreement, a licensed Daily Grill restaurant was opened in the DoubleTree Hotel
in Skokie, Illinois. Under the terms of the license, the hotel operator
paid all costs to build and open the restaurant and the Company is entitled to a
license fee equal to the greater of $65,000 or 2% of sales per year.

-8-

HOTEL PROPERTY AGREEMENT

In order to facilitate the Company's efforts to open restaurants on a large
scale basis in hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. HRP is responsible for identifying suitable hotel locations in
which a Grill or Daily Grill can be operated ("Managed Outlets") and negotiating
and entering into leases or management agreements for those properties. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company may advance certain pre-opening costs and
certain required advances ("Manager Loans") and will manage and supervise the
day to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $1,667 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company and 25% to HRP.

In July 2001, in conjunction with an investment in the Company by Starwood
Hotels, the Hotel Property Agreement was amended to limit, for so long as the
Company is subject to the exclusivity provisions of a Property Development
Agreement with Starwood, the amounts payable to HRP to $400,000 annually plus
12.5% of the amounts otherwise payable to HRP with respect to the Burbank,
Georgetown and San Jose Hilton restaurants.

The Agreement with HRP also provides that, beginning in May 2004, the
Company shall have the right to acquire HRP and HRP shall have the right to
cause the Company to acquire HRP. The purchase price of HRP shall be computed
by (1) multiplying the operating income of HRP over the preceding twelve months,
excluding operating income attributable to certain defined restaurants, by ten,
(2) subtracting from the product the principal balance of loans made in
connection with the development of restaurants pursuant to the HRP Agreement,
and (3) multiplying that amount by 25%. The purchase price shall be payable in
common stock of the Company based on the average closing price of the common
stock over the ten trading days immediately preceding closing.

Pursuant to the July 2001 amendment to the Hotel Property Agreement, the
maximum purchase price of HRP will not exceed $4,500,000.

BUSINESS EXPANSION

The Company's expansion plans focus on the addition of Daily Grill
restaurants with selected expansion of the Grill restaurant concept also
planned.

Management continually reviews possible expansion into new markets and
within existing markets. Such review will entail careful analysis of potential
locations to assure that the demographic make-up and general setting of new
restaurants is consistent with the patterns which have proven successful at the
existing Daily Grills and Grills. While the general appearance and operations of
future Daily Grills and Grill restaurants are expected to conform generally to
those of existing facilities, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.

The Company's future expansion efforts are expected to concentrate on (1)
expansion into new markets through the establishment of hotel based restaurants
pursuant to the Hotel Property Agreement, and (2) expansion within existing
markets through the opening of non-hotel based restaurants. With the assistance
of HRP, the Company expects to establish name recognition and market presence
through the opening of Daily Grill and Grill restaurants in fine hotel
properties in strategic markets throughout the United States. Upon establishing
name recognition and a market presence in a market, the Company intends to
construct and operate clusters of free standing restaurants within those
markets. Management intends to limit the construction and operation of Grill
restaurants to one restaurant per market while constructing multiple Daily Grill
restaurants within each market. The exact number of Daily Grill restaurants to
be constructed within any market will vary depending upon population,
demographics and other factors.

At December 29, 2002, the Company operated non-hotel based Daily Grill and
Grill restaurants in Southern California, principally the greater-Los Angeles
market, and metropolitan Washington, D.C. Management is presently evaluating the
opening of additional non-hotel based Daily Grill and Grill restaurants in
existing markets and in other major metropolitan areas. Existing markets will
be evaluated for expansion in order to establish market presence and economies
of scale. As of March 2003, no definitive site had been identified for future
construction of free standing restaurants. Management anticipates that the cost
to open additional free standing Daily Grill and Grill restaurants will average
$325 per square foot per restaurant, less tenant improvement allowances, with
each restaurant expected to be approximately 6,000 to 7,000 square feet in size.
Actual costs may vary significantly depending upon the tenant improvements,
market conditions, rental rates, labor costs and other economic factors
prevailing in each market in which the Company pursues expansion.

-9-

At December 29, 2002, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., Skokie, Illinois, San Francisco, California and Houston, Texas, and hotel
based Grill restaurants were operated in San Jose, California and Chicago,
Illinois. The Company and HRP are presently evaluating the opening of additional
hotel based Daily Grill restaurants in existing markets and in other major
metropolitan areas. Each hotel restaurant arrangement will be negotiated
separately and the size of the restaurants, ownership and operating arrangements
and capital investment by the Company may vary widely. The Company signed a
lease for a hotel-based owned Daily Grill restaurant in Bethesda, Maryland.

STARWOOD DEVELOPMENT AGREEMENT

On July 27, 2001, in conjunction with the purchase by Starwood Hotels and
Resorts of 666,667 shares of the Company's common stock and 666,667 $2.00
warrants for $1,000,000, the Company and Starwood entered into a Development
Agreement under which the Company and Starwood agreed to jointly develop the
Company's restaurant properties in Starwood hotels.

Under the Starwood Development Agreement, either the Company or Starwood
may propose to develop a Daily Grill, Grill or City Bar and Grill restaurant in
a Starwood hotel property. If the parties agree in principal to the development
of a restaurant, the parties will attempt to negotiate either a management
agreement or a license agreement with respect to the operation of the
restaurant.

So long as Starwood continues to meet certain development thresholds set
forth in the Development Agreement, the Company is prohibited from developing,
managing, operating or licensing the Company's restaurants in any hotel owned,
managed or franchised by a person or entity, other than Starwood, with more than
50 locations operated under a single brand. Existing hotel based restaurants
are excluded from the exclusive right of Starwood. The development thresholds
required to be satisfied to maintain Starwood's exclusive development rights
require, generally, (1) the signing of an average of one management agreement or
license agreement with respect to Daily Grill restaurants annually over the life
of the Development Agreement, (2) the signing of one management agreement or
license agreement in any two year period with respect to Grill restaurants, and
(3) the signing of an aggregate average of three management agreements or
license agreements with respect to all of the Company's restaurants annually
over the life of the Development Agreement. Satisfaction of the thresholds set
forth in the Development Agreement are determined on each anniversary of the
Development Agreement. With respect to satisfaction of the specific thresholds
applying to Daily Grill restaurants and Grill restaurants, the failure to
satisfy the development thresholds with respect to those individual brands will
terminate the exclusivity provisions relative to such brand but will not effect
the exclusivity rights as to the other brand or in general.

Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common stock
equal to four percent of the outstanding shares upon the attainment of certain
development milestones. Such warrants are issuable upon execution of management
agreements and/or license agreements relating to the development and operation,
and the commencement of operation, of an aggregate of five, ten, fifteen and
twenty of the Company's branded restaurants. If the market price of the
Company's common stock on the date the warrants are to be issued is greater than
the market price on the date of the Development Agreement, the warrants will be
exercisable at a price equal to the greater of (1) 75% of the market price as of
the date such warrant becomes issuable, or (2) the market price on the date of
the Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price equal
to the market price as of the date such warrants become issuable. The warrants
will be exercisable for a period of five years.

In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement exceeds
35% of the total Daily Grill, Grill and City Grill-branded restaurants, the
Company will be obligated to issue to Starwood a warrant to purchase a number of
shares of the Company's common stock equal to 0.75% of the outstanding shares on
that date exercisable for a period of five years at a price equal to the market
price at that date. On each anniversary of that date at which the restaurants
operated under the Development Agreement continues to exceed the 35% threshold,
for so long as the Development Agreement remains effective, the Company shall
issue to Starwood additional warrants to purchase 0.75% of the outstanding
shares on that date at an exercise price equal to the market price on that date.

-10-

Following the events of September 11, 2001, Starwood substantially
curtailed new development activities and only one management agreement has, as
yet, been entered into under the Development Agreement. Certain portions of the
exclusivity agreement have terminated due to the lack of performance on
Starwood's part.

RESTAURANT MANAGEMENT

The Company strives to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
adherence to standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has experienced a relatively low
turnover at every level at its Daily Grill and Grill restaurants. See "-- Daily
Grill Restaurants" above.

Each Daily Grill and Grill restaurant, including both free standing and
hotel based restaurants, is managed by one general manager and up to four
managers or assistant managers. Each restaurant also has one head chef and one
or two sous chefs, depending on volume. On average, general managers have
approximately seven years experience in the restaurant industry and three years
with the Company. The general manager has primary responsibility for the
operation of the restaurant and reports directly to an Area Director who in turn
reports to the Company's Director of Operations. In addition to ensuring that
food is prepared properly, the head chef is responsible for product quality,
food costs and kitchen labor costs. Each restaurant has approximately 85
employees. Restaurant operations are standardized, and a comprehensive
management manual exists to ensure operational quality and consistency.

The Company maintains financial and accounting controls for each Daily
Grill and Grill restaurant through the use of a "point-of-sale" computer system
integrated with centralized accounting and management information systems. In
the year 2000, the point of sale systems in the original six Daily Grills were
updated to new systems similar to those in newer restaurants. Inventory,
expenses, labor costs, and cash are carefully monitored with appropriate control
systems. With the current systems, revenue and cost reports, including food and
labor costs, are produced every night reflecting that day's business. The
restaurant general manager, as well as corporate management, receive these daily
reports to ensure that problems can be identified and resolved in a timely
manner. All employees receive appropriate training relating to cost, revenue
and cash control. Financial management and accounting policies and procedures
are developed and maintained by the Company's Corporate Controller, Director of
Information Systems, and Chief Financial Officer.

All managers participate in a comprehensive six week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
senior management meets bi-weekly with each restaurant management team to
discuss business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports, guest
comment cards and third party quality control reviews.

Servers at each restaurant participate in approximately ten days of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given responsibility for training new employees and are
rewarded with additional hourly pay plus other incentives. Management believes
that such practice fosters a cooperative team approach which contributes to a
lower turnover rate among employees. Representatives of corporate management
regularly visit the restaurants to ensure that the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.

-11-

PURCHASING

The Company has developed proprietary recipes for substantially all the
items served at its Daily Grill and Grill restaurants. In order to assure
quality and consistency at each of the Daily Grill and Grill restaurants,
ingredients approved for the recipes are ordered on a unit basis by each
restaurant's head chef from a supplier designated by the Company's Vice
President-Operations and Development. Because of the emphasis on cooking from
scratch, virtually all food items are purchased "fresh" rather than frozen or
pre-cooked, with the exception being bread, which is ordered from a central
supplier which prepares the bread according to a proprietary recipe and delivers
daily to assure freshness. In order to reduce food preparation time and labor
costs while maintaining consistency, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings, soups and seasoning combinations.

The Company utilizes its point-of-sale computer system to monitor inventory
levels and sales, then orders food ingredients daily based on such levels. The
Company employs contract purchasing in order to lock in food prices and reduce
short term exposure to price increases. The Company's Vice President-Operations
and Development establishes general purchasing policies and is responsible for
controlling the price and quality of all ingredients. The Vice President -
Operations and Development in conjunction with the Company's team of chefs,
constantly monitors the quality, freshness and cost of all food ingredients. All
essential food and beverage products are available, or upon short notice can be
made available, from alternative qualified suppliers.

ADVERTISING AND MARKETING

The Company's marketing philosophy is to provide our guests with an
exceptional and enjoyable dining experience that creates loyalty and frequent
visits. The Company's marketing and promotional efforts have been fueled
historically by its quality reputation, word of mouth, and positive local
reviews. The Grill on the Alley and The Daily Grill have been featured in
articles and reviews in numerous local as well as national publications. The
Company supplements its reputation with a program of marketing and public
relations activities designed to keep the Daily Grill and Grill name before the
public. Such activities include media advertising, direct mail promotions,
customer newsletters, a birthday club, as well as holiday and special interest
events. The Company also supports and participates in local charity campaigns.
These activities are managed by a full time Director of Marketing. Guest
feedback is solicited regularly through a comment card program. During 2002,
expenditures for advertising and promotion were approximately 1.3% of gross
revenues.

COMPETITION

The Daily Grill restaurants compete within the mid-price, full-service
casual dining segment. Daily Grill competitors include national and regional
chains, such as Cheesecake Factory and Houston's, as well as local
owner-operated restaurants. Grill restaurants compete within the fine dining
segment. Grill competitors include a limited number of national fine dining
chains as well as selected local owner-operated fine dining establishments.
Competition for the Company's hotel based restaurants is primarily limited to
restaurants within the immediate proximity of the hotel.

The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. The
Company believes that its ability to compete effectively will continue to depend
in large measure on its ability to offer a diverse selection of high quality,
fresh food products with an attractive price/value relationship served in a
friendly atmosphere.

EMPLOYEES

The Company and its subsidiaries employ approximately 1,269 people, 37 of
whom are corporate personnel and 98 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 40% are full-time employees, with the
remainder being part-time employees.

Management believes that its employee relations are good at the present
time. An anonymous employee survey is taken each year and the results are
disseminated to keep management aware of the level of employee satisfaction.

-12-

With the exception of the Chicago Grill on the Alley, none of the Company's
employees are represented by labor unions or are subject to collective
bargaining or other similar agreements. The union contract covering the Chicago
Grill expired in August 2002 and is presently in negotiation. Pending agreement
on a new union contract, the Chicago Grill on the Alley is subject to the risk a
work stoppage although management does not anticipate one.

TRADEMARKS AND SERVICE MARKS

The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "Satisfaction Served Daily,"
"Think Daily," "Daily Grind" and other marks with the United States Patent and
Trademark Office as service marks for restaurant service, and has secured
California state registration of such marks. The Company's policy is to pursue
registration of its marks and to oppose strenuously any infringement.

GOVERNMENT REGULATION

The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurants are located. Difficulties or failures in
obtaining or renewing the required licenses or approvals could result in
temporary or permanent closure of the Company's restaurants.

Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.

The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.

Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases
in minimum wages, paid leaves of absence and mandated health benefits, or
increased tax reporting requirements for employees who receive gratuities, could
be detrimental to the economic viability of the Company's restaurants.
Management is not aware of any environmental regulations that have had a
material effect on the Company to date.

ITEM 2. PROPERTIES

With the exception of certain properties which may be operated pursuant to
management arrangements or partnership or joint venture arrangements, all of the
Company's restaurants are located in space leased from parties unaffiliated with
the Company. The leases have initial terms ranging from 10 to 25 years, with
varying renewal options on all but one of such leases. Each of the leases
provides for a base rent plus payment of real estate taxes, insurance and other
expenses, plus additional percentage rents based on revenues of the restaurant.
See "Business."

The Grill restaurant in San Jose is located in space leased from a hotel
management company which may be deemed to be controlled by a director of the
Company, Lewis Wolff who may also be deemed to be an affiliate of the Company as
a result of his holdings of common stock and securities convertible into or
exercisable to acquire common stock of the Company.

-13-

The Company's executive offices are located in 3,300 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party pursuant to a lease expiring in May 2005.

Management believes that the Company's existing restaurant and executive
office space is adequate to support current operations. The Company intends to
lease, from time to time, such additional office space and restaurant sites as
management deems necessary to support its future growth plans.

ITEM 3. LEGAL PROCEEDINGS

Restaurants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of which the Company expects to be
covered by its general liability insurance. However, punitive damages awards
are not covered by general liability insurance. Punitive damages are routinely
claimed in litigation actions against the Company. No material causes of action
are presently pending against the Company. However, there can be no assurance
that punitive damages will not be given with respect to any actions which may
arise in the future.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 29, 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"GRIL". The following table sets forth the high and low bid price per share for
the Company's common stock for each quarterly period during the last two fiscal
years:

High Low
---- ---

2001 - First Quarter 3.344 1.938
Second Quarter 3.500 1.940
Third Quarter 2.900 1.500
Fourth Quarter 1.900 1.100

2002 - First Quarter 1.850 1.220
Second Quarter 2.000 1.500
Third Quarter 1.900 1.400
Fourth Quarter 1.850 0.970

The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.

At March 17, 2003, the closing bid price of the Common Stock was $1.32.

As of March 17, 2003, there were approximately 414 holders of record of the
Common Stock of the Company.

The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.

-14-

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table gives information about the Company's common stock that
may be issued upon exercise of (1) options granted pursuant to the option plan
and (2) options or warrants granted pursuant to equity compensation plans not
approved by security holders as of December 29, 2002.

NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
- -------------------- -------------------- ------------------ --------------------------

Equity compensation 669,975 $ 2.89 402,525
plans approved by
security holders

- - -
Equity compensation -------------------- ------------------ --------------------------
plans not approved
by security holders

Total 669,975 $ 2.89 402,525
-------------------- ------------------ --------------------------

-15-

ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein.

Fiscal Year Ended December
-------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
(In thousands except per share data)

Statement of Operations Data:
Sales $ 34,464 $ 38,432 $ 44,598 $ 44,529 $ 41,286
Management and license fees 444 544 1,078 872 1,006
----------- ----------- ----------- ----------- -----------
Total revenues 34,908 38,976 45,676 45,401 42,292
----------- ----------- ----------- ----------- -----------

Gross profit 25,234 28,090 32,674 32,985 30,858
Operating expenses:
Restaurant operating expenses 21,321 23,426 27,201 27,288 25,678
General and administration 2,755 3,296 3,303 3,540 3,568
Depreciation and amortization 1,137 1,196 1,334 1,457 1,492
Pre-opening costs 175 54 330 199 69
Gain on sale of assets - - - (225) (71)
Unusual charges 964 - 73 - -
----------- ----------- ----------- ----------- -----------

Total 26,352 27,972 32,241 32,259 30,736
----------- ----------- ----------- ----------- -----------

Income (loss) from operations (1,118) 118 433 726 122
Interest expense, net (231) (376) (478) (394) (214)
----------- ----------- ----------- ----------- -----------

Income (loss) before taxes, minority
interest, equity in loss of joint
venture and cumulative effective
of change in accounting principle (1,349) (258) (45) 332 (92)
Provision for income taxes (10) (6) (14) (65) (37)
Equity in loss of joint venture - (74) (9) (9) (23)
Minority interests 122 (68) 102 211 285
Cumulative effect of change in
accounting principle (70) - - - -
----------- ----------- ----------- ----------- -----------

Net income (loss) (1,307) (406) 34 469 133
----------- ----------- ----------- ----------- -----------

Preferred dividends accrued or paid (85) (50) (50) (50) (50)
Accounting deemed dividends (83) - - - -
----------- ----------- ----------- ----------- -----------

Net income (loss) applicable to
common stock $ (1,475) $ (456) $ (16) $ 419 $ 83
=========== =========== =========== =========== ===========

Net income (loss) per share applicable
to common stock (1):
Basic $ (0.37) $ (0.11) $ 0.00 $ 0.09 $ 0.02
=========== =========== =========== =========== ===========
Diluted $ (0.37) $ (0.11) $ 0.00 $ 0.09 $ 0.02
=========== =========== =========== =========== ===========

Weighted average shares outstanding
Basic 3,972,256 4,003,738 4,104,360 4,776,741 5,537,071
=========== =========== =========== =========== ===========
Diluted 3,972,256 4,003,738 4,104,360 4,866,449 5,551,751
=========== =========== =========== =========== ===========

-16-

Balance Sheet Data:
Working deficit $ (2,300) $ (3,685) $ (2,719) $ (693) $ (1,321)
Total assets 11,387 11,288 12,534 14,344 13,665
Long-term debt, less
current portion 2,928 2,033 2,866 1,534 976
Stockholders' equity 3,867 3,461 3,495 6,045 6,178

(1) All per share amounts and weighted average shares outstanding have been adjusted to reflect a
1-for-4 reverse stock split effective August 9, 1999.

-17-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 27 of this Form 10-K.

GENERAL

During the fiscal year ended December 29, 2002 the Company owned and
operated 15 restaurants and managed or licensed 7 additional restaurants
consisting of 10 Daily Grill restaurants (Encino closed in April 2002), 3 Grill
on the Alley restaurants, one The Grill on Hollywood restaurant and one Pizzeria
Uno restaurant (sold in April 2002) which were owned and operated by the
Company, 4 Daily Grill restaurants which are managed by the Company, a City Bar
and Grill restaurant which was converted from a managed to a licensed restaurant
during the year and 2 Daily Grill restaurants which are licensed by the Company.
During the fiscal year ended December 30, 2001, the Company owned and operated
16 restaurants and managed or licensed 5 additional restaurants, consisting of
10 Daily Grill restaurants, 2 Pizzeria Uno restaurants (one was sold in July
2001), 3 The Grill on the Alley restaurants and 1 The Grill on Hollywood (opened
in November 2001) which were owned and operated by the Company, 2 Daily Grill
restaurants and a City Bar and Grill restaurant which are managed by the Company
and 2 Daily Grill restaurants which are licensed by the Company. During the
fiscal year ended December 31, 2000, the Company owned and operated a total of
16 restaurants and managed or licensed 5 additional restaurants, consisting of
10 Daily Grill restaurants, 3 Pizzeria Uno restaurants (one was closed in July
2000) and 3 The Grill on the Alley restaurants which were owned and operated by
the Company, 2 Daily Grill restaurants and a City Bar & Grill restaurant which
are managed by the Company and 2 Daily Grill restaurants which are licensed by
the Company. See "Business."

Fiscal 2002 operating results include a full year of operations for The
Grill on Hollywood (compared to 7 weeks in 2001), 44 weeks of operations at the
San Francisco Daily Grill and 25 weeks of operations at the Houston Galleria
Daily Grill. The Encino Daily Grill was closed in April 2002 and the Cherry
Hill Pizzeria Uno was sold in April 2002.

Fiscal 2001 operating results include a full year of operations from the
Chicago Grill restaurant (compared to 29 weeks in 2000), 7 weeks of operations
of The Grill on Hollywood and a full year of operations for the Skokie
restaurant (compared to 12 weeks in 2000). The Pizzeria Uno restaurant in South
Plainfield, New Jersey was sold in July 2001.

Fiscal 2000 operating results include a full year of operations and
management fees from the Georgetown Inn Daily Grill restaurant (compared to 39
weeks of operations in 1999) and the Universal CityWalk Daily Grill (compared to
25 weeks of operations in 1999), 29 weeks of operations of the Chicago Grill
restaurant, and 12 weeks of operations at the Daily Grill in Skokie, Illinois.
The Pizzeria Uno restaurant in Media, Pennsylvania was closed in July 2000.

The Company accounts for its interest in the Universal CityWalk Daily Grill
using the equity method. All other owned restaurants are consolidated with
minority interest being reflected in the San Jose Fairmont Grill, The Chicago
Grill on the Alley, The Grill on Hollywood and the South Bay Daily Grill.

-18-

Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 81% of combined 2002 sales
were food and 19% were beverage. Sales revenues from restaurant operations are
primarily influenced by the number of restaurants in operation at any time, the
timing of the opening of such restaurants and the sales volumes of each
restaurant.

The Company's expenses are comprised primarily of cost of food and
beverages and restaurant operating expenses, including payroll, rent, occupancy
costs and franchise fees. The largest expenses of the Company are payroll and
the cost of food and beverages, which is primarily a function of the price of
the various ingredients utilized in preparing the menu items offered at the
Company's restaurants. Restaurant operating expenses consist primarily of wages
paid to part-time and full-time employees, rent, utilities, insurance and taxes.

In addition to its cost of food and beverages and normal restaurant
operating expenses through April 2002 when the Company sold its last Pizzeria
Uno Restaurant, the Company paid a continuing license fee with respect to its
Pizza Restaurant, an advertising fee and was required to expend certain minimum
amounts on local advertising and promotion. See "Business - Sale of Pizzeria Uno
Restaurants."

In addition to restaurant operating expenses, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's corporate offices. Corporate office general and administrative
expenses consist primarily of salaries of officers, management personnel and
clerical personnel, rent, legal and accounting costs, travel, insurance and
various office expenses.

RESULTS OF OPERATIONS

The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 2000, 2001 and 2002:

Fiscal Year Ended December
--------------------------
2000 2001 2002
------ ------ ------

Sales revenues 97.6% 98.1% 97.6%
Management and licensing fees 2.4 1.9 2.4
------ ------ ------

Total revenues 100.0 100.0 100.0
Cost of sales 28.5 27.3 27.0
------ ------ ------

Gross profit 71.5 72.7 73.0
------ ------ ------

Restaurant operating expense 59.6 60.1 60.7
General and administrative expense 7.2 7.8 8.5
Depreciation and amortization 2.9 3.2 3.5
Preopening costs 0.7 0.5 0.2
Gain on sale of assets - (0.5) (0.2)
Unusual charges 0.2 0.0 0.0
------ ------ ------

Total operating expenses 70.6 71.1 72.7
------ ------ ------

Operating income 0.9 1.6 0.3
Interest expense, net ( 1.0) (0.9) (0.5)
------ ------ ------

Income (loss) before income tax ( 0.1) 0.7 (0.2)
Provision for taxes 0.0 (0.2) (0.1)
Minority interest 0.2 0.5 0.7
Equity in loss of joint venture 0.0 0.0 (0.1)
------ ------ ------

Net income 0.1% 1.0% 0.3%
====== ====== ======

-19-

FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

Revenues. The Company's revenues for 2002 decreased 6.8% to $42.3 million
from $45.4 million in 2001. Sales revenues decreased 7.3% to $41.3 million in
2002 from $44.5 million in 2001. Management and license fee revenues increased
to $1,006,000 in 2002 from $872,000 in 2001. System-wide sales, including sales
of non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.2 million in 2002, a decrease of 0.3% from $62.4
million in 2001.

Sales for Daily Grill restaurants decreased by 8.9% from $28.1 million in
2001 to $25.6 million in 2002. The decrease in sales revenues for the Daily
Grill restaurants from 2001 to 2002 was primarily attributable to a decrease in
same store sales of 4.2% ($1.1 million) for restaurants open for 12 months in
both 2002 and 2001 and the closure of the Encino Daily Grill ($1.4 million).
Weighted average weekly sales at the Daily Grill restaurants decreased 4.8% from
$60,041 in 2001 to $57,133 in 2002. Comparable restaurant sales and weighted
average weekly sales at the Daily Grill restaurants in 2002 were negatively
affected by decreased customer counts in all restaurants.

Sales for Grill restaurants increased by 10.8% from $13.7 million in 2001
to $15.2 million in 2002. The increase in sales revenues for the Grill
restaurants from 2001 to 2002 was primarily attributable to the opening of the
Hollywood Grill in November 2001. Weighted average weekly sales at the Grill
restaurants decreased 17.9% from $88,965 in 2001 to $73,057 in 2002. Comparable
restaurant sales and weighted average weekly sales at the Grill restaurants in
2002 were negatively affected by decreased guest counts and a much lower check
average at the Grill on Hollywood compared to other Grill restaurants.

Sales for the Pizza Restaurants decreased by 81.7% from $2.7 million in
2001 to $0.5 million in 2002. The decrease in sales revenues for the Pizza
Restaurants from 2001 to 2002 was attributable to the closing of the Pizzeria
Uno franchise restaurant in Cherry Hill in April 2002 and the closing of the
South Plainfield restaurant in July 2001. Weighted average weekly sales at the
Pizza Restaurants decreased 14.9% from $34,340 in 2001 to $29,239 in 2002.

Price increases were last implemented during December 2002 for certain menu
items. Selected price increases may be implemented from time to time in the
future, consistent with the casual dining industry and how the economy fares.
Future revenue growth is expected to be driven principally by a combination of
expansion into new markets and the opening of additional restaurants and
establishment of market share in those new markets as well as increases in head
count at existing restaurants and selected price increases. When entering new
markets where the Company has not yet established a market presence, sales
levels are expected to be lower than in existing markets where the Company has a
concentration of restaurants and high customer awareness. Although the
Company's experience in developing markets indicates that the opening of
multiple restaurants within a particular market results in increased market
share, decreases in comparable restaurant sales may result.

Management and license fee revenues during 2002 were attributable to (1)
hotel restaurant management services which accounted for $726,000 of management
fees, and (2) licensing fees from the LAX Daily Grill and Skokie, Illinois Daily
Grill which totaled $175,000 and (3) $105,000 in management fees from Universal
CityWalk. The increase in management fees during 2002 was attributable to (1)
management of the San Francisco Daily Grill for 44 weeks in 2002, and (2)
management of the Houston Daily Grill for 25 weeks in 2002 offset by decreases
at the Georgetown Inn and Burbank Hilton.

The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.1million during 2002 as compared to $2.0 million during 2001.

Cost of Sales and Gross Profit. While sales revenues decreased by 7.3%
($3.2 million) in 2002 as compared to 2001, cost of sales decreased by 7.9%
($1.0 million) and decreased as a percentage of sales from 27.3% in 2001 to
27.0% in 2002. The decrease in cost of sales as a percentage of sales revenues
was attributable to improved purchasing and menu refinements.

Gross profit decreased 6.4% from $33.0 million (72.7% of sales) in 2001 to
$30.9 million (73.0% of sales) in 2002.

-20-

Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, pre-opening costs, and unusual charges, decreased
4.7% to $30.7 million in 2002 (representing 72.7% of revenues) from $32.3
million in 2001 (representing 71.1% of sales).

Restaurant operating expenses decreased 5.9% to $25.7 million in 2002 from
$27.3 million in 2001. As a percentage of sales, restaurant operating expenses
represented 60.7% in 2002 as compared to 60.1% in 2001. The dollar decrease in
restaurant operating expenses followed the sales decrease for the Company offset
by increases in minimum wages in California. The increase in operating expenses
as a percentage of sales resulted from increased insurance costs and labor due
to California minimum wage increases.

General and administrative expenses rose slightly to $3.6 million in 2002
compared to $3.5 million in 2001. General and administrative expenses
represented 8.5% of sales in 2002 as compared to 7.8% of sales in 2001. While
these expenses in total were nearly equal, there were increases of approximately
$224,000 in wages and related benefits, offset by decreases of approximately
$176,000 in professional services.

Depreciation and amortization expense was $1.5 million during 2002 and
2001. Increased depreciation related to the operation of The Grill on Hollywood
for a full year was offset by the discontinuance of depreciation for the Encino
Daily Grill and the Pizzeria Uno at Cherry Hill.

Pre-opening costs totaled $69,000 in 2002 as compared with $199,000 in
2001. These pre-opening costs were attributable to the opening in January 2003
of the South Bay Daily Grill and the opening of The Grill on Hollywood in
November 2001.

Interest Expense. Interest expense, net, totaled $214,000 during 2002 as
compared to $394,000 in 2001. The decrease in interest expense was primarily
attributable to not having any bank debt in 2002.

Minority Interest and Equity in Loss of Joint Venture. The Company
reported a minority interest in the loss of its majority owned subsidiaries of
$285,000 during 2002, consisting of a minority interest in the earnings of San
Jose Grill on the Alley, LLC of $102,000, a minority interest in the loss of
Chicago - The Grill on the Alley LLC of $67,000, a minority interest in the loss
of The Grill on Hollywood, LLC of $269,000 and a minority interest in the loss
of The Daily Grill at Continental Park, LLC of $51,000. For the year ending
December 30, 2001 the Company recorded a minority interest in the earnings of
San Jose Grill on the Alley, LLC of $77,000, a minority interest in the loss of
Chicago - The Grill on the Alley, LLC of $144,000 and a minority interest in the
loss of The Grill on Hollywood, LLC of $144,000.

The Company recorded equity in loss of joint venture of $23,000 in 2002 and
$9,000 in 2001 relating to the Company's 50% interest in the Universal CityWalk
Daily Grill.

The Company reported net income of $133,000 in 2002 as compared to a net
income of $469,000 for 2001.

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

Revenues. The Company's revenues for 2001 decreased 0.6% to $45.4 million
from $45.7 million in 2000. Sales revenues decreased 0.2% to $44.5 million in
2001 from $44.6 million in 2000. Management and license fee revenues decreased
to $872,000 in 2001 from $1,078,000 in 2000. System-wide sales, including sales
of non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.4 million in 2001 compared to $62.3 million in 2000.

The decline in consolidated revenues for the year is partially due to one
less week of sales in 2001 compared to 2000. Additionally it is believed to be
attributable to specific factors which may have effected individual restaurants,
to unfavorable economic and operating conditions which prevailed during the
fourth quarter of 2001, including weak economic conditions, the impact of the
September 11 terrorist attacks, corporate spending cutbacks and reduced business
travel. These factors contributed to a decline in consolidated revenues during
the fourth quarter of 15.1%, from $13.6 million in 2000 to $11.5 million in
2001.

-21-

Sales for Daily Grill restaurants were flat at $28.1 million in 2000 and
2001. Although weighted average weekly sales at the Daily Grill restaurants
increased 1.9% from $58,920 in 2000 to $60,041 in 2001, the additional week in
2000 contributed, on average, $530,000, or 2% of sales. An increase in the
average ticket of almost $2.00 was offset by a 0.9% decrease in the number of
guests.

Sales for Grill restaurants increased by 12.7% from $12.2 million in 2000
to $13.7 million in 2001. The increase in sales revenues for the Grill
restaurants from 2000 to 2001 was primarily attributable to (1) the opening of
the Grill on Hollywood in November 2001 which contributed $0.7 million and (2)
having the full year of Chicago compared to only 29 weeks in 2000 which
contributed $1.2 million. Weighted average weekly sales at the Grill
restaurants decreased 0.6% from $89,476 in 2000 to $88,965 in 2001. An increase
in the average ticket of $7.73, primarily attributable to San Jose Grill,
combined with the addition of Hollywood offset the decrease in guests at both
San Jose and Beverly Hills.

Sales for the Pizza Restaurants decreased by 37.2% from $4.3 million in
2000 to $2.7 million in 2001. The decrease in sales revenues for the Pizza
Restaurants from 2000 to 2001 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, PA ($0.6 million), (2) the sale of
the Pizzeria Uno in South Plainfield, NJ ($0.9 million) and (3) a 4.6% decline
in same store sales at the remaining location. Weighted average weekly sales at
the Pizza Restaurants increased 7.2% from $32,000 in 2000 to $34,300 in 2001.
Management previously determined that continued ownership and operation of the
Pizza Restaurants does not fit with the Company's strategic growth plans. In
July 2001, the Company finalized the sale of its Pizza Restaurant in South
Plainfield, New Jersey for $700,000. At the end of 2001, the Company was
seeking a suitable buyer for its Pizza Restaurant in Cherry Hill, New Jersey.

Price increases were last implemented during the fourth quarter of 2000 for
certain menu items with minor increases as a result of menu engineering in the
second quarter of 2001. While selected price increases may be implemented from
time to time in the future, the Company does not plan to implement additional
price increases in the foreseeable future. Future revenue growth is expected to
be driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.

Management and license fee revenues were attributable to (1) hotel
restaurant management services which accounted for management fees of $577,000
in 2001 and $750,000 in 2000, (2) licensing fees from the LAX Daily Grill and
Skokie, Illinois Daily Grill which totaled $194,000 in 2001 and $148,000 in
2000, and (3) fees from Universal CityWalk which totaled $101,000 in 2001 and
$122,000 in 2000. The decrease in management fees during 2001 was attributable
to decreased sales at the Burbank Hilton and San Jose City Bar & Grill offset by
increases at the Georgetown Inn.

The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.0 million during 2001 as compared to $2.2 million during 2000.

Cost of Sales and Gross Profit. While sales revenues decreased by 0.2% in
2001 as compared to 2000, cost of sales decreased by 4.5% ($0.6 million) and
decreased as a percentage of sales from 28.5% in 2000 to 27.3% in 2001. The
decrease in cost of sales as a percentage of sales revenues was primarily
attributable to menu refinements and related sales mix as well as cost
reductions resulting from improved purchasing.

Gross profit increased 1.0% from $32.7 million (71.5% of sales) in 2000 to
$33.0 million (72.7% of sales) in 2001.

Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, pre-opening costs, and unusual charges, rose 0.1%
to $32.3 million in 2001 (representing 71.1% of revenues) from $32.2 million in
2000 (representing 70.6% of sales).

-22-

Restaurant operating expenses decreased 0.5% to $27.1 million in 2001 from
$27.2 million in 2000. As a percentage of sales, restaurant operating expenses
represented 59.6% in both 2001 and 2000. The decrease in restaurant operating
expenses resulted primarily from the sale of the Pizzeria Uno restaurant in
South Plainfield, New Jersey for net proceeds of $225,000 which were credited
against restaurant operating expenses.

General and administrative expenses increased 7.2% to $3.5 million in 2001
from $3.3 million in 2000. General and administrative expenses represented 7.8%
of sales in 2001 as compared to 7.2% of sales in 2000. The increase in total
general and administrative was primarily the result of increased headcount at
the corporate office and related benefits ($0.3 million).

Depreciation and amortization expense was $1.5 million during 2001 as
compared to $1.3 million during 2000. The increase in depreciation and
amortization expense reflects the opening of the Hollywood Grill in November
2001 ($0.1 million) and a full year of expense for the Chicago Grill ($0.1
million).

Pre-opening costs totaled $199,000 in 2001 as compared with $330,000 in
2000. These pre-opening costs were attributable to the opening in 2001 of The
Grill on Hollywood and in 2000 of the Chicago Grill.

Unusual charges totaling $73,000 in 2000 related to the costs of closing
the Media Pizza Restaurant. The Company reported no unusual charges in 2001.

Interest Expense. Interest expense, net, totaled $394,000 during 2001 as
compared to $478,000 in 2000. The decrease in interest expense was primarily
attributable to the reduction in total debt and decrease in interest rates on
bank debt.

Minority Interest and Equity in Loss of Joint Venture. The Company
reported a minority interest in the loss of its majority owned subsidiaries of
$211,000 during 2001, consisting of a minority interest in the earnings of San
Jose Grill on the Alley, LLC of $77,000, a minority interest in the loss of
Chicago - The Grill on the Alley LLC of $144,000 and a minority interest in the
loss of The Grill on Hollywood, LLC of $144,000. For the year ending December
31, 2000 the Company recorded a minority interest in the earnings of San Jose
Grill on the Alley, LLC of $115,000 and a minority interest in the loss of
Chicago - The Grill on the Alley, LLC of $217,000.

The Company recorded equity in loss of joint venture of $9,000 in 2001 and
2000 relating to the Company's 50% interest in Universal CityWalk Daily Grill.

The Company reported net income of $469,000 in 2001 as compared to $34,000
for 2000.

LIQUIDITY AND CAPITAL RESOURCES

At December 29, 2002, the Company had a working capital deficit of $1.3
million and a cash balance of $1.3 million as compared to a working capital
deficit of $0.7 million and a cash balance of $2.3 million at December 30, 2001.
In 2002 the Company used cash to purchase fixed assets for the South Bay Daily
Grill ($0.7 million), remodel the Newport Beach Daily Grill ($0.4 million),
repay debt ($0.5 million) and make advances to managed restaurants ($0.4
million) which opened in San Francisco and Houston. During 2001, the Company's
cash was primarily attributable to the issuance of new equity, proceeds from the
sale of the Pizzeria Uno in South Plainfield, New Jersey and cash flow from
operations that were used to pay off the Company's bank borrowing of $1.2
million and other debt of $0.5 million. The Company has generated modest net
income in each of the last three fiscal years and has generated positive
operating cash flows in each of the last five years.

The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new restaurants. Historically, the Company has
funded its day-to-day operations through its operating cash flows which have
ranged from $1.0 million to $1.6 million over the past three fiscal years.
Growth has been funded through a combination of bank borrowing, loans from
stockholders/officers, the sale of debentures and stock, loans and tenant
allowances from certain of its landlords, and, beginning in 1999, through joint
venture arrangements.

At December 29, 2002, the Company had a bank credit facility with nothing
owing, a loan from a member of Chicago - The Grill on the Alley, LLC of $0.4
million, an SBA loan of $0.1 million, loans from stockholders/officers/directors
of $0.3 million, equipment loans of $0.8 million, and loans/advances from a
landlord of $0.1 million. Although no amounts have been borrowed under the
credit facility since 2001, availability under the line has been reducing in
accordance with its terms. Borrowings available to the Company under the credit
facility are $0.8 million at December 29, 2002 and will ratably reduce to $0.5
million by the end of fiscal year 2003. To provide for future financing needs,
management intends to increase its borrowing capacity in 2003 by securing
additional financing. However, there can be no assurances that such financing
will be available on acceptable terms.

On August 1, 2000, the Company received a $400,000 loan from private
individuals. The loan bears interest at 9% and is payable in monthly
installments over four years. In connection with the loan, the Company issued
40,000 warrants. In June 2001 the lender became a member of the Company's Board
of Directors and the loan was reclassified as related party debt. The balance
owed on the loan at December 29, 2002 was $176,000.

-23-

On December 13, 2001 the Company amended its bank credit facility
converting the term loan to a $0.8 million reducing line of credit under which
the amount available to draw is reduced each month by $25,000 so that it mimics
the previous term loan as to the maximum outstanding balance. The maximum
borrowing available under the reducing line of credit was $500,000 at December
29, 2002 and will ratably reduce to $200,000 by the end of fiscal 2003. The
Company has an additional line of credit which provides borrowing up to $0.3
million. At December 29, 2002 and December 30, 2001 there were no borrowings
under either line of credit. Interest is payable at the bank's prime rate. In
connection with the Credit Facility the Company is required to comply with
certain debt service coverage and liquidity requirements. Two of the Company's
principal stockholders have guaranteed the Credit Facility. In exchange for the
guarantee, the Company issued warrants to purchase 150,000 shares at an exercise
price of $1.406 per share exercisable for a period of four years and agreed to
pay each of the stockholders interest of 2% per annum on the average annual
balance on the note payable to the bank for guaranteeing the note. The reducing
line of credit matures in October 2004.

During 2002, the Company and its subsidiaries were obligated under 16
leases covering the premises in which the Company's Daily Grill, Grill and Pizza
Restaurants are located as well as leases on its executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $2.2 million in 2002 and paid percentage rent obligations above
and beyond minimum rent of $0.4 million. The Company's minimum rent obligations
for 2003 are $2.1 million.

The Company began management in February 2002, of the San Francisco Daily
Grill in the Handlery Hotel in Union Square. Cost of opening the Handlery Hotel
Daily Grill in San Francisco was $2.8 million, of which the Company advanced
approximately $287,000, with the balance being paid by the hotel owners. The
advance made by the Company will be repaid through future profits.

The Company began management of a hotel-based Daily Grill in the Westin
Galleria in Houston, Texas on July 10, 2002. Under the terms of the Management
Agreement, the Company has advanced $64,000 to the restaurant for initial
working capital to be repaid from future cash flows.

Management anticipates that new non-hotel based restaurants will cost
between $1 million and $2 million per restaurant to build and open depending
upon the location and available tenant allowances. Hotel based restaurants may
involve remodeling existing facilities, substantial capital contributions from
the hotel operators and other factors which will cause the cost to the Company
of opening such restaurants to be less than the Company's cost to build and open
non-hotel based restaurants.

Capital expenditures were $2.4 million in 2000, $1.4 million in 2001 and
$1.3 million in 2002. Capital expenditures in fiscal 2003 are expected to be
between $0.7 million and $1.1 million, primarily for the development of new
restaurants, capital replacements and refurbishing existing restaurants. The
amount of actual capital expenditures will be dependent upon, among other
things, the proportion of free standing versus hotel based properties as hotel
based restaurants are expected to generally require lower capital investment on
the Company's part. In addition, if the Company opens more, or less,
restaurants than it currently anticipates, its capital requirements will
increase, or decrease, accordingly.

In order to finance restaurant openings during 1997 and 1998, the Company
conducted an offering of common stock, convertible preferred stock and warrants
during 1997 and entered into a joint operating arrangement and loan in 1998.

The 1997 offering provided net proceeds to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred Stock,
500 shares of Series II 10% Convertible Preferred Stock, 187,500 five year $8.00
Warrants and 187,500 five year $12.00 Warrants. The aggregate sales price of
those securities was $1,500,000.

The Series I Convertible Preferred Stock was converted into 200,000 shares
of common stock in July 2000.

The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $4.00
per share, or (ii) 75% of the average closing price of the Company's common
stock for the five trading days immediately prior to the date of conversion;
provided, however, that the conversion price shall in no event exceed $10.00 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or redemption in
cash or, at the Company's option, in common stock at the then applicable
conversion price. The Series II Convertible Preferred Stock is subject to
redemption, in whole or in part, at the option of the Company on or after the
second anniversary of issuance at $1,000 per share. Accrued dividends in
arrears total $276,000 at December 29, 2002 and $226,000 at December 30, 2001.

-24-

The $8.00 Warrants were exercisable to purchase common stock at a price of
$8.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The warrants expired in June 2002.

The $12.00 Warrants were exercisable to purchase common stock at a price of
$12.00 per share commencing three years from the date of issuance and ending
five years from the date of issuance. The warrants expired in June 2002.

In February of 1999, the Company entered into a limited liability
company/member loan arrangement to provide financing for the planned opening of
a Grill restaurant at the Chicago Westin Hotel which opened June of 2000.
Pursuant to the financing arrangement for the Chicago Westin Hotel Grill,
investor members of the limited liability company (the "Chicago LLC") invested
$1,000 in the Chicago LLC and loaned an additional $1.699 million to the Chicago
LLC. $1,190,000 of the loan was converted to equity. The Company manages the
Chicago LLC for which it receives a management fee of 5% of sales and owns a 60%
interest in the Chicago LLC. The Company guaranteed repayment of the loan to
the Chicago LLC and issued warrants to acquire 203,645 shares of common stock at
$7.00 per share. The total cost to construct the Chicago Grill was $2.5
million. The Chicago Grill opened in June 2000. At December 29, 2002, the
balance of the loan to Chicago LLC guaranteed by the Company was $414,000.

The Operating Agreement and the Senior Promissory Note for Chicago - The
Grill on the Alley, LLC stipulates that the non-manager member of Chicago - The
Grill on the Alley, LLC is entitled to a cumulative preferred return of eight
percent annually of their converted capital contribution. Preferred return
payments of $81,000 were paid to the non-manager member during 2002. These
payments are treated as a reduction of equity. Payments returning $95,000 of
converted capital contribution were made in 2002. The minority member's
unrecovered capital contribution at December 29, 2002 was $750,000.

The Operating Agreement for San Jose Grill LLC, stipulates that
distributions of distributable cash shall be made first, 10% to the manager and
90% to the members in the ratio of their percentage interests until the members
have received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the members in the ratio of
their percentage interests until the additional capital contributions have been
repaid. Thereafter, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and the balance to the members in the ratio
of their percentage interests. In 2002 two distributions of distributable cash
totaling $167,000 were made to the minority member that reduced the member's
interest. The minority member's unrecovered capital contribution at December
29, 2002 was $150,000.

In July 2001, the Company entered into a limited liability company for the
opening of The Grill on Hollywood. The investor member of the limited liability
company invested $1.2 million. The Company invested $250,000 and owns a 51%
interest in The Grill on Hollywood, LLC. The Company manages The Grill for
which it receives a management fee of 5% of sales. In November 2001, the
Company opened The Grill on Hollywood as a free-standing restaurant in
Hollywood, California.

The Operating Agreement for The Grill on Hollywood, LLC stipulates that
distributions of distributable cash shall be made first, 90% to the non-manager
member and 10% to the manager member until non-manager member's preferred
return, unrecovered contribution account and additional contribution account are
reduced to zero. Second, 90% to the manager member and 10% to the non-manager
member until the manager member's preferred return and unrecovered contribution
account have been reduced to zero. Thereafter, distributions of distributable
cash shall be made to the members in proportion to their respective percentage
interests. No distributions were made in 2002. The minority member's
unrecovered capital contribution at December 29, 2002 was $1,200,000.

-25-

The Company may enter into investment/loan arrangements in the future on
terms similar to the Chicago Westin Grill arrangements to provide for the
funding of selected restaurants.

In September 2000, the Company opened a hotel-based licensed Daily Grill
restaurant at the Double Tree in Skokie, Illinois. All costs to build and open
the restaurant were paid by the hotel operator.

In July 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which the Company sold 666,667 shares of
restricted common stock and 666,6667 stock warrants at $2.00 to Starwood for
$1,000,000. Concurrently, the Company sold an additional 666,666 shares of
restricted common stock and 666,666 stock purchase warrants for $2.25 to other
strategic investors for $1,000,000. Proceeds reflected in the financial
statements are net of transaction costs.

In conjunction with the investment by Starwood, the Company and Starwood
entered into a Development Agreement under which the Company and Starwood agreed
to jointly develop the Company's restaurant properties in Starwood hotels.

Under the Starwood Development Agreement, either the Company or Starwood
may propose to develop a Daily Grill, Grill or City Bar and Grill restaurant in
a Starwood hotel property. If the parties agree in principal to the development
of a restaurant, the parties will attempt to negotiate either a management
agreement or a license agreement with respect to the operation of the
restaurant.

So long as Starwood continues to meet certain development thresholds set
forth in the Development Agreement, the Company is prohibited from developing,
managing, operating or licensing the Company's restaurants in any hotel owned,
managed or franchised by a person or entity, other than Starwood, with more than
50 locations operated under a single brand. Existing hotel based restaurants are
excluded from the exclusive right of Starwood. The development thresholds
required to be satisfied to maintain Starwood's exclusive development rights
require, generally, (1) the signing of an average of one management agreement or
license agreement with respect to Daily Grill restaurants annually over the life
of the Development Agreement, (2) the signing of one management agreement or
license agreement in any two year period with respect to Grill restaurants, and
(3) the signing of an aggregate average of three management agreements or
license agreements with respect to all of the Company's restaurants annually
over the life of the Development Agreement. Satisfaction of the thresholds set
forth in the Development Agreement are determined on each anniversary of the
Development Agreement. With respect to satisfaction of the specific thresholds
applying to Daily Grill restaurants and Grill restaurants, the failure to
satisfy the development thresholds with respect to those individual brands will
terminate the exclusivity provisions relative to such brand but will not effect
the exclusivity rights as to the other brand or in general.

Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common stock
equal to four percent of the outstanding shares upon the attainment of certain
development milestones. Such warrants are issuable upon execution of management
agreements and/or license agreements relating to the development and operation,
and the commencement of operation, of an aggregate of five, ten, fifteen and
twenty of the Company's branded restaurants. If the market price of the
Company's common stock on the date the warrants are to be issued is greater than
the market price on the date of the Development Agreement, the warrants will be
exercisable at a price equal to the greater of (1) 75% of the market price as of
the date such warrant becomes issuable, or (2) the market price on the date of
the Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price equal
to the market price as of the date such warrants become issuable. The warrants
will be exercisable for a period of five years.

In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement exceeds
35% of the total Daily Grill, Grill and City Grill-branded restaurants, the
Company will be obligated to issue to Starwood a warrant to purchase a number of
shares of the Company's common stock equal to 0.75% of the outstanding shares on
that date exercisable for a period of five years at a price equal to the market
price at that date. On each anniversary of that date at which the restaurants
operated under the Development Agreement continues to exceed the 35% threshold,
for so long as the Development Agreement remains effective, the Company shall
issue to Starwood additional warrants to purchase 0.75% of the outstanding
shares on that date at an exercise price equal to the market price on that date.

-26-

Following the events of September 11, 2001, Starwood substantially
curtailed new development activities and only one management agreement has, as
yet, been entered into under the Development Agreement. Certain portions of the
exclusivity agreement have terminated due to the lack of performance on
Starwood's part.

In July 2001, the Company sold its South Plainfield, New Jersey Pizza
Restaurant for net proceeds of $225,000.

In April 2002, the Company sold its Cherry Hill, New Jersey Pizza
Restaurant for net proceeds of $264,000.

In April 2002, the Company closed its Encino, California Daily Grill
restaurant when the lease expire